The Federal Reserve system is simply a central banking system for the United States. It was the brainchild of Treasury Secretary Alexander Hamilton, who created the First Bank of the United States in 1791 after a major economic recession. Due to the controversial nature of centralizing -- or federalist -- policies at the time, the bank was discontinued by 1811. It did not emerge in its current form until 1913 when President Woodrow Wilson's administration worked with Congress to pass the Federal Reserve Act.

Controlling Monetary Flow

The Federal Reserve was started to give the federal government tools to control the amount of money and availability of credit in the American economy. When too much credit is too easily available, too much money enters the economy and inflation drives up prices. When too little credit is available, there is not enough money circulating in the economy, and people have difficulty obtaining credit. The Federal Reserve system was started to balance interest rates and inflation rates to stabilize the economy.