Central Bank: Definition & Purpose

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Commodity Money: Definition & Examples

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:04 Central Bank Definition
  • 1:12 Purposes of the Central Bank
  • 4:34 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn who controls all of the money in the United States. Find out what the main functions of a central bank are and how it impacts your ability to get a job, the interest you pay on your car loan, and more.

Central Bank Definition

Have you ever wondered who was in charge of all the money in the United States? Who determines how much interest you pay for a car loan? How about your house payment? Who actually produces the physical dollar bills that are right now sitting in your wallet? The answer to those questions can be found in the definition of the central bank.

A central bank is a bank that oversees the money system of a nation. The central bank in the U.S. is known as the Federal Reserve and is often referred to as the Fed.

The Federal Reserve System was created in 1913 and is composed of a Board of Governors and twelve regional Federal Reserve Banks in cities such as Kansas City, Dallas, New York, and Atlanta. The head of the Federal Reserve is known as the Chairman. You may have heard of some of the most recent chairmen, such as Alan Greenspan, Ben Bernake, and Janet Yellen. Many people in the financial industry believe the chairman of the Federal Reserve is the most powerful person in the world!

A few of the other most powerful central banks in the world are the European Central Bank, the Bank of England, and the Bank of Japan.

Let's now look at the main purpose of central banks, with a focus on the Federal Reserve of the United States.

Purposes of the Central Bank

There are several different purposes of the central bank, which we'll look at one at a time now.

1. It supervises and regulate banks and financial institutions.

The central bank makes sure regular banks have adequate money to pay their customers. This is often referred to as reserves. Although rare in the United States, sometimes too many customers will withdraw their savings from a particular bank, and it will run out of money; the Federal Reserve can step in and loan the bank money to satisfy and pay its customers in times of distress.

The central bank is also responsible for ensuring that banks are treating customers fairly and charging appropriate interest rates on loans. The consumer rights and protection you get when you use an ATM machine, credit or debit card, or when you get a car loan, are all regulations the Federal Reserve creates and monitors.

2. It implements monetary policy.

The central bank regulates how much actual money is circulating in the country, which also can affect the interest rates we pay. The central bank can change interest rates and the amounts that banks have to keep in their vaults (reserves). These things affect how quickly the economy can grow and how much a bank charges you for that car loan you wanted. If the bank has to borrow money at a higher rate, they will pass along a higher rate to you so that they can make money.

3. It maintains healthy levels of inflation.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support