Relationships Between Different U.S. Economic Institutions

Instructor: Jason McCollom
The U.S. economy is made up of complex relationships between numerous institutions. In this lesson, learn about a few of the most important: private banks, the IRS, the Federal Reserve, and the stock market.

Economic Institutions in the U.S.

Do you have a bank account? Have you ever had to pay a mortgage bill or car payment? Maybe purchased some stocks in a big company? I'd also ask if you've ever paid taxes, but I already know the answer to that.

You have probably done a few if not all of these things. In order to do so, you must make use of various economic institutions that work together, influence each other, and shape the American economy. When we speak of economic institutions, we are referring to any business or agency, public or private, that serves to shape the economy or supply economic services to Americans. In one way or another, different economic institutions interrelate and impact the U.S. economy.

There are innumerable and complex ways in which economic institutions connect. In this lesson, we'll examine four of the most significant, offering you an introduction into the relationships between different U.S. economic institutions. Let's look at private banks, the Federal Reserve, the Internal Revenue Service or IRS, and the stock market.

Private Banks

Private banks hold depositors' money, make loans, and offer numerous other financial services. They are called 'private' because they are not owned or operated by the government, though they are regulated by government agencies, as we'll examine below.

There are a few different types of private banks. Commercial banks hold people's money, but are not allowed to invest that money the same way that investment banks can. Examples of commercial banks are Bank of America and Wells Fargo, while investment firms are represented by industry leaders such as Morgan Stanley or J.P. Morgan.

The Bank of America building in Midland, Texas
bank of america building

The Internal Revenue Service (IRS)

Every spring is tax season; be sure to file your taxes by April! The Internal Revenue Service (or IRS) is the major tax-collecting body of the U.S. government. Through the collection of income tax, the public's money is used to fund the federal government. The IRS enforces the Internal Revenue Code, which administers the tax policy for private banks and other financial institutions.

The Federal Reserve System

The Federal Reserve is the central bank of the U.S. It is not quite a public institution and not quite a private one. Though it is connected to the federal government by the federal appointment of its head and through consultations with federal officials, it is not controlled by lawmakers, the president, or the judicial branch.

The Federal Reserve building in Washington, D.C.
fed building

The Federal Reserve connects to the private banking system by setting interest rates. This means that when a private bank lends you a home loan, for example, the Federal Reserve has set the interest rate for that loan. The Federal Reserve also prints money (which it calls 'quantitative easing'), which goes into circulation through private banks and through the 12 regional Federal Reserve banks in major American cities. The Federal Reserve uses currency created by the Treasury Department, and the IRS is part of that department, as well.

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