Role of the U.S.Financial Sysytem

Essay by Jumeesa2A, July 2008

download word file, 3 pages 3.0

For decades, Americans have been through periods of slow economic growth, stock market crashes, innovative technological inventions, and globalization. Since the 18th century, economic stability within the United States has waxed and waned due to political strife, as well as trade and industry fluxuations. U.S. citizens desired a reliable system in place to handle current and future monetary issues. Thus, in the early 20th century, the Federal Reserve was created to instill strength and solidity within America's financial system. The Federal Reserve servers as a central bank providing national currency, supervising and regulating banks and bank holding businesses, as well as carrying out monetary policy (, n.d.).

Along with the Federal Reserve, the U.S. financial system provides a commercial banking system, which allows for the buying and trading of long and short-term securities. In order to trade the securities markets must be made available for companies to generate capital. The United States financial system is made up of many markets; however, this paper will discuss the long-term and short-term domestic markets.

Securities, which span one year or less, such as treasury bills, commercial paper, and bankers' acceptances, are placed into short-term markets, also known as money markets. A corporation raises short-term capital by securing auto loans, credit loans, and/or residential/commercial loans (Block, S., Hirt, G., 2005). There are also securities that have a life span longer than a year, which corporations may use for investing.

Capital markets, also called long-term markets, hold securities with a maturity greater than one year. Long-term investments and capital are handled in this market. Corporate securities in this market are common stocks, bonds, preferred stocks, and convertible securities. Businesses raise capital in this area by buying and selling investment securities, such as bonds. Companies can also invest in corporate shares, common or preferred, and make...