In 2023 the Federal Reserve, the institution that controls the U.S. money supply, posted a record loss of $114.3 billion. That puzzle opens a plain-language tour of how the Fed came to exist and how it works. America’s first two central banks were killed off in the 19th century, leaving a free banking era of thousands of currencies and recurring panics in 1873, 1893, and 1907. In the last of those, J.P. Morgan locked New York bankers inside his private library until they agreed to pool money and stop the runs.

From there the episode moves to the secret 1910 meeting on Jekyll Island, where Senator Nelson Aldrich and banker Paul Warburg drafted the compromise that became the Federal Reserve Act, signed by Woodrow Wilson on December 23, 1913. It then maps the three layers of the system, explains the dual mandate, and shows how interest on reserve balances works as a thermostat for the economy.

• The seven members of the Board of Governors serve staggered 14 year terms designed to shield them from election pressure.
• Member banks hold stock in the 12 regional Reserve Banks and earn a fixed dividend, but the shares cannot be traded and carry no control over policy. Remaining profits go to the Treasury.
• After 2008, quantitative easing flooded banks with reserves, so the Fed now steers rates mainly through the interest it pays on those reserves.
• Milton Friedman blamed the Fed for failing as lender of last resort in the early 1930s. In 2008 it drew the opposite charge after an $85 billion loan to AIG.
• Bloomberg’s lawsuit forced the Fed in 2011 to name recipients of emergency loans, and a 2021 trading scandal pushed two regional officials to resign.