Suppose you are a policymaker in the early 1900s, and you are chosen to lead the commission that is tasked with responding to the bank panic of 1907. Currently, the banking system in the United States is decentralized, inconsistent from place to place, and largely unregulated, while at the same time there is no central bank. How do you propose responding to the growing issues surrounding banks in the United States, including:

• people's general distrust of banks
• banks lending out too much of their reserves, thereby opening themselves up to risk in the scenario where many people make large withdrawals quickly
• bank failures (in many cases as a result of bullet point 2)
• frequent sizeable depositor losses

1. (2 points) Yes or no, would you, in your role as commissioner, make a central bank? Why or why not?

2. (14 points) Regardless of your answer to question 1, if you had to construct a central bank, describe what it would be like by responding to the following:

a. Are its leaders elected? Appointed?

b. How long are their terms?

c. Does it have a national headquarters?

d. Does it have regional branches? If so, where?

e. Does it have the ability to set reserve requirements for banks?

f. Does it offer lending to banks?

g. Does it have a role in crafting monetary policy and managing the money supply?

3. (4 points) Taking your answers to question 2 into account:

a. Is the central bank you would create similar to the Federal Reserve as we know it today?

b. Do you feel that the central bank you would create has too much power?

c. Are you surprised by your responses?