The Federal Reserve has been digging through its back add space a lot lately.

In March and on Sept. 16, the Fed invoked a rarely used clause in the Federal Reserve Act by granting bailouts to Bear Stearns and American International Group to the tune of $29 billion and $85 billion, respectively. The clause grants the Fed -- which typically only lends money to its member banks -- authority to lend money to nonbanks under "unusual and exigent" circumstances.

Section: Smart Savings

And what unusual times we live in. The $85 billion AIG deal was the biggest Federal Reserve bailout in history.

With such staggering amounts of money for use at his fingertips, it's no wonder the Federal Reserve chairman is often described as the second most powerful person in the nation, after the president.

So you'd think that with all of this power most Americans would know who the Fed chairman is, and what exactly he does. But in a poll published in June, Newsweek magazine found that only 36 percent of Americans know who the chairman of the Federal Reserve is. (It's Ben Bernanke).

So what is the Federal Reserve? Where does it gets billions of dollars to make loans? And, what makes the Federal Reserve chairman and the Federal Reserve so powerful?

Not Federal? Not A Reserve?

The name itself can be misleading. The words "federal" and "reserve" conjure up an image of a large federal government facility with stockpiles of the nation's gold stored underneath, like Fort Knox.

While there is about $90 billion in gold reserves stored in the basement of the New York Federal Reserve Bank, the gold is primarily owned by "foreign governments, other central banks and official organizations around the world," according to the Federal Reserve Bank of New York's Web site.

The gold doesn't belong to the U.S. government because the Federal Reserve is not part of any branch of the federal government. While the seven members of the Federal Reserve Board of Governors are appointed by the president and confirmed by the U.S. Senate, the Fed operates independently of the government.

According to the Fed's Web site, "The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government."

It is this lack of government control of the nation's money that many critics of the Federal Reserve oppose.

"Most people don't know that it's actually more or less a private organization with people that are appointed, not elected," said Andrew Davis, director of communications for the Libertarian Party. "And even people elected to office don't know a lot about the Federal Reserve. It's a rather shady and secretive organization."

G. Edward Griffin, author of "The Creature From Jekyll Island: A Second Look at the Federal Reserve," pointed out that the Federal Reserve is not federal and not a reserve.

The Fed does not receive funding from Congress but, according to its Web site, gets most of its money from the interest it collects on government securities purchased through the open market. Ownership of the Fed, if such a thing can be determined, is complicated. The Fed issues shares of stock to member banks, but owning a certain amount of Fed stock is a condition of membership. The stock may not be sold, traded, or pledged as security for a loan, and the Fed turns all of its profits over the U.S. Treasury after expenses are paid.

What Are Fed's Functions?

The Federal Reserve was created in 1913 by an act of Congress and has many functions. The one most Americans are probably familiar with is its power to set interest rates, which always make national headlines.

But the Fed also has a major impact on the nation's economy by influencing its inflation rate and credit supply.

According to the Fed's Web site, "When the Fed wishes to increase reserves, it buys securities; when it wishes to reduce reserves, it sells securities. Because open market operations greatly affect the amount of money and credit banks have on hand, open market operations ultimately affect interest rates and the performance of the U.S. economy."

The Fed's power was increased during the Great Depression when the nation went off the gold standard in 1933. The gold standard is a system where the money issued by the government is a fixed quantity of gold or is equal to the value of a fixed quantity of gold. When the gold standard was eliminated, the nation's money became completely fiat, worth nothing more than the government's insistence that it was worth something. Bailouts became easier to enact because money could be created whenever it was needed because it did not need to be backed up by gold.

"After 1933, the belief was that we've got stop this gold standard business," said Brad DeLong, an economics professor at UC Berkeley and a former deputy assistant secretary of the U.S. Department of Treasury during the Clinton Administration. "We simply have too many panics, they come too frequently, they produce too big depressions, they do too much damage to the economy, and we have to manage our money instead."

Through its control of the nation's fiat money the Fed can increase or decrease the nation's money supply and act as the "lender of last resort" by loaning money to failing banks to stop bank failures and financial panics. It was a bank panic in 1907 that prompted Congress to pass the Federal Reserve Act in 1913, which created the Fed. The Fed has the ability to prevent bank panics by essentially creating money out of nothing by making loans and authorizing bank bailouts with money that didn't previously exist. The act of lending the money actually creates the money.

Mariner Eccles, who was the chairman of the Federal Reserve on Sept. 30, 1941, explained it best in testimony before Congress when he was asked by Congressman Rep. Wright Patman where the Fed got the capital to purchase $2 billion of government bonds in 1933. He answered that the Fed created it. When asked what the Fed created it out of, he answered, "Out of the right to issue credit money."

"And there is nothing behind it, is there, except our government's credit?" Patman asked.

"That's what our system is," Eccles answered. "If there were no debts in our system, there wouldn't be any money."

As Eccles explained, the Federal Reserve is an elastic system that allows it to create or collapse the amount of money in circulation and thereby control the money's actual worth. According to many economists and the Fed itself, adding money to the total supply is a major cause of sustained inflation.

The bailouts of AIG and Bear Stearns are a little more complicated than the one Eccles was testifying about and would likely only cause inflation were the businesses to fail.

The AIG deal gives the government an 80 percent stake in the company and the hope of recouping the Fed's investment by forcing AIG to sell off assets. The Bear Stearns deal saw the Fed loaning JP Morgan $29 billion to buy the company and its liabilities.

"The Fed is there to bail out J.P. Morgan if they get into trouble. So it's not (a bailout) yet. It's promising to do so in the future," said DeLong.

According to a March 25 article by Rick Newman for U.S. News and World Report, "The risk to the Fed -- and to taxpayers -- is what happens to those troubled securities, which the Fed is essentially insuring. If they end up being completely worthless, then the Fed would be out the whole $29 billion."

Why Have A Central Bank?

With such a risk of inflation with bailouts, why do it?

The Fed argues that banks and institutions like Bear Stearns failing would have a greater impact on the economy than the inflation caused by bailouts. But the impact of inflation is enormous over time.

If you discovered $100,000 that your grandfather buried in the back yard in 1913, the year the Fed was created, it would have been worth the equivalent of $2,212,989.90 in today's dollars the day he buried it, according to the Department of Labor.

"Most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people," said Rep. Ron Paul, R-Texas, on the floor of the floor of the U.S. House of Representatives in 2002 while introducing a bill calling for the abolishment of the Federal Reserve.

Supporters of the Federal Reserve argue that since its creation and then the elimination of the gold standard in 1933, the nation has not undergone another depression because of the Fed's ability to more actively stem financial meltdowns. And the truest test of that theory seems to be playing out now because of the current meltdown on Wall Street.

"Since the Great Depression, the worst (financial crisis) we've had is what we're having right now," said DeLong. "But the unemployment rate has only gone up by 1 percent. The unemployment rate went up to something like 8 percent in 1907, and it went up to 25 percent in 1933. They created (the Federal Reserve) for a reason, and that is because it seems to work, or it seems to work less badly than it did before."