Why the Federal Reserve?

Federal Reserve System Federal Reserve acts as the central bank for the U.S. Look at a $1 bill After the panic of 1907 and the collapse of many banks, it was felt that a central bank was needed to stabilize our monetary system. “Runs” on banks—banks had no where to turn for emergency cash.

Panic of 1907 There was no way to expand the amount of money in circulation. This restricted expansion because there was a “fixed” supply of money available for loans, businesses, etc. Therefore, since they could not borrow more money, they starting withdrawing their savings. Banks didn’t have enough cash-bankrupt.

Panic of 1907 Second, the system of pyramided reserves failed. Pyramided Reserves—Smaller banks deposit some of their reserves with larger banks. These larger banks deposit some of these reserves with the largest commercial banks. These big banks loan out these “extra” funds to businesses and individuals. This encourages growth of the economy. In a panic, smaller banks withdraw deposits from larger banks, etc.

Panic of 1907 In 1908, the National Monetary Commission was created which reestablished a central bank. The Federal Reserve Act of 1913 created the central bank called the Federal Reserve System (FED).

Role of the FED 3 Main Goals of the Fed: Supervises member banks Holds cash reserves (available when economy needs it.) Moves money into and out of circulation. (Stabilizes money supply).

Characteristics of the Fed Has more than one central bank. (Has 12 district banks throughout U.S.) Owned and controlled by member banks. (The U.S. government does not own stock in the Fed) Optional membership in the Fed for some banks. (State chartered banks do not have to join the Fed).

12 FED District Banks 1.Boston 2. New York City 3. Philadelphia 4.. Cleveland 5.. Richmond 6.. Chicago 7.. Atlanta 8.. St. Louis 9. Kansas City 10. Dallas 11. Minneapolis 12. San Francisco Seat of Board of Governors: Washington DC

The Pyramid Structure of the Federal Reserve Structure of the Federal Reserve System 12 District Reserve Banks Federal Open Market Committee 4,000 member banks and 25,000 other depository institutions Board of Governors About 40 percent of all United States banks belong to the Federal Reserve. These members hold about 75 percent of all bank deposits in the United States.

Organization of the Fed The Fed is organized on two levels: National and District. National Level— Board of Governors—7 board of governors, appointed by the president. Each governor appointed for 14 year term. Federal Open Market Committee (FOMC) 7 members of the board of governors are members; plus, 4 members are district Federal Reserve bank presidents.

The Federal Open Market Committee (FOMC) The FOMC, which consists of The Board of Governors and 5 of the 12 district bank presidents, makes key decisions about interest rates and the growth of the United States money supply.

Organization of the Fed District Level: 12 regional federal reserve banks. Each bank serves different regions of the country, Also, 25 branch offices located throughout the country. 9 directors in each district 6 of the 9 are bankers. (Business people, generally). Board of Governors selects other 3 directors.

Gold Vault—N.Y. Fed

Gold Bars 27.4 Lbs. Each $950 per oz. $416,500 ea.!

The FED Vault 266 million oz. $950 per oz. $252 Billion

Weighing Gold at the FED 121 Countries Store their gold At the NY FED