The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster

The Origins of U.S. Central Banking  Bank of England  The Bank of North America (1781)  The First Bank of the United States (1791)  The Second Bank of the United States (1816) 1837–1865  The Free-Banking period.  The Civil War & Greenbacks - a fiat money. 1791–1836

1865–1912  The Gold Standard (1875).  Brief foray into bimetalism.  Panics of 1873, 1893 and 1907  Federal Reserve Act of 1913

The Federal Reserve Banking System  Board of Governors of the FRS 7 members, equal standing... but, includes Secretary of the Treasury and Comptroller of the Currency.  Problems  Problems: Only using discount window, Each District Bank sets its own policy.  Purpose  Purpose: 1.Develop, supervise & control the nation’s money. 2.Serve as a national check-clearing system. 3.Serve as depository for federal gov’t. funds.

The Federal Reserve Banking System

The Early Fed, 1913–1935 The Great Depression - Failure of the Fed  The Great Depression - Failure of the Fed Initially increased liquidity, but pulled back. By 1933, 33% of banks fail, MS fallen 33%. Accommodates the Treasury Dept. during WWI.  Accommodates the Treasury Dept. during WWI. Buys Treasury bonds to finance G spending (aka “monetizing the debt”). From 1916 to 1918, this increases MS by 70%. Huge risk of inflation.

The Fed - version 2.0, 1935 Serves as a “lender of last resort.”  Serves as a “lender of last resort.” Board of Governors reconstituted:  Board of Governors reconstituted: All 7 member selected by President/Senate confirms. Can’t include Treasury Sec. nor Comptroller of Currency. Members serve 14 yr. terms on staggered basis. Political party diversity. Office of Chairman and Vice Chairman created. Has authority over district banks. Federal Open Market Committee (FOMC)  Federal Open Market Committee (FOMC) 12 members; primary policy-making body.

The Evolution of the Modern Fed WWII - working “for” the U.S. Treasury  WWII - working “for” the U.S. Treasury Federal Reserve–Treasury Accord (1951)  Federal Reserve–Treasury Accord (1951) “Leaning Against The Wind”  “Leaning Against The Wind” –Martin ( ) The technocratic Fed  The technocratic Fed –Burns ( )... the “political business cycle” Coping with inflation  Coping with inflation –Volcker ( ) Keeping the economy stable?  Keeping the economy stable? –Greenspan ( ) Coping with recession  Coping with recession –Bernanke ( ) –Yellen (2014-?)

The Fed’s Balance Sheet THE FED’S ASSETS –Treasury securities –U.S. agency securities –Discount window loans –Gold certificates. –Special Drawing Right (SDR) certificates –Foreign currency reserves –Cash items in the process of collection LIABILITIES AND EQUITY CAPITAL –Federal Reserve notes –Bank reserve deposits –U.S. Treasury deposits –Foreign official deposits –Deferred availability cash items –Equity capital

The Fed’s Balance Sheet ,003 The Consolidated Balance Sheet of the Federal Reserve System ($ Millions, as of January 31, 2005)

2012

The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster