Federal Reserve System

The Origins of U.S. Central Banking, 1791–1836 Bank of England Bank of the British Empire The Bank of North America (1781) Robert Morris and the first chartered (government licensed) bank

History of Central Banking in the United States 1791 1st Bank of the United States 1811 Charter not renewed. 1816-1836 2nd Bank of the United States

The Free-Banking Period (1837-1861) A period that lasted until the Civil War during which each state had its own banking rules, and many states permitted relatively open competition among banks. U.S. Treasury operated without a central banking institution.

The Civil War, Greenbacks, and National Banking 1863 National Currency Act

Policy and Politics without a Central Bank Panic of 1873 and resumption of the gold standard (1875) Populism, free silver, and bimetalism Prelude to the federal reserve Panics of 1893 and 1907 Federal Reserve Act of 1913

Central Bank Official institution with broad responsibilities for a nation’s financial system.

Functions of a Central Bank Lender of last resort. Government’s banker and financial agent. Controls the creation of money. Shares the responsibility of regulating the financial system with other government agencies. Other banks hold deposits at the central bank Reserves Medium for check clearing

Federal Reserve Act (1913) Provided for the formation of the FRS and the foundation for the current banking system. Gave the Fed supervisory powers over member banks. Member banks subjected to reserve requirements (RR). Allowed the Fed to create a payment and collection system through member banks.

Federal Reserve Bank Central bank of the United States. Decentralized formal structure. A single bank located in Washington D.C. with 12 regional banks.

Federal Reserve – Technically Independent Long and staggered terms of governors. Earns more from operations than it needs to cover operating expenses - does not have to ask Congress for funds. Not directly subject to control by the executive and legislative branches of government. Federal Reserve banks are privately owned.

The Early Fed, 1913–1935 The Early Fed, 1913–1935 The great depression and reform of the Fed Restructuring the Fed New lines of authority

The Evolution of the Modern Fed Banking Act of 1935 The Fed’s fight for independence Marriner Eccles Working for the U.S. Treasury Federal Reserve – Treasury Accord 1951 Fed independent institution within the government

Federal Reserve: Organization Board of Governors Advisory Committees Federal Open Market Committee (FOMC) Federal District Banks

Board of Governors Appointed by the president of the United States with the advice and consent of the senate. Seven members 14-year, nonrenewable terms Terms are staggered so that at least one new governor is appointed every two years. The president names the chairman and vice chairman of the Board, subject to confirmation by the Senate. 4-year terms and may be re-appointed so long as their terms as governors have not expired. A chairman who is not re-appointed customarily resigns from the Board.

Board of Governors The Board is financed through an assessment on the incomes of the Federal Reserve Banks.

The Federal Open Market Committee Chief policy-making body of the Federal Reserve System. Primary task: Draft monetary policy. Voting Members all seven governors the president of the NY Fed 4 presidents of the other eleven regional Banks. The right to vote rotates among the 11 presidents - each voting for a period of one year. All presidents attend meetings. Meets about 8 times a year to formulate monetary policy. Decisions in the form of policy directives are passed on for execution to the NY Fed.

Federal Reserve Banks 12 Federal Reserve Districts Each district has one FRB. Many have additional branches in major cities. Banks are privately owned by the commercial banks that are members. The Board of Governors has broad authority over the operations of the regional Banks.

Federal Reserve: Roles Bank supervision Monetary policy Banking services Fiscal Agent

Federal Reserve: Monetary Policy Open Market Operations Discount Window Rate Reserve Requirements

Open Market Operations Purchase or sale of assets by the Fed in the open market. Executed by the System Account Manager at the Federal Reserve Bank of New York. Acts under the direction of the FOMC. The Manager invites primary dealers to tender offers of price and quantity.

Discount Policy Announcement effect.

Reserve Requirements The Fed has the authority to set reserve requirements within a range established by the Monetary Control Act of 1980. Apply to all depository institutions. Reserve requirements are an important determinant of the money multiplier. An increase in the reserve requirement means a decrease in the total quantity of money.

Federal Reserve: Banking Services Check clearing Wire Transfer through Fedwire Automated Clearing House System (ACH)

Federal Reserve: Fiscal Agent Banker for the federal government. Accepts payment for the federal taxes on behalf of the IRS. Fiscal agent for the Treasury when issuing, redeeming, and transferring ownership of government securities.