Copyright © 2002 Pearson Education, Inc. Slide 19-1

Copyright © 2002 Pearson Education, Inc. Slide 19-2 Chapter 19 Organization of the Federal Reserve System

Copyright © 2002 Pearson Education, Inc. Creation of the Federal Reserve System The Fed’s organization was shaped by the struggle between advocates regarding its power. After 1836, private institutions attempted to be lender of last resort. Severe financial panics led Congress to pass the Federal Reserve Act in 1913.

Copyright © 2002 Pearson Education, Inc. Federal Reserve Banks The Federal Reserve Act created 12 Federal Reserve districts, each with a district bank. Each district bank has a board of directors consisting of nine members. Subject to the board’s approval, the nine directors elect the president of that bank. The 12 Federal Reserve banks carry out many duties of the Fed.

Copyright © 2002 Pearson Education, Inc. Slide 19-5 Figure 19.1 Federal Reserve Districts and Banks

Copyright © 2002 Pearson Education, Inc. Member Banks The Federal Reserve Act required all national banks to become member banks. State banks were given the choice of whether or not to become members.

Copyright © 2002 Pearson Education, Inc. Board of Governors The Board of Governors is composed of seven members appointed by the President and confirmed by the U.S. Senate. Members serve 14-year, nonrenewable terms. It administers monetary policy. It has certain responsibilities relating to financial regulation.

Copyright © 2002 Pearson Education, Inc. Federal Open Market Committee The Federal Open Market Committee is composed of 12 members and directs the Fed’s open market operations. Members of the FOMC are the Board of Governors and five district bank presidents. The FOMC issues directives to the trading desk at the district bank in New York.

Copyright © 2002 Pearson Education, Inc. Power in the Fed The Board of Governors and the FOMC exert most of the Fed’s formal influence. The informal power of the chairman, the board staff, and the FOMC predominates. Member banks have little actual influence within the system.

Copyright © 2002 Pearson Education, Inc. Slide Figure 19.2a Organization and Authority of the Federal Reserve System

Copyright © 2002 Pearson Education, Inc. Slide Figure 19.2b Organization and Authority of the Federal Reserve System (cont.)

Copyright © 2002 Pearson Education, Inc. Handling External Pressure The Fed was designed to operate independently of external pressures. In reality the Fed operates in a political arena, and is subject to political pressure. The President exercises pressure through his appointments to the Board of Governors. The Fed is the creation of Congress, which can amend the Fed’s charter and powers.

Copyright © 2002 Pearson Education, Inc. Factors that Motivate the Fed The public interest view holds that the Fed acts in the interest of the general public. The principal-agent view implies that the Fed acts to increase its power and prestige. The principal-agent view also implies there could be a political business cycle. The evidence in favor of a political business cycle is at best mixed.

Copyright © 2002 Pearson Education, Inc. Fed Independence The issue of the Fed’s independence arises because of negative reaction to Fed policy. Proponents for Fed independence argue that politicians would do a poor job. Opponents of Fed independence claim that elected officials should make public policy.

Copyright © 2002 Pearson Education, Inc. Comparison of Major Central Banks The Fed has the longest fixed term of office for bank board members (14 years). The Fed has the shortest term for the head of the central bank (4 years). Of these countries, only Germany had a federal structure for the central bank. The overall degree of independence of the central bank varies.

Copyright © 2002 Pearson Education, Inc. Central Bank Independence in Other Countries Central bank independence is becoming greater. Countries with the most independent central banks have the lowest average rates of inflation.