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The Federal Reserve System

The Federal Reserve System. Chapter 14 Week 13. First Bank of the United States. 1791-1811 Congress decided not to renew charter Now a museum in Philadelphia Walnut Street Journal?. Second Bank of the United States. 1816-1836 Renewal of charter vetoed by Andrew Jackson in 1832

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The Federal Reserve System

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  1. The Federal Reserve System Chapter 14 Week 13 Maclachlan, Money & Banking Spring 2005

  2. First Bank of the United States • 1791-1811 • Congress decided not to renew charter • Now a museum in Philadelphia • Walnut Street Journal? Maclachlan, Money & Banking Spring 2005

  3. Second Bank of the United States • 1816-1836 • Renewal of charter vetoed by Andrew Jackson in 1832 • Now portrait gallery in Philadelphia Maclachlan, Money & Banking Spring 2005

  4. Federal Reserve System • Passed through Congress narrowly in December 1913 • Regional banks to disperse power and allay fears of monopoly capitalism • Lender of last resort (discount loans only) • 12 - 7- 12 Maclachlan, Money & Banking Spring 2005

  5. Federal Open Market Committee • 1935 • 12 members • 7 members of the Board of Governors + 5 Fed bank presidents (always including the President of the FRBNY) Maclachlan, Money & Banking Spring 2005

  6. Open Market Operations Maclachlan, Money & Banking Spring 2005

  7. FOMC Books • Green (national forecast) • Blue (projected monetary aggregates) • Beige (regional banks assessment of economy) Maclachlan, Money & Banking Spring 2005

  8. Board of Governors • 7 members. • 14 year non-renewable terms, one opens up every second January. • Chairman has 4 year renewable term. Maclachlan, Money & Banking Spring 2005

  9. Only 14 year terms … • Appointed in 1987 • 2005 -1987 = ? Maclachlan, Money & Banking Spring 2005

  10. Greenspan’s Legacy Maclachlan, Money & Banking Spring 2005

  11. Maclachlan, Money & Banking Spring 2005

  12. Federal Reserve Districts Maclachlan, Money & Banking Spring 2005

  13. Member bankers’ bank (keeps deposits and makes loans when reserves are too low) Clear checks Issue new currency and withdraw old Oversee bank mergers Liaison with the business community and collect data Bank examinations Research for input into MP decisions Functions of the Fed Banks Maclachlan, Money & Banking Spring 2005

  14. Federal Reserve Bank of New York Maclachlan, Money & Banking Spring 2005

  15. FRBNY is special because … • Open market operations executed there (FRBNY Fed President always part of FOMC). • Responsible for foreign exchange interventions on behalf of Fed and Treasury. • Gold reserves of many nations reside in the basement. • Biggest banks are in the 2nd district. • Represents Fed at Bank for International Settlements in Switzerland. Maclachlan, Money & Banking Spring 2005

  16. The Gold Vault • Over $100 billion worth of gold in the basement. • Belongs to 60 foreign countries and international organizations. • Most of it flowed in during WWII when European countries feared for the safety of their gold. • Relic from the days of the gold standard when countries had gold backing for their currency. Control Group with reps from Auditing, Vault Services, and Protection Maclachlan, Money & Banking Spring 2005

  17. More on Gold Vault … • On bedrock, 80 feet below street level, 50 feet below sea level. • Entryway is a narrow ten foot passage way cut into a 90 ton steel cylinder in a 140 ton steel and concrete frame. • Movie link: Die Hard III Maclachlan, Money & Banking Spring 2005

  18. Central Bank Independence Factors making Fed independent 1. Members of Board have long terms • Fed is financially independent: Factors making Fed dependent 1. Congress can amend Fed legislation 2. President appoints Chairmen and Board members and can influence legislation Maclachlan, Money & Banking Spring 2005

  19. Do we need a central bank? "I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject." Friedrich Hayek Maclachlan, Money & Banking Spring 2005

  20. Arguments for Fed Lender of last resort. Elastic currency. Counter Argument Did not function during the Depression Ability to expand money supply can be misused. Economic growth with fixed money implies steadily declining prices. Case for Central Bank Maclachlan, Money & Banking Spring 2005

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