Federal Reserve System

1. Federal Reserve System

2. 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

3. 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

4. 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.

5. The Civil War, Greenbacks, and National Banking • 1863 National Currency Act

6. 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

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

8. 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

9. 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.

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

11. 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.

12. 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

13. 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

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

15. 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.

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

17. 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.

18. 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.

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

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

21. 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.

22. Discount Policy • Announcement effect.

23. 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.

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

25. 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.