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Snippet from Wikipedia: Federal Reserve

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s, the September 11 attacks in 2001, the Great Recession during the late 2000s, and the COVID-19 pandemic in 2020 have led to the expansion of the roles and responsibilities of the Federal Reserve System.

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications, such as the Beige Book and the FRED database.

The Federal Reserve System is composed of several layers. It is governed by the presidentially appointed board of governors or Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some of the board members of, the Federal Reserve Bank of their region. The Federal Open Market Committee (FOMC) sets monetary policy. It consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time (the president of the New York Fed and four others who rotate through one-year voting terms). There are also various advisory councils. Thus, the Federal Reserve System has both public and private components. It has a structure unique among central banks, and is also unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used.

The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury. Although an instrument of the US Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms."

“A great industrial nation is now controlled by its system of credit. ”

“We are no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.” (see Banksters) – Woodrow Wilson, 28th US President. Wilson signed in the Federal Reserve Act in exchange for campaign support.

The Federal Reserve (also known as The Fed) is a central banking system that controls the monetary system of the United States. It was established by the Federal Reserve Act, which was passed by Congress and signed into law by President Woodrow Wilson in 1913. “… the Board is a federal government agency consisting of seven members appointed by the President of the United States and confirmed by the U.S. Senate.”<ref> Board of Governors of the Federal Reserve System - Fedpoints - Federal Reserve Bank of New York</ref> The Federal Reserve is a system of private banks, twelve of which are designated as Federal Reserve Banks and have some features of public federal agencies. The Federal Reserve is headed by a Board of Governors and a Chairman. The current Chairman is Ben Bernanke, a Republican appointed by President George W. Bush; his predecessor was Alan Greenspan, a Republican appointed by President Ronald Reagan.

One of the main jobs of the Federal Reserve is to control inflation by adjusting the supply of money in the economy, while at the same time maintain the stability of the financial system and promote economic growth. This is done by buying and selling government bonds in order to influence banks' cash supply (called “open market operations”), setting the amount of money that banks must keep in reserve, and setting the interest rates for money it lends to banks (the Fed's lending facility is called the “discount window”).<ref>http://www.federalreserve.gov/pf/pdf/pf_3.pdf</ref> These three major operations are the basis of monetary policy, and are performed by the Fed to target a specific Federal Funds Rate that it believes will be low enough to ensure available credit and stimulate the economy, but high enough to prevent inflation. The Fed also has the responsibility of supervising and regulating banking institutions.<ref>http://www.federalreserve.gov/generalinfo/mission/default.htm</ref>

In 2008 the Fed became a major player in many new ways, taking over several major banks (ostensibly to prevent total economic collapse) and making trillions of dollars in guarantees. See Financial Crisis of 2008.

Federal Reserve banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, St. Louis, Minneapolis, Dallas, and San Francisco.

Criticism

Libertarians, such as Ron Paul, and many conservatives want to abolish the Federal Reserve. For 30 years Ron Paul has called for the secretive Federal Reserve bank to be audited.<ref>Audit the Federal Reserve</ref> Ron Paul's website declares “Since the Fed’s creation in 1913 the dollar has lost more than 96% of its value, and by recklessly inflating the money supply the Fed continues to distort interest rates and intentionally erodes the value of the dollar.”<ref>Audit the Federal Reserve</ref>

However, conservatives are not united in their criticism: the prominent conservative commentator Vox Day, a member of Mensa, describes himself as a “loyal Federal Reserve supporter”.<ref>Vox Day's blog</ref>

Effects of the Fed's Monetary Policy

The Fed made the Great Depression much, much worse by utterly failing in its primary responsibility. It simply did nothing, as hundreds and thousands of banks failed (see bank run). What it was supposed to do was lend them enough money to keep going!

Friedman and Schwartz argued that all this was due to the Fed’s failure to carry out its assigned role as the lender of last resort. Rather than providing liquidity through loans, the Fed just watched as banks dropped like flies, seemingly oblivious to the effect this would have on the money supply. The Great Depression According to Milton Friedman

Recent Literature

  • Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. ISBN 0-02-864323-2. excerpt and text search
  • Greenspan, Alan. The Age of Turbulence: Adventures in a New World (2007), memoirs covering his chairmanship 1987-2006 excerpt and text search
  • Greider, William, Secrets of the Temple. (1987). ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker
  • Hafer, R. W. The Federal Reserve System: An Encyclopedia. (2005). 451 pp, 280 entries; ISBN 4-313-32839-0.
  • Meyer, Lawrence H. A Term at the Fed: An Insider's View. (2004) ISBN 0-06-054270-5; focuses on the period from 1996 to 2002, emphasizing Alan Greenspan's chairmanship during the Asian financial crisis, the stock market boom and the 9-11 Attacks
  • Treaster, Joseph B. Paul Volcker: The Making of a Financial Legend (2004), chairman 1979-87 online edition
  • Tuccille, Jerome. Alan Shrugged: The Life and Times of Alan Greenspan, the World's Most Powerful Banker (2002) online edition
  • Wells, Donald R. The Federal Reserve System: A History (2004)
  • Woodward, Bob. Maestro: Greenspan's Fed and the American Boom (2000) study of Greenspan in 1990s.

Historical Literature

  • Broz, J. Lawrence. The International Origins of the Federal Reserve System (1997). online edition
  • Carosso, Vincent P. “The Wall Street Trust from Pujo through Medina”, Business History Review (1973) 47:421-37
  • Chandler, Lester V. American Monetary Policy, 1928-41. (1971).
  • Epstein, Gerald and Thomas Ferguson. “Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932.” Journal of Economic History 44 (December 1984): 957-84. in JSTOR
  • Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960 (1963)
  • Hetzel, Robert L. The Monetary Policy of the Federal Reserve: A History (2008) from 1913 to 2007; excerpt and text search
  • Kubik, Paul J. , “Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit.” Journal of Economic Issues . 30#3. 1996. pp 829+.
  • Link, Arthur. Wilson: The New Freedom (1956) pp 199-240.
  • Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
  • Mayhew, Anne. “Ideology and the Great Depression: Monetary History Rewritten.” Journal of Economic Issues 17 (June 1983): 353-60.
  • Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history excerpt and text search
  • Roberts, Priscilla. “'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War”, Business History Review (1998) 72: 585-603
  • Romer, Christina D. and David H. Romer. Choosing the Federal Reserve Chair: Lessons from History. The Journal of Economic Perspectives, Vol. 18, No. 1. (2004), pp. 129-162. (jstor)
  • Schull, Bernard. “The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence” (2005) ISBN 1-56720-624-7 online edition
  • Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
  • West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
  • Wicker, Elmus R. “A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression”, Journal of Economic History (1966) 26: 223-238, in JSTOR
  • Wicker, Elmus. Federal Reserve Monetary Policy, 1917-33. (1966).
  • Wells, Donald R. The Federal Reserve System: A History (2004)
  • Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (2005).
  • Wood, John H. A History of Central Banking in Great Britain and the United States (2005)
  • Wueschner; Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927 (1999)

References

<references/>

Finance Progressive Era United States History Economic History

Fair Use Source: http://www.conservapedia.com/Federal_Reserve_System


Give Me Control of a Nation’s Money …

“Give me control of a nation's money and I care not who makes the laws.” - Mayer Amschel Rothschild (Rothschild)

Very few people seem to know the truth about the Federal Reserve and our monetary system. For whatever reason, this topic simply gets brushed over. Yet, the Federal Reserve and its monetary policy, does play a significant role in each of our lives. Afterall, the Fed controls the nation's money.

Inflation … that's prices going up, right? Nope. Inflation is an increase in the money supply, without an equal increase in available goods and services. In other words, it's counterfeiting!

When the Fed “prints” money, it affects your dollar in the same way as a counterfeiter's dollar would - the value of your dollar declines. Prices do increase, but only because the dollar in your pocket isn't as valuable as it was before (meaning it takes more dollars to buy the same goods and services).

Inflation is not a “natural” occurence either. It's a deliberate act by the Federal Reserve … to STEAL your wealth. This is not a conspiracy theory. It's “just the facts, ma'am.”

value-us-dollar

The Struggle for the Control of the Nation's Money

David Gordon | Mises Daily

[A History of Money and Banking in the United States: From the Colonial Era to World War II (pdf). By Murray N. Rothbard, edited by Joseph T. Salerno. Mises Institute, 2002. 510 pages.]

Murray Rothbard had a remarkable ability to throw unexpected light on historical controversies. Again and again in his work, he pointed out factors that earlier authors had overlooked. After Rothbard has finished with a topic, we can never see it in the same way again. This talent is much in evidence in the present book, a collection of several long articles by Rothbard that together constitute a comprehensive look at American monetary history for the period indicated in the book's title.

An example will illustrate Rothbard's technique. Everyone knows Lenin's theory of imperialism. Developed capitalist economies, Lenin maintained, characteristically produce more than they can sell domestically. To find an outlet for their surplus goods, capitalists seek markets abroad. Their endeavors bring about a struggle for colonies; thus, the “highest stage” of capitalism is imperialism.

So much is well known; but how did Lenin arrive at this account? Rothbard has unearthed a surprising source. The theory stems ultimately from capitalist supporters of imperialism:

By the late 1890s, groups of theoreticians in the United States were working on what would later be called the “Leninist” theory of capitalist imperialism. The theory was originated, not by Lenin but by advocates of imperialism, centering around such Morgan-oriented friends and brain trusters of Theodore Roosevelt as Henry Adams, Brooks Adams, Admiral Alfred T. Mahan, and Massachusetts Senator Henry Cabot Lodge. … The ever lower rate of profit from the “surplus capital” was in danger of crippling capitalism, except that salvation loomed in the form of foreign markets and especially foreign investments. … Hence, to save advanced capitalism, it was necessary for Western governments to engage in outright imperialist or neo-imperialist ventures, which would force other countries to open their markets for American products and would force open investment opportunities abroad. (pp. 209 – 10)

I have concentrated on this detail, not only for its own sake, but because from it, we can see in operation several themes in Rothbard's conception of American financial history. Most obviously, he agrees with Michelet that history is a resurrection of the flesh. Not for him are impersonal trends and forces: history always involves the motives and actions of particular persons. (Professor Salerno, in his excellent introduction, explains the theoretical basis for Rothbard's stress on the particular.)

To illustrate, Rothbard does not confine himself to a general statement of the monopoly capitalist origins of the Leninist theory. He describes in great detail the activities of Charles Conant, a leading advocate of imperialism. Conant, it transpires, did much more than theorize. He actively worked to install the gold-exchange standard, a key tool of American monetary imperialism, in Latin America and elsewhere. Rothbard describes Conant's activities in his unique style: “Conant, as usual, was the major theoretician and finagler” (p. 226).

Neither as theorist nor practitioner did Conant act on his own, and to see why not enables us to grasp a central plank of Rothbard's edifice:

Nor should it be thought that Charles A. Conant was the purely disinterested scientist he claimed to be. His currency reforms directly benefited his investment banker employers. Thus, Conant was treasurer, from 1902 to 1906, of the Morgan-run Morton Trust Company of New York, and it was surely no coincidence that Morton Trust was the bank that held the reserve funds for the governments of the Philippines, Panama, and the Dominican Republic, after their respective currency reforms. (pp. 232 – 33)

Rothbard maintains that the House of Morgan held effective control of the American government for much of the late nineteenth and early twentieth centuries, down to the onset of Roosevelt's New Deal in 1933. He traces in detail Morgan backing for a central bank, culminating in the creation of the Federal Reserve System in 1913.

Through an overwhelming mass of detail, Rothbard makes his case; but a question here arises. Why did the Morgan interests (or anyone else, for that matter) wish to establish a central banking system?

Our author explains the main reason in great detail. A central banking system vastly increases the ability of bankers to lend more money than they possess in reserves. Absent central control, monetary expansion in a fractional reserve system faces limits. If a bank, desiring to increase its profits, expands too much, rival banks will call in its notes. If it cannot meet its obligations, it will collapse. A central banking system removes this obstacle.

The House of Morgan was by no means the first group in American history to seek the ill-gotten gains of centralized banking; Rothbard discusses in great detail, e.g., the struggles over the First and Second Banks of the United States.

Throughout his narrative, Rothbard stresses a point vital to the understanding of monetary history: A popular belief holds that poor people, likely to be in debt, favor easy money, while their rich creditors oppose it. Often, this turns out to be the reverse of the truth.

Debtors benefit from inflation and creditors lose; realizing this fact, older historians assumed that debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary nostrums. But of course, there are no rigid “classes” of creditors and debtors; indeed, wealthy merchants and land speculators are often the heaviest debtors. (p. 58)

Bankers, then, favor monetary expansion; but why should the rest of us oppose it? Do we not require an “elastic” currency to deal with the failure of prices quickly to adjust to changing business conditions? Not at all, answers Rothbard. “As 'Austrian' business cycle theory has pointed out, any bank credit inflation creates conditions of boom-and-bust” (p. 94).

“Suppose all this is true,” we can imagine an expansionist protesting. “Do we not still need monetary expansion to rescue us from recession?” Rothbard demurs; in his view, the business liquidations that accompany recessions are precisely the cure for the preceding boom. Efforts to interfere with these liquidations through inflation will induce another cycle.

Although Austrian theory provides the framework for Rothbard's history, its intricacies are not at the heart of the book. Let us then return to what I found the book's most valuable historical contribution, the discussion of the Morgan bank and its influence.

Rothbard makes clear that the Morgan interests aimed at much more than profits. To this very powerful group, the interests of Great Britain and her empire were paramount; and the Morgan bank constantly aimed to subordinate the interests of the United States to this superior power. After the onset of World War I,

[t]he Morgans played a substantial role in bringing the United States into the war on Britain's side, and, as head of the Fed, Benjamin Strong obligingly doubled the money supply to finance America's role in the war effort. (p. 270)

Rothbard's point serves to introduce a story within the larger story of Morgan influence. Benjamin Strong, the governor of the New York Federal Reserve Bank, was by far the most influential figure in the entire Federal Reserve System from its inception until his death in 1928. He entered into close association with Montagu Norman, governor of the Bank of England. Both men had enlisted in the Morgan camp:

While the close personal relations between Strong and Norman were of course highly important for the collaboration that formed the international monetary world of the 1920s, it should not be overlooked that both were intimately bound to the House of Morgan. (p. 374)

At Norman's behest, Strong inflated the US monetary supply in order to enable Britain to maintain in operation the gold-exchange standard. By doing so, Rothbard claims, Strong bears heavy responsibility for the onset of the 1929 stock market crash and the ensuing depression.

   The United States inflated its money and credit in order to prevent inflationary Britain from losing gold to the United States, a loss which would endanger the new, jerry-built "gold standard" structure. The result, however, was eventual collapse of money and credit in the US and abroad, and a worldwide depression. Benjamin Strong was the Morgans' architect of a disastrous policy of inflationary boom that led inevitably to bust. (p. 271)

Rothbard goes even further in his assault on Federal Reserve inflationism. Contrary to Milton Friedman, the Federal Reserve did not follow a contractionist policy once the depression began. Rothbard assails that

the spuriousness of the monetarist legend that the Federal Reserve was responsible for the great contraction of money from 1929 to 1933. On the contrary, the Fed and the administration tried their best to inflate, efforts foiled by the good sense, and by the increasing mistrust of the banking system, of the American people. (p. 275)

The book's narrative is a complex one, and by no means reduces to an account of the vicissitudes of the House of Morgan. A rival banking group, consisting most importantly of Rockefeller interests, challenged it for supremacy. For Rothbard, the New Deal can best be viewed as the victory of the Rockefeller group. (Although the Morgans recovered some of their influence after the mid-1930s, they henceforward occupied a subordinate position.)

Throughout the book, Rothbard pursues with tenacity a biographical method of analysis that stresses the ties of influential figures to central financial groups, such as the Morgans. In his intricate tracing of patrons and clients, Rothbard brings to mind the great works of Ronald Syme and Lewis Namier.

But Rothbard has the advantage over these renowned historians in that he does not restrict himself to the amassing of biographical detail. He has in addition a carefully worked out theory, Austrian economics, to guide him. I have endeavored in this review to mirror Rothbard's constant movement between detail and general theory, but I have at best been able to provide a small taste of this outstanding book.


Categories: Economics & Investing: Silver, Gold, Stock Market

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}}

The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.<ref name=“mnglass”/><ref name=“initial”/><ref>

</ref><ref name=FDS-H-04/><ref name=FDS-H-05/><ref name=FDS-H-06/> Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.<ref name=“initial”/><ref>

“It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.”</ref> Events such as the Great Depression were major factors leading to changes in the system.<ref>

</ref>

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates.<ref>

</ref> The first two objectives are sometimes referred to as the Federal Reserve's dual mandate.<ref>

</ref> Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions.<ref name=“mission”>

</ref> The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.<ref>

(See structure)</ref><ref>

</ref><ref>Advisory Councils – http://www.federalreserve.gov/aboutthefed/advisorydefault.htm</ref> The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time (the president of the New York Fed and four others who rotate through one-year terms). The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.<ref>

</ref> According to the Board of Governors, the Federal Reserve System “is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”<ref>From “Who owns the Federal Reserve?”, Current FAQs, Board of Governors of the Federal Reserve System, at ://www.federalreserve.gov/faqs/about_14986.htm.</ref>

The authority of the Federal Reserve System is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chair and vice-chair, are chosen by the President and confirmed by the Senate. The federal government sets the salaries of the Board's seven governors. Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region; this entitles them to elect some of the members of the board of the regional Federal Reserve Bank. Thus the Federal Reserve system has both public and private aspects.<ref name=“who_owns_faq”>

</ref><ref>

</ref><ref>

</ref><ref>

</ref> The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.<ref name=“nyt transfer”>

</ref> This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury Department.<ref>Fed Gives $77 Billion in Profits to Treasury Department Binyamin Appelbaum http://www.nytimes.com/2012/01/11/business/economy/fed-returns-77-billion-in-profits-to-treasury.html</ref>

Purpose

in Washington, D.C., which serves as the Federal Reserve System's headquarters.]] The primary motivation for creating the Federal Reserve System was to address banking panics.<ref name=“initial”>

“Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to 'panics,' in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy.”</ref> Other purposes are stated in the Federal Reserve Act, such as “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes”.<ref>

</ref> Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.<ref name=“BoG 2006 pp=1”>

</ref>

Current functions of the Federal Reserve System include:<ref name=“mission”/><ref name=“BoG 2006 pp=1”/>

  • To address the problem of banking panics
  • To serve as the central bank for the United States
  • To strike a balance between private interests of banks and the centralized responsibility of government
    • To supervise and regulate banking institutions
    • To protect the credit rights of consumers
  • To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of
    • maximum employment
    • stable prices, including prevention of either inflation or deflation<ref>

      </ref>

    • moderate long-term interest rates
  • To maintain the stability of the financial system and contain systemic risk in financial markets
  • To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
    • To facilitate the exchange of payments among regions
    • To respond to local liquidity needs
  • To strengthen U.S. standing in the world economy

Addressing the problem of bank panics

Banking institutions in the United States are required to hold reserves – amounts of currency and deposits in other banks – equal to only a fraction of the amount of the banks' deposit liabilities owed to customers. This practice is called fractional-reserve banking. As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur. Many economists, following Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929.<ref name=“Federal Reserve Board”>

</ref>

Elastic currency

holiday shopping season as new currency is created so people can make withdrawals at banks, and then removed from circulation afterwards, when less cash is demanded.]] One way to lessen the likelihood and the effect of bank runs is to have a money supply that can expand when money is needed. The use of the term “elastic currency” in the Federal Reserve Act does not imply only the ability to expand the money supply, but also the ability to contract the money supply. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as:<ref>

</ref>

Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change.

Check clearing system

Because some banks refused to clear checks from certain others during times of economic uncertainty, a check-clearing system was created in the Federal Reserve system. It is briefly described in The Federal Reserve System – Purposes and Functions as follows:<ref>

</ref>

Lender of last resort

In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector “clearing houses” which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.

Emergencies

According to the Federal Reserve Bank of Minneapolis, “the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.”<ref>lender of last resort, Federal Reserve Bank of Minneapolis, Retrieved May 21, 2010</ref> The Federal Reserve System's role as lender of last resort has been criticized because it shifts the risk and responsibility away from lenders and borrowers and places it on others in the form of inflation.<ref>

</ref>

Fluctuations

Through its discount window and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate (officially the primary credit rate).

By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.<ref name=“dfeverydayecon”/> For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).<ref name = 'Federal Reserve-AIG Press Release-2008-09-16'>

</ref><ref name= 'NYT-Andrews-2008-09-16'>

</ref>

Central bank

issued in 2009.]] In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.<ref name=“Fed_currency”>

</ref> During the Fiscal Year 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.<ref name=“Bureau_cost”>

</ref>

Federal funds

Federal funds are the reserve balances (also called Federal Reserve Deposits) that private banks keep at their local Federal Reserve Bank.<ref name=“fedfunds”>

</ref><ref>

</ref> These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works partly by influencing how much interest the private banks charge each other for the lending of these funds.

Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.

Balance between private banks and responsibility of governments

The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:<ref>

</ref>

In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is a part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

Government regulation and supervision

hearing on February 10, 2009. Members of the Board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.]]

The Federal Banking Agency Audit Act, enacted in 1978 as Public Law 95-320 and 31 U.S.C. section 714 establish that the Board of Governors of the Federal Reserve System and the Federal Reserve banks may be audited by the Government Accountability Office (GAO).<ref>

</ref> The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however there are restrictions to what the GAO may audit. Audits of the Reserve Board and Federal Reserve banks may not include:

  1. transactions for or with a foreign central bank or government, or nonprivate international financing organization;
  2. deliberations, decisions, or actions on monetary policy matters;
  3. transactions made under the direction of the Federal Open Market Committee; or
  4. a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3).<ref>

Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714(b), our audits of the Federal Reserve Board and Federal Reserve banks may not include (1) transactions for or with a foreign central bank or government, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits: Restrictions on GAO's Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher.

The real purpose of this historic “duck hunt” was to formulate a plan for U.S. banking and currency reform that Aldrich could present to Congress.

</ref><ref>

The Audit the Fed Coalition asserts that although the Fed is currently audited by outside agencies, these audits are not thorough and do not include monetary policy decisions or agreements with foreign central banks and governments. According to the Coaliition, the crucial issue of Federal Reserve transparency requires an analysis of 31 USC 714, the section of U.S. Code which establishes that the Federal Reserve may be audited by the Government Accountability Office (GAO), but which simultaneously severely restricts what the GAO may in fact audit. The coalition argues that the GAO is allowed to audit only check-processing, currency storage and shipments, and some regulatory and bank examination functions, etc. The Coalition contends that the most important matters, which directly affect the strength of the dollar and the health of the financial system, are immune from oversight.</ref>

The financial crisis which began in 2007, corporate bailouts, and concerns over the Fed's secrecy have brought renewed concern regarding ability of the Fed to effectively manage the national monetary system.<ref>

</ref> A July 2009 Gallup Poll found only 30% of Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.<ref>

The Fed's ability to influence Congress is diluted by public anger. A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.</ref> The Federal Reserve Transparency Act was introduced by congressman Ron Paul in order to obtain a more detailed audit of the Fed. The Fed has since hired Linda Robertson who headed the Washington lobbying office of Enron Corp. and was adviser to all three of the Clinton administration's Treasury secretaries.<ref>

</ref><ref>

</ref><ref>

</ref><ref>

</ref>

The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:<ref>

</ref>

</ref> that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and “agreement corporations” (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.

The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chair also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chair has formal responsibilities in the international arena as well.}}

Regulatory and oversight responsibilities

The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors. This policy is described in United States Code:<ref>

</ref>

National payments system

The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.<ref>

</ref>

In passing the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

The Federal Reserve plays a vital role in both the nation's retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients – individuals and smaller businesses. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions. The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution's failure to make or settle its payments.

The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing. The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.<ref>

</ref>

Structure

The Federal Reserve System has a “unique structure that is both public and private”<ref>

</ref> and is described as “independent within the government” rather than “independent of government”.<ref>

</ref> The System does not require public funding, and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1913 and is subject to Congressional modification or repeal.<ref name=FRBPhilPubPriv>"Is The Fed Public Or Private?" Federal Reserve Bank of Philadelphia. Retrieved June 29, 2012.</ref> The four main components of the Federal Reserve System are (1) the Board of Governors, (2) the Federal Open Market Committee, (3) the twelve regional Federal Reserve Banks, and (4) the member banks throughout the country.

Board of Governors

The seven-member Board of Governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general.<ref>

.</ref> Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms.<ref name=“dfeverydayecon”>

</ref> One term begins every two years, on February 1 of even-numbered years, and members serving a full term cannot be renominated for a second term.<ref name=FRB01/> “[U]pon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified.” The law provides for the removal of a member of the Board by the President “for cause”.<ref name=usc12-242>See

.</ref> The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.

The Chair and Vice Chair of the Board of Governors are appointed by the President from among the sitting Governors. They both serve a four-year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire.<ref name=usc12-241>See

</ref>

List of members of the Board of Governors

The current members of the Board of Governors are as follows:<ref name=FRB01>

</ref>

Governor Entered office<ref>

</ref>

Term expires
Janet Yellen<br />(Chair) October 4, 2010 (as Vice Chair)<br />February 3, 2014 (as Chair) February 3, 2014 (as Vice Chair)<br />February 3, 2018 (as Chair)<br />January 31, 2024 (as Governor)
Vacant<br />(Vice Chair)
Jeremy C. Stein May 30, 2012 January 31, 2018
Daniel Tarullo January 28, 2009 January 31, 2022
Sarah Bloom Raskin October 4, 2010 January 31, 2016
Jerome H. Powell May 25, 2012 January 31, 2014
Vacant

Nominations and confirmations

In late December 2011, President Barack Obama nominated Stein, a Harvard University finance professor and a Democrat, and Powell, formerly of Dillon Read, Bankers Trust<ref name=MW01/> and The Carlyle Group<ref>"Jerome Powell: Visiting Scholar". Bipartisan Policy Center. Retrieved December 27, 2011.</ref> and a Republican. Both candidates also have Treasury Department experience in the Obama and George H.W. Bush administrations respectively.<ref name=MW01>Goldstein, Steve (December 27, 2011). "Obama to nominate Stein, Powell to Fed board". MarketWatch. Retrieved December 27, 2011.</ref>

“Obama administration officials [had] regrouped to identify Fed candidates after Peter Diamond, a Nobel Prize-winning economist, withdrew his nomination to the board in June [2011] in the face of Republican opposition. Richard Clarida, a potential nominee who was a Treasury official under George W. Bush, pulled out of consideration in August [2011]”, one account of the December nominations noted.<ref>Lanman, Scott; Runningen, Roger (December 27, 2011). "Obama to Choose Powell, Stein for Fed Board". Bloomberg LP. Retrieved December 27, 2011.</ref> The two other Obama nominees in 2011, Yellen and Raskin,<ref>Robb, Greg (April 29, 2010). "Obama nominates 3 to Federal Reserve board". MarketWatch. Retrieved April 29, 2010.</ref> were confirmed in September.<ref>Lanman, Scott (September 30, 2010). "Yellen, Raskin Win Senate Approval for Fed Board of Governors". Bloomberg LP. Retrieved December 27, 2011.</ref> One of the vacancies was created in 2011 with the resignation of Kevin Warsh, who took office in 2006 to fill the unexpired term ending January 31, 2018, and resigned his position effective March 31, 2011.<ref>Censky, Annalyn (February 10, 2011). "Fed inflation hawk Warsh resigns". CNNMoney. Retrieved December 27, 2011.</ref><ref>Chan, Sewell (February 10, 2011). "Sole Fed Governor With Close Ties to Conservatives Resigns". The New York Times. Retrieved December 27, 2011.</ref> In March 2012, U.S. Senator David Vitter (R, LA) said he would oppose Obama's Stein and Powell nominations, dampening near-term hopes for approval.<ref>Robb, Greg (March 28, 2012). "Senator to block quick vote on Fed picks: report". MarketWatch. Retrieved March 28, 2012.</ref> However Senate leaders reached a deal, paving the way for affirmative votes on the two nominees in May 2012 and bringing the board to full strength for the first time since 2006<ref>Robb, Greg, "Stein sworn in as Fed governor", MarketWatch, May 30, 2012. Retrieved May 30, 2012.</ref> with Duke's service after term end. Later, on January 6, 2014, the United States Senate confirmed Yellen's nomination to be Chair of the Federal Reserve Board of Governors; she is slated to be the first woman to hold the position and will become Chair on February 1, 2014.<ref>

</ref> Subsequently, President Obama nominated Stanley Fischer to replace Yellen as the Vice Chair.<ref>

</ref>

Federal Open Market Committee

The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and 5 of the regional Federal Reserve Bank presidents. The FOMC oversees open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The president of the Federal Reserve Bank of New York is a permanent member of the FOMC; the presidents of the other banks rotate membership at two- and three-year intervals. All Regional Reserve Bank presidents contribute to the committee's assessment of the economy and of policy options, but only the five presidents who are then members of the FOMC vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the Chair of the Board of Governors as its chair and the president of the Federal Reserve Bank of New York as its vice chair. It is informal policy within the FOMC for the Board of Governors and the New York Federal Reserve Bank president to vote with the Chair of the FOMC; anyone who is not an expert on monetary policy traditionally votes with the chair as well; and in any vote no more than two FOMC members can dissent.<ref name=“Laws of the Fed”>

</ref> Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.<ref>

</ref>

Federal Advisory Council

Federal Reserve Banks

There are 12 Federal Reserve Banks located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the Board of Governors. Presidents serve five-year terms and may be reappointed.<ref name=“FRB_pres”>

</ref>

Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories large, medium, and small. Each category elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are nominated by the Board of Governors, and are also intended to represent the interests of the public.<ref>

</ref>

A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members (and hold stock in their regional Federal Reserve bank), upon meeting certain standards. About 38% of U.S. banks are members of their regional Federal Reserve Bank.<ref name=“Factcheck”>

</ref> The amount of stock a member bank must own is equal to 3% of its combined capital and surplus.<ref>

</ref><ref>

</ref> However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors.<ref name=“dfeverydayecon”/><ref name='R000107'>

</ref> From the profits of the Regional Bank of which it is a member, a member bank receives a dividend equal to 6% of their purchased stock.<ref name=“who_owns_faq” /> The remainder of the regional Federal Reserve Banks' profits is given over to the United States Treasury Department. In 2009, the Federal Reserve Banks distributed $1.4 billion in dividends to member banks and returned $47 billion to the U.S. Treasury.<ref>

</ref>

The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.<ref name=“Scott 8th Cir. 2005”>Kennedy C. Scott v. Federal Reserve Bank of Kansas City, et al., 406 F.3d 532 (8th Cir. 2005).</ref> In Lewis v. United States,<ref name=Lewis-vs-U.S.>680 F.2d 1239 (9th Cir. 1982).</ref> the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,<ref name=“Scott 8th Cir. 2005”/> in which the distinction is made between Federal Reserve Banks, which are federally created instrumentalities, and the Board of Governors, which is a federal agency.

Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks, political science professor Michael D. Reagan has written that:<ref>Michael D. Reagan, “The Political Structure of the Federal Reserve System,” American Political Science Review, Vol. 55 (March 1961), pp. 64–76, as reprinted in Money and Banking: Theory, Analysis, and Policy, p. 153, ed. by S. Mittra (Random House, New York 1970).</ref>

Member banks

According to the web site for the Federal Reserve Bank of Richmond, “[m]ore than one-third of U.S. commercial banks are members of the Federal Reserve System. National banks must be members; state chartered banks may join by meeting certain requirements.”<ref>

</ref>

Accountability

The Board of Governors of the Federal Reserve System, the Federal Reserve banks, and the individual member banks undergo regular audits by the GAO and an outside auditor. GAO audits are limited and do not cover “most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee” …[nor may the GAO audit] “dealings with foreign governments and other central banks.”<ref>

</ref> Various statutory changes, including the Federal Reserve Transparency Act, have been proposed to broaden the scope of the audits.

As of August 27, 2012, the Federal Reserve Board began publishing unaudited financial reports for the Federal Reserve banks. Reports are released every quarter.<ref>

</ref> This is an expansion of prior financial reporting practices. Greater transparency is offered with more frequent disclosure and more detail.

November 7, 2008, Bloomberg L.P. News brought a lawsuit against the Board of Governors of the Federal Reserve System to force the Board to reveal the identities of firms for which it has provided guarantees during the Late-2000s financial crisis.<ref>

</ref> Bloomberg, L.P. won at the trial court<ref>Docket entry 31, Bloomberg, L.P. v. Board of Governors of the Federal Reserve System, case no. 1:08-cv-09595-LAP, U.S. District Court for the District of New York.</ref> and the Fed's appeals were rejected at both the United States Court of Appeals for the Second Circuit and the U.S. Supreme Court. The data was released on March 31, 2011.<ref>

</ref><ref>

</ref>

Monetary policy

The term “monetary policy” refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of an economy. The Federal Reserve Act of 1913 gave the Federal Reserve authority to set monetary policy in the United States.<ref name=“mp”>

</ref><ref name=“mpb”>Federal Reserve Education – Monetary Policy Basics

</ref>

Interbank lending is the basis of policy

The Federal Reserve sets monetary policy by influencing the Federal funds rate, which is the rate of interbank lending of excess reserves. The rate that banks charge each other for these loans is determined in the interbank market but the Federal Reserve influences this rate through the three “tools” of monetary policy described in the ''Tools'' section below.

The Federal Funds rate is a short-term interest rate that the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.<ref>

</ref>

Tools

There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:<ref name=“mp”/>

Tool Description
Open market operations Purchases and sales of U.S. Treasury and federal agency securities – the Federal Reserve's principal tool for implementing monetary policy. The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the federal funds rate (the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that was largely complete by the end of the decade.<ref>

</ref>

Discount rate The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility – the discount window.<ref>

</ref>

Reserve requirements The amount of funds that a depository institution must hold in reserve against specified deposit liabilities.<ref name = “reserve_req”>

</ref>

Federal funds rate and open market operations

File:Federal funds effective rate 1954 to present.svg

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the interest rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.

Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of United States Treasury security, sometimes called “Treasury bills” or more informally “T-bills” or “Treasuries”. The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.<ref name=“FRB of NY”>

</ref>

The Federal Reserve education website describes open market operations as follows:<ref name=“mpb”/>

Repurchase agreements

To smooth temporary or cyclical changes in the money supply, the desk engages in repurchase agreements (repos) with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer's reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer's reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.<ref>

</ref>

Discount rate

The Federal Reserve System also directly sets the “discount rate”, which is the interest rate for “discount window lending”, overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 basis points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the “discount rate” option.<ref>Federal Reserve Bank San Francisco( 2004)</ref> The equivalent operation by the European Central Bank is referred to as the “marginal lending facility”.<ref>

</ref>

Both the discount rate and the federal funds rate influence the prime rate, which is usually about 3 percent higher than the federal funds rate.

Reserve requirements

Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio.<ref>

</ref> The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,<ref name=“BoG 2005 pp=27”>

</ref> which depository institutions trade in the federal funds market discussed above.<ref>

</ref> The required reserve ratio is set by the Board of Governors of the Federal Reserve System.<ref>

</ref> The reserve requirements have changed over time and some of the history of these changes is published by the Federal Reserve.<ref name=“hist_resreq”>

</ref>

Reserve Requirements in the U.S. Federal Reserve System<ref name = “reserve_req”/>
Liability Type Requirement
| Percentage of liabilities | Effective date
Net transaction accounts
$0 to $11.5 million 0 December 29, 2011
More than $11.5 million to $71 million 3 December 29, 2011
More than $71 million 10 December 29, 2011
Nonpersonal time deposits 0 December 27, 1990
Eurocurrency liabilities 0 December 27, 1990

As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances. The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC.<ref>

</ref>

New facilities

In order to address problems related to the subprime mortgage crisis and United States housing bubble, several new tools have been created. The first new tool, called the Term Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool<ref name=“taffaq”/> but there have been suggestions that this new tool may remain in place for a prolonged period of time.<ref>

</ref> Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008.<ref name=“tslfannounce”>

</ref> The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject treasury securities into the banking system.<ref>

“The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash…Unlike the newest tool, the past steps added cash to the banking system, which affects the Fed's benchmark interest rate…By contrast, the TSLF injects liquidity by lending Treasuries, which doesn't affect the federal funds rate. That leaves the Fed free to address the mortgage crisis directly without concern about adding more cash to the system than it wants”</ref> Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008.<ref>

</ref> The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealers, which was previously against Fed policy.<ref>

</ref> The differences between these three new facilities is described by the Federal Reserve:<ref name=pdcffaq>

</ref>

Some of the measures taken by the Federal Reserve to address this mortgage crisis have not been used since The Great Depression.<ref>

</ref> The Federal Reserve gives a brief summary of these new facilities:<ref>

</ref>

A fourth facility, the Term Deposit Facility, was announced December 9, 2009, and approved April 30, 2010, with an effective date of June 4, 2010.<ref>“Reserve Requirements of Depository Institutions Policy on Payment System Risk,” 75 Federal Register 86 (May 5, 2010), pp. 24384–24389.</ref> The Term Deposit Facility allows Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. Term deposits are intended to facilitate the implementation of monetary policy by providing a tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thus drain reserve balances from the banking system.

Term auction facility

The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions.<ref name=“taffaq”>

</ref> The creation of this facility was announced by the Federal Reserve on December 12, 2007, and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets.<ref name=“taf”>

</ref> The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.<ref>

</ref><ref>

</ref><ref>

</ref> <ref>

</ref> Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.<ref name=“mwtaf”>

</ref> Foreign exchange swap lines with the European Central Bank and Swiss National Bank were opened so the banks in Europe could have access to U.S. dollars.<ref name=“mwtaf”/> Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

It is also described in the Term Auction Facility FAQ<ref name=“taffaq”/>

Term securities lending facility

The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.<ref name=“tslffaq”>Term Securities Lending Facility: Frequently Asked Questions: http://www.newyorkfed.org/markets/tslf_faq.html</ref> Like the Term Auction Facility, the TSLF was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable. It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., J.P. Morgan Chase, and Morgan Stanley, will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets.

The currency swap lines with the European Central Bank and Swiss National Bank were increased.

Primary dealer credit facility

The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.<ref name=pdcffaq/> This new facility marks a fundamental change in Federal Reserve policy because now primary dealers can borrow directly from the Fed when this previously was not permitted.

Interest on reserves

, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp.<ref>

</ref> As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.<ref>

</ref>

Term deposit facility

The Term Deposit Facility is a program through which the Federal Reserve Banks will offer interest-bearing term deposits to eligible institutions. By removing “excess deposits” from participating banks, the overall level of reserves available for lending is reduced, which should result in increased market interest rates, acting as a brake on economic activity and inflation. The Federal Reserve has stated that:

</ref>}}

The Federal Reserve initially authorized up to five “small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures.”<ref>

</ref> After three of the offering auctions were successfully completed, it was announced that small-value auctions would continue on an on-going basis.<ref>

</ref>

The Term Deposit Facility is essentially a tool available to reverse the efforts that have been employed to provide liquidity to the financial markets and to reduce the amount of capital available to the economy. As stated in Bloomberg News:

</ref> }}

Chairman Ben S. Bernanke, testifying before House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:

Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) was also called the AMLF. The Facility began operations on September 22, 2008, and was closed on February 1, 2010.<ref>

</ref>

All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks were eligible to borrow under this facility pursuant to the discretion of the FRBB.

Collateral eligible for pledge under the Facility was required to meet the following criteria:

  • was purchased by Borrower on or after September 19, 2008 from a registered investment company that held itself out as a money market mutual fund;
  • was purchased by Borrower at the Fund's acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by Borrower;
  • was rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, the ABCP must have been rated within the top rating category by that agency;
  • was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
  • had a stated maturity that did not exceed 120 days if the Borrower was a bank or 270 days for non-bank Borrowers.
Commercial Paper Funding Facility

On October 7, 2008, the Federal Reserve further expanded the collateral it will loan against to include commercial paper using the new Commercial Paper Funding Facility (CPFF). The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.<ref>Fed Action

</ref> This program lent out a total $738 billion before it was closed. Forty-five out of 81 of the companies participating in this program were foreign firms. Research shows that Troubled Asset Relief Program (TARP) recipients were twice as likely to participate in the program than other commercial paper issuers who did not take advantage of the TARP bailout. The Fed incurred no losses from the CPFF.<ref>

</ref>

Quantitative policy

A little-used tool of the Federal Reserve is the quantitative policy. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business. The Federal Reserve Board used this policy in the early 1990s when the U.S. economy experienced the savings and loan crisis.

The bursting of the United States housing bubble prompted the Fed to buy mortgage-backed securities for the first time in November 2008. Over six weeks, a total of $1.25 trillion were purchased in order stabilize the housing market, about one-fifth of all U.S. government-backed mortgages.<ref>

</ref>

History

Central banking in the United States

In 1690, the Massachusetts Bay Colony became the first to issue paper money in what would become the United States, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade.<ref name=“A Brief History of Our Nation's Paper Money”/> Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies.<ref name=“Benjamin Franklin And the Birth of a Paper Money Economy”>

</ref> However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate.<ref name=“A Brief History of Our Nation's Paper Money”>

</ref> The Currency Act of 1751 set limits on the issuance of Bills of Credit by the New England states and set requirements for the redemption of any bills issued. This Act was in response to the overissuance of bills by Rhode Island, eventually reducing their value to 1/27 of the issuing value.<ref>

</ref> The Currency Act of 1764 completely banned the issuance of Bills of Credit (paper money) in the colonies and the making of such bills legal tender because their depreciation allowed the discharge of debts with depreciated paper at a rate less than contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects. The ban proved extremely harmful to the economy of the colonies and inhibited trade, both within the colonies and abroad.<ref>"The Currency Act of 1764". The Royal Colony of South Carolina. carolana.com. Retrieved January 3, 2012. “This act was not repealed prior to the American Revolution. It had very dire consequences for both North Carolina and South Carolina, both of whose economies were already shaky. The Currency Act was, therefore, a great hardship to trade within and without the colonies and, equally important, proof that the British government put the interests of mother country merchants ahead of theirs.&nbsp;… The entire text of the Act is provided below.” “…and whereas such bills of credit have greatly depreciated in their value, by means whereof debts have been discharged with a much less value than was contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects…no act, order, resolution, or vote of assembly, in any of his Majesty's colonies or plantations in America, shall be made, for creating or issuing any paper bills, or bills of credit of any kind or denomination whatsoever, declaring such paper bills, or bills of credit, to be legal tender in payment of any bargains, contracts, debts, dues, or demands whatsoever; and every clause or provision which shall hereafter be inserted in any act, order, resolution, or vote of assembly, contrary to this act, shall be null and void.”</ref>

The first attempt at a national currency was during the American Revolutionary War. In 1775 the Continental Congress, as well as the states, began issuing paper currency, calling the bills “Continentals”. The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting, caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787,<ref>

</ref> as well as banning such issuance by the various states, and limiting the states ability to make anything but gold or silver coin legal tender on August 28.<ref>US Constitution Article 1, Section 10. “no state shall ..emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;”</ref>

In 1791, the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811.<ref name=“A Brief History of Our Nation's Paper Money”/> The First Bank of the United States came to an end under President Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under President Jackson when its charter expired. Both banks were based upon the Bank of England.<ref>

</ref> Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.

Timeline of central banking in the United States

:Sources:

Creation of First and Second Central Bank

The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791, at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President Madison, because Congress refused to renew it.<ref name=“boshistory”>

</ref>

In 1816, however, Madison revived it in the form of the Second Bank of the United States. Years later, early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies

. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907,<ref name=FDS-H-04>Panic of 1907: J.P. Morgan Saves the Day</ref><ref name=FDS-H-05>Born of a Panic: Forming the Fed System</ref><ref name=FDS-H-06>The Financial Panic of 1907: Running from History</ref> provided demand

for the creation of a centralized banking system.

Creation of Third Central Bank

The main motivation for the third central banking system came from the Panic of 1907, which caused renewed demands

for banking and currency reform.<ref name=FDS-H-04/><ref name=FDS-H-05/><ref name=FDS-H-06/><ref name=“herrickpanic”>

</ref> During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics.<ref name=“EFlaherty”/> According to many economists, the previous national banking system had two main weaknesses: an inelastic currency and a lack of liquidity.<ref name=“EFlaherty”>

</ref> In 1908, Congress enacted the Aldrich-Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.<ref name=“mnwarburg”>

</ref> The National Monetary Commission returned with recommendations which were repeatedly rejected by Congress. A revision crafted during a secret meeting on Jekyll Island by Senator Aldrich and representatives of the nation's top finance and industrial groups later became the basis of the Federal Reserve Act.<ref>

</ref><ref>

</ref> The House voted on December 22, 1913, with 298 yeas to 60 nays, and the Senate voted 43–25 on December 23, 1913.<ref>

</ref> President Woodrow Wilson signed the bill later that day.<ref>

</ref>

Federal Reserve Act

The head of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions – one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them.<ref name=“mnwarburg”/> Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg, an attendee of the meeting and longtime advocate of central banking in the U.S., later wrote that Aldrich was “bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties”.<ref name=“Warburg document”>

</ref> After ten days of deliberation, the bill, which would later be referred to as the “Aldrich Plan”, was agreed upon. It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible.<ref name=“Warburg document”/> The compromise involved representation of the public sector on the Board of Directors.<ref name=“ecresearch”>

</ref>

Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as J. P. Morgan and John D. Rockefeller, Jr., Aldrich's son-in-law. Most Republicans favored the Aldrich Plan,<ref name=“ecresearch” /> but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the “eastern establishment”.<ref name=“mnglass”>

</ref> In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.<ref name=“ecresearch” /> Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.<ref name=“ecresearch” />

The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress.<ref name=“Warburg document” /> Nonetheless, President Woodrow Wilson believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator Robert Owen in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government.<ref name=“mnglass” /><ref name=“boshistory”/> The bill passed Congress on December 23, 1913,<ref>

</ref><ref>

</ref> on a mostly partisan basis, with most Democrats voting “yea” and most Republicans voting “nay”.<ref name=“boshistory”/>

Key laws

Measurement of economic variables

The Federal Reserve records and publishes large amounts of data. A few websites where data is published are at the Board of Governors Economic Data and Research page,<ref>

</ref> the Board of Governors statistical releases and historical data page,<ref>

</ref> and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.<ref>

</ref> The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.<ref name=“eco_ind”>Federal Reserve Education – Economic Indicators

</ref>

Some criticism involves economic data compiled by the Fed. The Fed sponsors much of the monetary economics research in the U.S., and Lawrence H. White objects that this makes it less likely for researchers to publish findings challenging the status quo.<ref>

</ref>

Net worth of households and nonprofit organizations

The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled Flow of Funds.<ref>FRB: Z.1 Release – Flow of Funds Accounts of the United States, Release Dates See the pdf documents from 1945 to 2007. The value for each year is on page 94 of each document (the 99th page in a pdf viewer) and duplicated on page 104 (109th page in pdf viewer). It gives the total assets, total liabilities, and net worth. This chart is of the net worth.</ref> At the end of the third quarter of fiscal year 2012, this value was $64.8 trillion.

Money supply

File:Components of the United States money supply2.svg

The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

Measure Definition
M0 The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1 M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts (“checking” or “current” accounts).
M2 M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
M3 M2 + all other CDs, deposits of eurodollars and repurchase agreements.

The Federal Reserve stopped publishing M3 statistics in March 2006, saying that the data cost a lot to collect but did not provide significantly useful information.<ref name = “prxliv”>

</ref> The other three money supply measures continue to be provided in detail.

Personal consumption expenditures price index

The Personal consumption expenditures price index, also referred to as simply the PCE price index, is used as one measure of the value of money. It is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Using a variety of data including United States Consumer Price Index and U.S. Producer Price Index prices, it is derived from the largest component of the Gross Domestic Product in the BEA's National Income and Product Accounts, personal consumption expenditures.

One of the Fed's main roles is to maintain price stability, which means that the Fed's ability to keep a low inflation rate is a long-term measure of the their success.<ref>

</ref> Although the Fed is not required to maintain inflation within a specific range, their long run target for the growth of the PCE price index is between 1.5 and 2 percent.<ref>

</ref> There has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.<ref>

</ref><ref>

</ref><ref>

</ref>

Inflation and the economy

There are two types of inflation that are closely tied to each other. Monetary inflation is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.

The second way that inflation can occur and the more frequent way

is by an increase in the velocity of money. This has only been measured since the mid-'50s. A healthy economy usually has a velocity of 1.8 to 2.3. If the velocity is too high, then this means that people are not holding on to their money and spending it as fast as they get it. Inflation happens when too many dollars are chasing too few goods. If people are spending as soon as they get it, then there are more “active” dollars in the marketplace, as opposed to sitting in a bank account. This will also cause a price increase.<ref name=“mpb”/>

The effects of monetary and price inflation include:<ref name=“mpb”/>

  • Price inflation makes workers worse off if their incomes don't rise as rapidly as prices.
  • Pensioners living on a fixed income are worse off if their savings do not increase more rapidly than prices.
  • Lenders lose because they will be repaid with dollars that aren't worth as much.
  • Savers lose because the dollar they save today will not buy as much when they are ready to spend it.
  • Debtors win because the dollar they borrow today will be repaid with dollars that aren't worth as much.
  • Businesses and people will find it harder to plan and therefore may decrease investment in future projects.
  • Owners of financial assets suffer.
  • Interest rate-sensitive industries, like mortgage companies, suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.
  • Developed-market currencies become weaker against emerging markets.<ref name=“GIN”>

    </ref>

Adherents of the Austrian School of economic theory blame the economic crisis in the late 2000s on the Federal Reserve's policy, particularly under the leadership of Alan Greenspan, of credit expansion through historically low interest rates starting in 2001, which they claim enabled the United States housing bubble.<ref>O'Driscoll, Gerald P. Jr. (April 20, 2010). "An Economy of Liars". The Wall Street Journal. Retrieved June 23, 2010.</ref>

Most mainstream economists favor a low, steady rate of inflation.<ref name=“econjournalwatch.org”>Hummel, Jeffrey Rogers. “Death and Taxes, Including Inflation: the Public versus Economists” (January 2007).://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists p.56</ref> Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.<ref>“Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others” Lars E.O. Svensson, Journal of Economic Perspectives, Volume 17, Issue 4 Fall 2003, p145-166</ref> The task of keeping the rate of inflation low and stable is usually given to monetary authorities.

Unemployment rate

File:US Seasonal Unemployment.svg

One of the stated goals of monetary policy is maximum employment. The unemployment rate statistics are collected by the Bureau of Labor Statistics, and like the PCE price index are used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world.<ref>

</ref>

Budget

The Federal Reserve is self-funded. The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as “capital gains/losses” that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.<ref>Chicago Fed – Demonstrating Knowledge of the Fed: ://www.chicagofed.org/education_resources/files/Demonstrating_Knowledge.ppt

</ref> The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress. There are two reports with budget information. The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, “Annual Report”. It also includes data about employment throughout the system. The other report, which explains in more detail the expenses of the different aspects of the whole system, is called “Annual Report: Budget Review”. These are comprehensive reports with many details and can be found at the Board of Governors' website under the section “Reports to Congress”<ref name=budget>

</ref>

Net worth

Balance sheet

One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the “Consolidated Statement of Condition of All Federal Reserve Banks” showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks. The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.<ref>

</ref><ref name=“balance sheet”>

</ref>

Below is the balance sheet as of July 6, 2011 (in billions of dollars):

NOTE: The Fed balance sheet shown in this article has assets, liabilities and net equity that do not add up correctly. The Fed balance sheet is missing the item “Reserve Balances with Federal Reserve Banks” which would make the figures balance.

ASSETS:
Gold Stock 11.04
Special Drawing Rights Certificate Acct. 5.20
Treasury Currency Outstanding (Coin) 43.98
Securities Held Outright 2647.94
&nbsp;&nbsp;&nbsp;U.S. Treasury Securities 1623.78
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Bills 18.42
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes and Bonds, nominal 1530.79
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes and Bonds, inflation-indexed 65.52
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inflation Compensation 9.04
&nbsp;&nbsp;&nbsp;Federal Agency Debt Securities 115.30
&nbsp;&nbsp;&nbsp;Mortgage-Backed Securities 908.85
Repurchase Agreements 0
Loans 12.74
Primary Credit 12
Secondary Credit 0
Seasonal Credit 53
&nbsp;&nbsp;&nbsp;Credit Extended to AIG Inc. 0
&nbsp;&nbsp;&nbsp;Term Asset-Backed Securities Loan Facility 12.67
&nbsp;&nbsp;&nbsp;Other Credit Extended 0
Commercial Paper Funding Facility LLC 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 60.32
Preferred Interest in AIG Life-Insurance Subsidiaries 0
Net Holdings of TALF LLC 0.75
Float -1.05
Central Bank Liquidity Swaps 0
Other Assets 133.56
Total Assets 2914.51
LIABILITIES:
Currency in Circulation 1031.30
Reverse repurchase agreements 68.09
Deposits 91.12
&nbsp;&nbsp;&nbsp;Term Deposits 0
&nbsp;&nbsp;&nbsp;U.S. Treasury, general account 76.56
&nbsp;&nbsp;&nbsp;U.S. Treasury, supplementary financing account 5
&nbsp;&nbsp;&nbsp;Foreign official 0.17
&nbsp;&nbsp;&nbsp;Service Related 2.53
&nbsp;&nbsp;&nbsp;Other Deposits 6.85
Funds from AIG, held as agent 0
Other Liabilities 73.06
Total liabilities 1263.73
CAPITAL <small>(AKA Net Equity)</small>
Capital Paid In 26.71
Surplus 25.91
Other Capital 4.16
Total Capital 56.78
MEMO <small>(off-balance-sheet items)</small>
Marketable securities held in custody for foreign official and international accounts 3445.42
&nbsp;&nbsp;&nbsp;U.S. Treasury Securities 2708
&nbsp;&nbsp;&nbsp;Federal Agency Securities 737.31
Securities lent to dealers 30.46
&nbsp;&nbsp;&nbsp;Overnight 30.46
&nbsp;&nbsp;&nbsp;Term 0
|| ||

Analyzing the Federal Reserve's balance sheet reveals a number of facts:

  • The Fed has over $11 billion in gold stock (certificates), which represents the Fed's financial interest in the statutory-determined value of gold turned over to the U.S. Treasury in accordance with the Gold Reserve Act on January 30, 1934.<ref name=“The Federal Reserve Does NOT Own Any Gold at All”>

    </ref> The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce. As of March 2009, the market value of that gold is around $247.8 billion.

  • The Fed holds more than $1.8 billion in coinage, not as a liability but as an asset. The Treasury Department is actually in charge of creating coins and U.S. Notes. The Fed then buys coinage from the Treasury by increasing the liability assigned to the Treasury's account.
  • The Fed holds at least $534 billion of the national debt. The “securities held outright” value used to directly represent the Fed's share of the national debt, but after the creation of new facilities in the winter of 2007–2008, this number has been reduced and the difference is shown with values from some of the new facilities.
  • The Fed has no assets from overnight repurchase agreements. Repurchase agreements are the primary asset of choice for the Fed in dealing in the open market. Repo assets are bought by creating depository institution liabilities and directed to the bank the primary dealer uses when they sell into the open market.
  • The more than $1 trillion in Federal Reserve Note liabilities represents nearly the total value of all dollar bills in existence; over $176 billion is held by the Fed (not in circulation); and the “net” figure of $863 billion represents the total face value of Federal Reserve Notes in circulation.
  • The $916 billion in deposit liabilities of depository institutions shows that dollar bills are not the only source of government money. Banks can swap deposit liabilities of the Fed for Federal Reserve Notes back and forth as needed to match demand from customers, and the Fed can have the Bureau of Engraving and Printing create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).
  • The $93.5 billion in Treasury liabilities shows that the Treasury Department does not use private banks but rather uses the Fed directly (the lone exception to this rule is Treasury Tax and Loan because the government worries that pulling too much money out of the private banking system during tax time could be disruptive).
  • The $1.6 billion foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
  • The $9.7 billion in 'other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to member banks for the 6% dividend on the 3% of their net capital they are required to contribute in exchange for nonvoting stock their regional Reserve Bank in order to become a member. Member banks are also subscribed for an additional 3% of their net capital, which can be called at the Federal Reserve's discretion. All nationally chartered banks must be members of a Federal Reserve Bank, and state-chartered banks have the choice to become members or not.
  • Total capital represents the profit the Fed has earned, which comes mostly from assets they purchase with the deposit and note liabilities they create. Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as “Miscellaneous Revenue”.

In addition, the balance sheet also indicates which assets are held as collateral against Federal Reserve Notes.

Federal Reserve Notes and Collateral
Federal Reserve Notes Outstanding 1128.63
&nbsp;&nbsp;&nbsp;Less: Notes held by F.R. Banks 200.90
&nbsp;&nbsp;&nbsp;Federal Reserve notes to be collateralized 927.73
Collateral held against Federal Reserve notes 927.73
&nbsp;&nbsp;&nbsp;Gold certificate account 11.04
&nbsp;&nbsp;&nbsp;Special drawing rights certificate account 5.20
&nbsp;&nbsp;&nbsp;U.S. Treasury, agency debt, and mortgage-backed securities pledged 911.50
&nbsp;&nbsp;&nbsp;Other assets pledged 0

Criticism

The Federal Reserve System has faced various criticisms since its inception in 1913. These criticisms include the assertions that the Federal Reserve System violates the United States Constitution and that it impedes economic prosperity. Critic Miranda Fleschert contends that the twelve regional Federal Reserve banks (as opposed to the entire Federal Reserve System) consider themselves to be private corporations with private funding.<ref>

</ref> The movement to audit the Federal Reserve System has gained national traction; a bill related to the movement was passed through the House of Representatives in 2012.<ref>

</ref> Many critics see auditing the Federal Reserve System as a means of gaining insight into an institution they contend has historically had little to no transparency, that has acted without congressional approval or oversight, and that has the power to create and loan U.S. dollars based on a monetary policy determined by its own interests.<ref>

</ref>

See also

References

Bibliography

Recent

Historical

  • J. Lawrence Broz; The International Origins of the Federal Reserve System Cornell University Press. 1997.
  • Vincent P. Carosso, “The Wall Street Trust from Pujo through Medina”, Business History Review (1973) 47:421-37
  • Chandler, Lester V. American Monetary Policy, 1928–41. (1971).
  • Epstein, Gerald and Thomas Ferguson. “Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932”. Journal of Economic History 44 (December 1984): 957–84. in JSTOR
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External links

federal_reserve_system.txt · Last modified: 2020/03/12 18:34 (external edit)