Federal Reserve System
The Federal Reserve System, often referred to as the Fed, is the central banking system of the United States. It is responsible for conducting monetary policy, regulating and supervising banks, and maintaining the stability of the financial system. The Fed plays a crucial role in influencing the country's economic growth and stability through its control over interest rates and money supply.
8 Key excerpts on "Federal Reserve System"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Critics have maintained that the Federal Reserve System—also known as the Fed—has sometimes destabilized the economy by causing inflation or recession. However, proponents of the Fed argue that it has done a credible job of promoting economic stability. They maintain that severe economic shocks—such as stock market crashes, wars, rising oil prices, and foreign competition—have unsettled the economy and that the Fed has done its best to maintain a stable economy. In this chapter, we will examine the nature and operation of the Fed. We will begin by considering its structure and how it attempts to control the money supply and interest rates in order to stabilize the economy. The Federal Reserve System The Federal Reserve System (Fed), is the central bank of the United States. It was legislated by Congress and signed into law by President Woodrow Wilson in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. All major countries have a central bank whose functions are broadly similar to those of the Fed. These central banks include the Bank of England, the Bank of Canada, and the Bank of Japan. Before Congress created the Fed, periodic financial panics had plagued the nation. These panics had contributed to many bank failures, business bankruptcies, and general economic downturns. A particularly severe crisis in 1907 prompted the eventual passage of the Federal Reserve Act in 1913. Structure of the Federal Reserve System The Fed’s structure was designed by Congress to give it a broad perspective on the economy and on economic activity in all parts of the nation. At the head of its formal organization is the Board of Governors, located in Washington, D.C. The 12 regional Federal Reserve Banks make up the next level. The organization of the Fed also includes the Federal Open Market Committee and three advisory councils...
eBook - ePubUnderstanding Central Banking
The New Era of Activism
- David Jones(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...3 Contemporary Federal Reserve Policy Perhaps this chapter on the nuts and bolts of monetary policy should begin by noting the key element that guides Fed policy deliberations and actions. In setting the stage for a discussion of the objectives, instruments, and organizational machinery of monetary policy, including the key policymaking body known as the Federal Open Market Committee (FOMC), it is necessary to point out that the Fed is, first and foremost, a chair-centered culture. In virtually all cases, it is the Fed chair who calls the shots in policymaking and represents our central bank in all important outside events, including congressional testimony. This chapter highlights the role of Fed chairman Ben Bernanke in fighting the worst credit crisis of modern times. O RGANIZATION The Federal Reserve System is a unique organization consisting of a board of governors in Washington, DC, and 12 district Federal Reserve banks scattered around the country. Formally, it is an independent agency of U.S. Congress and accordingly is subject to legislative change at any time, if Congress so desires. The Federal Reserve System was created in 1913, largely in response to the Panic of 1907. The idea was to have the Fed act as a lender of last resort when future unforeseen financial crises or panics erupted. The Fed was, for the most part, a bystander in the Roaring Twenties, though it did tighten policy early in the decade to try to curtail inflation and late in the decade to try to deflate the stock market bubble. In the early 1920s, the monetary authorities were slow to recognize the usefulness of open market operations, their primary “conventional” monetary policy instrument. Upon its creation, it was assumed that the Fed would influence credit conditions chiefly through changes in the discount rate that it charged on loans to member banks...
eBook - ePub- Jack Rabin, Jack Rabin(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...economy? How does the Fed formulate strategies to reach its goals? HOW IS THE FEDERAL RESERVE STRUCTURED? The Federal Reserve System (called the Fed, for short) is the nation’s central bank. It was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks (for a discussion of the Fed’s overall responsibilities, see The Federal Reserve System: Purposes and Functions). The Congress structured the Fed to be independent within the government—that is, although the Fed is accountable to the Congress, it is insulated from day-to-day political pressures. This reflects the conviction that the people who control the country’s money supply should be independent of the people who frame the government’s spending decisions. Most studies of central bank independence rank the Fed among the most independent in the world. What Makes the Fed Independent? Three structural features make the Fed independent: the appointment procedure for governors, the appointment procedure for Reserve Bank Presidents, and funding. Appointment Procedure for Governors The seven Governors on the Federal Reserve Board are appointed by the President of the United States and confirmed by the Senate. Independence derives from a couple of factors: First, the appointments are staggered to reduce the chance that a single U.S. President could “load” the Board with appointees; second, their terms of office are 14 years—much longer than elected officials’ terms. Appointment Procedure for Reserve Bank Presidents Each Reserve Bank President is appointed to a five-year term by that Bank’s Board of Directors, subject to final approval by the Board of Governors...
eBook - ePubBanking Crises
Perspectives from the New Palgrave Dictionary of Economics
- Garett Jones, Garett Jones(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...Federal Reserve System The Federal Reserve System of the United States was established on 23 December 1913, when President Woodrow Wilson signed the Federal Reserve Act. The need for a new federal banking institution became clear when a severe crisis occurred in 1907. In May 1908 the Aldrich–Vreeland Act established a bipartisan National Monetary Commission that proposed establishing a National Reserve Association with 15 locally controlled branches that would ‘provide an elastic note issue based on gold and commercial paper’ (Warburg, 1930, p. 59). The proposal was not enacted, nor was a subsequent proposal for a central bank with about 20 branches that would be controlled by a centralized Federal Reserve Board, consisting largely of commercial bankers. In the debate preceding the Federal Reserve Act, banking industry domination was rejected in favour of a board that had five members appointed by the President and two ex officio members, the Secretary of the Treasury and the Comptroller of the Currency. The appointed members had staggered terms and were to represent different commercial, industrial, and geographic constituencies. A sixth appointed member representing agriculture was added in 1923. The composition of the Board and its relation to Federal Reserve banks were drastically changed in 1935. Partly because of continuing disagreements about public versus commercial bank control, the new Board’s powers were left ambiguous in the act. The act mandated that all national banks become members of the new system and stockholders of Federal Reserve banks. Because reserves were to be concentrated in 12 Federal Reserve banks, the act substantially reduced reserve requirements at national banks. State chartered banks could join if they chose to and were judged to be financially strong. The first Board was sworn in on 10 August 1914 and the system opened for business on 16 November 1914...
eBook - ePubThe Money Masters
The Progress and Power of Central Banks
- Onno de Beaufort Wijnholds(Author)
- 2020(Publication Date)
- Palgrave Macmillan(Publisher)
...Being a product of compromise, the System was unnecessarily complicated and too decentral. It consisted of 12 Reserve banks in major cities in the United States. The commercial banks that joined the System (compulsory for National banks, but not for State chartered banks) were shareholders in the regional banks and had to make a contribution to the System of 6 percent of their capital and surplus. At the same time they received a fixed dividend of 5 percent on their shares. The regional central banks were tasked with rediscounting commercial bills and buying and selling gold and government bonds. They were free to set their discount rates on their own. The boards of the 12 regional Reserve banks were made up of local bankers and businessmen. This decentralized construction was checked by the existence of a Board of Governors situated in Washington. Its seven Governors were appointed by the President, who rewarded Paul Warburg for his enormous input by making him a member of the first Board of the Fed. In the first decade of the Fed it was dominated by the Treasury whose Secretary as well as the head of the Comptroller of the Currency were members of the highest organ of the Fed. This lack of independence would hamper the Fed’s policymaking on many occasions. And the absence of full centralization of the new system initially led to severe and unproductive competition between the Board and the Reserve banks (Lowenstein 2015). A glaring shortcoming of the Federal Reserve System was its vagueness about the new institution’s objectives. The Act did not go beyond stipulating that the System was to produce an elastic currency. To some this meant no more than allowing for a seasonal expansion and contraction of the banknote circulation. To others this implied the possibility of an active monetary policy, such as regular open market operations...
eBook - ePubThe Political Economy of U.S. Monetary Policy
How the Federal Reserve Gained Control and Uses It
- Edwin Dickens(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...2 The Origin of the Federal Reserve System The Institutionalization of the Alliance between the Large New York Banks and the Large Regional Banks Central banks exist to perform two contradictory functions—namely, acting as lender of last resort for private banks and exercising monetary control over the money supply. In Chapter 1, I defined the art of central banking as exercising monetary control during periods of calm between financial crises despite the fact that central banks must intervene, and financial-market participants know they must intervene, as lenders of last resort when financial crises occur. Henceforward, I will refer to this art as attempting to stabilize the economy on a non-inflationary growth path, or at full employment with price stability. In this chapter, I explain how the Federal Reserve System evolved out of failed attempts of bank clearinghouses to stabilize the economy on a non-inflationary growth path. My thesis is that private, profit-maximizing banks need a public, non-profit-maximizing central bank to accomplish this goal. In Section 2.1, I explain why private banks needed a central bank to act as lender of last resort and in Section 2.2 I explain why they needed one to exercise monetary control. In both cases, at the center of analysis is the struggle of individual banks to increase their profits at the expense of other banks. In the case of the evolution of the monetary-control function, I also show the fundamental role played by the struggle of the banks, taken as a whole, to increase their profits at the expense of other social classes. In Section 2.3, I then explain why, until the New Deal, other social classes acquiesced to the establishment and operation of an institution opposed to their interests. In this way, my analysis goes beyond strictly economic terms. As Charles Goodhart (1989, p...
eBook - ePubMonetary Policy and the Onset of the Great Depression
The Myth of Benjamin Strong as Decisive Leader
- M. Toma(Author)
- 2013(Publication Date)
- Palgrave Macmillan(Publisher)
...In drafting the Federal Reserve Act, the founders made an explicit decision to retain the essential features of the correspondent system. Interregional borrowing and lending among banks could, and did, take place (Toma 1997, 29–30). In this sense, the Federal Reserve Act provided an avenue through which Reserve banks could indirectly compete in supplying reserve balances to out-of-district member banks as well as currency to the out-of-district general public. Before concluding that the Federal Reserve System represented an effective solution to the currency elasticity problem, there is one more base to cover. Are there outside parties that may serve as a bottleneck to accommodation? We know from our discussion of the National Banking System that the Treasury was one such party with little incentive to insure the timely delivery of notes to national banks. The founders of the Federal Reserve System did not make the same mistake: note delivery would be brought within the Federal Reserve System proper. In particular, a board-appointed Federal Reserve agent would be assigned to each Reserve bank and charged with the responsibilities of validating commercial paper for collateral-backing and of transporting the notes from the Treasury to the Reserve bank. Significantly, the act stipulated that the agent’s salary would be paid by his Federal Reserve bank, thus aligning the agent’s interest with the Reserve bank’s interest in the speedy delivery of Federal Reserve notes. The Federal Reserve agent, as an incentivized link between the Treasury and Reserve banks, represented a key ingredient in a decentralized, self-regulating Federal Reserve System. The Federal Reserve Board represented perhaps an even more potent threat to currency elasticity. The board enjoyed significant supervisory powers, the most important of which were to set discount rates and to define which bills would be eligible for rediscount (Federal Reserve Act, Sections 13 and 14)...
eBook - ePubImagining the Fed
The Struggle for the Heart of the Federal Reserve, 1913-1970
- Nicolas Thompson(Author)
- 2021(Publication Date)
- SUNY Press(Publisher)
...During the 2008 global financial crisis, it invoked FRA Section 13(3) authority to extend loans directly to domestic and foreign corporations. 23 In ensuing years, it engaged in three rounds of so-called quantitative easing, creating trillions of reserves to inject liquidity into the banking system. While the scale of this practice was new, it was tried before in 1932. 24 Bold Fed responses kept the world financial system afloat, and arguably avoided another Depression. 25 Benjamin Strong recognized this capacity in 1928, writing “we have the power to deal with an … emergency instantly by flooding the street with money, but I think the country is well aware of this and probably places reliance upon the common sense and power of the System.” 26 This stylized portrait has shown that the Fed’s institutional order, mandate, and emergency powers, were settled by 1970. The modern Fed emerged at the dawn of a new era of flexible exchange rates, which left it free to pursue domestic goals. Social forces later aligned in support of an aggressive Fed inflation-fighting posture, but this change reflected an emerging consensus that central banks should prioritize domestic price stability over other goals, not a reordering of Fed institutions. 27 Those skeptical of the claim that the Fed’s development ended in 1970 can rightfully point out that Fed communication strategies have since evolved. This claim is correct insofar as the Fed has grown its transparency by making the public aware of its policy decisions right after FOMC meetings and even providing forward guidance regarding how its members think interest rates will move in the future. 28 This change has not resulted in “a durable shift in governing authority,” however. 29 The technocratic Fed built in 1970 still stands. We can now consider how different ideologies are braided into the fabric of the modern Fed. Jeffersonianism occupies the most subordinate strand in modern Fed culture...
