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Encyclopedia > Federal Reserve
The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC.
The Federal Reserve System is headquartered in the Eccles Building on Constitution Avenue in Washington, DC.

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. ImageMetadata File history File links Download high resolution version (1024x768, 800 KB) The Federal Reserve headquarters in Washington, DC Taken 8/2004 by User:Rdsmith4 jhgsxcvjvcnbwc yoıu torkey sizin ananızı sikecez File links The following pages link to this file: Federal Reserve Image:Federal Reserve. ... ImageMetadata File history File links Download high resolution version (1024x768, 800 KB) The Federal Reserve headquarters in Washington, DC Taken 8/2004 by User:Rdsmith4 jhgsxcvjvcnbwc yoıu torkey sizin ananızı sikecez File links The following pages link to this file: Federal Reserve Image:Federal Reserve. ... The Eccles Building, situated on Constitution Avenue in Washington, DC. The Marriner S. Eccles Federal Reserve Board Building houses the Federal Reserve Board in Washington, D.C. The building was designed by Paul Phillippe Cret and finished in 1937. ... In Washington, D.C., Constitution Avenue is a major east-west street running just north of the United States Capitol in the citys Northwest and Northeast quadrants. ... Aerial photo (looking NW) of the Washington Monument and the White House in Washington, DC. Washington, D.C., officially the District of Columbia (also known as D.C.; Washington; the Nations Capital; the District; and, historically, the Federal City) is the capital city and administrative district of the United... Reserve Bank of India in Mumbai, India. ...


The Federal Reserve System is a quasi-governmental, decentralized central bank. It is composed of a central Board of Governors in Washington, D.C., twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous member banks and other entities (see below). Ben Bernanke serves as the current Chairman of the Board of Governors of the Federal Reserve. Nickname: the District Motto: Justitia Omnibus (Justice for All) Official website: http://www. ... Ben Bernanke Ben Shalom Bernanke (born December 13, 1953) (pronounced ber-NAN-kee, bər-nan-kē or ), American macroeconomist, is the Chairman of the Board of Governors of the United States Federal Reserve (the Fed). He was previously Chairman of the U.S. Presidents Council of Economic Advisers... The Chairman of the Board of Governors of the United States Federal Reserve is the head of the central bank of the United States and one of the most important players in American economic policies. ...


The Federal Reserve System was created via the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system." The legislation provided for a system that included a number of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Reserve Banks opened for business in November 1914. Congress created Federal Reserve Notes to provide the nation with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public. It includes a system of eight to twelve regional reserve banks, owned by its commercial member banks and supervised by the Federal Reserve Board. The board and its chairman are appointed by the president and approved by the Senate. The Federal Reserve Act of 1913, also called the Glass-Owen Bill, established the Federal Reserve System in the United States. ... Various Federal Reserve Notes Notes are missing serial number imprints. ... The presidential seal was used by president Hayes in 1880 and last modified in 1959 by adding the 50th star for Hawaii. ...

Contents


History

Main article: History of Central Banking in the United States

The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791. Later, in 1816, the Second Bank of the United States was chartered. From 1837 to 1862, in the Free Banking Era there was no formal central bank, while from 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank runs later provided the impetus for the creation of a more centralized banking system. It has been suggested that Banking in the United States be merged into this article or section. ... The First Bank of the United States was proposed by Alexander Hamilton to relieve the war debt from the United States Revolutionary War, develop a national currency, and dispose of the western territories. ... The Second Bank of the United States was founded in 1816, five years after the expiration of the First Bank of the United States out of desperation to stabilize the currency. ... The term national bank has several meanings: especially in developing countries, a bank owned by the state an ordinary private bank which operates nationally (as opposed to regionally or locally or even internationally) In the past, the term national bank has been used synonymously with central bank, but it is... The National Banking Act of 1863 raised money for the Union in the United States Civil War by enticing banks to buy federal bonds, and taxed state bonds out of existence. ... Theatrical promotional poster depicting a bank run A bank run is a type of financial crisis. ...

After the Panic of 1907 came close to shutting down the national banking system, bankers turned to Europe for ideas on how to implement central banking. Impetus for the System came from the voluminous reports (1909-1912) of the National Monetary Commission created by the Aldrich-Vreeland Act in 1908. Senator Nelson W. Aldrich was the Republican leader in the Senate. It took the political genius of Woodrow Wilson to get the bankers' plan passed over the objections of agrarian leader William Jennings Bryan. Wilson started with the bankers' plan that had been designed for conservative Republicans by banker Paul M. Warburg. Wilson had to outmaneuver the powerful agrarian wing of the party, led by William Jennings Bryan, which strenuously denounced banks and Wall Street. They wanted a government owned central bank which could print paper money whenever Congress wanted; Wilson convinced them that because Federal Reserve notes were obligations of the government, the plan fit their demands. Southerners and westerners learned from Wilson that that the system was decentralized into 12 districts and surely would weaken New York and strengthen the hinterlands. One key opponent Congressman Carter Glass, was given credit for the bill, and his home of Richmond, Virginia, was made a district headquarters. Powerful Senator James A. Reed of Missouri was given two district headquarters in St. Louis and Kansas City. Congress passed the Federal Reserve Act in late 1913. Wilson named Warburg and other prominent bankers to direct the new system, pleasing the bankers. The New York branch dominated the Fed and thus power remained in Wall Street. The new system began operations in 1915 and played a major role in financing the Allied and American war efforts. [Link 1956 pp 199-240] Image File history File links Download high resolution version (1275x1753, 363 KB) Summary 1913 newspaper clipping USA Licensing This image is in the public domain in the United States. ... Image File history File links Download high resolution version (1275x1753, 363 KB) Summary 1913 newspaper clipping USA Licensing This image is in the public domain in the United States. ... The Panic of 1907 was a relatively serious economic downturn in the United States caused by a New York credit crunch that spread across the nation and led to the closings of banks and businesses. ... National Monetary Commission was a study group created by the Aldrich Vreeland Act of 1908. ... The Aldrich-Vreeland Act of 1908 established a National Monetary Commission which recommended the Federal Reserve Act of 1913. ... Nelson Wilmarth Aldrich (November 6, 1841 - April 16, 1915) was an American politician. ... Thomas Woodrow Wilson (December 28, 1856 – February 3, 1924) was the 28th President of the United States (1913–1921). ... William Jennings Bryan, 1907 William Jennings Bryan (March 19, 1860–July 26, 1925) was an American lawyer, statesman, and politician. ... Paul Moritz Warburg (August 10, 1868 - January 24, 1932) was a German-American banker and early advocate of the U.S Federal Reserve system. ... William Jennings Bryan, 1907 William Jennings Bryan (March 19, 1860–July 26, 1925) was an American lawyer, statesman, and politician. ... Carter Glass Carter Glass (January 4, 1858–May 28, 1946) was an American politician from Virginia, who served many years in Congress, as well as U.S. Secretary of the Treasury under Woodrow Wilson. ... James Alexander Reed (November 9, 1861 September 9, 1944) was an American politician. ...


Roles and responsibilities

The main tasks of the Federal Reserve are:

Other tasks include: Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, achieving full employment or economic growth. ... Open Market Operations are the means by which central banks control the liquidity of the national currency by buying and selling government securities. ... The term discount rate is used in several different contexts: mathematical discount rate, monetary policy, and project valuation. ... In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks retaining only a fraction of their clients deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder in loans to generate income. ... Mrs. ... BEP Annual Production Figures Categories: U.S. Dept. ...

  • Economic research
  • Economic education
  • Community outreach

Organization of the Federal Reserve

Federal Reserve headquarters, Eccles Building, Washington, DC.
Federal Reserve headquarters, Eccles Building, Washington, DC.

The basic structure of the Federal Reserve System includes: From federalreserve. ... From federalreserve. ...

  • The Board of Governors of the Federal Reserve System;
  • The Federal Reserve Banks;
  • The member banks.

Each Federal Reserve Bank and each member bank of the Federal Reserve System is subject to oversight by a Board of Governors (see generally 12 U.S.C. § 248). The 7 members of the board are appointed by the President and confirmed by the Senate. See 12 U.S.C. § 241. Members are selected to terms of 14 years (unless removed by the President for cause), with the ability to serve for no more than one term. See 12 U.S.C. § 242. A governor may serve the remainder of another governor's term in addition to his or her own full term. The Federal Open Market Committee (FOMC) is charged under the law with overseeing open market operations, the principal tool of US national monetary policy. ... The United States Code (U.S.C.) is a compilation and codification of the general and permanent federal Law of the United States. ... The presidential seal was used by president Hayes in 1880 and last modified in 1959 by adding the 50th star for Hawaii. ... Seal of the Senate The United States Senate is one of the two chambers of the Congress of the United States, the other being the House of Representatives. ... The United States Code (U.S.C.) is a compilation and codification of the general and permanent federal Law of the United States. ... The United States Code (U.S.C.) is a compilation and codification of the general and permanent federal Law of the United States. ...


The current members of the Board of Governors are: A Board of Governors is the board of directors of a publicly owned corporation, such as the United States Postal Service and Amtrak. ...

On February 22, 2006, Vice-Chairman Roger W. Ferguson, Jr. announced his resignation effective April 28, 2006. Ben Bernanke Ben Shalom Bernanke (born December 13, 1953) (pronounced ber-NAN-kee, bər-nan-kē or ), American macroeconomist, is the Chairman of the Board of Governors of the United States Federal Reserve (the Fed). He was previously Chairman of the U.S. Presidents Council of Economic Advisers... Dr. Roger W. Ferguson, Jr. ... Susan Bies Susan Schmidt Bies (born May 5, 1947) is a member of the Board of Governors of the Federal Reserve Board. ... Don Kohn Donald L. Kohn (born November 7, 1942) is a member of the Board of Governors of the Federal Reserve Board. ... Mark Olson Mark W. Olson (born May 17, 1943) is a member of the Board of Governors of the Federal Reserve Board. ...


The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives selected from the Federal Reserve Banks. The representative from the 2nd District, New York, is a permanent member, while the rest of the banks rotate on two and three year intervals. The Federal Open Market Committee (FOMC) is charged under the law with overseeing open market operations, the principal tool of US national monetary policy. ... Official language(s) None, English de facto Capital Albany Largest city New York City Area  - Total  - Width  - Length  - % water  - Latitude  - Longitude Ranked 27th 141,205 km² 455 km 530 km 13. ...


Control of the money supply

The Federal Reserve controls the size of the money supply by conducting open market operations, in which the Federal Reserve engages in the lending or purchasing of specific types of securities with authorized participants, known as the Fed's primary dealers. All Open Market Operations in the United States are conducted by the Open Market Desk at the Federal Reserve Bank of New York with an aim to making the federal funds rate as close to the target rate as possible. For a detailed look at the process by which changes to a reserve account held at the Fed affect the wider monetary supply of the economy, see money creation. Open Market Operations are the means by which central banks control the liquidity of the national currency by buying and selling government securities. ... Primary dealers are banks or brokerage firms who may trade directly with the Federal Reserve System. ... The Federal Reserve Bank of New York, located at 33 Liberty Street in Manhattan. ... The federal funds rate is the interest rate at which depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight. ... There are several ways that a government, in coordination with the countrys commercial banks, can increase or decrease the money supply of a country. ...


The Open Market Desk has two main tools to adjust the monetary supply, repurchase agreements and outright transactions.


To smooth temporary or cyclical changes in the monetary 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, though the Fed will most commonly conduct overnight and 14-day repos. Repurchase agreements (RPs or Repos) are financial instruments used in the money markets. ...


Since there is an increase of bank reserves during the term of the repo, repos temporarily increase the money supply. The effect is temporary since all repo transactions unwind, with the only lasting net effect being a slight depletion of reserves caused by the accrued interest (think one day of interest at a 4.5% annual yield, or (.045/365) = .00012). The Fed has conducted repos almost daily in 2004-2005, but can also conduct reverse repos to temporarily shrink the money supply.


In a reverse repo the Fed will borrow money from the reserve accounts of primary dealers in exchange for Treasury securities as collateral. At maturity, the Fed will return the money to the reserve accounts with the accrued interest, and collect the collateral. Since this drains reserves, reverse repos temporarily contract the monetary supply, except, again, for the extremely small lasting increase caused by the accrued interest. Treasury Securities are bonds issued by the U.S. Treasury, and sold by the Federal Open Market Committee, or FOMC. They are the debt finance instruments of the Federal government, and are often referred to as treasuries. ...


The other main tool available to the Open Market Desk is the outright transaction. Outrights differ from repos in that they permanently alter the money supply. Outright transactions overwhelmingly involve the purchase of Treasury securities in the secondary market.


In an outright purchase, the Fed will buy Treasury securities from primary dealers and finance these purchases by depositing newly created money in the dealer’s reserve account at the Fed. Since this operation does not unwind at the end of a set period, the resulting growth in the monetary supply is permanent. The Fed also has the authority to sell Treasuries in an outright, but this has been exceedingly rare since the 1980's. The sale of Treasury securities results in a permanent decrease in the money supply, as the money used as payment for the securities from the primary dealers is removed from their reserve accounts, thus working the money multiplier (see Money creation) process in reverse. There are several ways that a government, in coordination with the countrys commercial banks, can increase or decrease the money supply of a country. ...


Discount rates

The effective federal funds rate charted over fifty years

The Federal Reserve implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. Description: Historical chart of the U.S. federal funds rate. ... Description: Historical chart of the U.S. federal funds rate. ... Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, achieving full employment or economic growth. ... The federal funds rate is the interest rate at which depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight. ... Federal Funds transactions redistribute bank reserves. ...


The Federal Reserve also directly sets the discount rate, which is the interest rate that banks pay the Fed to borrow directly from it. However, a bank will prefer to borrow Fed funds from another bank, rather than from the Fed at the normally higher discount rate, which might suggest problems with the bank's credit-worthiness or solvency. The term discount rate is used in several different contexts: mathematical discount rate, monetary policy, and project valuation. ...


Both of these rates influence the prime rate which is usually about 3 percentage points higher than the federal funds rate. The prime rate is the rate that most banks price their loans at for their best customers. Definition In North American banking, the prime rate is the interest rate charged by lenders to borrowers who they consider most creditworthy. ...


Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.) Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, achieving full employment or economic growth. ...


The Federal Reserve usually adjusts the federal funds rate by 0.25% or 0.50% at a time. From early 2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times, from 6.25 to 1.00%, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. (This is known as a negative real interest rate, because money paid back from a loan with an interest rate less than inflation has lower purchasing power than it had before the loan.) On June 25, 2003, the federal funds rate was lowered to 1.00%, its lowest nominal rate since July, 1958, when the overnight rate averaged 0.68%. Starting at the end of June, 2004, the Federal Reserve started to raise the target interest rate. As of March 28, 2006, the rate is at 4.75%; this is the result of fifteen 0.25% increases. A recession is usually defined in macroeconomics as a fall of a countrys real Gross Domestic Product in two or more successive quarters of a year. ... June 25 is the 176th day of the year (177th in leap years) in the Gregorian Calendar, with 189 days remaining. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... 2004 is a leap year starting on Thursday of the Gregorian calendar. ... March 28 is the 87th day of the year in the Gregorian Calendar (88th in Leap years). ... 2006 (MMVI) is a common year starting on Sunday of the Gregorian calendar. ...


The Federal Reserve might also attempt to use open market operations to change long-term interest rates, but its "buying power" on the market is significantly smaller than that of private institutions. The Fed can also attempt to "jawbone" the markets into moving towards the Fed's desired rates, but this is not always effective. Open Market Operations are the means by which central banks control the liquidity of the national currency. ...


The Federal Reserve Banks and the member banks

Federal Reserve Regions
Federal Reserve Regions

The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations—possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6% per year.[1] The largest of the Reserve Banks, in terms of assets, is the Federal Reserve Bank of New York, which is responsible for the Second District covering the state of New York, the New York City region, Puerto Rico, and the U.S. Virgin Islands. based on usgs map - no copyright - coloration by me This image has been released into the public domain by the copyright holder, its copyright has expired, or it is ineligible for copyright. ... based on usgs map - no copyright - coloration by me This image has been released into the public domain by the copyright holder, its copyright has expired, or it is ineligible for copyright. ... The Federal Reserve Bank of New York, located at 33 Liberty Street in Manhattan. ... Official language(s) None, English de facto Capital Albany Largest city New York City Area  - Total  - Width  - Length  - % water  - Latitude  - Longitude Ranked 27th 141,205 km² 455 km 530 km 13. ... Nickname: The Big Apple Official website: City of New York Government Counties (Boroughs) Bronx (The Bronx) New York (Manhattan) Queens (Queens) Kings (Brooklyn) Richmond (Staten Island) Mayor Michael Bloomberg (R) Geographical characteristics Area Total 468. ...


The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Federal Reserve Banks. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Fed. The Federal Reserve does not pay interest on these funds. In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks retaining only a fraction of their clients deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder in loans to generate income. ...


The Federal Reserve System was created via the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system." The legislation provided for a system that included a number of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Reserve Banks opened for business in November 1914. Congress created Federal Reserve Notes to provide the nation with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public. Various Federal Reserve Notes Notes are missing serial number imprints. ...


The Federal Reserve Districts are listed below along with their identifying letter and number. These are used on Federal Reserve Notes to identify the issuing bank for each note. Various Federal Reserve Notes Notes are missing serial number imprints. ...

Boston A 1 [2]
New York B 2 [3]
Philadelphia C 3 [4]
Cleveland D 4 [5]
Richmond E 5 [6]
Atlanta F 6 [7]
Chicago G 7 [8]
St Louis H 8 [9]
Minneapolis I 9 [10]
Kansas City J 10 [11]
Dallas K 11 [12]
San Francisco L 12 [13]

The Federal Reserve Bank of Boston is responsible for the First District of the Federal Reserve, which covers Connecticut (excluding Fairfield County), Massachusetts, Maine, New Hampshire, Rhode Island and Vermont. ... The Federal Reserve Bank of New York, located at 33 Liberty Street in Manhattan. ... The Federal Reserve Bank of Philadelphia, headquartered in Philadelphia, Pennsylvania, is responsible for the Third District of the Federal Reserve, which covers eastern Pennsylvania, southern New Jersey, and Delaware. ... The Federal Reserve Bank of Cleveland. ... The Federal Reserve Bank of Richmond is the headquarters of the Fifth District of the Federal Reserve. ... The Federal Reserve Bank of Atlanta is responsible for the 6th District of the Federal Reserve, which covers Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee. ... Federal Reserve Bank of Chicago, located at the corner of LaSalle and Jackson streets. ... The Federal Reserve Bank of St. ... Federal Reserve Bank of Minneapolis The Federal Reserve Bank of Minneapolis covers the 9th District of the Federal Reserve, including Minnesota, Montana, North and South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan. ... Front of the Federal Reserve Bank of Kansas City The Federal Reserve Bank of Kansas City covers the 10th District of the Federal Reserve, which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, and portions of western Missouri and northern New Mexico. ... The Federal Reserve Bank of Dallas covers the Eleventh Federal Reserve District, which includes Texas, northern Louisiana and southern New Mexico. ... The facade of the Federal Reserve Bank of San Francisco. ...

Legal Status and Position in Government

The Board of Governors of the Federal Reserve System is an independent government agency. It is subject to laws like the Freedom of Information Act and the Privacy Act which cover Federal agencies and not private entities. However, its decisions do not have to be ratified by the President or anyone else in the executive or legislative branches of government, it does not receive funding from Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. Once a member of the Board of Governors is appointed by the president, he or she is relatively independent (although the law provides for the possibility of removal by the President "for cause" under 12 U.S.C. section 242). Federal independent agencies were established through separate statutes passed by Congress. ... Nearly sixty countries around the world have implemented some form of freedom of information legislation, which sets rules on governmental secrecy. ... The presidential seal was used by president Hayes in 1880 and last modified in 1959 by adding the 50th star for Hawaii. ... A legislature is a governmental deliberative body with the power to adopt laws. ...


In Lewis v. United States, 680 F.2d 1239 (9th Cir. 1982), the United States Court of Appeals for the Ninth Circuit stated that the "Federal reserve banks are not federal instrumentalities for purposes of a Federal Torts Claims Act, but are independent, privately owned and locally controlled corporations." The opinion also stated that "the Reserve Banks have properly been held to be federal instrumentalities for some purposes." The U.S. Court of Appeals for the Ninth Circuit is a federal court with appellate jurisdiction over the district courts in the following districts: District of Alaska District of Arizona Central, Eastern, Northern, and Southern Districts of California District of Hawaii District of Idaho District of Montana District of...


Influence of Government

Central bank independence from political control is a crucial concept in both economic theory and practice. The problem arises as central banks strive to maintain a credible commitment to price stability, when the markets know that there is political pressure to keep interest rates low. Low interest rates tend to keep unemployment below trend, encourage economic growth, and allow for cheap credit and loans. Some models however say such a policy is not sustainable without accelerating inflation in the long term. Thus, a central bank believed to be under political control cannot make a credible commitment to fight inflation, as the markets know that sitting politicians will lobby to keep rates low. This point was one of the major research topics of economist Edward C. Prescott's career. It is in this limited sense that the Federal Reserve System is independent. The members of the FOMC are not elected and do not answer to politicians in making their interest rate decisions. Prescott Photo Edward C. Prescott, born 26 December 1940 in Glens Falls, New York, received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 2004, sharing the award with Finn E. Kydland, for their contributions to dynamic macroeconomics: the time consistency of economic policy and...


The Federal Reserve is financially independent because it runs a surplus, due in part to its ownership of government bonds. In fact, it returns billions of dollars to the government each year. However, the Fed is still subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. To further communication with Congress, the Fed delivers a report to both houses semiannually. Its independence from the executive branch was strengthened by the 1951 Accord. In general, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. A government bond is a bond issued by a national government denominated in the countrys own currency. ... A statute is a formal, written law of a country or state, written and enacted by its legislative authority, perhaps to then be ratified by the highest executive in the government, and finally published. ... ... Under the doctrine of the separation of powers, the executive is the branch of a government charged with implementing, or executing, the law. ... The 1951 Accord, also known simply as the Accord, was an agreement between the U.S. Department of the Treasury and the Federal Reserve restoring independence to the Fed. ...


Fractional-Reserve Banking

Main article: fractional-reserve banking

In its role of setting reserve requirements for the country's banking system, the Fed regulates what is known as fractional-reserve banking. This is the common practice by banks of retaining only a fraction of their deposits to satisfy demands for withdrawals, lending the remainder at interest to obtain income that can be used to pay interest to depositors and provide profits for the banks' owners. Some people also use the term to refer to fiat money, which is money that is not backed by a tangible asset such as gold. In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks retaining only a fraction of their clients deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder in loans to generate income. ... In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks retaining only a fraction of their clients deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder in loans to generate income. ... Fiat money or fiat currency, is money that is current or legal tender as satisfaction for money debts by government fiat, that is by law. ... General Name, Symbol, Number gold, Au, 79 Chemical series transition metals Group, Period, Block 11, 6, d Appearance metallic yellow Atomic mass 196. ...


Fractional reserves are very easily abused and rules for these will necessarily favor certain activities in the economy very systematically over others. The United States' rules and oversight are within limits and guidelines set by the Bank for International Settlements, a peer agency to the IMF and the World Bank that was originally set up as one of the Bretton Woods set of institutions. More recently the WTO has been regarded also as such a peer. BIS Headquarters in Basel The Bank for International Settlements (or BIS) is an international organization of central banks which exists to foster cooperation among central banks and other agencies in pursuit of monetary and financial stability. It carries out its work through subcommittees, the secretariats it hosts, and through its... The flag of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ... Logo of the World Bank The International Bank for Reconstruction and Development (IBRD, in Romance languages: BIRD), better known as the World Bank, is an international organization whose original mission was to finance the reconstruction of nations devastated by WWII. Now, its mission has expanded to fight poverty by means... [[Bretton Woods]] can refer to: The resort town of Bretton Woods, New Hampshire. ... For other uses of the initials WTO, see WTO (disambiguation). ...


Criticisms of the Fed

Critics charge that a cult of personality surrounded Alan Greenspan
Critics charge that a cult of personality surrounded Alan Greenspan

A large and varied group of criticisms are often directed against the Federal Reserve. Some of these criticisms relate to inflation and fractional reserve banking more generally, and an in-depth treatment of these issues may be found in their respective articles. There are also specific issues relating to the chairmanship of Alan Greenspan, specifically, that the Fed’s credibility is based on a cult of personality around him and his successors. This line of argument is also more thoroughly addressed in this article. Nonetheless, critics still point to a number of specific criticisms about the methods and actions of the Fed; these are treated below. Photo is from http://www. ... Photo is from http://www. ... Mao Zedong dominates a poster during the Cultural Revolution. ... Alan Greenspan The Honorable Alan C. Greenspan, PhD, KBE (b. ... In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks of retaining only a fraction of their deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder at interest to obtain income that can be used to pay interest to depositors... Alan Greenspan The Honorable Alan C. Greenspan, PhD, KBE (b. ... Mao Zedong dominates a poster during the Cultural Revolution. ...


Historical Criticisms

Criticisms of the Fed are not new, and some historical criticisms are reflective of current concerns. Specifically, Austrian School economists criticize the Fed’s expansionary monetary policy in the 1920’s, allowing misallocations of capital resources and supporting a massive stock price bubble. Others argue that the Fed then deepened the resulting Great Depression by contracting the money supply at the very moment that markets needed liquidity. These criticisms resemble concerns that the current Fed over-emphasizes consumer spending, and has thus not been aggressive enough in reducing U.S. dependence on oil and energy-intensive capital goods, and allowing household debt to accumulate to excessively large levels. The Austrian School is a school of economic thought that rejects economists overreliance on methods used in natural science for the study of human action, and instead bases its formalism on a logic of action known as praxeology. Alongside this formalism, the school has traditionally advocated an interpretive approach. ... Dorothea Langes Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, a mother of seven children, age 32, in Nipomo, California, March 1936. ...


Economic Indicators

Some critics argue that the Fed’s concentration on GDP or other aggregate indicators risks ignoring important changes in regional economies, and is an unsuitable proxy as an indicator of well-being.


For example, critics argue that the Fed’s focus on reducing national inflation made it unable to adequately respond to the economic problems in the aftermath of Hurricane Katrina. Specifically, the Fed continued to tighten interest rates immediately after the Hurricane, which some see as evidence that the Fed has ignored the large losses in that devastated region. They argue that the Fed’s concern with aggregate national inflation measures, and the inflationary aspects of the large reconstruction effort (especially the potential for larger government budget deficits), made it unable to deal properly with the highly unusual, but particularly devastating situation.


Another criticism is that the Fed places too much emphasis on GDP as a measure of well-being. Critics point to programs in the UK and Canada, such as the Genuine Progress Indicator, which are intended to be a better indicator of both the benefits and costs of economic growth. Even more conservative commentators believe Net Domestic Product is a far better indicator than GDP of economic growth, as GDP hides uneconomic growth and can lead to improper decisions. The Genuine Progress Indicator (GPI) is a concept in green economics and welfare economics that has been suggested as a replacement metric for gross domestic product (GDP) as a metric of economic growth. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Accumulated GDP growth for various countries. ...


However, this idea remains controversial. The Fed is notoriously tight-lipped about the measures and metrics which are used to make its decisions (see Opacity, directly below), and there is no support in the released transcripts (available for meetings up until 1999) for the notion that the Fed is overly focused on GDP and inflation alone. Rather, the transcripts indicate that the Fed watches a very wide basket of indicators, and that the members of the FOMC are certainly aware of the limitations of the GDP measure.


Opacity

Another criticism of the Federal Reserve is that it is shrouded in secrecy. Meetings are held behind closed doors, and the transcripts are released with a lag of five years. Even expert policy analysts are unsure as to the logic behind Fed decisions. Critics argue that such opacity leads to greater market volatility, as the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication is often called "Fed speak." (see e.g. [14] [15] [16])


Furthermore, the lag in the release of FOMC transcripts, as well as the extremely limited and carefully worded minutes and statement, leads to the public being unaware of the issues of major concern to the Fed, and leaves it with an inadequate understanding of the logic and rationale behind the decisions. Some argue that this is a concerted attempt to keep Congress and the public at arm’s length, but this criticism has not gained much widespread acceptance.


Critics who want to abolish the Federal Reserve

Economists of the Austrian School such as Ludwig Von Mises contend that it is the Federal Reserve's artificial manipulation of the money supply that leads to the boom/bust business cycle that has occurred over the last century. Austrians and many Libertarians believe that it was the Federal Reserve's manipulation of the money supply to stop "gold flight" from England which caused the Great Depression. In general libertarian advocates of free banking argue that there is no better judge of the proper interest rate and money supply than the market. Some, like Larry Kudlow, argue that the Federal Reserve should exist, but the Federal Funds Rate and the Discount rate should be determined by a free float. This way, the Federal Reserve would still be able to influence the money supply with its open-market operations (buying and selling bonds), and banks would be more efficient setting their own rates. The Libertarian Party advocates the abolition of the Federal Reserve, saying that a central bank is not a power given to the government in the Constitution. [17] Nobel Economist Milton Friedman says, he "prefer[s] to abolish the federal reserve system altogether."[1] Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ...


Further reading

  • 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
  • Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0028643232.
  • Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (1963)
  • Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0671675567; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker
  • Arthur Link, Wilson: The New Freedom (1956) pp 199-240.
  • James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
  • Allan H. Meltzer. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history
  • Meyer, Lawrence H (2004). A Term at the Fed: An Insider's View. HarperBusiness. ISBN 0060542705; focuses on the period from 1996 to 2002, emphasizing Alan Greenspan's chairmanship during the Asian financial crisis, the stock market boom and the financial aftermath of the September 11 attacks
  • Priscilla Roberts, "'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
  • Murray N. Rothbard. A History of Money and Banking in the United States: The Colonial Era to World War II (2002) libertarian who wants no Fed
  • Rothbard, Murray N. (1994). The Case Against the Fed. Ludwig Von Mises Institute. ISBN 094546617X. libertarian who wants no Fed
  • Frank G. Steindl, Monetary Interpretations of the Great Depression. (1995).
  • Robert Craig West, Banking Reform and the Federal Reserve, 1863-1923 (1977)
  • Elmus R. Wicker, "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression," Journal of Economic History (1966) 26: 223-238, by economist
  • Donald R. Wells. The Federal Reserve System: A History (2004)
  • John H Wood. A History Of Central Banking In Great Britain And The United States (2005)
  • Bob Woodward, Maestro: Greenspan's Fed and the American Boom (2000) popular history of Greenspan in 1990s.

William Greider is an American author who writes primarily about economics. ... Economist Paul Adolph Volcker (September 5, 1927 - ) born in Cape May, New Jersey, is best-known as the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). ... Alan Greenspan The Honorable Alan C. Greenspan, PhD, KBE (b. ... The Asian financial crisis was a financial crisis that started in July 1997 in Thailand and affected currencies, stock markets, and other asset prices in several Asian countries, many considered East Asian Tigers. ... Dot-com (also dotcom or redundantly dot. ... A huge plume of smoke and fire can be seen emerging from the North Tower. ... A huge plume of smoke and fire can be seen emerging from the North Tower. ... Murray Newton Rothbard Murray Newton Rothbard (March 2, 1926 - January 7, 1995) was an American economist and political theorist belonging to the Austrian School of Economics who helped define modern libertarianism and anarcho-capitalism. ...

Notes

  1. Friedman and Freedom, Interview with Peter Jaworski. The Journal, Queen's University, March 15, 2002 - Issue 37, Volume 129

See also

The Bank of Canada Building in Ottawa The Bank of Canada is Canadas central bank. ... The Bank of England is the central bank of the United Kingdom, sometimes known as The Old Lady of Threadneedle Street or The Old Lady. The nearest London Underground station is Bank station. ... The Bank of Japan has its headquarters in this building in Tokyo. ... Discount window refers to the practice by a central bank of extending short-term loans secured by government bonds to financial institutions. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... The ECB building in Frankfurt The European Central Bank (ECB) (French: Banque Centrale Europeénne, German: Europäische Zentralbank) The ECB is one of the worlds largest central banks, being in charge of fiscal and monetary policy for the European Unions official currency, the euro, which is - to... Federal Funds transactions redistribute bank reserves. ... In 1936 the U.S. Treasury Department began construction of the United States Bullion Depository at Fort Knox, Kentucky on land deeded from the military. ... Free banking is a theory of banking which involves only market forces, with a conspicuous absence of central banks and any banking regulations, with only the general commercial laws applicable. ... This article is on the monetary principle. ... Government debt (also known as public debt or national debt) is money owed by any level of government; either central government, federal government, municipal government or local government. ... For short-term mutual funds investing in money market securities, see Money fund: The money market is the financial market for short-term borrowing and lending, typically up to thirteen months. ... The examples and perspective in this article or section may not represent a worldwide view. ... The National Economic Stabilization And Recovery Act or NESARA is a proposal for legislation to reform the fiscal policy, monetary policy, and monetary system, of the United States of America. ... Repurchase agreements (RPs or Repos) are financial instruments used in the money markets. ... This article is about general United States currency. ...

External links

  • Official Federal Reserve web site

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Federal Reserve Note - Wikipedia, the free encyclopedia (1279 words)
Federal Reserve Notes (FRNs, "ferns") is the official name for the type of banknote used in the United States, more commonly known as a bill (as in "twenty-dollar bill").
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