Transcript Why the Federal Reserve

Why the Federal Reserve?
Federal Reserve System
• Federal Reserve acts as the central bank
for the U.S.
• Look at a $1 bill
• After the panic of 1907 and the collapse of
many banks, it was felt that a central bank
was needed to stabilize our monetary
system.
• “Runs” on banks—banks had no where to
turn for emergency cash.
Panic of 1907
• There was no way to expand the amount
of money in circulation.
• This restricted expansion because there
was a “fixed” supply of money available for
loans, businesses, etc.
• Therefore, since they could not borrow
more money, they starting withdrawing
their savings.
• Banks didn’t have enough cash-bankrupt.
Panic of 1907
• Second, the system of pyramided reserves
failed.
• Pyramided Reserves—Smaller banks deposit
some of their reserves with larger banks. These
larger banks deposit some of these reserves
with the largest commercial banks. These big
banks loan out these “extra” funds to businesses
and individuals.
• This encourages growth of the economy.
• In a panic, smaller banks withdraw deposits from
larger banks, etc.
Panic of 1907
• In 1908, the National Monetary
Commission was created which
reestablished a central bank.
• The Federal Reserve Act of 1913 created
the central bank called the Federal
Reserve System (FED).
Role of the FED
• 3 Main Goals of the Fed:
– Supervises member banks
– Holds cash reserves (available when
economy needs it.)
– Moves money into and out of circulation.
(Stabilizes money supply).
Characteristics of the Fed
• Has more than one central bank. (Has
12 district banks throughout U.S.)
• Owned and controlled by member
banks. (The U.S. government does not
own stock in the Fed)
• Optional membership in the Fed for
some banks. (State chartered banks do
not have to join the Fed).
12 FED District Banks
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1.Boston
2. New York City
3. Philadelphia
4.. Cleveland
5.. Richmond
6.. Chicago
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7.. Atlanta
8.. St. Louis
9. Kansas City
10. Dallas
11. Minneapolis
12. San Francisco
Seat of Board of
Governors:
Washington DC
The Pyramid Structure
of the Federal Reserve
Federal Open Market Committee
12 District
Reserve Banks
Board of Governors
Structure of the Federal Reserve System
4,000 member banks
and 25,000 other
depository institutions
• About 40 percent
of all United
States banks
belong to the
Federal Reserve.
These members
hold about 75
percent of all bank
deposits in the
United States.
Organization of the Fed
• The Fed is organized on two levels:
– National and District.
National Level—
Board of Governors—7 board of governors,
appointed by the president.
Each governor appointed for 14 year term.
Federal Open Market Committee (FOMC)
 7 members of the board of governors are
members; plus, 4 members are district Federal
Reserve bank presidents.
The Federal Open Market
Committee (FOMC)
– The FOMC, which consists of The Board of
Governors and 5 of the 12 district bank
presidents, makes key decisions about
interest rates and the growth of the United
States money supply.
Organization of the Fed
• District Level:
• 12 regional federal reserve banks.
• Each bank serves different regions of the
country,
• Also, 25 branch offices located throughout the
country.
• 9 directors in each district
• 6 of the 9 are bankers. (Business people, generally).
• Board of Governors selects other 3 directors.
Gold Vault—N.Y. Fed
Gold Bars
27.4 Lbs. Each
$950 per oz.
$416,500 ea.!
The FED Vault
266 million oz.
$950 per oz.
$252 Billion
Weighing Gold at the FED
121 Countries
Store their gold
At the NY FED