ID DATA
The Federal Reserve System
What it is and Why it matters.
aka The Fed, Federal Reserve, FRS
The Federal Reserve System headquarters is located in the Eccles Building in Washington, D.C.
The Fed
Defining "Federal Reserve"
Citibank: The central banking system of the USA.
Wikipedia: The Federal Reserve System is composed of a central Board of Governors in Washington, D.C. and eight regional Federal Reserve Banks located in major cities throughout the nation.
Dictionary.com: The central bank of the United States; incorporates 12 Federal Reserve branch banks and all national banks and state charted commercial banks and some trust companies; "the Fed seeks to control the United States economy by raising and lowering short-term interest rates and the money supply."
How it got started.
In the beginning: The first institution with responsibilities of a central bank in the US was the First Bank of the United States, chartered in 1791. Later, in 1816, the Second Bank of the United States was chartered.
Go to Plan B: From 1837 to 1862, in the Free Banking Era there was no formal central bank, while from 1862 to 1913, a system of (private) national banks were in charge.
No plan at all: After a series of devastating bank runs, it was decided that the US needed a centralized banking system.
Today's plan: The Federal Reserve Board was created by the U.S. Congress through the passing of the Owen-Glass Act, signed by President Woodrow Wilson on December 23, 1913.
Organizational Structure
Top Level: Board of Governors
2nd Level: Federal Open Market Committee
3rd Level: 12 Regional Federal Reserve Banks
Board of Governors
The Federal Reserve is made up of 7 Governors.
The seven members are appointed by the President, and must be confirmed by the Senate.
Members are elected to serve 14-year terms. They may not serve more than one term. However, a governor may finish out someone else's term, and then receive their own.
The current Governors of the Fed are:
- Alan Greenspan, Chairman
- Roger W. Ferguson, Jr., Vice-Chairman
- Susan Bies
- Donald Kohn
- Mark Olson
There are two openings on the Board of Governors.
FOMC
The Federal Open Market Committee (FOMC) is made up of the 7 Governors, plus 5 representatives from the Federal Reserve Banks.
The representative from the 2nd District, New York, is permanently on the committee. The other four slots rotate between the other 11 districts on two- and three-year intervals.
Regional Fed Reserve Banks
The 12: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco.
The Rules: These banks were established by Congress and organized a lot like private corporations. However, there are certain rules that must be followed, by law.
- All National banks are required to join the Federal Reserve system. Other banks are welcome to join.
- The regional Fed Reserve banks issue, or sell, shares of stock to private banks.
- Ownership of a certain amount of stock is required to become part of the system.
- To join, the private banks must also deposit a certain amount of money in the Fed Reserve system. It does not earn interest.
- These shares of stock may not be sold, traded, or used to secure loans.
- Yearly dividends of exactly 6% can be paid on the stocks. This dividend is paid in lieu of interest on the required deposits.
- All banks are required to to maintain fractional reserves of their deposits. In other words, based on how much has been deposited by account holders, they have to keep a certain percentage of "cash on hand."
- The fractional reserves, or "cash on hand," are mostly stored in a regional Federal Reserve bank. Again, the Fed does not pay the banks interest for these amounts.
Fractional-Reserve Banking: This system of keeping only a fraction of deposits on hand is is sometimes called "fiat money." That is the term for money that is not backed by a tangible asset, usually gold. The United States used to operate on a gold standard, but no longer does.
What the Fed does
Responsibilities of the Federal Reserve
The Fed is mandated by Congress to pursue both price stability and full employment.
- Supervise and regulate banks.
- Implement monetary policy by buying and selling U.S. Treasury securities.
- Maintain a strong payments system.
- Control the amount of money that is made and destroyed on a day to day basis (in conjunction with the Mint and Bureau of Engraving and Printing).
- Economic research, economic education, and community outreach.
What Congress ordered.
Overall goal: The system was designed to add both flexibility and strength to the nation's financial system.
Flexible currency: Federal Reserve notes would be printed by the Federal Reserve and used as currency, to provide the nation with an elastic currency.
Distribution: The Federal Reserve would distribute these notes - in a controlled, orderly fashion - to the regional Reserve Banks. The Reserve Banks would then distribute them to banking institutions to meet the needs of the public.
Communication: The Fed delivers a report to Congress semi-annually. In general, it must work within the guidelines of the overall objectives of economic and financial policy established by the government.
Not Really Part of Government
Independently Operaated
Oversight: Decisions made by the Fed do not have to be ratified by Congress or approved by the President. Congress can periodically review its policies and make laws to alter its responsibilities.
Funding: The Fed does not receive any funding from Congress. It runs a surplus, partially because it owns government bonds.
Autonomy: The terms of Governors span multiple presidential and legislative terms. Although it is not a lifetime appointment, once approved as a Governor, that individual has about as much freedom as a Supreme Court justice.
Which is it?
Government agency? The Fed is supposed to be an independent federal government agency. It is covered by the Freedom of Information Act and the Privacy Act; private businesses are not.
Not a government agency? In the 1982 case Lewis v. United States, the Ninth Circuit Federal Court of Appeals 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 Fed's Challenges
Aging Population
Alan Greenspan said in a Washington Post article that the aging of the U.S. population will create pressures on the Fed and Congress. He has warned repeatedly this year that he believes the government has promised more to future retirees, through Social Security and Medicare, than the nation can afford to deliver. He has urged Congress to scale back those commitments to avoid ruinous federal budget deficits or much higher taxes.
Risk Management Policy
Greenspan said he expects the Fed to continue refining his "risk management" approach to making interest rate policy. He has outlined it previously as one in which policymakers weigh the various risks to the economy and the potential consequences of each. They then address the most dangerous one, rather than the most likely.
There's More to this Story
This particular page is the government's version of the Federal Reserve System.
Many websites, books and videos are available that explain "the rest of the story," such as:
Please take the time to educate yourself about interest rates, fractional-reserve banking, the history of Central Banks in the United States, and how they manipulate money supply and the "boom or bust" cycles of the economy.
