Government Policy: Monetary & Fiscal Policy What’s the difference?

Monetary Policy - Policy that involves changing the rate of growth of the money supply in circulation in order to affect the cost and availability of credit. Fiscal Policy - Using taxes and spending to help the economy grow.

The Federal Reserve System: Definitions Federal Reserve System: the central bank of the United States Open Market Operations: the buying and selling of government securities (bonds) by the Fed

The History of American Banking We will identify critical periods in the history of American banking and the purpose of the Federal Reserve. I will be able to identify and/or define aspects of the FED

A bank is an institution for receiving, keeping, and lending money.

Today, the Federal Reserve Bank oversees banking in the United States. It was not always this way.

There was a time when banks were not regulated by the Federal government. Sometimes bankers made poor decisions that bankrupted their banks.

Federalists vs. Anti-Federalists At the founding of the nation, Federalists wanted a strong, central bank. Anti-Federalists did not. Anti- Federalists believed that a strong, central bank would only loan to the rich and powerful. Federalists and Anti-Federalist just didn’t agree.

Then There Was None Sometimes the Anti-Federalists won. Whenever a central bank was lacking, there was frequently chaos in banking. Banks often made too many bad loans. When enough people defaulted or did not pay back their loans, the banks went bankrupt.

You see, banks make money by loaning money. However, if banks loan money to people who cannot repay their loans, then banks lose money.

The Federal Reserve Bank Eventually, it became clear that the nation needed a strong, central bank to oversee banking in America. A strong central bank could monitor banking in the country and make sure that banks did not make too many loans. A strong, central bank could hold bankers to higher standards thereby protecting consumers.

Panic of 1907 The Panic of 1907 was the first worldwide financial crisis of the twentieth century. It transformed a recession into a contraction surpassed in severity only by the Great Depression. The panic’s impact is still felt today because it spurred the monetary reform movement that led to the establishment of the Federal Reserve System

In the case of banking, the Federalists may have been right. A central bank does prevent abuses in banking.

The Fed Explains the Central Bank https://www.youtube.com/watch?v=8Hq5zw4YaZQ

The Fed The Federal Reserve Bank is commonly referred to as the “Fed.” The Federal Reserve Bank can make loans to banks, raise or lower interest rates, and require banks to hold adequate reserves.

The Fed helps banks by monitoring banking in every part of the United States.

Let’s Assess… 1. What is a bank? 2. What was the primary difference between the Federalist party and the Anti-Federalists? 3. Why did chaos occur in banking when a strong, central bank did not exist in the country? 4. What is the Federal Reserve Bank?

Structure of the Federal Reserve Each of the 12 districts has one main branch, other branches. Allocation of regional banks reflects conditions around 1913. NY, Chicago, and SF are the 3 largest district banks in terms of assets. (50%) FRBs are quasi-public, technically owned by member banks. (just technically). 9 directors (6 elected by Banks, 3 by BOG); 3 A directors are professional bankers; 3 B directors are leaders from industry, labor agriculture; 3 C directors are appointed by BOG as public reps. What is the function of the regional reserve banks? Functions: Payments: clear checks, issue new currency, withdraw damaged currency, BS&R: evaluate bank consolidation, make discount loans, BS&R, Monetary Policy: collect data on local business conditions, conduct economic research. Monetary Policy: decide who gets discount loans, select banker for Federal Advisory Council, serve on the FOMC, votes on policy rotate through 4/11 banks and NY. Special role of FRB NY: 1) Contains the largest banks for BS&R; 2) Conducts OMO and FX operations, (ensures smooth functioning of financial markets); 3) Only FRB to be a member of BIS. (close contact with foreign central bankers); 4) NY President is only permanent member of the FOMC. Political genius to stress regional representation over HQ in NY or DC. National banks are required to be members of the Federal Reserve System. State banks are not required to be members. 1/3 of banks are members, down from 1/2 in 1947. Banks used to leave Fed system b/c they were required to keep deposits there. This hurt the conduct of monetary policy. Depository Institutions Deregulation and Monetary Control Act of 1980 required all banks to keep same required reserves with the Fed. All banks given discount window privileges. F. Mishkin, THE ECONOMICS OF MONEY AND THE ECONOMIC POLICY REVIEW. (c) 1998 Frederic S. Mishkin. Reproduced by Addison Wesley Longman. All rights reserved.

Federal Reserve Districts and Banks Purpose: to carry out day-to-day operations of the Federal Reserve System, the nation has been divided into twelve Federal Reserve Districts

The Board of Governors of The Federal Reserve Coordinates and controls the activities of the Federal Reserve System 7 Members 14 Year Terms Appointed by the President with Senate approval A governor is appointed every other year President designates one member as President for a 4 year term

The Federal Open Market Committee of the Federal Reserve The major policy making group within the Fed Authority to Conduct Open Market Operations (Buying and Selling of Federal Securities) 12 Members 7 Board of Governors 5 District Bank Presidents (including New York)

Functions of the Federal Reserve System CONDUCT THE NATIONS MONITARY POLICY Econ movies: HELP MAINTAIN THE STABILITY OF THE FINANCIAL SYSTEM https://www.youtube.com/watch?v=RaeIBeJT5hY https://www.youtube.com/watch?v=wOfQPn9Jwpo https://www.youtube.com/watch?v=SYFYla1H7KE

Functions of the Federal Reserve System SUPERVISE AND REGULATE FINANCIAL INSTITUTIONS - Hold depository institutions’ reserves - Supervise Member Banks - Serve as the government’s banker - Serve as the lender of last resort

Functions of The Federal Reserve System FOSTER PAYMENT AND SETTLEMENT SYSTEM SAFETY AND EFFICIENCY Provide check-clearing services PROMONTE CUSTOMER PROTECTION AND COMMUNITY DEVELOPMENT

Review: The Federal Reserve Explained

Let’s Assess Complete Map Activity

Divide the map into FED economic regions Number each region correctly Interactive Map: https://www.federalreserve.gov/aboutthefed/federal-reserve-system.htm Divide the map into FED economic regions Number each region correctly Locate and label central bank cities ( ) Locate and label the city where the Board of Governors meets ( ) Color each region a different color

More information Interactive Map: https://www.federalreserve.gov/aboutthefed/federal-reserve-system.htm https://www.federalreserve.gov/aboutthefed/pf.htm

END