Banking History Chapter 16 Section 1

Problems of the Federal Reserve Initially the Federal Reserve System did not work well because the actions of one regional bank would counteract the actions of another.

The Federal Reserve Act of 1913 The Federal Reserve System, often referred to as “the Fed,” is a group of 12 regional, independent banks. Woodrow Wilson created this system

A Stronger Fed In 1935, Congress adjusted the Federal Reserve structure so that the system could respond more effectively to crises. The Great Depression Today’s Fed has more centralized powers so that regional banks can work together while still representing their own concerns.

Structure of the Federal Reserve 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.

The Board of Governors The Federal Reserve System is overseen by Seven-member Board of Governors of the Federal Reserve. Actions taken by the Federal Reserve are called monetary policy.

Federal Reserve Districts The Federal Reserve System consists of 12 Federal Reserve Districts with one Federal Reserve Bank per district. The Federal Reserve Banks monitor and report on economic activity in their districts.

Federal Reserve Functions Chapter 16 Section 2

Serving Government The U.S. Government has: Operating budget of $1.7 Trillion Revenue from taxes of $1 Trillion $900 Billion revenue from its programs It is obvious the government needs a banker

Federal Government’s Banker The Fed maintains a checking account for the Treasury Department and processes payments Social Security Checks IRS refunds

Issuing Currency The district Federal Reserve Banks are responsible for issuing paper currency The Department of the Treasury issues coins

Serving Banks The Federal Reserve provides certain functions for banks Its most well known function is clearing checks It also: Protects bank reserves Lends money to banks

Check Clearing Check clearing is the process by which banks record whose account gives up money, and whose account receives money when a customer writes a check.

The Journey of a Check After you write a check, the recipient presents it at his or her bank. The Path of a Check Check writer Recipient The check is then sent to a Federal Reserve Bank. Check writer’s bank Your processed check is returned to you by your bank. Federal Reserve Bank The reserve bank collects the necessary funds from your bank and transfers them to the recipient’s bank.

Monetary Policy Tools Chapter 16 Section 3

Money Creation Money creation is the process by which money enters into circulation. Banks can put money into the economy to speed it up or take money out to slow it down.

Required Reserve Ratio Assume that you have deposited $1,000 dollars in your checking account. The bank doesn’t keep all of your money, but rather lends out some of it to businesses and other people. The portion of your original $1,000 that the bank needs to keep on hand, or not loan out This is called the required reserve ratio (RRR). The RRR is set by the Fed. As the bank lends a portion of your money to businesses and consumers, they too may deposit some of it. Banks then continue to lend out portions of that money, although you still have $1,000 in your checking account. Hence, more money enters circulation.

The Money Creation Process To determine how much money is actually created by a deposit, we use the money multiplier formula. The money multiplier formula is calculated as 1/RRR. Money Creation You deposit $1,000 into your checking account. Your $1,000 deposit minus $100 in reserves is loaned to Elaine, who gives it to Joshua. $100 held in reserve $900 available for loans Joshua’s $900 deposit minus $90 in reserves is loaned to another customer. At this point, the money supply has increased by $2,710. $90 held in reserve $810 available for loans

Fiscal and Monetary Policy Tools The federal government and the Federal Reserve both have tools to influence the nation’s economy. Fiscal and Monetary Policy Tools Fiscal policy tools Monetary policy tools 1. increasing government spending 2. cutting taxes Expansionary tools 1. open market operations: bond purchases 2. decreasing the discount rate 3. decreasing reserve requirements Contractionary tools 1. decreasing government spending 2. raising taxes 1. open market operations: bond sales 2. increasing the discount rate 3. increasing reserve requirements