PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 17 Central Banking and the Federal Reserve System

Copyright © 2004 South-Western. All rights reserved.17–2 Fundamental Issues 1.What were the first central banking institutions, and how did central banking initially develop in the United States? 2.Where did responsibilities for monetary and banking policies rest in the absence of a U.S.central bank in the nineteenth and early twentieth centuries? 3.What motivated Congress to establish the Federal Reserve System?

Copyright © 2004 South-Western. All rights reserved.17–3 Fundamental Issues (cont’d) 4.Why did Congress restructure the Federal Reserve in 1935? 5.Who makes the key policy decisions at the Federal Reserve?

Copyright © 2004 South-Western. All rights reserved.17–4 The Number of Central Banking Institutions, 1670 to the Present Figure 17–1 SOURCE: Forrest Capie, Charles Goodhart, and Norbert Schnadt, “The Development of Central Banking,” in Capie et al.,eds., The Future of Central Banking: The Tercentenary Symposium of the Bank of England (Cambridge: Cambridge University Press, 1994), pp.1–231, and authors’ estimates.

Copyright © 2004 South-Western. All rights reserved.17–5 Central Bank Employees Per 100,000 Residents for Selected Nations. Figure 17–2 SOURCE: Bank for International Settlements.

Copyright © 2004 South-Western. All rights reserved.17–6 The Origins of U.S. Central Banking, 1791–1836 Bank of England  Bank of the British Empire The Bank of North America (1781)  Robert Morris and the first charted (government licensed) bank The First Bank of the United States (1791) The Second Bank of the United States (1816)

Copyright © 2004 South-Western. All rights reserved.17–7 Policy and Politics without a Central Bank, 1837–1912 (cont’d) The free-banking period:  A period that lasted until the Civil War during which each state had its own banking rules, and many states permitted relatively open competition among banks.  U.S. Treasury operated without a central banking institution. The Civil War, Greenbacks, and national banking

Copyright © 2004 South-Western. All rights reserved.17–8 Policy and Politics without a Central Bank, 1837–1912 (cont’d) Panic of 1873 and resumption of the gold standard (1875) Populism, free silver, and bimetalism  Free silver: A late-nineteenth-century idea for unlimited coinage of silver to meet the monetary needs of a growing U.S. economy. Prelude to the federal reserve  Panics of 1893 and 1907  Federal Reserve Act of 1913

Copyright © 2004 South-Western. All rights reserved.17–9 The Federal Reserve Banking System Federal Reserve banks:  The twelve central banking institutions that oversee regional activities of the Federal Reserve System. Federal Reserve districts:  The twelve geographic regions of the Federal Reserve System.

Copyright © 2004 South-Western. All rights reserved.17–10 The Federal Reserve Banking System Board of Governors of the Federal Reserve System:  A group of seven individuals appointed by the president and confirmed by the Senate that, under the terms of the Banking Act of 1935, has key policymaking responsibilities within the Fed. Federal Open Market Committee (FOMC):  A group composed of the seven governors and five of the twelve Fed bank presidents that determines how to conduct the Fed’s open market operations.

Copyright © 2004 South-Western. All rights reserved.17–11 The Early Fed, 1913–1935 The hesitant Fed The great depression and reform of the Fed  Restructuring the Fed  New lines of authority

Copyright © 2004 South-Western. All rights reserved.17–12 The Evolution of the Modern Fed The Fed’s fight for independence Working for the U.S. Treasury The fight for Fed Independence  Federal Reserve–Treasury Accord: A 1951 agreement that dissociated the Fed from a previous policy of pegging Treasury bill rates at artificially low levels. “Leaning Against The Wind” The technocratic Fed Inflation and monetary targeting

Copyright © 2004 South-Western. All rights reserved.17–13 Federal Reserve District Banks Figure 17–3 SOURCE: Federal Reserve Bulletin, various issues.

Copyright © 2004 South-Western. All rights reserved.17–14 Organizational Structure of the Federal Reserve System Figure 17–4 SOURCE: Board of Governors of the Federal Reserve System.

Copyright © 2004 South-Western. All rights reserved.17–15 The Federal Open Market Committee FOMC directive:  The official written instructions from the FOMC to the head of the Trading Desk at the Federal Reserve Bank of New York. Trading Desk:  The Fed’s term for the office at the Federal Reserve Bank of New York that conducts open market operations on the Fed’s behalf.

Copyright © 2004 South-Western. All rights reserved.17–16 Federal Reserve Discount Window Lending since June 2001 Figure 17–5 SOURCE: Board of Governors of the Federal Reserve System.

Copyright © 2004 South-Western. All rights reserved.17–17 Federal Reserve Holdings of Repurchase Agreements and Reserve Deposits at Federal Reserve Banks Figure 17–6 SOURCE: Board of Governors of the Federal Reserve System. Fed holdings of repurchase agreements ($ billions) Reserve deposits at Federal Reserve banks ($ billions)