1. THE FEDERAL RESERVE SYSTEM 1913

2. Two Ways the Economy is Influenced
Fiscal Policy
Government’s ability to tax and spend; Fed. Gov't
regulating taxes & expenditures
Tax more and spend less =
economy slowed
Tax less and spend more =
economy stimulated
Monetary Policy
The Federal Reserve Bank (the FED) affecting the economy through controlling the money supply.
Private control since Fed, not Gov’t, controls the amount of $ in circulation

3. STRUCTURE OF THE FED Owned by its member banks
-all national banks -some state banks
Twelve Districts with Directors/
Presidents
-but supervised by Fed in DC
Janet Yellen - Chairperson
Board of Governors – 7 members
-appointed by P & approved by Senate
-14 year terms, staggered, can’t be reappointed
Member banks are commercial banks that are members of and hold stock in the Fed
What institutions are members of the Federal Reserve System, and what does membership entail?
National banks--those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury)--by law are members of the Federal Reserve System. State-chartered banks and trust companies may apply for membership. To be accepted as a member, an applicant must meet requirements set by the Board of Governors.
Member banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6 percent of their capital and surplus, of which 3 percent must be paid in; the remaining 3 percent is subject to call by the Board of Governors. The holding of stock in a Federal Reserve Bank does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation that goes along with membership, and the stock may not be sold or pledged as collateral for loans. Member banks annually receive a 6 percent dividend on their stock, as specified by law, and vote for some of the directors (so-called class A and class B directors) of their Reserve Bank.
Issued shares of stock in 1913 just like any other corporation
National banks (chartered by fed. Gov’t) HAVE to be members – those chartered by state gov’ts don’t have to.
Board of Governors appointments are staggered – every two years / always experienced people on Board
Fed is the bank for bankers --- does all the same functions for banks as local banks do for people
FAC – reps from each of the 12 district banks that provide advice to the Fed. Reserve on economy’s overall health.
Federal Open Market Committee
-money supply & interest rates
-12 voting members meet 8 x year
Federal Advisory Council
-gives advice on overall economic health

5. The Federal Reserve System

6. The Federal Reserve System
Monetary policy-
It’s all about:
Manipulating
Interest rates
Setting Reserve
requirements
Manipulating the
Money supply:
Increase it by buying bonds and decrease by selling bonds

7. Responsibilities of the Fed
State member
bank supervision
Fed
Must monitor the reserves held by state member banks ($ on hand to clear checks)
Banks can fail….particularly in past days like 30s with bank runs….”It’s A Wonderful Life”
Today though banks insured by FDIC
Electronic failure much more likely than a bank run
Example: Continental IL bank, 8th largest in nation, had a modern day run
billions loaned out to oil companies – family – loans not getting repaid
Many small regional banks had $ in Continental IL but these large deposits by banks not insured by FDIC
Businesses with deposits at Continental worried & withdraw $ via computer, telephone….a modern bank run
FED steps in and loans $ to Continental IL…who will have to pay back the fed at the “discount rate”
one of Fed’s basic functions
Continental was finally returned to private sector 7 years later
FED does annual inspections of member banks to insure overall banking safety. If bank deemed unsound, will be monitored constantly & could be shut down.
A main role of the FED is to keep up consumer confidence in the banking system.

8. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Fed
BHC – are corporations that own one or more banks – don’t accept deposits or make loans

9. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Fed
International
bank
supervision
Supervise foreign banks in U.S. – they control about 20% of banking assets in U.S.

10. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Fed
International
bank
supervision
Mergers

11. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Fed
International
bank
supervision
Moving funds around to clear checks
Used to sort 75 million or more checks per day….. not now with debits
Mergers
Check
clearing

12. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Fed
International
bank
supervision
Requires sellers to make complete and accurate disclosures to people who buy on credit.
Regulation Z gives Fed authority to extend these disclosures to people who purchase & borrow from
corps., retail stores, auto dealers, banks, etc.
For ex., they have to explain size of down payment, amt of monthly payment, amt of interest, etc.
Truth-in-
lending
laws
Mergers
Check
clearing

13. Responsibilities of the Fed
State member
bank supervision
Bank
holding
companies
Issuing
Currency &
Storing Cash
Fed
International
bank
supervision
Fiat money – federal reserve notes
Robots move cash into vaults and sorting areas
80,000 bills an hour are counted
counterfeit bills sent to the FBI
worn out bills are shredded, trashed into “bricks”
Truth-in-
lending
laws
Mergers
Check
clearing

14. Responsibilities of the Fed
Margin – 50%
State member
bank supervision
Margin &
reserve
requirements
Bank
holding
companies
Reserve – 3-10%
Fed
Issuing
Currency &
Storing Cash
International
bank
supervision
A depository institution's reserve requirements vary by the dollar amount of net transaction accounts held at that institution. Effective December 30, 2010, institutions with net transactions accounts:
Of less than $10.7 million have no minimum reserve requirement;
Between $10.7 million and $58.8 million must have a liquidity ratio of 3%;
Exceeding $58.8 million must have a liquidity ratio of 10%.[4]
Truth-in-
lending
laws
Mergers
Check
clearing

15. Gold reserves in the Federal Reserve Bank of New York
Federal Reserve vaults in Dallas

16. Federal Open Market Committee & Money Supply
Government sells bonds -
Money flows to the treasury - reduces the money supply
Government redeems (buys back) bonds -
Money flows out of the treasury - increases the money
supply

17. Fractional Reserve System & Money Supply
Allows the Fed to control the growth of the money supply.
A percentage of each deposit into a bank account must be kept in the bank. The remainder can be loaned out.
The Fed determines the percentage – called the reserve requirement
A lower reserve fraction results in more monetary expansion
A higher reserve fraction results in less monetary expansion

18. HOW BANKS INCREASE THE SUPPLY OF MONEY

19. Formula: Divide D by RR and multiply x 100 = increased money supply

20. How Fractional Reserves Work
Money supply (MS) growth:
D=deposit
RR= reserve requirement
R=excess reserve
MS = D (1+R+R2+R3 +R4 +R5…. +Rn) = D/RR
If D= $1000
RR=.1
MS=1000/.1=$10,000
If D= $1000
RR=.4
MS=1000/.4=$2,500