1. Copyright © 2002 Pearson Education, Inc. Creation of the Federal Reserve System After 1836, private institutions attempted to be lender of last resort…NY Clearing House / JP Morgan Severe financial panics  Federal Reserve Act,1913. Board of Governors and 12 District Banks District banks: Nine member board of directors: 3 bankers, 3 business (industry, commerce, agriculture), 3 “public” Board elects bank president, subject to BOG “suggestion” District bank duties: Clear checksIssue currency Supervise banksDiscounting Gather dataEconomic research

2. Copyright © 2002 Pearson Education, Inc. Slide 19-2 Figure 19.1 Federal Reserve Districts and Banks

3. Copyright © 2002 Pearson Education, Inc. Member Banks The Federal Reserve Act required all national banks to become member banks. State banks were given the choice of whether or not to become members. Member banks are “shareholders” Limited dividends Limited influence Federal Advisory Committee

4. Copyright © 2002 Pearson Education, Inc. Board of Governors Seven members appointed by the President and confirmed by the U.S. Senate. 14-year, nonrenewable terms Chairman – 4 year renewable term. http://federalreserve.gov/bios Administers monetary policy: Serve on Federal Open Market Committee (FOMC) Set discount rate (on district bank recommendation) Set reserve requirements Regulatory responsibilities: margin requirements

5. Copyright © 2002 Pearson Education, Inc. Federal Open Market Committee 12 voting members – direct open market operations 7 BOG Governors and five district bank presidents. Issues directives to the trading desk at the NY Fed Independent Monetary Policy? The President exercises pressure through his appointments to the Board of Governors. The Fed is creation of Congress, which can amend the Fed’s charter and powers.

6. Copyright © 2002 Pearson Education, Inc. Slide 19-6 Figure 19.2a Organization and Authority of the Federal Reserve System

7. Copyright © 2002 Pearson Education, Inc. Slide 19-7 Figure 19.2b Organization and Authority of the Federal Reserve System (cont.)

8. Copyright © 2002 Pearson Education, Inc. Central Bank Independence: Comparison of Major Central Banks The Fed has the longest fixed term of office for bank board members (14 years). The Fed has the shortest term for the head of the central bank (4 years). The overall degree of independence of the central bank varies. Countries with the most independent central banks have the lowest average rates of inflation.