1. Copyright 2014 by Diane Scott Docking 1 The Federal Reserve “The Fed Today” video

2. Copyright 2014 by Diane Scott Docking 2 Learning Objectives Understand the history of the Federal Reserve System (FRS) Understand the major functions of the FRS Identify the structure of the FRS

3. Copyright 2014 by Diane Scott Docking 3 History of Federal Reserve System First Bank of the United States (1791– 1811) Disbanded in 1811 Originally each bank printed its own money (bank notes) Varied size, amount, looks, etc. Next slide

4. Copyright 2014 by Diane Scott Docking 4

5. 5 History of Federal Reserve System (cont.) No central bank for 4 years. Second Bank of the United States (1816–1836) Disbanded in 1836 when President Andrew Jackson vetoed its renewal.

6. Copyright 2014 by Diane Scott Docking 6 History of Federal Reserve System (cont.) No central bank from 1836 – 1913 “Free banking era” 1837 – 1863 National Banks: 1863 - 1913 National Bank Act of 1863 Allowed only selected nationally chartered banks to issue currency Standardized denomination, size, looks, etc. Collateralized by T-Bonds and silver “Silver Certificates” No lender of last resort

7. Silver Certificate Copyright 2014 by Diane Scott Docking 7

8. 8 History of Federal Reserve System (cont.) No central bank from 1836 – 1913 No lender of last resort Banking panics became regular events Panics of 1837, 1893, and 1907 Thousands of banks failed during this time.

9. Banking Panic of 1907 A swarm gathers on Wall Street during the bank panic in October 1907. 1. Stock market decline of over 50% led by Augustus Heinz and his company United Copper Company attempting to corner the copper market. Financed by Knickerbocker Trust. 2. Contagion spread and other large banks failed. 3. J.P. Morgan to the rescue. Copyright 2014 by Diane Scott Docking 9

10. 10 Federal Reserve System: Third U. S. Central Bank Third U.S. Central Bank - The Fed (1913 – present) Created by the Federal Reserve Act of 1913 President Woodrow Wilson passed to allay public concern over the soundness of the US banking system.

11. Copyright 2014 by Diane Scott Docking 11 Federal Reserve Act of 1913 Created the Federal Reserve System as the central bank and guarantor of the banking system’s liquidity The Federal Reserve is responsible for: Providing an “elastic currency” which means the Fed can adjust the money supply to support a dynamic economy FRS was lender of last resort to banks with liquidity and capital problems

12. Copyright 2014 by Diane Scott Docking 12 Federal Reserve Act of 1913 This act established the Federal Reserve System. Headed by 7 Board of Governors/Directors 12 Federal Reserve Banks Nationally chartered banks required to join; state chartered optional  Gave FRS power to supervise and examine banks

13. Copyright 2014 by Diane Scott Docking 13 Federal Reserve System Federal Reserve System (1913–) Only 12 federal reserve Banks to issue Federal Reserve Notes

14. Copyright 2014 by Diane Scott Docking 14 http://www.federalreserve.gov/

15. Formal Structure of the Fed 15 Copyright 2014 by Diane Scott Docking

16. 16 Organization of the Federal Reserve: The Board of Governors Board of Governors __ individuals appointed by the U.S. president and confirmed by the Senate Serve nonrenewable ____-year terms U.S. president appoints one of the 7 as chair whose ___-year term is renewable Offices in Washington, D.C. Independence of Federal Reserve Staggered terms of Governors Budget separate from Congress

17. Copyright 2014 by Diane Scott Docking 17 Who is this?

18. Copyright 2014 by Diane Scott Docking 18 Organization of the Federal Reserve: The Board of Governors Regulate commercial banks Supervise and regulate member banks and bank holding companies Oversight of 12 Fed district banks Establish consumer finance regulations after Congressional legislation Establish and effect monetary policy Direct control over two tools of monetary policy Set reserve requirements Approve discount rate set by district banks Indirect control in a third area Governors are members of the Federal Open Market Committee Board of Governors has two main functions:

19. Copyright 2014 by Diane Scott Docking 19 Organization of the Federal Reserve: The Federal Reserve District Banks Federal Reserve District Banks ___ districts District bank size related to economic wealth of district District banks owned by private member banks ___ Board of Directors of district banks Three appointed by Board of Governors Three professional bankers Three business persons in district

20. Copyright 2014 by Diane Scott Docking 20

21. Copyright 2014 by Diane Scott Docking 21 The FRB of New York Responsible for oversight of some of the largest financial institutions headquartered in Manhattan and the surrounding area. Houses the open market desk. All of the Feds open market operations are directed through this trading desk. Only member of the Bank for International Settlements, providing close contact with other foreign central bankers. Chairman of New York Fed is the only permanent member of the FOMC, serving as the vice-chairman of the committee.

22. Copyright 2014 by Diane Scott Docking 22 Organization of the Federal Reserve: Advisory Committees & Member Banks Advisory committees from private sector also are a part of overall structure of the Fed Member Banks Must meet requirements of the Federal Reserve Board of Governors to be a member bank Nationally chartered banks must be member banks Chartered by Office of the Comptroller of the Currency State chartered banks may be member banks Own Federal Reserve Stock 25% of banks controlling 80% of all deposits are members Currently 37% of the commercial banks in U.S. are members

23. Copyright 2014 by Diane Scott Docking 23 Organization of the Federal Reserve: The Federal Open Market Committee 12 members 7 Board of Governors President of the New York Fed 4 other district bank presidents appointed on a rotating basis Other presidents participate but do not vote on monetary policy matters Monetary policy goals of: high employment price stability economic growth Make monetary policy decisions to achieve goals Forward decisions to N.Y. Fed open market desk The FOMC meets about every 6 weeks (approx. 8 times/year):

24. Changing the Discount Rate Copyright 2014 by Diane Scott Docking 24

25. Borrowing From the Federal Reserve Bank – Discount Loans A Bank With Immediate Reserve Needs Can Borrow From the Federal Reserve. There Are _______ Types of Loans for Different Needs, Each With Its Own Interest Rate. There are no longer restrictions on the ___________ of borrowing at the Federal Reserve. Copyright 2014 by Diane Scott Docking 25

26. Borrowing From the Federal Reserve Bank FRB Discount Window.html 1. _________ Credit (neé:Adjustment credit) Only for a few days Can be used for anything, but usually to provide immediate aid in meeting reserve requirements. May be used to fund sales of Fed Funds. Available to generally sound financial institutions “No questions asked” loan Rate = Discount rate 2. ________ Credit Only for a few days Usually to provide immediate aid in meeting reserve requirements. Cannot be used to fund an expansion of bank’s assets. Available to banks not eligible for primary credit Bank will have to provide more info to Fed. Rate = Primary rate + 50 bp. Copyright 2014 by Diane Scott Docking 26

27. Borrowing From the Federal Reserve Bank FRB Discount Window.html 3. ________ Credit Designed to assist small banks with seasonal swings in deposits and loans. Longer maturity Rate = market rate (floating) 4. ________ Credit For longer-term liquidity problems of problem banks, individuals, partnerships, and corporations. Expensive Copyright 2014 by Diane Scott Docking 27

28. Copyright 2014 by Diane Scott Docking 28 Inside the Fed: the books Several research documents are by the Fed, and have been given official, colorful names: Green book: national forecasts for the next two years Blue book: projections of monetary aggregates Beige book: districts’ “state of the economy”

29. Copyright 2014 by Diane Scott Docking 29 In Summary: Functions of the Federal Reserve System Effect Monetary Policy U.S. Central Bank In International Area Fiscal Agent of U.S. Treasury Facilitate Efficient Payments System Regulate Banks and Bank Holding Co. Enforce Consumer Credit Laws

30. http://www.youtube.com/watch?v=Kj9-kRv0e6s&feature=player_embedded Copyright 2014 by Diane Scott Docking 30 Video: The Fed – Drawing Board – from the FRB of Cleveland Click on Black Screen on next slide