1. The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster

2. The Origins of U.S. Central Banking  Bank of England  The Bank of North America (1781)  The First Bank of the United States (1791)  The Second Bank of the United States (1816) 1837–1865  The Free-Banking period.  The Civil War & Greenbacks - a fiat money. 1791–1836

3. 1865–1912  The Gold Standard (1875).  Brief foray into bimetalism.  Panics of 1873, 1893 and 1907  Federal Reserve Act of 1913

4. The Federal Reserve Banking System  Purposes  Purposes: 1.Develop, supervise & control the nation’s money. 2.Serve as a “lender of last resort.” 3.Serve as a national check-clearing system. 4.Serve as depository for federal gov’t. funds.  Structure  Structure: 1.Board of Governors. 2.Twelve District Banks. 3.Federal Open Market Committee. 4.Regulatory bureaucracy.

5. The Federal Reserve Banking System  Board of Governors  Board of Governors: 1.Selected for one 14 year term. [Except…] 2.Staggered selection; geographic diversity. 3.Chairman & Vice Chairman selected for 4 years. 4.Can’t be members of the executive branch.  Policy Tools  Policy Tools: 1.Open Market Operations. Buy and sell U.S. Treasury bonds. 2.Set bank required reserve ratio. 3.Set “discount” rate of interest.

6. The Banking System Reserves (Cash in vault) T-Bills (Liquidity & income) Loans (Banks’ earnings) Demand Deposits (Checking; Transaction) Equity AssetsLiabilities & Equity Accounting Identity: A  L + E M1 +$10,000 +$10,000 +$8,000 +$8,000 +$2,000

7. The Fed & the Banking System Reserves (Cash in vault) T-Bills (Liquidity & income) Loans (Banks’ earnings) Demand Deposits (Checking; Transaction) Equity AssetsLiabilities & Equity M1

8. The Federal Reserve Banking System

9. The Early Fed, 1913–1935 The Great Depression - Failure of the Fed (?)  The Great Depression - Failure of the Fed (?) Initially increased liquidity, but pulled back. By 1933, 33% of banks fail, MS fallen 33%. Accommodates the Treasury Dept. during WWI.  Accommodates the Treasury Dept. during WWI. Buys Treasury bonds to finance G spending (aka “monetizing the debt”). From 1916 to 1918, this increases MS by 70%. Huge risk of inflation.

10. The Fed - version 2.0, 1935  District bank independence curbed.  Board of Governors reconstituted.  Federal Open Market Committee (FOMC)  12 members  All 7 governors  FRNY bank president  4 other district bank presidents on rotating basis  Meet every 6 weeks and receive lots of press.  Announce goals and intentions.  During WWII, did the same as WWI.

11. The Evolution of the Modern Fed WWII - working “for” the U.S. Treasury  WWII - working “for” the U.S. Treasury Federal Reserve–Treasury Accord (1951)  Federal Reserve–Treasury Accord (1951) “Leaning Against The Wind”  “Leaning Against The Wind” –Martin (1953-1970) The technocratic Fed  The technocratic Fed –Burns (1970-1978)... the “political business cycle” Coping with inflation  Coping with inflation –Volcker (1979-1987) Keeping the economy stable?  Keeping the economy stable? –Greenspan (1987-2006) Coping with recession  Coping with recession –Bernanke (2006-2014) –Yellen (2014-?)

12. The Fed’s Balance Sheet THE FED’S ASSETS –Treasury securities –U.S. agency securities –Discount window loans –Gold certificates. –Special Drawing Right (SDR) certificates –Foreign currency reserves –Cash items in the process of collection LIABILITIES AND EQUITY CAPITAL –Federal Reserve notes –Bank reserve deposits –U.S. Treasury deposits –Foreign official deposits –Deferred availability cash items –Equity capital

13. The Fed’s Balance Sheet - 2005 782,003 The Consolidated Balance Sheet of the Federal Reserve System ($ millions, as of January 31, 2005)

16. 2012

18. The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster