HGov: Federal Reserve

federalreserve_buildingCongress created the Federal Reserve System on December 23, 1913 as the central banking organization in the United States. Its major purpose was to end the periodic financial panics that had occurred during the 1800s and into the early 1900s. The Federal Reserve System or Fed, is made up of a Board of Governors assisted by the Federal Advisory Council, the Federal Open Market Committee, 12 Federal Reserve district banks, 25 branch banks, and member banks. Power is not concentrated in a single central bank but is shared by the governing board and the 12 district banks.

The Board of Governors directs the operations of the Fed. It supervises the 12 Federal Reserve district banks and regulates certain activities of member banks and all other depository institutions. The 7 full time members of the Board of Governors are appointed by the President with approval of the Senate. The President chooses one member as a chairperson. Each member of the board serves for 14 years. The terms are arranged so that an opening occurs every 2 years. Their length of term, manner of selection, and independence in working frees members from political pressures and their decisions are not subject to the approval of the President or Congress.

The Board of Governors is assisted by the Federal Advisory Council (FAC). It is made up of 12 members elected by the directors of each Federal Reserve district bank. The FAC meets at least 4 times each year and reports to the Board of Governors on general business conditions in the nation.

The 12 voting members on the Federal Open Market Committee (FOMC) meet 8times a year to decide the course of action that the Fed should take to control the money supply. The FOMC determines such economic decisions as whether to raise or lower interest rates. It is this committee’s actions that have a resounding effect throughout the financial world.

The nation is divided into 12 Federal Reserve districts with each district having a Fed district bank. Each of the 12 district banks is set up as a corporation owned by its member banks. A 9-person board of directors, made up of bankers and business people, supervises each Federal Reserve district bank. The system also includes 25 Federal Reserve branch banks. These smaller banks act as branch offices and aid the district banks in carrying out their duties.

All national banks chartered by the federal government are required to become members of the Federal Reserve System. Banks chartered by the states may join if they choose to do so. To become a member bank, a national or state bank buys stock in its district’s Federal Reserve bank. In the past, only member banks were required to meet Fed regulations, such as keeping a certain percentage of their total deposits as cash in their own vaults or as deposits in their Federal Reserve district bank. Now all institutions that accept deposits from customers must keep reserves in their Fed district bank. Fed services are also available to all depository institutions, member or nonmember, for a fee. The major advantage of member ship in the Fed is that member banks, as stockholders in their district bank, receive dividends on their stock in the district bank. Member banks also are able to vote for 6 of the district bank’s 9 board members.

1)Read Chapter 13 pp.413-421



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