It was created on December 23, , with the enactment of the Federal Reserve Act , after a series of financial panics particularly the panic of led to the desire for central control of the monetary system in order to alleviate financial crises. The U. Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates.
1913 federal reserve act pdf study
The Federal Reserve System is composed of several layers. Twelve regional Federal Reserve Banks , located in cities throughout the nation, regulate and oversee privately owned commercial banks.
It consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time the president of the New York Fed and four others who rotate through one-year voting terms. There are also various advisory councils.
The Meeting at Jekyll Island
Thus, the Federal Reserve System has both public and private components. The primary motivation for creating the Federal Reserve System was to address banking panics.
A particularly severe crisis in led Congress to enact the Federal Reserve Act in Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.
Current functions of the Federal Reserve System include:  . This practice is called fractional-reserve banking.
Your Gateway to the History of the Federal Reserve System
As a result, banks usually invest the majority of the funds received from depositors. On rare occasions, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur.
Many economists, following Nobel laureate Milton Friedman , believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of ; Friedman argued that this contributed to the Great Depression.
Because some banks refused to clear checks from certain other banks during times of economic uncertainty, a check-clearing system was created in the Federal Reserve System.
By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks.
To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy.
It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs. Through its discount window and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is called the discount rate officially the primary credit rate.
By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.
In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.
Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled.
As part of this service relationship, the Fed sells and redeems U. It also issues the nation's coin and paper currency. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing , actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value.
Jekyll Island and the Creation of the Federal Reserve
The Federal Reserve Banks then distribute it to other financial institutions in various ways. Federal funds are the reserve balances also called Federal Reserve Deposits that private banks keep at their local Federal Reserve Bank.
The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another.
This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy is put into effect partly by influencing how much interest the private banks charge each other for the lending of these funds.
Revenue Act of 1913
Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.
The Federal Reserve regulates private banks. The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In Donald L. Kohn , vice chairman of the board of governors, summarized the history of this compromise: .
Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.
The legislation that Congress ultimately adopted in reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today. The balance between private interests and government can also be seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the board of governors are selected by the President of the United States and confirmed by the Senate.
The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however, there are restrictions to what the GAO may audit. The board of governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.
A general description of the types of regulation and supervision involved in the U. The Board also plays a major role in the supervision and regulation of the U. It has supervisory responsibilities for state-chartered banks  that are members of the Federal Reserve System, bank holding companies companies that control banks , the foreign activities of member banks, the U.
The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately state member banks and 5, bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.
Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System.
The Board also issues regulations to carry out major federal laws governing consumer credit protection , such as the Truth in Lending , Equal Credit Opportunity , and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks. Members of the Board of Governors are in continual contact with other policy makers in government.
They frequently testify before congressional committees on the economy, monetary policy , banking supervision and regulation , consumer credit protection , financial markets , and other matters. The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chair also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury.
1913 Federal Reserve Act
The Chair has formal responsibilities in the international arena as well. There is a very strong economic consensus in favor of independence from political influence. The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities.
If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the board of governors. This policy is described in United States Code: . Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information.
The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.
The Federal Reserve plays a role in the U. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin.
For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U. In the Depository Institutions Deregulation and Monetary Control Act of , Congress reaffirmed that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services.
The Federal Reserve plays a role in the nation's retail and wholesale payments systems by providing financial services to depository institutions. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system.
Federal Reserve Act
By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions.
The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U. The Federal Reserve System has a "unique structure that is both public and private"  and is described as " independent within the government " rather than " independent of government ". The seven-member board of governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy.
It also supervises and regulates the U. House of Representatives. The chair and vice chair of the board of governors are appointed by the president from among the sitting governors. They both serve a four-year term and they can be renominated as many times as the president chooses, until their terms on the board of governors expire.
The current members of the board of governors are as follows: . Bush administrations respectively.
Richard Clarida , a potential nominee who was a Treasury official under George W. Bush , pulled out of consideration in August ", one account of the December nominations noted. Later, on January 6, , the United States Senate confirmed Yellen's nomination to be chair of the Federal Reserve Board of Governors; she was the first woman to hold the position.
In April , Stein announced he was leaving to return to Harvard May 28 with four years remaining on his term. At the time of the announcement, the FOMC "already is down three members as it awaits the Senate confirmation of