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| South Western Collectibles Grading Service |
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| South Western Collectibles Grading Service |
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| Federal Reserve Notes For Sale |
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| FEDERAL RESERVE SYSTEM, central banking system of the U.S., popularly called the Fed. Established in December 1913, it began operation in November 1914 as the banker to both the banking community and the government; it also issues the national currency, conducts monetary policy, and plays a major role in the supervision and regulation of banks and bank holding companies. These functions are the responsibilities of key officials of the Federal Reserve System: the Board of Governors, located in Washington, D.C.; the top officers of the 12 District Federal Reserve Banks, located throughout the nation; and the Federal Open Market Committee (FOMC). The Fed's actions, described below, generally have a significant effect on U.S. interest rates and, subsequently, on stock, bond, and other financial markets. The Federal Reserve's basic powers are concentrated in the Board of Governors, which is paramount in all policy issues concerning bank regulation and supervision and in most aspects of monetary control. The board enunciates the Fed's policies on both monetary and banking matters. Because the board is not an operating agency, most of the day-to-day implementation of policy decisions is left to the Reserve Banks. The U.S. banking system's regulatory apparatus is complex; the authority of the Federal Reserve is shared in some instances—for example, in mergers or the examination of banks—with other federal agencies such as the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). In the critical area of regulating the nation's money supply in accordance with national economic goals, however, the Federal Reserve is independent within the government. Income and expenditures of the Reserve Banks and of the Board of Governors are not subject to the congressional appropriation process; the Federal Reserve is self-financing. Its income ($25.2 billion in 1996) comes mainly from Reserve Banks holdings of income-earning securities, primarily those of the U.S. government. Outlays and other deductions include operating expenses of the 12 Reserve Banks and branches, assessments to Reserve Banks for expenditures by the Board of Governors, and the cost of currency. In 1996 the Federal Reserve returned about $20.1 billion in net income to the U.S. Treasury. History. During the 50 years before the Federal Reserve System began operation, surging economic growth was interrupted by economic crises, frequently accompanied by the collapse of the monetary system. The U.S. banking system was unable to respond flexibly to business cycles (see BUSINESS CYCLE,). Under the National Bank Act (1864), the banking system was divided into three groups: central reserve city banks (the first was located in New York City; Chicago and Saint Louis, Mo., were added in 1887), reserve city banks (in 16 other large cities), and country banks. All national banks were required to hold reserves, but country banks could hold a percentage of these deposits in reserve city banks. When country banks required additional reserves to meet their customers' cash demands, they would call on reserve city banks, which would in turn demand funds from central reserve city banks. Any weak block in this pyramid could lead to the collapse of the entire system. Additional liquidity could not be created anywhere, and suspension of specie (that is, gold coin) payment was the frequent consequence. Banking crises such as these occurred in 1873, 1883, 1893, and 1907. The panic of 1907 led to the formation (1908) of a bipartisan congressional body, the National Monetary Commission, whose report set the stage for the Federal Reserve Act (1913) and a decentralized, adaptable banking system. Structure. All national banks are required to be members of the Federal Reserve System; membership of state-chartered institutions is voluntary. Members have to purchase stock in their district Reserve Bank, for which they are entitled to a statutory 6 percent dividend and the right to vote for six directors of that district bank. Stock ownership does not convey control or the financial interest normally attached to stock in a corporation. The stock may not be sold or used as collateral and must be returned to the Reserve Bank if the commercial bank ceases to be a member. The Depository Institutions Deregulation and Monetary Control Act of 1980 imposed a reserve requirement on all depository institutions, but it also permits them to borrow from the Federal Reserve and to obtain payment-mechanism and other services from the Fed. Moreover, the act mandates that the Federal Reserve charge a fee for services provided. By enabling banks to borrow reserves from the Reserve Banks, the liquidity of the entire banking system is increased. The 12 Reserve Banks are located in the following cities: Boston; New York; Philadelphia; Cleveland, Ohio; Richmond, Va.; Atlanta, Ga.; Chicago; St. Louis; Minneapolis, Minn.; Kansas City, Mo.; Dallas, Tex.; and San Francisco. Each bank is formally responsible to a nine-member board of directors, which is divided into three classes. The six class A and B directors are elected by the member banks; the three class C directors including the chairman and vice-chairman are appointed by the Board of Governors. The board of directors is responsible for the administration of its bank and for appointing the bank's president and vice-president (subject to the approval of the Board of Governors). The directors also recommend the discount rate—that is, the interest rate charged to banks for borrowing from the Reserve Banks—again, subject to review by the Board of Governors. Reserve Banks implement the decisions made by the Fed's Board of Governors and by their own officers. Their staffs examine state member banks (national banks are examined by the staff of the Comptroller of the Currency; insured nonmember banks are subject to FDIC examination), decide on granting loans to members, and carry out the routine banking functions for the federal government. Branching, merging, and holding company decisions are often handled by Reserve Bank officers. Sales and purchases of securities for the Federal Reserve System's own account are conducted by the Federal Reserve Bank of New York, which is also the operating arm for international financial activities. At the top of the Federal Reserve System is the Board of Governors, which over the years has undergone significant change both in its responsibilities and its format. The 1913 act established a seven-member Federal Reserve Board, consisting of five presidential appointees, each from a different Federal Reserve district, plus the secretary of the Treasury and the Comptroller of the Currency. Terms of office for the appointees were initially set at ten years and were staggered, so that no two would end at the same time; board members could not be removed from office except for cause. These provisions implied that the presidential appointees were to be insulated from day-to-day politics. The board's powers, nevertheless, were confined to supervising the Reserve Banks, with limited power over the discount rate and little discretion over the structure of the banking industry. The Banking Act of 1935 centralized power in a Board of Governors, all of whom are appointed by the president with the advice and consent of the Senate to serve 14-year terms; the president also appoints governors to serve as chairman and vice-chairman for 4-year terms that may be renewed. The governors' powers were also expanded. For example, discount rates now had to be approved periodically by the board. Sales and purchases of government securities—the open-market operation that previously had been managed solely at the discretion of the presidents of the Reserve Banks—were centralized in the FOMC, consisting of the seven governors, the president of the Federal Reserve Bank of New York, and four other Reserve Bank presidents serving on a rotating basis. Since 1935, Congress has given additional powers to the Board of Governors. These powers include control over mergers, bank holding companies, U.S. offices of international banks, and the reserves of all depository institutions. Monetary Control. The Fed is best known to the public for the influence it has on interest rates by “loosening” or “tightening” the money supply. The term money supply has various technical definitions (see MONEY,), but basically it is the amount of money available at any one time in the U.S. financial system. The Federal Reserve's open-market operations are the most flexible and most frequently used instrument of controlling the money supply. When the FOMC decides that the money supply is growing too slowly, the bank may purchase U.S. government securities, thus injecting cash into the financial system and expanding the monetary base. This enables banks to create additional deposits, which constitute a major portion of the money supply. Conversely, should the money supply grow more rapidly than is desired, the FOMC will sell federal securities on the open market. Such sales reduce bank reserves and thus the ability of the banking system to create deposits. Generally, the less money there is, the higher is its cost—the rate of interest. Results similar to those obtained by use of the open-market system can also be achieved by changing the required reserve ratio—that is, the percentage of deposits that banks must maintain on reserve at the Reserve Banks. When the required reserve ratio is raised, banks are unable to create as much money as they previously were able to because a larger portion of their assets must be held in reserve; the converse is true when the reserve ratio is reduced. The Federal Reserve can also make changes in the discount rate. When banks seek additional reserves by borrowing from the Reserve Banks, a significant escalation in the discount rate makes such borrowing more expensive and consequently reduces bank demands for reserves. A discount rate change may, at times, reinforce open-market operations. It may also, at times, have an “announcement effect,” signaling a change in the Federal Reserve's underlying evaluation of economic conditions. The Federal Reserve also has a narrow role in regulating operations of the stock market. It may selectively lower or raise the margin requirement, which is the percentage of a stock price that must be provided in cash by someone who buys the stock on credit (see MARGIN DEALS,). The margin requirement, a legacy of depression legislation, aims to curb market speculation. Analysis of Federal Reserve Policies. Economists today tend to feel that, over the long run, the policies of the Federal Reserve have had both positive and negative effects: (1) Federal Reserve policy decisions have occasionally increased rather than decreased economic instability; (2) minute adjustments of monetary instruments are not productive and may well be destabilizing; (3) over time, Federal Reserve policies that slow down the growth rate of money supply will reduce the rate of inflation; and (4) some problems that have faced the U.S., such as a shortage of oil, are supply-related issues that central banks are ill-equipped to resolve. Generally, economists feel that the Federal Reserve's record is mixed. Many economists would agree, for example, that the Federal Reserve is partly to blame for the severity of the depression of the 1930s. On the other hand, the record of price stability during the late 1950s and early ‘60s is partly due to the Fed's effective monetary policy. Critics were more vocal during the 1970s and early ‘80s, as monetary authorities attempted to combat inflation by raising interest rates to unusually high levels. Criticism was muted when both inflation and interest rates declined through the mid- and late 1980s and remained stable in the ‘90s. Relations with the Government. The Federal Reserve is sometimes considered a fourth branch of the U.S. government because it is made up of a powerful group of national policymakers freed from the usual restrictions of governmental checks and balances. Indeed, the Board of Governors is formally independent of the executive branch and protected by tenure well beyond that allotted to the president. In fact, however, a working relationship has evolved; the Federal Reserve works according to the objectives of economic and financial policy established by the executive branch of the government. The relationship between the Federal Reserve and Congress is more complex. On the one hand, the central bank is unmistakably a creature of Congress, being responsible to it for its mandate and its continued existence. On the other hand, the self-financing feature of the Federal Reserve removes from Congress its primary source of influence, the agency budget. Thus, the Federal Reserve is relatively free from partisan political pressures, but it is required to report frequently to the Congress on the conduct of monetary policy. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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