Federal Reserve System

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Federal Reserve System
Seal The Federal Reserve System Eccles Building (Headquarters)
Headquarters	Washington, D.C.
Chairman	Ben Bernanke
Central Bank of	United States
Currency	U.S. dollar
ISO 4217 Code	USD
Base borrowing rate	0–0.25%
Base deposit rate	3.5%
Website	federalreserve.gov

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The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system^[1] that comprises (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. Since February 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System. Donald Kohn is the current Vice Chairman (Term: June 2006 - June 2010).

[edit] History

[edit] Banking in the United States

[edit] Central banking in the United States

The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791 by Alexander Hamilton. Its charter was not renewed in 1811. In 1816, the Second Bank of the United States was chartered. Early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter. The country entered into a recession, and the bank blamed Jackson's policies. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907 provided strong demand for the creation of a centralized banking system.

The timeline of central banking in the United States is as follows:

• 1791-1811

First Bank of the United States

• 1811-1816

No central bank

• 1816-1836

Second Bank of the United States

• 1837-1862

Free Bank Era

• 1863-1913

National Banks

• 1913-Present

Federal Reserve System

[edit] Creation of a third central bank

The main motivation for the third central banking system came from the Panic of 1907, which renewed demands for banking and currency reform.^[2] During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics.^[3] According to proponents of the Federal Reserve System and many economists, the previous national banking system had two main weaknesses: an "inelastic" currency; and a lack of liquidity.^[3] The following year Congress enacted the Aldrich-Vreeland Act which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.^[4] The American public believed that the Federal Reserve System would bring about financial stability, so that a panic like the one in 1907 could never happen again; but just 22 years later in 1929, the stock market crashed again, and the United States entered the worst depression in its history, the Great Depression. Critics of the Federal Reserve System including Robert Latham Owen, Milton Friedman and Murray Rothbard^[5] state that the Federal Reserve System caused the Great Depression.

[edit] Federal Reserve Act

Newspaper clipping, December 24, 1913

The chief of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions — one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central-banking systems and report on them.^[4] Aldrich went to Europe opposed to centralized banking, but after viewing Germany's banking system came away believing that a centralized bank was better than the government-issued bond system that he had previously supported. Centralized banking was met with much opposition from politicians, who were suspicious of a central bank and who charged that Aldrich was biased due to his close ties to wealthy bankers such as J.P. Morgan and his daughter's marriage to John D. Rockefeller, Jr.

Aldrich fought for a private bank with little government influence, but conceded that the government should be represented on the Board of Directors. Most Republicans favored the Aldrich Plan,^[6] but it lacked enough support in the bipartisan Congress to pass.^[7] Progressive Democrats instead favored a reserve system owned and operated by the government and out of control of the "money trust", ending Wall Street's control of American currency supply.^[6] Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.^[6] The Federal Reserve Act passed Congress in late 1913 on a mostly partisan basis, with most Democrats in support and most Republicans against it.^[8]

[edit] Post-Bretton Woods era

In July 1979, Paul Volcker was nominated, by President Carter, as Chairman of the Federal Reserve Board amid roaring inflation. He tightened the money supply, and by 1986 inflation had fallen sharply.^[9] In October 1979 the Federal Reserve announced a policy of "targeting" money aggregates and bank reserves in its struggle with double-digit inflation.^[10]

In January 1987, with retail inflation at only 1%, the Federal Reserve announced it was no longer going to use money-supply aggregates, such as M2, as guidelines for controlling inflation, even though this method had been in use from 1979, apparently with great success. Before 1980, interest rates were used as guidelines; inflation was severe. The Fed complained that the aggregates were confusing. Volcker was chairman until August 1987, whereupon Alan Greenspan assumed the mantle, seven months after monetary aggregate policy had changed.^[11]

[edit] Key laws

Key laws affecting the Federal Reserve have been:^[12]

• Banking Act of 1935
• Employment Act of 1946
• Federal Reserve-Treasury Department Accord of 1951
• Bank Holding Company Act of 1956 and the amendments of 1970
• Federal Reserve Reform Act of 1977
• International Banking Act of 1978
• Full Employment and Balanced Growth Act (1978)
• Depository Institutions Deregulation and Monetary Control Act (1980)
• Financial Institutions Reform, Recovery and Enforcement Act of 1989
• Federal Deposit Insurance Corporation Improvement Act of 1991
• Gramm-Leach-Bliley Act (1999)
• Emergency Economic Stabilization Act (2008)

[edit] Purpose

The primary motivation for creating the Federal Reserve System was to address banking panics.^[13] Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."^[14] Before the founding of the Federal Reserve, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Fed has broader responsibilities than only ensuring the stability of the financial system.^[13]

Current functions of the Federal Reserve System include:^[13][15]

• To address the problem of banking panics
• To serve as the central bank for the United States
• To strike a balance between private interests of banks and the centralized responsibility of government
  • To supervise and regulate banking institutions
  • To protect the credit rights of consumers
• To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of
  • maximum employment
  • stable prices, including prevention of either inflation or deflation^[16]
  • moderate long-term interest rates
• To maintain the stability of the financial system and contain systemic risk in financial markets
• To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system
  • To facilitate the exchange of payments among regions
  • To respond to local liquidity needs
• To strengthen U.S. standing in the world economy

Critics of the Federal Reserve System state that it is not able to accomplish these goals.^[17]

[edit] Addressing the problem of bank panics

Bank runs occur because all banking institutions in the United States practice fractional-reserve banking and do not keep enough cash in reserve to give to all of their depositors simultaneously. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort if a bank run does occur.

[edit] Elastic currency

One way to prevent bank runs is to have a money supply that can expand when money is needed. The term "elastic currency" in the Federal Reserve Act doesn't just mean the ability to expand the money supply, but also to contract it. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as:^[12]

Currency that can, by the actions of the central monetary authority, expand or contract in amount warranted by economic conditions.

Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change. In practice, the Federal Reserve has never contracted the monetary supply since the Great Depression, on the fear that contracting the money supply may cause a deflationary recession, and because according to the operating theory of the Federal Reserve, monetary supply should expand as the economy expands to accommodate larger volumes of transaction.

[edit] Check clearing system

Because some banks refused to clear checks from certain other banks during times of economic uncertainty, which increased financial problems, a check-clearing system was created in the Federal Reserve System. It is briefly described in The Federal Reserve System—Purposes and Functions:^[12]

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 1907. 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. The System, then, was to provide not only an elastic currency—that is, a currency that would expand or shrink in amount as economic conditions warranted—but also an efficient and equitable check-collection system.

[edit] Lender of last resort

The Federal Reserve has the authority to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.^[18]

Through its discount 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 the discount rate (officially the primary credit rate).

In 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.^[19]

For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).^[20][21]

The Federal Reserve System's role as lender of last resort is criticized for shifting risk and responsibility away from lenders and borrowers and placing them on others in the form of taxes and/or inflation.

[edit] Central bank

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.S. 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.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells it to the Federal Reserve Banks at manufacturing cost, currently about 4 cents per bill for paper currency. The Federal Reserve Banks then distribute it to other financial institutions in various ways.^[22]

The Federal Reserve System's role as a central bank is criticized for enabling the United States federal government to issue fiat currency.

[edit] Federal funds

Federal funds are the reserve balances that private banks keep at their local Federal Reserve Bank.^[23][24] These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism through which private banks can 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 works by influencing how much money the private banks charge each other for the lending of these funds.

[edit] Balance between private banks and responsibility of governments

The system was designed out of a compromise between the competing philosophies of privatization and government regulation.^[22] While planning the design of the system, some people wanted the system to have generally private aspects whereas others wanted more government involvement. The system that resulted ended up being a compromise between these two philosophies. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:^[25]

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 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is the part of government that regulates the private banks. The balance between privatization and government involvement is also 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 private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

[edit] Government regulation and supervision

The Board of Governors is the part of the Federal Reserve System that is responsible for supervising the private banks. A general description of the types of regulation and supervision involved is given by the Federal Reserve:^[12]

The Board also plays a major role in the supervision and regulation of the U.S. banking system. 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.S. activities of foreign banks, and Edge Act and agreement corporations (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 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 Chairman also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chairman has formal responsibilities in the international arena as well.

[edit] Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also have regulatory and supervisory responsibilities. For example, a member bank (private bank) is not permitted to give out too many loans to people who cannot pay them back. This is because too many defaults on loans will lead to a bank run. If the board of directors 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:^[26]

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 punishment for making false statements or reports which overvalue an asset is also stated in the U.S. Code:^[27]

Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

These aspects of the Federal Reserve System are the parts intended to prevent or minimize speculative asset bubbles which ultimately lead to severe market corrections.

[edit] National payments system

^[12]The Federal Reserve plays an important role in the U.S. payments system. 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.S. government securities.

In passing the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress reaffirmed its intention 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. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

The Federal Reserve plays a vital role in both the nation’s retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution’s retail clients—individuals and smaller businesses. The Reserve Banks’ retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. 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.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution’s failure to make or settle its payments.

The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing. The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.^[28]

[edit] Structure

[edit] Independent Federal Agency

The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit. The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system.^[29] The System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President.^[30] The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations.^[31] The Federal Reserve System's unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed's responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent whilst also remaining within the government of the United States, it is often said to be "independent within the government."^[30]

The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve System. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock "may not be sold, traded, or pledged as security for a loan" and all member banks receive a 6% annual dividend.^[30] No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm.^[32] These member banks must maintain fractional reserves either as vault cash or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks (and since shares in ownership of the Federal Reserve Banks are redeemable only at par, the nominal "owners" do not benefit from this surplus capital); the Federal Reserve system contributed over $29 billion to the Treasury in 2006.^[33]

[edit] Outline

Organization of the Federal Reserve System

Whole

^[22]

• The nation's central bank
• A regional structure with 12 districts
• Subject to general Congressional authority and oversight
• Operates on its own earnings

Board of Governors

• 7 members serving staggered 14-year terms
• Appointed by the U.S. President and confirmed by the Senate
• Oversees System operations, makes regulatory decisions, and sets reserve requirements

Federal Open Market Committee

• The System's key monetary policymaking body
• Decisions seek to foster economic growth with price stability by influencing the flow of money and credit
• Composed of the 7 members of the Board of Governors and the Reserve Bank presidents, 5 of whom serve as voting members on a rotating basis

Federal Reserve Banks;

• 12 regional banks with 25 branches
• Each independently incorporated with a 9-member board of directors, with 6 of them elected by the member banks while the remaining 3 are designated by the Board of Governors.
• Set discount rate, subject to approval by Board of Governors.
• Monitor economy and financial institutions in their districts and provide financial services to the U.S. government and depository institutions.

Member banks

^[19]

• Private banks
• Hold stock in their local Federal Reserve Bank
• Elect six of the nine members of Reserve Banks’ boards of directors.

Advisory Committees

• Carry out varied responsibilities

[edit] Board of Governors

The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate one on Jan. 31 of every even-numbered year, for staggered, 14-year terms.^[19] By law, the appointments must yield a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country," and as stipulated in the Banking Act of 1935, the Chairman and Vice Chairman of the Board are one of seven members of the Board of Governors who are appointed by the President from among the sitting Governors.^[34][35] As an independent federal government agency,^[36] the Board of Governors does not receive funding from Congress, and the terms of the seven members of the Board span multiple presidential and congressional terms. Once a member of the Board of Governors is appointed by the president, he or she functions mostly independently. The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.^[37] It also supervises and regulates the operations of the Federal Reserve Banks, and US banking system in general.

Membership is generally limited to one term. However, if someone is appointed to serve the remainder of another member's uncompleted term, he or she may be reappointed to serve an additional 14-year term.^[38] Conversely, a governor may serve the remainder of another governor's term even after he or she has completed a full term. The law provides for the removal of a member of the Board by the President "for cause."^[38]

Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System.

The current members of the Board of Governors are:

• Ben Bernanke, Chairman
• Donald Kohn, Vice-Chairman
• Kevin Warsh
• Randall Kroszner*
• Elizabeth A. Duke
• Daniel Tarullo
• Vacancy*

(*Governor Duke was confirmed by the Senate after a year-long delay on June 27, 2008, and she was sworn into office on August 5, 2008. Governor Kroszner's term has also expired, but the law allows him to remain in office until a successor is confirmed)

[edit] Federal Open Market Committee

The Federal Open Market Committee (FOMC) created under 12 U.S.C. § 263 comprises the seven members of the board of governors and five representatives selected from the regional Federal Reserve Banks. The FOMC is charged under law with overseeing open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The representative from the Second District, New York, is a permanent member, while the rest of the banks rotate at two- and three-year intervals. All the presidents participate in FOMC discussions, contributing to the committee’s assessment of the economy and of policy options, but only the five presidents who are committee members vote on policy decisions. The FOMC, under law, determines its own internal organization and by tradition elects the Chairman of the Board of Governors as its chairman and the president of the Federal Reserve Bank of New York as its vice chairman. Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in Telephone consultations and other meetings are held when needed.^[12]

[edit] Transparency issues

There has been considerable debate over a lack of transparency as to what is discussed in Federal Open Market Committee meetings.^[39][40][41] Since the FOMC sets monetary policy, which affects the entire U.S. economy, many people feel that it is important to know what the FOMC is doing.

[edit] Federal Reserve Banks

Federal Reserve Districts

There are 12 regional Federal Reserve Banks (not to be confused with the "member banks") with 25 branches, which serve as the operating arms of the system. Each Federal Reserve Bank is subject to oversight by a Board of Governors.^[42] Each Federal Reserve Bank has a board of directors, whose members work closely with their Reserve Bank president to provide grassroots economic information and input on management and monetary policy decisions. These boards are drawn from the general public and the banking community and oversee the activities of the organization. They also appoint the presidents of the Reserve Banks, subject to the approval of the Board of Governors. Reserve Bank boards consist of nine members: six serving as representatives of nonbanking enterprises and the public (nonbankers) and three as representatives of banking. Each Federal Reserve branch office has its own board of directors, composed of three to seven members, that provides vital information concerning the regional economy.^[19]

Total assets of each Federal Reserve Bank.

The Reserve Banks opened for business on November 16, 1914. Federal Reserve Notes were created as part of the legislation, to provide a supply of currency. The notes were to be issued to the Reserve Banks for subsequent transmittal to banking institutions. The various components of the Federal Reserve System have differing legal statuses.

[edit] Legal status

The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. Each member bank owns nonnegotiable shares of stock in its regional Federal Reserve Bank—but these shares of stock give the member banks only limited control over the actions of the Federal Reserve Banks, and the charter of each Federal Reserve Bank is established by law and cannot be altered by the member banks. While it is unusual, private individuals and non-bank corporations (with proof of a resolution of the board of directors indicating it intends to do so) may also purchase one or more shares of stock of any of the Federal Reserve Banks.^{[citation needed]} The stock is the same nonnegotiable stock as banks receive, cannot be sold and pays a small dividend. In Lewis v. United States,^[43] the United States Court of Appeals for the Ninth Circuit stated that:

The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.

The opinion also stated that:

The Reserve Banks have properly been held to be federal instrumentalities for some purposes.

Another decision is Scott v. Federal Reserve Bank of Kansas City^[36] in which the distinction between the Federal Reserve Banks and the Board of Governors is made.

[edit] Board of Directors

The nine member board of directors of each district is made up of 3 classes, designated as classes A, B, and C. The directors serve a term of 3 years. The makeup of the boards of directors is outlined in U.S. Code, Title 12, Chapter 3, Subchapter 7:^[44]

[edit] Class A

• three members
• chosen by and representative of the stockholding banks.
• member banks are divided into 3 groups based on size—large, medium, and small banks. Each group elects one member of Class A.

[edit] Class B

• three members
• No director of class B shall be an officer, director, or employee of any bank
• represent the public with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.
• member banks are divided into 3 groups based on size—large, medium, and small banks. Each group elects one member of Class B.

[edit] Class C

• three members
• No director of class C shall be an officer, director, employee, or stockholder of any bank
• designated by the Board of Governors of the Federal Reserve System. They shall be elected to represent the public, and with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.
• Shall have been for at least two years residents of the district for which they are appointed, one of whom shall be designated by said board as chairman of the board of directors of the Federal reserve bank and as Federal reserve agent.

A list of all of the members of the Reserve Banks' boards of directors is published by the Federal Reserve.^[45]

[edit] List of Federal Reserve Banks

The Federal Reserve Districts are listed below along with their identifying letter and number. These are used on Federal Reserve Notes to identify the issuing bank for each note. The 25 branches are also listed.

[edit] Primary Dealers

A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States.^[47] They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.^[48] They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy. [4] [5]

Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market, for example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in world financial markets.

The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.

[edit] Current list of primary dealers

As of February 11, 2009 according to the Federal Reserve Bank of New York the list includes:

Five notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase. On February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.

[edit] Member Banks

Each member bank is a private bank (e.g., a privately owned corporation) that holds stock in one of the twelve regional Federal Reserve banks. All of the commercial banks in the United States can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve System:^[12]

All nationally chartered banks hold stock in one of the Federal Reserve banks. State-chartered banks may choose to be members (and hold stock in a regional Federal Reserve bank), upon meeting certain standards.

Holding stock in a Federal Reserve bank is not, however, like owning publicly traded stock. The stock cannot be sold or traded. Member banks receive a fixed, 6 percent dividend annually on their stock, and they do not directly control the applicable Federal Reserve bank as a result of owning this stock. They do, however, elect six of the nine members of Reserve banks’ boards of directors.^[19] Federal statute provides (in part):

Every national bank in any State shall, upon commencing business or within ninety days after admission into the Union of the State in which it is located, become a member bank of the Federal Reserve System by subscribing and paying for stock in the Federal Reserve bank of its district in accordance with the provisions of this chapter and shall thereupon be an insured bank under the Federal Deposit Insurance Act [. . . .]

—^[49]

Other banks may elect to become member banks. According to the Federal Reserve Bank of Boston:

Any state-chartered bank (mutual or stock-formed) may become a member of the Federal Reserve System. The twelve regional Reserve Banks supervise state member banks as part of the Federal Reserve System’s mandate to assure strength and stability in the nation’s domestic markets and banking system. Reserve Bank supervision is carried out in partnership with the state regulators, assuring a consistent and unified regulatory environment. Regional and community banking organizations constitute the largest number of banking organizations supervised by the Federal Reserve System.

—^[50]

For example, as of October 2006 the member banks in New Hampshire included Community Guaranty Savings Bank; The Lancaster National Bank; The Pemigewasset National Bank of Plymouth; and other banks.^[51] In California, member banks (as of September 2006) included Bank of America California, National Association; The Bank of New York Trust Company, National Association; Barclays Global Investors, National Association; and many other banks.^[52]

[edit] List of member banks

FDIC-insured banks. N (national banks) and SM (state members) are members of the Federal Reserve System while the rest of the FDIC-insured banks are not members. Each charter type is defined as follows:^[53] *N = commercial bank, national (federal) charter and Fed member, supervised by the Office of the Comptroller of the Currency (OCC) – Dept of Treasury *SM = commercial bank, state charter and Fed member, supervised by the Federal Reserve (FRB) *NM = commercial bank, state charter and Fed nonmember, supervised by the FDIC *OI = insured U.S. branch of a foreign chartered institution (IBA) *SA = savings associations, state or federal charter, supervised by the Office of Thrift Supervision (OTS) *SB = savings banks, state charter, supervised by the FDIC While the OI, SA, and SB categories are not members of the system, they are sometimes treated as if they were members under certain circumstances.^[54]

A list of all member banks can be found at the website of the Federal Deposit Insurance Corporation (FDIC).^[53] This is a list of all banks that are insured by the FDIC, which means that every member bank of the Federal Reserve System is listed here along with non-members who are FDIC-insured. Commercial banks that are not insured by the FDIC are not included. This is a comprehensive list with many categories describing the characteristics of each bank such as the total assets, bank holding company, charter type, location of headquarters, federal reserve district, and several others. From this list, one can see that most commercial banks in the United States are not members of the Federal Reserve System, but the total value of all the banking assets of member banks is substantially larger than the total value of the banking assets of nonmembers.

Summary of all FDIC insured banks:^[53]

[edit] Advisory Committees

The Federal Reserve System uses advisory committees in carrying out its varied responsibilities. Three of these committees advise the Board of Governors directly:^[12]

• Federal Advisory Council
• Consumer Advisory Council
• Thrift Institutions Advisory Council

Of these advisory committees, perhaps the most important are the committees (one for each Reserve Bank) that advise the Banks on matters of agriculture, small business, and labor. Biannually, the Board solicits the views of each of these committees by mail.

[edit] Monetary policy

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.^[55][56]

[edit] Interbank lending is the basis of policy

The Federal Reserve implements monetary policy by influencing the interbank lending of excess reserves. Interbank lending occurs when too many withdrawals have been made at a bank and it needs to borrow funds from another bank to make up the difference. The rate that banks charge each other for these loans is determined by the markets but the Federal Reserve influences this rate through the three tools of monetary policy which are described in the "Tools of monetary policy" section below. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks...By conducting open market operations, imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.

—^[12]

This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.^[57]

[edit] Goals

The goals of monetary policy include:^[15][56]

• maximum employment
• stable prices
• moderate long-term interest rates
• promotion of sustainable economic growth

[edit] Tools

There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:^[55]

[edit] Open market operations

Open market operations put money in and take money out of the banking system. This is done through the sale and purchase of U.S. government treasury securities. When the U.S. government sells securities, it gets money from the banks and the banks get a piece of paper (I.O.U.) that says the U.S. government owes the bank money. This drains money from the banks. When the U.S. government buys securities, it gives money to the banks and the banks give the I.O.U. back to the U.S. government. This puts money back into the banks. The Federal Reserve education website describes open market operations as follows:^[56]

Open market operations involve the buying and selling of U.S. government securities (federal agency and mortgage-backed). The term 'open market' means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an 'open market' in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy.

Open market operations are the primary tool used to regulate the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Open market operations are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. The transactions are undertaken with primary dealers.

The Fed’s goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer’s bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two. That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. These short-term transactions are called repurchase agreements (repos) – the dealer sells the Fed a security and agrees to buy it back at a later date.

A simpler description is described in The Federal Reserve in Plain English:^[13]

How do open market operations actually work? Currently, the FOMC establishes a target for the federal funds rate (the rate banks charge each other for overnight loans). Open market purchases of government securities increase the amount of reserve funds that banks have available to lend, which puts downward pressure on the federal funds rate. Sales of government securities do just the opposite—they shrink the reserve funds available to lend and tend to raise the funds rate.

By targeting the federal funds rate, the FOMC seeks to provide the monetary stimulus required to foster a healthy economy. After each FOMC meeting, the funds rate target is announced to the public.

[edit] Repurchase agreements

To smooth temporary or cyclical changes in the monetary supply, the desk engages in repurchase agreements (repos) with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer’s reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer’s reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.^[61]

[edit] Federal funds rate and discount rate

The effective federal funds rate charted over fifty years.

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The late economist Milton Friedman consistently criticized this reverse method of controlling inflation by seeking an ideal interest rate and enforcing it through affecting the money supply since nowhere in the widely accepted money supply equation are interest rates found.^[62]

The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.^[63] The equivalent operation by the European Central Bank is referred to as the "marginal lending facility."^[64]

Both of these rates influence the prime rate which is usually about 3 percentage points higher than the federal funds rate.

Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build, but at the cost of promoting the expansion of the money supply and thus greater inflation. Higher interest rates may slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.)

The Federal Reserve System usually adjusts the federal funds rate by 0.25% or 0.50% at a time.

The Federal Reserve System might also attempt to use open market operations to change long-term interest rates, but its "buying power" on the market is significantly smaller than that of private institutions. The Fed can also attempt to "jawbone" the markets into moving towards the Fed's desired rates, but this is not always effective.^{[citation needed]}

[edit] Reserve requirements

Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio.^[65] The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,^[66] which depository institutions trade in the federal funds market discussed above.^[67] The required reserve ratio is set by the Board of Governors of the Federal Reserve System.^[68]The reserve requirements have changed over a time and some of the history of these changes is published by the Federal Reserve.^[69]

[edit] New facilities

In order to address problems related to the subprime mortgage crisis and United States housing bubble, several new tools have been created. The first new tool, called the Term Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool^[70] but there have been suggestions that this new tool may remain in place for a prolonged period of time.^[71] Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008.^[72] The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject treasury securities into the banking system.^[73] Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008.^[74] The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealers, which was previously against Fed policy.^[75] The differences between these 3 new facilities is described by the Federal Reserve:^[76]

The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.

Some of the measures taken by the Federal Reserve to address this mortgage crisis haven't been used since The Great Depression^[77]. The Federal Reserve gives a brief summary of what these new facilities are all about:^[78]

As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation. These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity.

The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.

[edit] Term auction facility

The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions.^[70] The creation of this facility was announced by the Federal Reserve on December 12, 2007 and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets.^[79] The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.^{[80][81][82][83]} Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.^[84] Foreign exchange swap lines with the European Central Bank and Swiss National Bank were opened so the banks in Europe could have access to U.S. dollars. ^[84] Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms...TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.^[85]

It is also described in the Term Auction Facility FAQ^[70]:

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.

[edit] Term securities lending facility

The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.^[86] Like the Term Auction Facility, the TSLF was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable. It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns Cos. and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets.^[87] The currency swap lines with the European Central Bank and Swiss National Bank were increased.

[edit] Primary dealer credit facility

The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.^[76] This new facility marks a fundamental change in Federal Reserve policy because now primary dealers can borrow directly from the Fed when this previously was not permitted.

[edit] Interest on reserves

As of October 2008^[update], the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp.^[88] As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.^[89]

[edit] Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

This section requires expansion.

The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) is also called the AMLF. Borrower Eligibility:

All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks are eligible to borrow under this facility pursuant to the discretion of the FRBB.

Eligible Collateral:

Collateral eligible for pledge under the Facility must meet the following criteria:

• was purchased by Borrower on or after September 19, 2008 from a registered investment company that holds itself out as a money market mutual fund;
• was purchased by Borrower at the Fund’s acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by Borrower;
• is rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, the ABCP must have been rated within the top rating category by that agency;
• was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
• has a stated maturity that does not exceed 120 days if the Borrower is a bank or 270 days for non-bank Borrowers.

[edit] Commercial Paper Funding Facility

The Commercial Paper Funding Facility is also called the CPFF. On October 7, 2008 the Federal Reserve further expanded the collateral it will loan against, to include commercial paper. The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.^[90]

[edit] Money Market Investor Funding Facility

The Money Market Investor Funding Facility is also called the MMIFF. The Federal Reserve introduced a facility on October 21, 2008, whereby money market mutual funds can set up a structured investment vehicle of short-term assets which will be underwritten by the Federal Reserve Bank of New York.^[91] The program will run until April 30, 2009, unless extended by the FRB.

[edit] Uncertainties

A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:^[12]

• While these policy choices seem reasonably straightforward, monetary policy makers routinely face certain notable uncertainties. First, the actual position of the economy and growth in aggregate demand at any time are only partially known, as key information on spending, production, and prices becomes available only with a lag. Therefore, policy makers must rely on estimates of these economic variables when assessing the appropriate course of policy, aware that they could act on the basis of misleading information. Second, exactly how a given adjustment in the federal funds rate will affect growth in aggregate demand—in terms of both the overall magnitude and the timing of its impact—is never certain. Economic models can provide rules of thumb for how the economy will respond, but these rules of thumb are subject to statistical error. Third, the growth in aggregate supply, often called the growth in potential output, cannot be measured with certainty.
• In practice, as previously noted, monetary policy makers do not have up-to-the-minute information on the state of the economy and prices. Useful information is limited not only by lags in the construction and availability of key data but also by later revisions, which can alter the picture considerably. Therefore, although monetary policy makers will eventually be able to offset the effects that adverse demand shocks have on the economy, it will be some time before the shock is fully recognized and—given the lag between a policy action and the effect of the action on aggregate demand—an even longer time before it is countered. Add to this the uncertainty about how the economy will respond to an easing or tightening of policy of a given magnitude, and it is not hard to see how the economy and prices can depart from a desired path for a period of time.
• The statutory goals of maximum employment and stable prices are easier to achieve if the public understands those goals and believes that the Federal Reserve will take effective measures to achieve them.
• Although the goals of monetary policy are clearly spelled out in law, the means to achieve those goals are not. Changes in the FOMC’s target federal funds rate take some time to affect the economy and prices, and it is often far from obvious whether a selected level of the federal funds rate will achieve those goals.

[edit] Measurement of economic variables

A lot of data is recorded and published by the Federal Reserve. A few websites where data is published are at the Board of Governors Economic Data and Research page^[92], the Board of Governors statistical releases and historical data page^[93], and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.^[94] The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.^[95]

[edit] Net worth of households and nonprofit organizations

The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled, Flow of Funds.^[96] At the end of fiscal year 2008, this value was $51.5 trillion.

[edit] Money supply

Components of US money supply (currency, M1, M2, and M3) since 1959

The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

The Federal Reserve ceased publishing M3 statistics in March 2006, explaining that it cost a lot to collect the data but did not provide significantly useful information.^[97] The other three money supply measures continue to be provided in detail.

[edit] Consumer price index

US consumer price index 1913–2006.

Year on year change in the US dollar consumer price index 1914–2006. The ability to maintain a low inflation rate is a long-term measure of the Fed's success.

The consumer price index is used as one measure of the value of the money. It is defined as:

A measure of the average price level of a fixed basket of goods and services purchased by consumers as determined by the Bureau of Labor Statistics. Monthly changes in the CPI represent the rate of inflation. Core CPI excludes volatile components, i.e., food and energy prices.

—^[95]

The data consists of the US city average of consumer prices and can be found at The US Department of Labor—Bureau of Labor Statistics^[98]

The CPI taken alone is not a complete measure of the value of money. For example, the monetary value of stocks, real estate, and other goods and services categorized as investment vehicles are not reflected in the CPI. It is difficult to obtain a full picture of value across the full range of the cost of living, so the CPI is typically used as a substitute. The CPI therefore has powerful political ramifications, and Administrations of both parties have been tempted to change the basis for its calculation, progressively underestimating the true rate of decline in purchasing power. ^[99]

One of the Fed's main roles is to maintain price stability. This means that the change in the consumer price index over time should be as small as possible. The ability to maintain a low inflation rate is a long-term measure of the Fed's success.^[13] Although the Fed usually tries to keep the year-on-year change in CPI between 2 and 3 percent,^[100] there has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.^{[101][102][103]}

[edit] Inflation and the economy

There are two types of inflation that are closely tied to each other. Monetary inflation is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.^[56]

The effects of monetary and price inflation include:^[56]

• Price inflation makes workers worse off if their incomes don’t rise as rapidly as prices.
• Pensioners living on a fixed income are worse off if their savings do not increase more rapidly than prices.
• Lenders lose because they will be repaid with dollars that aren't worth as much.
• Savers lose because the dollar they save today will not buy as much when they are ready to spend it.
• Businesses and people will find it harder to plan and therefore may decrease investment in future projects.
• Owners of financial assets suffer.
• Interest rate-sensitive industries, like mortgage companies, suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.

[edit] Unemployment rate

United States unemployment rates 1950-2005

The unemployment rate statistics are collected by the Bureau of Labor Statistics. Since one of the stated goals of monetary policy is maximum employment, the unemployment rate is a sign of the success of the Federal Reserve System.

Like the CPI, the unemployment rate is used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world. ^[104]

[edit] Budget

The Federal Reserve is self-funded. The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as “capital gains/losses” that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.^[105] The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress. There are two reports with budget information. The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, Annual Report. It also includes data about employment throughout the system. The other report, which explains in more detail the expenses of the different aspects of the whole system, is called Annual Report: Budget Review. These are comprehensive reports with many details and can be found at the Board of Governors' website under the section Reports to Congress^[106]

[edit] Net worth

[edit] Balance sheet

Total combined assets for all 12 Federal Reserve Banks. The changes in the composition of the assets reflects the changes in Federal Reserve policy in order to battle the subprime mortgage crisis and United States housing bubble.

One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks.^[107]

Below is the sheet as of March 11, 2009 (in millions of dollars):

Analyzing the Federal Reserve's balance sheet reveals a number of facts:

• The Fed has over $11 billion in gold which is a holdover from the days the government used to back US Notes and Federal Reserve Notes with gold.^{[citation needed]}. The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce. As of March 2009, the market value of that gold is around $247.8 billion.
• The Fed holds more than $1000 million in coinage, not as a liability but as an asset. The Treasury Department is actually in charge of creating coins and US Notes. The Fed then buys coinage from the Treasury by increasing the liability assigned to the Treasury's account.
• The Fed holds at least $515 billion of the national debt. The "securities held outright" value used to directly represent the Fed's share of the national debt, but after the creation of new facilities in the winter of 2007-2008, this number has been reduced and the difference is shown with values from some of the new facilities.
• The Fed has about $20 billion in assets from overnight repurchase agreements. Repurchase agreements are the primary asset of choice for the Fed in dealing in the open market. Repo assets are bought by creating 'depository institution' liabilities and directed to the bank the primary dealer uses when they sell into the open market.
• The $1.024 trillion in Federal Reserve Note liabilities represents the total value of all dollar bills in existence; over $176 billion is held by the Fed (not in circulation); and the "net" figure of $848 billion represents the total face value of Federal Reserve Notes in circulation.
• The $808 billion in deposit liabilities of depository institutions shows that dollar bills are not the only source of government money. Banks can swap deposit liabilities of the Fed for Federal Reserve Notes back and forth as needed to match demand from customers, and the Fed can have the Bureau of Engraving and Printing create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).
• The $46.7 billion in Treasury liabilities shows that the Treasury Department does not use private banks but rather uses the Fed directly (the lone exception to this rule is Treasury Tax and Loan because government worries that pulling too much money out of the private banking system during tax time could be disruptive).^{[citation needed]}
• The $187 million foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
• The $11.8 billion in 'other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to member banks for the 6% dividend on the 3% of their net capital they are required to contribute in exchange for nonvoting stock their regional Reserve Bank in order to become a member. Member banks are also subscribed for an additional 3% of their net capital, which can be called at the Federal Reserve's discretion. All nationally-chartered banks must be members of a Federal Reserve Bank, and state-chartered banks have the choice to become members or not.
• Total capital represents the profit the Fed has earned which comes mostly from the assets they purchase with the deposit and note liabilities they create. Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as "Miscellaneous Revenue".

In addition, the balance sheet also indicates which assets are held as collateral against Federal Reserve Notes.

[edit] Criticisms

A large and varied group of criticisms has been directed against the Federal Reserve System. One critique, typified by the Austrian School, is that the Federal Reserve is an unnecessary and counterproductive interference in the economy.^[108] According to this theory, interest rates should be naturally low during times of excessive consumer saving (because lendable money is abundant) and naturally high when high net volumes of consumer credit are extended (because lendable money is scarce). These critics argue that setting a baseline lending rate amounts to centralized economic planning; a hallmark of socialist and communist societies; and inflating the currency amounts to a regressive, incremental redistribution of wealth.^[109]

Some people who criticize the Federal Reserve System also criticize fiat currency and support a return to the gold standard.^[110] Some critics state that the Federal Reserve System is unconstitutional because Congress is empowered by the Constitution to coin money, and is not empowered to print money.^[111] Others state that the Federal Reserve System supports fractional reserve banking, which they claim resembles an unsustainable pyramid scheme.^[109] Some critics argue that the Fed lacks accountability and transparency or that there is a culture of secrecy within the Reserve.^[112] In addition, the Fed sponsors much of the monetary economics research in the US. Some believe this makes it less likely for researchers to publish findings challenging the status quo that is the Federal Reserve.^[113] The Federal Reserve Board Abolition Act is a proposed remedy to these issues.

[edit] Historical criticisms

Criticisms of the Federal Reserve System are not new, and some historical criticisms reflect current concerns.

At one end of the spectrum are economists from the Austrian School and the Chicago School who want the Federal Reserve System abolished.^[114] They criticize the Federal Reserve System’s expansionary monetary policy in the 1920s, arguing that the policy allowed misallocations of capital resources and supported a massive stock price bubble. They also cite politically motivated expansions or tightening of currency in the 1970s and 1980s.^[114]

"That in pursuance of that plan they devised a plan for the formation of so-called citizens’ and other leagues to educate the public in their way of thinking, and that the final outcome of the campaign they started was that they secured the Federal reserve act, now in incubation. That that plan was drafted in Wall Street for Wall Street greed by Paul M. Warburg in about 1902 and placed in cold storage till just before the panic of 1907; but even then its real purpose was disclosed only to those in the secret.
"I shall show that all along, from 1906 to the present time, the Money Trust forces have adroitly managed the campaign for the building up of this Federal Reserve act and putting it into operation, and it will appear that the President selected for the Federal Reserve Board members who have been schooled in the Money Trust system and that a majority of them are pupils of that system."^[115]

-Minnesota Republican Congressman Charles August Lindbergh, from his book written in 1913, titled Banking and Currency and The Money Trust, trying to warn the American public that a dangerous transfer of power had taken place nearly unnoticed with the passage of the Federal Reserve Act. He also points out that those behind the Money Trust indoctrinated men and women in the academic sector of society to accept and embrace the idea of a central banking system in the United States.

A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation, therefore, and all our activities are in the hands of a few men * * *. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world.

-Woodrow Wilson, 1916, reference: United States Congressional Serial Set, p100. reference: "Repeal the Federal Reserve Banks" by Rev. Casimir Frank

"We have restricted credit and control of development, and we have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world. No longer a government of free opinions, no longer a government by conviction and the vote of majority, but a government by the opinion and duress of a small group of dominant men.

-Congressional Record, 1923: Federal Reserve, p.5337

"If all bank loans were paid, there would not be a dollar of coin or currency in circulation. Someone has to borrow every dollar we have in circulation. We are absolutely without a permanent money system."

-Robert Hemphill, Federal Reserve Bank. Atlanta.

As quoted in the foreword of 100% Money, by Irving Fisher

"After Wilson was out of office, the New York Federal Reserve Bank got absolute control, just like they tried to do while I was President of the United States and didn't have a chance to do. Now they've got control again, and somebody's got to wake up to the fact that the control of the finances of the country must be in the hands of the people and the Congress of the United States, and the President, if he wants to exercise that control."

-President Harry Truman

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

-Henry Ford

"Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits."

-Sir Joseph Stamp, (President of the Bank of England in the 1920s, the second richest man in Britain)

"The depression was the calculated 'shearing' of the public by the World Money powers, triggered by the planned sudden shortage of supply of call money in the New York money market.... The One World Government leaders and their ever close bankers have now acquired full control of the money and credit machinery of the U.S. via the creation of the privately owned Federal Reserve Bank."

-Curtis Dall, FDR's son-in-law in his book, My Exploited Father-in-Law

"If the Federal Reserve was the public master created to control Wall Street, then why did the Fed turn always for political protection not to labor or farmers or small business but to the largest and most influential bankers?"

-Secrets of the Temple, by William Greider

"Every Congressman, every Senator knows precisely what causes inflation... but can't, [won't] support the drastic reform to stop it [repeal of the Federal Reserve Act] because it could cost him his job."

-Robert A Heinlein, Expanded Universe

"The regional Federal Reserve banks are not government agencies, ...but are independent, privately owned and locally controlled corporations."

-Lewis vs. United States, 680 F. 2d 1239 9th Circuit 1982

"Those who create and issue money and credit direct the policies of government and hold in the hollow of their hands the destiny of the people."

-Sir Reginald McKenna, former President of the Midland Bank of England

The following quotes are about institutions which served the same
purpose as the Federal Reserve, but were abolished in previous
generations of the United States government.  Previous generations
found these institutions to be unconstitutional.

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs."

-Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802) 3rd president of US (1743 - 1826)

[The] Bank of the United States... is one of the most deadly hostility existing, against the principles and form of our Constitution... An institution like this, penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this bank of the United States, with all its branch banks, be in time of war! It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile?

-Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin, 1803. ME 10:437 http://en.wikiquote.org/wiki/Thomas_Jefferson

"All the perplexities, confusion and distress in America rise, not from defects in the Constitution or Confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation."

-John Adams, in a letter to Thomas Jefferson, 1787

"It is not our own citizens only who are to receive the bounty of our government. More than 8 Millions than the stock of this bank are held by foreigners...Is there no daner to our liberty and independence in a bank that in it's nature has so little to bond it to our country? Controlling our currencies, receiving our public moneys, and holding thousands of our citizens in dependence...would be more formidable and dangerous than a military power of the enemy. If government would confine itself to equal protection, and, as Heavan does it's rains shower it's favor alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles."

-President Andrew Jackson

"You are a den of vipers. I intend to rout you out and by the Eternal God.... If the people only understood the rank injustice of our money and banking system, there would be a revolution before morning."

-President Andrew Jackson

Jackson became the first president to have an assassination attempt (Jan 30, 1835)

"To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor even hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people."

-Alexander Hamilton

"Whoever controls the volume of money in any country is absolute master of all industry and commerce."

-President James A Garfield

"While boasting of our noble deeds, we are careful to control the ugly fact that by an iniquitous money system, we have nationalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery."

-Horace Greely

"Give me the power to issue a nation's money; then I do not care who makes the law."

-Anselm Rothschild

"The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests."

- Rothschild Brothers' of London communiqué to associates in New York, June 25, 1863

[edit] Excessive New York City influence

Historically in the United States, many people have complained that people in New York City have too strong of an influence on banking in the United States. This has been researched in a working paper written for the Federal Reserve Bank of Atlanta in 2003. The abstract for this working paper says:^[116]

In our previous research we have detected that New York City banking entities usually exert substantial influence on legislation, greater than their large proportion of United States’ banking resources. The authors describe how this influence affected the success or failure of central banking movements in the United States, and the authors use this evidence to support their arguments regarding the influence of New York City bankers on the legislative efforts that culminated in the creation of the Federal Reserve System. The paper argues that successful central banking movements in the United States owed much to the influence of New York City banking interests.

[edit] Handling of The Great Depression

Milton Friedman (1912-2006), leader of the Chicago School, argued that the Federal Reserve System caused the Great Depression and, in addition made it worse by contracting the money supply at the very moment that markets needed liquidity. Since its entire existence was predicated on its mission to prevent events like the Great Depression, it had failed in what the 1913 bill had tried to achieve.^[117] Friedman explains his hypothesis on the cause of The Great Depression and the role the Federal Reserve played in it in his book and documentary series Free to Choose. An excerpt of his hypothesis:^[118]

the recession only became a crisis when these failures spread to New York and in particular to this building, then the headquarters of the Bank of United States. The failure of this bank had far reaching effects and need never have happened...Only a few blocks away is the Federal Reserve Bank of New York. It was here that the Bank of United States could have been saved. Indeed, the Federal Reserve System had been set up 17 years earlier precisely to prevent the worst consequences of bank failures...It was all a question of reassuring the public that they could get their money. The Federal Reserve System was there to ensure that this happened by supplying cash to the banks...Why didn't this system prevent The Great Depression after 1929? Because from 1929 to 1930 after the stock market crashed, the Federal Reserve system allowed the quantity of money to decline slowly thereby throttling the monetary structure...If the Federal Reserve had stepped in, bought government securities on a large scale, provided the cash, the depositors would have found that they could've got their money and they would have stopped asking for it...Despite excellent advice from New York, the system refused to buy government bonds, something which would have provided cash to the commercial banks with which they could have met more easily the insisted demands of their depositors. Instead, believe it or not, the system stood idly by while banks crashed on all sides. As the head of one of the banks put it, the reserve system had to keep its powder dry for a real emergency.

This is also the current conventional wisdom on the matter, as both Ben Bernanke and other economists such as the late John Kenneth Galbraith—the latter being an ardent Keynesian—have upheld this reasoning. In an interview with Peter Jaworski (The Journal, Queen's University, March 15, 2002—Issue 37, Volume 129) Friedman said that ideally he would "prefer to abolish the federal reserve system altogether" rather than try to reform it, because it was a flawed system in the first place. He also said he would like to "abolish the Federal Reserve and replace it with a computer," meaning that it would be a mechanical system that would keep the quantity of money going up at a steady rate^[119] and that "leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement."^[120]

Ben Bernanke agreed that the Fed had made the Great Depression worse, saying in a 2002 speech:

I would like to say to Milton [Friedman] and Anna [J. Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

—^[121][122]

There are heterodox thinkers who argue that the Federal Reserve System directly caused the Great Depression through monetary inflation in the 1920s.^[123] One theory about business cycles (that has been dismissed in the mainstream^{[124][125][126][127]} ), suggests that a policy of monetary easing results in a boom that becomes a recession or depression, especially quickly when the monetary ease is stopped. Within this theory the Great Depression was simply one of countless booms and busts throughout history that result when the money supply is manipulated. Among other evidence supporting this position is a particularly notorious quote in 1927 from Benjamin Strong, the chairman at the time. Strong said that the American authorities would reduce discount rates as “un petit coup de whisky for the stock exchange.”^[128]

[edit] Inflation

CPI (relative to 1967) since 1800

One major area of criticism focuses on the failure of the Federal Reserve System to stop inflation; this is seen as a failure of the Fed's legislatively mandated duty^[15] to maintain stable prices. These critics focus particularly on inflation's effects on wages, since workers are hurt if their wages do not keep up with inflation.^[129] They point out that wages, as adjusted for inflation, or real wages, have sometimes gone down (such as at the end of 2004).^[130]

Milton Friedman alleged that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve.^[117] Friedman discusses the high inflation rate of the 1970s and other periods in Free to Choose:^[131]

Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later...That's why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it's the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later. That's why it's so hard to persist with the cure. In the United States, four times in the 20 years after 1957, we undertook the cure. But each time we lacked the will to continue. As a result, we had all the bad effects and none of the good effects.

United States Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy (of the House Banking Committee), has also criticized Federal Reserve policy for creating and downplaying excessive inflation:^[132]

This decline in the value of the dollar is simple to explain. The dollar loses value as the direct result of the Federal Reserve and U.S. Treasury increasing the money supply. Inflation, as the late Milton Friedman explained, is always a monetary phenomenon. The federal government consistently wants to spend more than it can tax and borrow, so Congress turns to the Fed for help in covering the difference. The result is more dollars, both real and electronic—which means the value of every existing dollar goes down...

...when the Fed sets interest rates artificially low, the cost of borrowing becomes cheap. Individuals incur greater amounts of debt, while businesses overextend themselves and grow without real gains in productivity. The bubble bursts quickly once the credit dries up and the bills cannot be paid...the Fed steadily increased the monetary supply throughout the 1990s by printing money. Recent Fed numbers show double-digit annual increases in the M2 money supply. These new dollars may make Americans feel richer, but the net result of monetary inflation has to be the devaluation of savings and purchasing power.

Ralph Nader, a consumer activist and presidential candidate in several elections, has criticized the inflation policies of the Federal Reserve for, he says, ignoring excessive inflation in stock prices and corporate welfare disbursements while showing consistent concern over any rise in ordinary people's wages. In an article he published on his own website in 1999, he stated:^[133]

And here he is (Alan Greenspan), widely known as a fierce watchdog against inflationary trends, yet he is remarkably selective in what kind of inflation he is against. For example, he now recognizes stock values along with housing values as mainstays of our economy. The prices of stocks have risen vastly more than the prices of housing over the past six years. Yet apart from some vague mumblings, he seems to be viewing prices of stocks as outside the realm of an inflationary trend. Other numbers are also going up but they are clearly outside the conventional definitions. Corporate welfare disbursements and preferences are proliferating in every direction at all three levels of government, totalling hundreds of billions of dollars a year. The percentage of the working poor that is under the poverty level is at a record high...More families are making less in inflation-adjusted income than families did in 1970...Nor is he above inflating one indicator -- interest rates -- in order to deflate other parts of the economy -- a maneuver that doesn't affect large corporations as it does consumers and small businesses. The Fed Chairman does show consistent concern about one inflationary indicator -- any rise in ordinary wages -- and he is regularly relieved to see that they have been "stable," even though labor's productivity has been up sharply recently. It is clear that he loses little sleep over workers not sharing in the massive profits that their companies are reaping.

[edit] Money issuing power

United States Congressman Dennis Kucinich, at the 2005 Monetary Reform Conference^[134], raised the question of why the Federal Reserve should have the power to issue the United States' currency. He stated:

...and it's going to be my pleasure...to take this discussion to Capitol Hill, because Washington needs to understand how we are mired in debt and how we are staying there with the help of this fractional-reserve banking. Washington needs to understand that questions must be raised about why in effect did we give up our control of this asset, this ability to be able to issue money. Why did we give it to the Federal Reserve? We need to look at that again. It's not as though this country should be headed for bankruptcy or our people for destitution. The money's there. We need the will there, to begin to look at America in a new way and look at our potential to create material wealth in a new way

Kucinich has also questioned the idea that the Federal Reserve should be independent. He suggested that it should be "accountable" instead. In October 2007 he was asked, "You mentioned the Federal Reserve. Do you think it should not be independent, that it should be answerable to...", to which he immediately responded:^[135]

Well, of course it should be answerable. This idea of an independent Federal Reserve, what actually happened from 1913 on is a privatization of the money supply. Now, you know, right now, we have to look at the Federal Reserve, with two cuts in the interest rates recently, they're creating winners and losers. People have to look at the implications of this for Wall Street. I think that the Federal Reserve -- they have to be accountable. And I'm one of the few people who have been able to bring someone from the Federal Reserve to talk about the crisis in subprime loans, to ask about their responsibility. The Fed has a responsibility here.

[edit] Opacity

Some argue that the Federal Reserve System is shrouded in excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released five years after the meeting was held.^[136] Even expert policy analysts are unsure about the logic behind Fed decisions.^[137] Critics argue that such opacity leads to greater market volatility, because the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under the previous Fed Chairman Alan Greenspan, has often been called "Fed speak."^{[137] [138][139][140]} The Fed has also been known to be standoffish in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this.

Some critics argue that the lag in the release of FOMC transcripts, and the limited and carefully worded minutes and statements lead to public unawareness of the issues of major concern to the Fed, and leave the public with an inadequate understanding of the logic and rationale behind the decisions.^{[citation needed]} Some argue that this is a concerted attempt to keep Congress and the public at arm’s length^{[citation needed]}, and that the Fed did not help this public attitude with their prior actions--transcripts of meetings were not released until 1994. Before that time, the Fed refused to give transcripts out on requests, even under the Freedom of Information Act (FOIA). When a judge ordered the transcripts released in the 1970s, the Fed said they had stopped taking transcripts at all.^{[citation needed]} In 1993, Rep. Henry B. Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress.^[141] After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. The time period has been extended, so that for example 1992's transcripts were not released until 1998.^[141]

Some critics believe the Fed exacerbated this idea when it decided to stop publishing the M3 aggregate of financial data, which details the total amount of money in circulation at a time. Some of them argue that it is a way the Fed could hide an impending economic disaster from the public if it felt the need.^[142] The Fed said that economists did not need M3 when they had M2, despite the fact that the M3 was the only aggregate to contain information regarding the most extravagant monetary exchanges, and therefore would be needed to have a complete understanding of the overall monetary policy in the United States.^[97]

Ralph Nader has suggested a solution to the transparency problems through an effort that would "democratize Federal Reserve transparency". He presented a 7-point program that he claims could help to democratize the Federal Reserve System as a whole.^[143] He compares the Federal Reserve to other parts of government by stating:

The steps to open government would really be “baby steps” for the Federal Reserve. After all, most of the Federal government must live by “open government” laws and rules, and bureaucrats with a grumble or two – still manage to survive.

On November 7, 2008, Bloomberg News requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit seeking to force disclosure. According to a Bloomberg News article:^[144]

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

The Federal Reserve response to this request was reported by Bloomberg News:^[145]

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

On November 25, 2008, Fox Business Network also filed a request under the Freedom of Information Act seeking the actual data from the U.S. Treasury on the use of the bailout funds for American International Group and the Bank of New York Mellon. It then filed an additional request on December 1, 2008 on the bailout funds for Citigroup, Inc. Then, on December 18, 2008, Fox Business reported that the Treasury was ignoring their requests. Kevin Magee, Executive Vice President of FOX News commented:^[146]

The Treasury has repeatedly ignored our requests for information on how the government is allocating money to these troubled institutions. In a critical time like this amidst mounting corruptions and an economic crisis, we as a news organization feel it’s more important than ever to hold the government accountable.

[edit] Business cycles, libertarian philosophy and free markets

According to the Austrian economic theory of the business cycle, monetary ease results in a boom that becomes a recession or depression, especially quickly when the monetary ease is stopped. Within this theory the Great Depression was simply one of countless booms and busts throughout history that result when the money supply is manipulated. Austrian economist Murray Rothbard^[123] and once Keynesian economist Milton Friedman^[147], have argued that the Federal Reserve System directly caused the Great Depression through monetary inflation in the 1920s. Among other evidence supporting this position is a particularly quote in 1927 from Benjamin Strong, the chairman of the Federal Reserve at the time. Strong said that the American authorities would reduce discount rates as “un petit coup de whisky for the stock exchange.”^[128] The Austrian school is heavily critized by Keynesian philosophy^{[148][124][125][126][127][149][150][151]}

Many libertarians also contend that the Federal Reserve Act is unconstitutional. Congressman Ron Paul, for example, argues that:

The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy. ^[152]

[edit] Congress

Congressman Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920–31, accused the Federal Reserve of deliberately causing the Great Depression. In several speeches made shortly after he lost the chairmanship of the committee, McFadden claimed that the Federal Reserve was run by Wall Street banks and their affiliated European banking houses. On June 10, 1932, McFadden said:

Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States and the people of the United States out of enough money to pay the national debt. These twelve private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us for our hospitality by undermining our American institutions...The people have a valid claim against the Federal Reserve Board and the Federal Reserve banks.

—^[153]

In 1933, he introduced House Resolution No. 158, Articles of impeachment for the Secretary of the Treasury, two assistant Secretaries of the Treasury, the Board of Governors of the Federal Reserve, and the officers and directors of its twelve regional banks. There were two attempts on McFadden's life, a failed shooting and an apparent poisoning that made him "violently ill" after attending a political banquet in Washington. In 1936, McFadden attended a banquet in New York, and died shortly after, what could possibly be a third and successful attempt of assassination.

Quite a few Congressmen who have been involved in the House and Senate Banking and Currency Committees have been open critics of the Federal Reserve, including Chairmen Wright Patman, Henry Reuss, and Henry B. Gonzalez. Currently, Congressman Ron Paul is the ranking member of the Monetary Policy Subcommittee and he is a staunch opponent of the Federal Reserve System. During each Congress Paul introduces a bill to abolish the Federal Reserve System (H.R. 2755—110th Congress, H.R. 2778—108th Congress, H.R. 5356—107th Congress, H.R. 1148—106th Congress), although he has yet to have any hearings held on his legislation or to gather any cosponsors.^[154] It has often been said that the Federal Reserve is a creature of Congress and it is the fluctuating opinion of that body that it answers to.^[155]

[edit] See also

[edit] References

[edit] Bibliography

[edit] Recent

• Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0-02-864323-2.
• Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker
• R. W. Hafer. The Federal Reserve System: An Encyclopedia. Greenwood Press, 2005. 451 pp, 280 entries; ISBN 4-313-32839-0.
• Meyer, Lawrence H (2004). A Term at the Fed: An Insider's View. HarperBusiness. ISBN 0-06-054270-5; focuses on the period from 1996 to 2002, emphasizing Alan Greenspan's chairmanship during the Asian financial crisis, the stock market boom and the financial aftermath of the September 11, 2001 attacks.
• Woodward, Bob. Maestro: Greenspan's Fed and the American Boom (2000) study of Greenspan in 1990s.

[edit] Historical

• J. Lawrence Broz; The International Origins of the Federal Reserve System Cornell University Press. 1997.
• Vincent P. Carosso, "The Wall Street Trust from Pujo through Medina", Business History Review (1973) 47:421-37
• Chandler, Lester V. American Monetary Policy, 1928-41. (1971).
• Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932." Journal of Economic History 44 (December 1984): 957-84. in JSTOR
• Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (1963)
• G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (1994) ISBN 0-912986-21-2
• Paul J. Kubik, "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit." Journal of Economic Issues . Volume: 30. Issue: 3. Publication Year: 1996. pp 829+.
• Link, Arthur. Wilson: The New Freedom (1956) pp 199–240.
• Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
• Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." Journal of Economic Issues 17 (June 1983): 353-60.
• Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history
• Roberts, Priscilla. "'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War", Business History Review (1998) 72: 585-603
• Bernard Shull, "The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence" (2005) ISBN 1-56720-624-7
• Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
• Temin, Peter. Did Monetary Forces Cause the Great Depression? (1976).
• West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
• Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression", Journal of Economic History (1966) 26: 223-238, in JSTOR
• Wicker, Elmus. Federal Reserve Monetary Policy, 1917-33. (1966).
• Wells, Donald R. The Federal Reserve System: A History (2004)
• Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed Ohio State University Press, 2005.
• Wood, John H. A History of Central Banking in Great Britain and the United States (2005)
• Wueschner; Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927 Greenwood Press. (1999)
• Mullins, Eustace C. "Secrets of the Federal Reserve", 1952. John McLaughlin. ISBN 0-9656492-1-0

[edit] External links

Wikimedia Commons has media related to: Federal Reserve

Wikiquote has a collection of quotations related to: Federal Reserve

[edit] Official Federal Reserve websites and information

• Federal Reserve Reports to Congress
• The Federal Reserve in Plain English—An easy-to-read guide to the structure and functions of the Federal Reserve System
• ebook: The Federal Reserve System—Purposes and Functions
• Ask Dr. Econ - An educational resource from the Federal Reserve Bank of San Francisco
• Board of Governors of the Federal Reserve — Official website
• "The Federal Reserve System in Brief." — at the Federal Reserve Bank of San Francisco.
• Decision of the Reserve Bank Organization Committee Determining the Federal Reserve Districts and the Location of Federal Reserve Banks under the Federal Reserve Act Approved December 23, 1913, April 2, 1914; With Statement of the Committee in Relation Thereto, April 10, 1914. 27 pages. Government Printing Office, Washington, D.C., 1914.]
• Historical Beginnings ... The Federal Reserve by the Federal Reserve Bank of Boston
• Federal Reserve Districts and Banks
• Federal Reserve Education
• Federal Reserve Financial Services

[edit] Open Market operations

• NY FED: Open Market Operations

[edit] Repurchase agreements

• NY FED: Repurchase and Reverse Repurchase Transactions

[edit] Discount window

• The Official FED Discount Window information website

[edit] Economic indicators

• http://www.federalreserveeducation.org/fed101_html/policy/indicators_print.htm
• Consumer Price Index Calculator

[edit] Federal Reserve publications

• Modern Money Mechanics (out of print)
• Publications Catalog

[edit] Other websites describing the Federal Reserve

• "How 'The Fed' Works" — at HowStuffWorks.com
• "Federal Reserve Update" — money-rates.com
• Macroeconomic Effects of Interest Rate Cuts, by Jason Cawley, Wolfram Demonstrations Project, 2007.
• All 12 Federal Reserve Banks on a Google Map

[edit] Sites critical of the Federal Reserve

• Ludwig von Mises Institute
• Abolish the Federal Reserve

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