Federal Reserve Bank

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Federal Reserve Districts

The United States Federal Reserve System consists of twelve Federal Reserve Banks, each responsible for a particular district, and some with branches.

Contents

[edit] Brief history

The twelve regional Federal Reserve Banks were established by the United States Congress as the operating arms of the nation's central banking system. These banks were the idea of Alexander Hamilton, the first Secretary of Treasury, who started a movement advocating the creation of a central bank. Following this movement the First Bank of the United States was established in 1791. The First Bank of the United States was headquartered in Philadelphia, but had branches in other major cities. The Bank performed the basic banking functions of accepting deposits, issuing bank notes, making loans and purchasing securities. These twelve regional banks are organized much like private corporations—possibly leading to some confusion about “ownership.” [1]

The Federal Reserve System was created by the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system. The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Federal Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Federal Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.

[edit] Controversy

Main article: Criticism of the Federal Reserve

The Federal Reserve is often criticized by both political parties and economists. Early on, Hamilton was the creator and only true supporter of the Bank of the United States. His main critics were Thomas Jefferson and James Madison. There was a mass of controversy surrounding the constitutionality of the central banking system.

“That is a lie - most importantly their opposition was not so much political as ideological; they vehemently opposed the bank as unconstitutional and potentially dangerous to republican government. Jefferson and Randolph pressed the president to veto the bank bill, and Madison’s vain attempt to galvanize opposition in congress made it obvious where he stood” (Cowen and Wright, 11).

Hamilton took the arguments of Jefferson and Randolph and quickly made revisions to his bank bill. Within one week Hamilton re-presented the bill and Washington signed it (Cowen and Wright, 11-13). Through this argument, a whole new way of interpreting the constitution came about known as the doctrine of implied powers. [2]

[edit] Function

The Bank Bill created by Alexander Hamilton was a proposal to institute a National Bank, in order to improve the economic stability of the nation after her independence from Britain. Although the bank is used as a tool for the government it is privately owned. Hamilton wrote several articles providing information regarding his national bank idea. The articles expressed the validity and "would be" success of the national bank based upon: incentives for rich to invest, ownerships of bonds and shares, rooted in fiscal management, and stable monetary system. The National Bank, or Federal Reserve Banking System provides the government with a ready source of loans, it is also the safe depository for federal monies. The Federal Reserve is also a low cost mechanism for transferring funds and it is an inexpensive agent for meeting payments on the national debt and government salaries.

The Federal Reserve Banks issue shares of stock to member banks. However, owning Federal Reserve Bank stock is quite different from owning stock in a private company. The Federal Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the system. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year. [1]

The dividends paid to member banks are considered partial compensation for the lack of interest paid on member banks' required reserves held at the Federal Reserve. By law, banks in the United States must maintain fractional reserves, most of which are kept on account at the Federal Reserve. The Federal Reserve does not pay interest on these funds. (The Federal Reserve now has authority to pay interest on these funds granted by Congress in the EESA of 2008.)

The Federal Reserve Bank of New York is located only a few blocks from the former location of the World Trade Center buildings. It has a gold vault 100 feet (30 m) beneath the street. That depository is the largest in the world; even larger than the legendary Fort Knox gold reserves in the mid-1980s. The gold is owned by foreign nations, including Saudi Arabia and Kuwait. Its value is estimated at $25 billion. Free tours of the vault are available to the public. Missouri, California and Tennessee are the only states which have two Federal Reserve Bank branches seated within their states, with Tennessee having 2 branches of 2 different districts within the same state. A major responsibility of The Federal Reserve is to oversee their banking and financial systems. Overseeing the banking and financial systems of a bank is crucial in a society.

“Confidence in the soundness of the banking and financial systems is what mobilizes a societies savings, allows the savings to be channeled into productive investments, and encourages economic growth” (William J. McDonough, 4)

[3]

Although the original intentions of the Federal Reseve Bank were to improve the economy and financial system today it is suggested that the Federal Reserve has gained too much power over the nations money.[4] In "The Federal Reserve System, Purposes and Functions, Fiftieth Anniversary Edition" the Fed. states that they are the only system with the ability to create and destroy money and thus the ability to control the value of the dollar and the amount in the hands of the public. The Federal Reserve System is a prominent controversy in modern society, but the question still remains, does the Federal Reserve System have a positive or negative influence on the economy?


There is a lot of speculation and controversy over the issue of monetary control. By constitutional law the Bureau of Engraving and Printing (BEP, GOV) is the only entity allowed to manufacture, print, or mint US Monies. The Federal Reserve System is the only entity authorized by the US Government to legally destroy currency deemed unfit for circulation. All currency destroyed must be reported to the US Treasury so new monies can be produced by the Bureau of Engraving and Printing to replace that which has been destroyed. The only means in which the Federal Reserve System can create money is by offering banking institutions additional credit on the reserves held by the Federal Reserve System to those financial institutions in need of additional assistance. These “Loans” must be approved by the US Treasury, therefore leaving the monetary control under Government rulings. The Federal Reserve System operates under very strict guidelines set forth by the US Treasury, and is subjected to routine audits from government officials operating from the offices of the Treasury.

It is generally considered that the Federal Reserve System is best described as the Commercial Bank's Bank. It supplies the banking industry with very much the same services as the commercial banking industry offers to the public, commercial, and industries, with the exception of not offering interest on the funds stored within their accounts in the Federal Reserve System.

[edit] Banks

[edit] Sources

  1. ^ "The Founding of the Fed." FEDERAL RESERVE BANK of NEW YORK. 24 Mar. 2009 <http://www.newyorkfed.org/>.
  2. ^ Cowen, David J. and Robert E. Wright. Financial Founding Fathers. Chicago: Robert E. Wright and David J. Cowen, 2006.
  3. ^ McDonough, William J. "An Independent Central Bank in a Democratic Country: The Federal Reserve Experience." University of Chicago, Chicago. 22 Apr. 1994.
  4. ^ What Happened to Our Money? Preview By: Mcmanus, John F.. New American (08856540), 2/4/2008, Vol. 24 Issue 3, p33-38

[edit] See also

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