Federal Reserve System - PowerPoint Presentation

Slide1

Federal Reserve System

History of the Federal Reserve System

Presented by S. CoxSlide2

Objectives

Describe the first two central banks in the US

Explore the problems caused by the lack of a central bank

Explain how the Federal Reserve System solved the nation’s financial problemsSlide3

Central Bank in the US

Secretary of the Treasury, Alexander Hamilton, advocated and developed the First Bank of the United States

A

central bank

is the organization that oversees a nation’s monetary systemSlide4

Central Bank in the US

The First Bank was chartered in 1791, was considered a central bank and

Assumed the debts of the individual states

Made commercial loans

Held federal funds

Issued payments

Performed well but the chartered expired in 1811

Thomas Jefferson and other opponents believed it took power away from the states and put it in the hands of eastern bankersSlide5

Central Bank in the US

In 1816 Congress saw the need again for a central bank and the Second Bank was chartered…similar to but bigger than the First Bank

The bank’s existence was challenged…farmers from the South and West opposed it

States tried to undermine the authority of the bank which led to the Supreme court challenge to its constitutionality…

McCulloch v. Maryland (1819) – Supreme court ruled that it was within the rights of Congress to create a central bankSlide6

Central Bank in the US

Once in office, President Andrew Jackson ordered all government funds be withdrawn from the bank and in 1836 vetoed the bill that renewed the bank’s charter

1837-1863 was known as the

era of free banking

All bank functions were handled by the state banks and federal funds were held in the US TreasurySlide7

Banking Without a Central Bank

Many banks failed without constant regulation

Government needed strong and reliable banks to get financing for the Civil War

National Currency Act

created the Office of the Comptroller of the Currency (OCC)in 1863

The Office of the Comptroller of the Currency

created a uniform national currency and a system of national banks

Today, the OCC still charters and supervises national banksSlide8

Banking Without a Central Bank

1864 – National Currency Act became the National Banking act

which allowed

the federal government to charter private banks

These new banks issued

bank notes

which were intended to be used as currency and promise immediate payment by that bank that issued the note

State banks had to pay 10% tax which persuaded them to seek a national charterSlide9

Banking Without a Central Bank

National charter had strict rules one of which required the banks to have a minimum cash reserve

Many state banks failed because they weren’t subject to the same strict rules as were national banks which led to

bank panics

in 1873, 1893, and 1907

A widespread worry that banks do not have enough money to cover customer demands for withdrawals

Started by a run on a single

bank…bank run

…depositors arrive in great numbers at the same time to withdraw their moneySlide10

Banking Without a Central Bank

After the bank panic in 1907, the idea of a central bank began to take hold

1913 – Federal Reserve System was established

President Woodrow Wilson signed the Federal Reserve ActSlide11

Federal Reserve System

Structure of the Federal Reserve SystemSlide12

Objectives

Explain how the Federal Reserve System is structured

Describe how decentralization affected the location of the Federal Reserve Banks

Identify the roles of the Federal Reserve’s Board of Governors and Federal Open Market CommitteeSlide13

Structure of the Federal Reserve

Also known as the Fed

Responsible for the US’s monetary system (the mechanism a nation uses to provide and manage money for itself)

Has a lot of power, so checks need to be put in place

Structure is meant to safeguard against corruptionSlide14

Location of the Federal Reserve

Decentralization was one of the driving forces that determined how the Fed would be organized

Decentralization

– when a central authority shares power with regional and local authorities

The Fed is composed of 12 regional central banks, known as the Federal Reserve BanksSlide15

District Reserve BanksSlide16

Organization of the Federal Reserve

Each Federal Reserve Bank governs itself and supervises the member banks in its regionSlide17

Board of Governors

Board of Governors

is the governing body of the Federal Reserve System

Independent central bank…does not report to the US president or any other member of the executive branch, but the Fed reports to the US Congress

Fed’s actions should be in-line with the government’s economic goals

Twice a year the Fed chairperson reviews recent actions and its economic predictions and presents these to CongressSlide18

Board of Governors

BOG members are appointed by the US president and confirmed by the Senate

Has only had 15 Fed chairs since its creation…longest was Al Greenspan and in 2006 Ben Bernanke was appointed by President G W Bush and then reappointed four years later by President ObamaSlide19

Federal Open Market Committee

Even though the Fed chair is a very visible position, the Federal Open Market Committee is responsible for making monetary policy

The BOG members are also members of the FOMC, which has 12 members

Meets eight times a year

The BOG chair is also the FOMC chair

The president from New York is always a member and the other four are chosen from the other Federal Reserve Banks and those not on the FOMC still attend the meetings and participate in the discussionsSlide20

Federal Reserve System

Function of the Federal Reserve SystemSlide21

Core Functions

Establish the nation’s monetary policy, which affects the monetary and credit conditions in the economy

Supervise and regulate banking institutions

Provide financial services to depository institutions, the US government, and foreign official institutions, including operating the nation’s payments system

Maintaining the stability of the financial systemSlide22

Monetary Policy

Monetary Policy

is the regulation of a country’s money supply to achieve economic goals and stability

Fed uses tools to regulate the interest rate charged for loans and the amount required in reserves

Open market operations…example FMOC supervises the purchase and sale of long-term loans issued by the government to raise money

The

discount rate

– the interest banks pay to borrow money from a Federal Reserve Bank…affects the interest rate banks charge customers to borrow money…set every two weeks…

prime rate

– interest rate that banks charge their best commercial customers

Reserve requirements

– amount of money a bank must keep and not invest or loan out

if banks are instructed to have higher reserves, the interest rate borrowers must pay drops, which causes the economy to growSlide23

Bank Regulation and Supervision

All national banks and some state-chartered banks are members of the Federal Reserve System

Issues regulations that affect how member banks conduct business

Supervises it’s member bank to evaluate their soundness…on-site audits

Uses software to screen the activities of member banks for negative trends and possible problemsSlide24

Financial Services

Collecting and paying funds when two member banks use checks to transfer funds between them

Transferring funds almost immediately

Offering customer services such as depositing a payroll check directly into a bank account and automatic payment of some bills

Holding the reserves that member banks are required to maintainSlide25

Financial Services

For Government –

Holds all of the checking accounts owned by the US government from which tax refunds and Social Security benefits are paid

Monitors the value of the dollar compared to the currency issued by other nations

Buys

and sells the dollar and currency issued by other countries to keep the valued of the dollar stable

Charges fees for the services provided to its member banks to pay its own expenses…if any is left over it is given to the US Treasury where it is applied to the national debtSlide26

Stability of the Financial System

By issuing regulations and supervising its bank members it is able to:

Monitor

the economy

Supervise and regulate member banks

Serves as the nation’s bank