SECTION 7

The Official Story

U.S. FEDERAL RESERVE SYSTEM

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, the day before Christmas Eve, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve’s dual mandate. Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications, such as the Beige Book and the FRED database.

The Federal Reserve System is composed of several layers. It is governed by the presidentially-appointed board of governors or Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some board members of, the Federal Reserve Bank of their region.

The Federal Open Market Committee (FOMC) sets monetary policy. It consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time—the president of the New York Fed and four others who rotate through one-year voting terms. There are also various advisory councils. It has a structure unique among central banks, and is also unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used.

The federal government sets the salaries of the board’s seven governors, and it receives all the system’s annual profits, after dividends on member banks’ capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion. Although an instrument of the US Government, the Federal Reserve System considers itself “an independent central bank because its monetary policy decisions do not have to be approved by the President or by anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms.”

Top 5 Largest Central Banks by Total Assets

Rank:	Central Bank Profile:	Total Assets:
1	U.S. Federal Reserve System	$8,757,460,000,000
2	Bank of Japan	$5,878,875,571,224
3	People’s Bank of China	$5,144,760,000,000
4	Deutsche Bundesbank	$3,103,230,000,000
5	Bank of France	$2,138,080,000,000

Purpose

The primary declared motivation for creating the Federal Reserve System was to address banking panics. 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”. Before the founding of the Federal Reserve System, 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 Federal Reserve System has responsibilities in addition to stabilizing the financial system.

Current functions of the Federal Reserve System include:

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

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

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 the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways. During the Fiscal Year 2013, the Bureau of Engraving and Printing delivered 6.6 billion notes at an average cost of 5.0 cents per note.

Source: Wikipedia