Download The Federal Reserve

The Federal Reserve System
ECO 285 – Macroeconomics – Dr. D. Foster
The Origins of U.S. Central Banking
1791–1836
 Bank of England
 The Bank of North America (1781)
 The First Bank of the United States (1791)
 The Second Bank of the United States (1816)
1837–1865
 The Free-Banking period.
 The Civil War & Greenbacks - a fiat money.
1865–1912
 The Gold Standard (1875).
 Brief foray into bimetalism.
 Panics of 1873, 1893 and 1907
 Federal Reserve Act of 1913
The Federal Reserve Banking System
 Purposes:
1. Develop, supervise & control the nation’s money.
2. Serve as a “lender of last resort.”
3. Serve as a national check-clearing system.
4. Serve as depository for federal gov’t. funds.
 Structure:
1. Board of Governors.
2. Twelve District Banks.
3. Federal Open Market Committee.
4. Regulatory bureaucracy.
The Federal Reserve Banking System
 Board of Governors:
1. Selected for one 14 year term. [Except…]
2. Staggered selection; geographic diversity.
3. Chairman & Vice Chairman selected for 4 years.
4. Can’t be members of the executive branch.
 Policy Tools:
1. Open Market Operations.
• Buy and sell U.S. Treasury bonds.
2. Set bank required reserve ratio.
3. Set “discount” rate of interest.
The Banking System
Assets
Liabilities & Equity
Reserves
+$10,000
+$2,000
(Cash in vault)
Demand Deposits
(Checking; Transaction)
T-Bills
+$10,000
(Liquidity & income)
Loans
+$8,000
Equity
(Banks’ earnings)
Accounting Identity: A  L + E
M1
+$8,000
The Fed & the Banking System
Assets
Reserves
(Cash in vault)
Liabilities & Equity
Demand Deposits
(Checking; Transaction)
T-Bills
(Liquidity & income)
Loans
Equity
(Banks’ earnings)
M1
The Federal Reserve Banking System
The Early Fed, 1913–1935
 Accommodates the Treasury Dept. during WWI.
 Buys Treasury bonds to finance G spending
(aka “monetizing the debt”).
 From 1916 to 1918, this increases MS by 70%.
 Huge risk of inflation.

The Great Depression - Failure of the Fed (?)
 Initially increased liquidity, but pulled back.
 By 1933, 33% of banks fail, MS fallen 33%.
The Fed - version 2.0, 1935
 District bank independence curbed.
 Board of Governors reconstituted.
 Federal Open Market Committee (FOMC)
 12 members
 All 7 governors
 FRNY bank president
 4 other district bank presidents on rotating basis
 Meet every 6 weeks and receive lots of press.
 Announce goals and intentions.
 During WWII, did the same as WWI.
The Evolution of the Modern Fed
 WWII - working “for” the U.S. Treasury
 Federal Reserve–Treasury Accord (1951)
 “Leaning Against The Wind”
– Martin (1953-1970)
 The technocratic Fed
– Burns (1970-1978) . . .
the “political business cycle”
 Coping with inflation
– Volcker (1979-1987)
 Keeping the economy stable?
– Greenspan (1987-2006)
 Coping with recession
– Bernanke (2006-2014)
– Yellen (2014-?)
The Fed’s Balance Sheet
• THE FED’S ASSETS
– Treasury securities
– U.S. agency securities
– Discount window loans
– Gold certificates.
– Special Drawing Right
(SDR) certificates
– Foreign currency
reserves
– Cash items in the
process of collection
• LIABILITIES AND
EQUITY CAPITAL
– Federal Reserve notes
– Bank reserve deposits
– U.S. Treasury deposits
– Foreign official
deposits
– Deferred availability
cash items
– Equity capital
The Fed’s Balance Sheet - 2005
The Consolidated
Balance Sheet of
the Federal
Reserve System
($ millions, as
of January 31,
2005)
782,003
2012
The Federal Reserve System
ECO 285 – Macroeconomics – Dr. D. Foster