Download Money, Banking, and Financial Markets 2e

Chapter 17
Central Banking
and the
Federal Reserve
System
PowerPoint Presentation by Charlie Cook
Copyright © 2004 South-Western. All rights reserved.
Fundamental Issues
1. What were the first central banking
institutions, and how did central banking
initially develop in the United States?
2. Where did responsibilities for monetary and
banking policies rest in the absence of a
U.S.central bank in the nineteenth and early
twentieth centuries?
3. What motivated Congress to establish the
Federal Reserve System?
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17–2
Fundamental Issues (cont’d)
4. Why did Congress restructure the Federal
Reserve in 1935?
5. Who makes the key policy decisions at the
Federal Reserve?
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17–3
The Number of Central Banking Institutions, 1670 to the Present
SOURCE: Forrest Capie, Charles Goodhart, and Norbert Schnadt, “The Development of Central
Banking,” in Capie et al.,eds., The Future of Central Banking: The Tercentenary Symposium of the Bank
of England (Cambridge: Cambridge University Press, 1994), pp.1–231, and authors’ estimates.
Copyright © 2004 South-Western. All rights reserved.
Figure 17–1
17–4
Central Bank Employees
Per 100,000 Residents
for Selected Nations.
SOURCE: Bank for International Settlements.
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Figure 17–2
17–5
The Origins of U.S. Central Banking,
1791–1836
• Bank of England
 Bank of the British Empire
• The Bank of North America (1781)
 Robert Morris and the first charted (government
licensed) bank
• The First Bank of the United States (1791)
• The Second Bank of the United States (1816)
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17–6
Policy and Politics without a Central
Bank, 1837–1912 (cont’d)
• The free-banking period:
 A period that lasted until the Civil War during which
each state had its own banking rules, and many
states permitted relatively open competition among
banks.
 U.S. Treasury operated without a central banking
institution.
• The Civil War, Greenbacks, and national
banking
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17–7
Policy and Politics without a Central
Bank, 1837–1912 (cont’d)
• Panic of 1873 and resumption of the gold
standard (1875)
• Populism, free silver, and bimetalism
 Free silver: A late-nineteenth-century idea for
unlimited coinage of silver to meet the monetary
needs of a growing U.S. economy.
• Prelude to the federal reserve
 Panics of 1893 and 1907
 Federal Reserve Act of 1913
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17–8
The Federal Reserve Banking System
• Federal Reserve banks:
 The twelve central banking institutions that oversee
regional activities of the Federal Reserve System.
• Federal Reserve districts:
 The twelve geographic regions of the Federal
Reserve System.
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17–9
The Federal Reserve Banking System
• Board of Governors of the Federal Reserve
System:
 A group of seven individuals appointed by the
president and confirmed by the Senate that, under
the terms of the Banking Act of 1935, has key
policymaking responsibilities within the Fed.
• Federal Open Market Committee (FOMC):
 A group composed of the seven governors and five
of the twelve Fed bank presidents that determines
how to conduct the Fed’s open market operations.
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17–10
The Early Fed, 1913–1935
• The Early Fed, 1913–1935
• The hesitant Fed
• The great depression and reform of the Fed
 Restructuring the Fed
 New lines of authority
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17–11
The Evolution of the Modern Fed
• The Fed’s fight for independence
• Working for the U.S. Treasury
• The fight for Fed Independence
 Federal Reserve–Treasury Accord: A 1951
agreement that dissociated the Fed from a
previous policy of pegging Treasury bill rates at
artificially low levels.
• “Leaning Against The Wind”
• The technocratic Fed
• Inflation and monetary targeting
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17–12
Federal Reserve District Banks
SOURCE: Federal Reserve Bulletin, various issues.
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Figure 17–3
17–13
Organizational Structure of the Federal Reserve
System
SOURCE: Board of Governors of the Federal Reserve System.
Figure 17–4
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17–14
The Federal Open Market Committee
• FOMC directive:
 The official written instructions from the FOMC to
the head of the Trading Desk at the Federal
Reserve Bank of New York.
• Trading Desk:
 The Fed’s term for the office at the Federal
Reserve Bank of New York that conducts open
market operations on the Fed’s behalf.
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17–15
Federal Reserve
Discount Window
Lending since
June 2001
SOURCE: Board of Governors of the Federal Reserve System.
Figure 17–5
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17–16
Fed holdings of repurchase
agreements ($ billions)
Federal Reserve Holdings
of Repurchase Agreements
and Reserve Deposits at
Federal Reserve Banks
Reserve deposits at Federal
Reserve banks ($ billions)
Figure 17–6
SOURCE: Board of Governors of the Federal Reserve System.
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17–17