Federal Reserve System

Why do a report on the Federal Reserve System? This is a question I went over in
my head while making a decision on the type of report to do, and what I wanted
to learn more about and why. Over the past few years I have realized the impact
that the Federal Government has on our economy, yet I never knew enough about
the subject to understand why. While taking this Economics course it has brought
so many things to my attention, especially since I see inflation, gas prices,
and interest rates on the rise. It has given me a better understanding of the
affect of the Government on the economy, the stock market, the interest rates,
etc. Since the Federal Government has such a control over our Economy, I decided
to tackle the subject of the Federal Reserve System and try to get a better
understanding of the history, the structure, and the monetary policy of the
power that it holds.

Federal Reserve System is the central banking authority of the United States. It
acts as a fiscal agent for the United States government and is custodian of the
reserve accounts commercial banks, makes loans to commercial banks, and is
authorized to issue Federal Reserve notes that constitute the entire supply of
paper currency of the country. Created by the Federal Reserve Act of 1913, the

12 Federal Reserve banks, the Federal Open Market Committee, and the Federal

Advisory Council, and since 1976, a Consumer Advisory Council which includes
several thousand member banks. The board of Governors of the Federal Reserve

System determines the reserve requirements of the member banks within statutory
limits, reviews and determines the discount rates established pursuant to the

Federal Reserve Act to serve the public interest; it is governed by a board of
nine directors, six of whom are elected by the member banks and three of whom
are appointed by the Board of Governors of the Federal Reserve System. The

Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago,

San Francisco, Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; Saint

Louis, Mo.; Minneapolis, Minnesota; Kansas City, Mo.; and Dallas Texas. The

Federal Open Market Committee, consisting of the seven members of the Board of

Governors and five members elected by the Federal Reserve banks, is responsible
for the determination of Federal Reserve Bank policy in the purchase and sale of
securities on the open market. The Federal Advisory Council, whose role is
purely advisory, consists of 12 members if the meet membership qualifications.

The Federal Reserve System exercises its regulatory powers in several ways, the
most important of which may be classified as instruments of direct or indirect
control. One form of direct control can be exercised by adjusting the legal
reserve ratio (the proportion of its deposits that a member bank must hold in
its reserve account), and as a result, increasing or decreasing the amount of
new loans that the commercial banks can make. Because loans give rise to new
deposits, the possible money supply is, in this way, expanded or reduced. This
policy tool has not been used too much in recent years. The money supply may
also be influenced through manipulation of the discount rate, which is the rate
if interest charged by the Federal Reserve banks on short-term secured loans to
member banks. Since these loans are typically sought to maintain reserves at
their required level, an increase in the cost of such loans has an effect
similar to that of increasing the reserve requirement. The classic method of
indirect control is through open-market operations, first widely used in the

1920s and now used daily to make some adjustment to the market. Federal Reserve
bank sales or purchases of securities on the open market tend to reduce or
increase the size of commercial bank reserves. (When the Federal Reserve sells
securities, the purchasers pay for them with checks drawn on their deposits,
thereby reducing the reserves of the banks on which the checks are drawn. The
three instruments of control explained above have been conceded to be more
effective in preventing inflation in times of high economic activity than in
bring about revival from a period of depression. Another control occasionally
used by the Federal Reserve Board is that of changing the margin requirements
involved in the purchase of securities. The Federal Reserve System was founded
by Congress in 1913 to provide the nation with a safer, more flexible and more
stable monetary and financial system. Over the years its role in banking and the
economy has expanded. Today the Federal Reserveís Duties fall into four
general areas: