The Federal Reserve System

A little DemWit digging to bring readers information about the subject of my previous post, “The little committee that could.”

I readily admit a good deal of it is over my head, but, hopefully, this information will be helpful in understanding the U.S. House committee action discussed in the last post.

Encyclopaedia Britannica, 2009:

Central banking authority of the United States. It acts as a fiscal agent for the U.S. government, is custodian of the reserve accounts of commercial banks, makes loans to commercial banks and oversees the supply of currency, including coin, in coordination with the U.S. Mint. The system was created by the Federal Reserve Act, which Pres. Woodrow Wilson signed into law on Dec. 23, 1913. It consists of the Board of Governors of the Federal Reserve System, the 12 Federal Reserve banks, the Federal Open Market Committee, the Federal Advisory Council, and, since 1976, a Consumer Advisory Council; there are several thousand member banks.

The seven-member 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 by the 12 Federal Reserve banks and reviews the budgets of the reserve banks. The Chairman of the Board of Governors is appointed to a four-year term by the president of the United States.

A Federal Reserve bank is a privately owned corporation 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 12 Federal Reserve banks are located in Boston; New York City; Philadelphia; Chicago; San Francisco; Cleveland, Ohio; Richmond, Virginia; Atlanta, Georgia; St. Louis, Missouri; Minneapolis, Minnesota; Kansas City, Missouri; and Dallas, Texas.

The 12-member Federal Open Market Committee, consisting of the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve bank policy to encourage long-term objectives of price stability (i.e., controlling inflation through the adjustment of interest rates) and economic growth. The Federal Advisory Council, whose role is purely advisory, consists of one representative from each of the 12 Federal Reserve districts.

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—i.e., the proportion of its deposits that a member bank must hold in its reserve account—thus increasing or reducing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the potential money supply is, in this way, expanded or reduced.

The money supply may also be influenced through manipulation of the discount rate, which is the rate of interest charged by Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought by banks 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 employed daily to make small adjustments in 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; e.g., 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 described here have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a period of depression. A supplemental control occasionally used by the Federal Reserve Board is that of changing the margin requirements involved in the purchase of securities.

The Federal Reserve has broad supervisory and regulatory authority over state-chartered banks and bank holding companies, as well as foreign banks operating in the United States. It is also involved in maintaining the credit rights of consumers. One of the longest chairmanships of the Federal Reserve Board was held by Alan Greenspan, who took office in August 1987 and held the post until January 2006.


What Is The Federal Reserve?

A History of The US Central Banking System

By Rebecca Turner , Suite101
Jan 28, 2008

What is the Federal Reserve?

It's an independent government organization that controls America's money supply.

What The Federal Reserve Does

As the central bank of the United States, the Federal Reserve has three key functions which revolve around managing the money supply:

* To adjust base interest rates
* To print and release new bank notes
* To remove existing notes from circulation

By controlling the amount of money in circulation, the Federal Reserve can make US currency either more or less valuable, thereby influencing the country’s economy on a multitude of levels.

How The Federal Reserve Was Founded

In 1907, rumours emerged that caused the latest of a string of large-scale bank runs. Fears of an economic depression shattered the confidence of the American people, who soon called for bank reforms.

A group of wealthy businessmen – led by J P Morgan, Paul Warburg and John D Rockefeller – intervened to pave the way for the establishment of a private central bank. With their connections, they soon put a banker-controlled plan to President Woodrow Wilson.

In a decision that would later come to haunt him, President Wilson signed the Federal Reserve Act into law. In doing so, he effectively placed control of the US economy squarely in the hands of the private bankers, who would go on to create massive amounts of credit – backed by absolutely nothing.

(About suite101.com: “The world's most comprehensive independent online magazine: written and edited by professionals, trusted by over 24 million readers monthly.”)


Frodo, friend to Ben, said...

Okay, here we go again. Here are a few generic questions: What is the name of the President of the Bank with whom you conduct your personal business? Is the objective of your personal bank to make more loans or to increase interest payments to you?
Two questions about your personal bank, and Frodo has already made you say "I don't know." Now tell Frodo why it is a good thing for MC's to be determining the reserve requirements of community banks in states other than the one in which they reside? Do you know how many MC's sit on the Board of Directors on banks? Wouldn't it be a conflict of interest for them to be both the fox and the chicken (at least as far as regulation is concerned)?
Frodo is adamant about the involvement of a deliberative and partisan body with too much control over the flow of money. Does any rational person actually want Congressman Joe Wilson making decisions with a wider impact than the group of nutbags who voted for him in the first place?
No, the Federal Reserve Bank is the "governor" on the well-oiled machine that can go too fast without a stedy hand at the wheel. Would that the Congress of the United States could perform its presently assigned duties as well.

katherine said...

Thanks, BJ.

What's frightening to me about the U.S. government's relationship to The Fed is its similarity to a credit card holder in arrears. Underneath everything we do as a nation is this underlying relationship to 'privatized' money loaned to us with interest. This relationship has consequences for us all, aware of that or not.

An example: Generally, today, it takes two paychecks to purchase what one paycheck used to buy in the '50's. That's twice as much citizenry work for the same purchasing power. An ever-increasing portion of a paycheck is paying for the national debt being compounded with interest. It takes more work to make enough money to pay off the ever-growing debt. After a time, a citizen is really working for the bank, with little or nothing left of the paycheck for his own needs. Remember "Sixteen Tons"?

If I understand this situation correctly, our entire monetary policy is
screaming for corrective legislative solutions and imaginative citizenry
antidotes--post haste.
government indebtedness to 'privatized' money feels extremely g to me.
I don't know if it's visionary or not, although the new House legislation might at least demand accountability for the return on our investment of trillions of taxpayer dollars which have gone missing at The Fed.