The Federal Reserve System

1. The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster

2. 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.

3. 1865–1912 • The Gold Standard (1875). • Brief foray into bimetalism. • Panics of 1873, 1893 and 1907 • Federal Reserve Act of 1913

4. The Federal Reserve Banking System • Purposes: • Develop, supervise & control the nation’s money. • Serve as a “lender of last resort.” • Serve as a national check-clearing system. • Serve as depository for federal gov’t. funds. • Structure: • Board of Governors. • Twelve District Banks. • Federal Open Market Committee. • Regulatory bureaucracy.

5. The Federal Reserve Banking System • Board of Governors: • Selected for one 14 year term. [Except…] • Staggered selection; party diversity. • Chairman & Vice Chairman selected for 4 years. • Can’t be members of the executive branch. • Policy Tools: • Open Market Operations. • Buy and sell U.S. Treasury bonds. • Set bank required reserve ratio. • Set “discount” rate of interest.

6. The Banking System Assets Liabilities & Equity Reserves(Cash in vault) T-Bills(Liquidity & income) Loans(Banks’ earnings) +$10,000 +$2,000 Demand Deposits (Checking; Transaction) Equity +$10,000 +$8,000 M1 Accounting Identity: A  L + E +$8,000

7. The Fed & the Banking System Assets Liabilities & Equity Reserves(Cash in vault) T-Bills(Liquidity & income) Loans(Banks’ earnings) Demand Deposits (Checking; Transaction) Equity M1

8. The Federal Reserve Banking System

9. 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%.

10. 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.

11. 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-?)

12. 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

13. The Fed’s Balance Sheet - 2005 The Consolidated Balance Sheet of the Federal Reserve System ($ thousands, as of January 31, 2005) 782,003

16. 2012

18. The Federal Reserve System ECO 285 – Macroeconomics – Dr. D. Foster