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The Federal Reserve System

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  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 • Purpose: • Develop, supervise & control the nation’s money. • Serve as a national check-clearing system. • Serve as depository for federal gov’t. funds. • Board of Governors of the FRS • 7 members, equal standing . . . but, includes • Secretary of the Treasury and • Comptroller of the Currency. • Problems: • Only using discount window, • Each District Bank sets its own policy.

  5. The Federal Reserve Banking System

  6. 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%.

  7. The Fed - version 2.0, 1935 • Serves as a “lender of last resort.” • Board of Governors reconstituted: • All 7 member selected by President/Senate confirms. • Can’t include Treasury Sec. nor Comptroller of Currency. • Members serve 14 yr. terms on staggered basis. • Political party diversity. • Office of Chairman and Vice Chairman created. • Has authority over district banks. • Federal Open Market Committee (FOMC) • 12 members; primary policy-making body.

  8. 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-?)

  9. 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

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

  11. 2012

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