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The Federal Reserve System Chapter 14 Week 13 First Bank of the United States 1791-1811 Congress decided not to renew charter Now a museum in Philadelphia Walnut Street Journal? Second Bank of the United States 1816-1836 Renewal of charter vetoed by Andrew Jackson in 1832

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the federal reserve system

The Federal Reserve System

Chapter 14

Week 13

Maclachlan, Money & Banking Spring 2005

first bank of the united states
First Bank of the United States
  • 1791-1811
  • Congress decided not to renew charter
  • Now a museum in Philadelphia
  • Walnut Street Journal?

Maclachlan, Money & Banking Spring 2005

second bank of the united states
Second Bank of the United States
  • 1816-1836
  • Renewal of charter vetoed by Andrew Jackson in 1832
  • Now portrait gallery in Philadelphia

Maclachlan, Money & Banking Spring 2005

federal reserve system
Federal Reserve System
  • Passed through Congress narrowly in December 1913
  • Regional banks to disperse power and allay fears of monopoly capitalism
  • Lender of last resort (discount loans only)
  • 12 - 7- 12

Maclachlan, Money & Banking Spring 2005

federal open market committee
Federal Open Market Committee
  • 1935
  • 12 members
  • 7 members of the Board of Governors + 5 Fed bank presidents (always including the President of the FRBNY)

Maclachlan, Money & Banking Spring 2005

open market operations
Open Market Operations

Maclachlan, Money & Banking Spring 2005

fomc books
FOMC Books
  • Green (national forecast)
  • Blue (projected monetary aggregates)
  • Beige (regional banks assessment of economy)

Maclachlan, Money & Banking Spring 2005

board of governors
Board of Governors
  • 7 members.
  • 14 year non-renewable terms, one opens up every second January.
  • Chairman has 4 year renewable term.

Maclachlan, Money & Banking Spring 2005

only 14 year terms
Only 14 year terms …
  • Appointed in 1987
  • 2005 -1987 = ?

Maclachlan, Money & Banking Spring 2005

greenspan s legacy
Greenspan’s Legacy

Maclachlan, Money & Banking Spring 2005

federal reserve districts
Federal Reserve Districts

Maclachlan, Money & Banking Spring 2005

functions of the fed banks
Member bankers’ bank (keeps deposits and makes loans when reserves are too low)

Clear checks

Issue new currency and withdraw old

Oversee bank mergers

Liaison with the business community and collect data

Bank examinations

Research for input into MP decisions

Functions of the Fed Banks

Maclachlan, Money & Banking Spring 2005

federal reserve bank of new york
Federal Reserve Bank of New York

Maclachlan, Money & Banking Spring 2005

frbny is special because
FRBNY is special because …
  • Open market operations executed there (FRBNY Fed President always part of FOMC).
  • Responsible for foreign exchange interventions on behalf of Fed and Treasury.
  • Gold reserves of many nations reside in the basement.
  • Biggest banks are in the 2nd district.
  • Represents Fed at Bank for International Settlements in Switzerland.

Maclachlan, Money & Banking Spring 2005

the gold vault
The Gold Vault
  • Over $100 billion worth of gold in the basement.
  • Belongs to 60 foreign countries and international organizations.
  • Most of it flowed in during WWII when European countries feared for the safety of their gold.
  • Relic from the days of the gold standard when countries had gold backing for their currency.

Control Group with reps from Auditing, Vault Services, and Protection

Maclachlan, Money & Banking Spring 2005

more on gold vault
More on Gold Vault …
  • On bedrock, 80 feet below street level, 50 feet below sea level.
  • Entryway is a narrow ten foot passage way cut into a 90 ton steel cylinder in a 140 ton steel and concrete frame.
  • Movie link: Die Hard III

Maclachlan, Money & Banking Spring 2005

central bank independence
Central Bank Independence

Factors making Fed independent

1. Members of Board have long terms

  • Fed is financially independent:

Factors making Fed dependent

1. Congress can amend Fed legislation

2. President appoints Chairmen and Board members and can influence legislation

Maclachlan, Money & Banking Spring 2005

do we need a central bank
Do we need a central bank?

"I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject." Friedrich Hayek

Maclachlan, Money & Banking Spring 2005

case for central bank
Arguments for Fed

Lender of last resort.

Elastic currency.

Counter Argument

Did not function during the Depression

Ability to expand money supply can be misused. Economic growth with fixed money implies steadily declining prices.

Case for Central Bank

Maclachlan, Money & Banking Spring 2005