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HISTORY AND DEVELOPMENT OF THE US FEDERAL RESERVE
Cielo Casteel Jeff Inman
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US FEDERAL RESERVE
Governs U.S. monetary and banking systems
Use monetary policy to bring stability in the money supply and banking system
Government
Households Firms
Goods and services Labor and wages
Goods and services
Taxes and transfer
payments
Goods and services
Taxes & subsidies
Financial Sector
Borrowing & lending
Monetary policy
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GOVERNANCE STRUCTURE
Board of Governors (7)
President per district (12)
Chairman of the Federal Reserve
Federal Open Market Committee
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FEDERAL RESERVE DISTRICTS
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PURPOSE
Maintain U.S. stability of the currency and money supply
Seek to accomplish Stability in price levels High employment Economic growth Stability in foreign currency exchanges
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INSTRUMENTS
Bank Reserves Rates affect money supply
Open Market Operations Most effective
Open Market Repurchase Agreements Temporary change in reserve level
Discount Rates Least effective
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OPEN MARKET OPERATIONS
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FEDERAL RESERVE TIMELINE
1791–1811 First Bank of the United States 1811–1816 No central bank 1816–1836 Second Bank of the United States 1837–1862 Free Bank Era 1863–1913 National Banks
(National Banking Act) (Legal Tender Act of 1862) Panics under national banking system
1873, 1893 and 1907 Demonstrated need for national banking system
1908 National Monetary Commission Recommendations became Federal Reserve Act
1913 Federal Reserve founded
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FEDERAL RESERVE EVOLUTION
1929 Great Depression Fed Allowed contraction of money supply initially
Ties to gold limited Feds ability to stimulate economy 40% notes issued required to be coverable by gold
New Deal Credited with enabling economic recovery Stabilized banks by insuring deposits Removed gold standard from dollar
1973 Oil Crisis Cut interest rates to encourage growth
Inflation risk accepted High inflation and low economic growth resulted
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FEDERAL RESERVE RECENT ACTIVITY
Late 2000’s Financial Crisis Collapse of US housing
bubble Over leveraging Predatory lending
Responses Bailouts Purchase of $2.5 trillion in
government debt and troubled private assets from banks
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FUTURE POLICY CHANGES
Maximum wage is an idea which has been enacted in early 2009 in the United States, where they capped executive pay at $500,000 per year for companies receiving extraordinary financial assistance from the US Taxpayer
Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk
Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification
Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to "discourage them from becoming too big and to offset their competitive advantage
Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance.
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SOURCES
Wikipedia Federal Reserve Website Thomson Leaning CNNMoney.com