Federal Reserve System 14.1Federal Reserve System 14.1

• Federal Reserve acts as the central bank for the U.S.

• Look at a $1 bill• After the panic of 1907 and the collapse of

many banks, it was felt that a central bank was needed to stabilize our monetary system.

• “Runs” on banks—banks had no where to turn for emergency cash.

Panic of 1907Panic of 1907

• There was no way to expand the amount of money in circulation.

• This restricted expansion because there was a “fixed” supply of money available for loans, businesses, etc.

• Therefore, since they could not borrow more money, they starting withdrawing their savings.

• Banks didn’t have enough cash-bankrupt.

Panic of 1907 14.1Panic of 1907 14.1

• Second, the system of pyramided reserves failed.

• Pyramided Reserves—Smaller banks deposit some of their reserves with larger banks. These larger banks deposit some of these reserves with the largest commercial banks. These big banks loan out these “extra” funds to businesses and individuals.

• This encourages growth of the economy.• In a panic, smaller banks withdraw deposits from

larger banks, etc.

Panic of 1907Panic of 1907

• In 1908, the National Monetary Commission was created which reestablished a central bank.

• The Federal Reserve Act of 1913 created the central bank called the Federal Reserve System (FED).

Role of the FEDRole of the FED

• 3 Main Goals of the Fed:– Supervises member banks– Holds cash reserves (available when

economy needs it.)– Moves money into and out of circulation.

(Stabilizes money supply).

Characteristics of the FedCharacteristics of the Fed

• Has more than one central bank. (Has 12 district banks throughout U.S.)

• Owned and controlled by member banks. (The U.S. government does not own stock in the Fed)

• Optional membership in the Fed for some banks. (State chartered banks do not have to join the Fed).

12 FED District Banks12 FED District Banks

• 1.Boston• 2. New York City• 3. Philadelphia• 4.. Cleveland• 5.. Richmond• 6.. Chicago

• 7.. Atlanta• 8.. St. Louis• 9. Kansas City• 10. Dallas• 11. Minneapolis• 12. San Francisco• Seat of Board of

Governors: Washington DC

Organization of the Fed 14.1Organization of the Fed 14.1

• The Fed is organized on two levels:– National and District.National Level—

Board of Governors—7 board of governors, appointed by the president.

Each governor appointed for 14 year term.Federal Open Market Committee (FOMC) 7 members of the board of governors are

members; plus, 4 members are district Federal Reserve bank presidents.

Organization of the FedOrganization of the Fed

• District Level:• 12 regional federal reserve banks.• Each bank serves different regions of the

country,• Also, 25 branch offices located throughout the

country.• 9 directors in each district• 6 of the 9 are bankers. (Business people, generally).

• Board of Governors selects other 3 directors.

Gold Vault—N.Y. FedGold Vault—N.Y. Fed

Gold BarsGold Bars

27.4 Lbs. Each$950 per oz.

$416,500 ea.!

The FED VaultThe FED Vault

266 million oz.$950 per oz.$252 Billion

Weighing Gold at the FEDWeighing Gold at the FED

121 Countries Store their goldAt the NY FED

Find out about:Find out about:

• 1. Who is the current FED chairman?

• 2. What president appointed him?

• 3. How long has he been chairman?• 4. Who is the old FED chairman?

(Appointed by Ronald Reagan)

• 5. Tell two things about the current chairman?