A Federal Reserve Note

Focus Question:  What is the organization and functions of the Federal Reserve System?

Topics on the Page

Structure of the Federal Reserve

• Federal Reserve Act of 1913

Janet Yellen:  First Female Chair

Duties of the Federal Reserve

Teaching Resources

Test Questions

  Link to Monetary Policy of the Federal Reserve

Structure of the Federal Reserve
Federal Reserve Act of 1913

• Response to The Panic of 1907, in which the New York Stock Exchange fell almost 50%

• https://www.federalreservehistory.org/essays/panic_of_1907

• Created 12 regional banks supervised by a Federal Reserve Board
• Regions created by geographic regions of business
• The banks are located in:
• Boston
• New York City
• Philadelphia
• Cleveland
• Richmond
• Atlanta
• Chicago
• St. Louis
• Minneapolis
• Kansas City
• Dallas
• San Francisco
• Some of the regional banks are actually multiple banks

Requirements of Reserve Banks

• All national banks have to be part of the Federal Reserve
• State banks can be if they meet requirements
• Member banks:
• Hold most of the deposits of all commercial banks
• Own stock in Federal Reserve Bank in district
• Maintain legal reserves on deposit with district bank
• Required reserves proportional to member bank's deposit (varies by location and character of deposits)

Leaders

• Each reserve bank managed by a board of 9 directors
• 3 appointed by Federal Reserve Board, 6 by local member banks
• 1 of these federally appointed directors is chosen by the Board as chairman and Federal Reserve agent
• This person acts as a liaison between the Board and bank
• Board also appoints the bank's president, other officers, and employees
• These banks create an income that
• covers expenses
• pays a 6% cumulative dividend annually on the stock held by member banks
• Add to surplus
• Provide US Treasury with over $1 billion a year in revenue
• Board of Governors of the Federal Reserve System
• National Supervisory Agency
• 7 members appointed for 14-year terms by the President
• Chairman and vice chairman, who serve 4-year terms, are included in the 7
• Offices are in Washington, DC
• Federal Open Market Committee-created in 1923
• 12 total members, 1 of which is appointed annually by the board of directors of each reserve bank
• The 7 members of the Board and 5 representatives of the Federal Reserve banks
• Confers with Board on general business and makes recommendations
• Directs purchases and sales by reserve banks of the federal government in the open market
• Consumer Advisory Council-created in 1976
• Consumer and creditor representatives
• Advises Board on consumer-related matters

  Janet Yellen: First Female Chair in the Board of Governors

• Appointed February 2014 by President Obama, term ended 2018

• Graduated Summa Cum Laude from Brown University in 1967 with a degree in Economics

• Doctorate in Economics from Yale in 1971

• Assistant Professor at Harvard from 1971-76

• From 1977-78 worked as an Economist for the board

• 1978-80 Faculty at London School of Economics and Political Science

• Professor Emeritus University of California at Berkeley 1980-present

• Member of the Board of Governors 1994-97

• Chair of Economic Advisors 1997-99

• Chair, Economic Policy Committee of the Organization for Economic Cooperation and Development 1997-99

• President and CEO of Federal Reserve Bank of San Francisco 2004-10

• Vice Chair of the Board of Governors 2010-14

• Academic Honors

• Wilbur Cross Medal- Yale University 1997

• Honorary Doctor of Laws Degree- Brown University 1998

• Honorary Doctor of Humane Letters- Bard College 2000

• And she is married with an adult son

• A very impressive Resume, Very qualified
  

Who is Janet Yellen? In Two and a Half Minutes- Bloomberg 

Crash Course Economics Video - "What's all the Yellen About? Monetary Policy and the Federal Reserve: Crash Course Economics #10"


Read more: Federal Reserve System: Structure — Infoplease.com http://www.infoplease.com/ce6/bus/A0858087.html#ixzz1KUPOkZF7

Duties of the Federal Reserve

• The Federal Reserve is a "banker's bank"
• Member banks use reserve accounts with reserve banks just like a bank depositor uses his/her checking
• They can deposit in reserve accounts the checks on other banks
• Surplus currency from their customers
• Draw on the reserve to obtain currency and pay checks drawn upon them
• The Federal Reserve is responsible for:
• Maintenance of monetary and credit conditions to stay favorable to agriculture, industry, and commerce
• Lending to member banks
• Maintaining open-market operations
• Open-market purchase of securities by authorities supply banks with additional funds
• Sale of securities can diminish funds
• Fixing reserve requirements
• Within limits imposed by law on the Board
• Raise or lower reserve requirements on the reserves that member banks deposit in reserve banks
• Can diminish or enlarge the volume of funds that member banks have for lending
• Directly affect the volume of member funds but don't immediately affect the use of the funds
• Establishing discount rates
• By giving discounts, authorities can supply banks with additional reserve funds
• They also make funds more or less expensive for member banks by either raising or lowering discount rates
• Discounts usually expand when member banks need to borrow
• Issuing regulations
• Reserves allow:
• The Federal Reserve authorities to influence lending activities of banks
• If a bank has reserves in excess of requirements, it can lend more
• Basically, the Federal Reserve controls how much banks can lend out and therefore has a large influence on the country's economy
• Expanding bank credit can lead to an upswing in the business cycle and inflation
• Restriction of credit can lead to decreased business growth and deflation
• The Federal Reserve has control over the use of funds in the stock market speculation field through the use of margin requirements
• The Federal Reserve also issues Federal Reserve notes for circulation
• The chief element in the nation's currency
• Most economists and bankers agree that the Federal Reserve System has approved America's monetary and banking institutions

The Federal Reserve Does Not Always Enjoy Bipartisan Support:

     https://www.youtube.com/watch?v=qVgcStKfQfk- Fox Business “Trump says the Federal Reserve has Gone Crazy”

Two Short Classroom Friendly Summary Videos:

     https://www.youtube.com/watch?v=0lN2EBBpKJE- Now This: World

     https://www.youtube.com/watch?v=9t2ifgMscDA - CNN Business

Read more: Federal Reserve System: Function — Infoplease.com http://www.infoplease.com/ce6/bus/A0858088.html#ixzz1KUM37YC2


Click here to read the Federal Reserve Act that established the Federal Reserve.

 Test Questions

CST Test Question from 2008
One of the key goals of the 1913 Federal Reserve Act was to:
A. Place a banking system under the direct control of Congress
B. Decentralize the banking industry in order to allow for local control of money
C. Protect the banking industry by removing the country from the gold standard
D. Create a banking system that could regulate the amount of money in circulation

The correct answer is D.

 MTEL Practice Test Questions

 
How would the Federal Reserve Board most likely use its monetary power during a period of inflation?

A. Increase the interest rate on money borrowed from the Federal Reserve
B. Raise the reserve requirements of member banks
C. Increase the purchase of government bonds in open market operations
D. Raise the margin requirements for the purchase of securities

The correct answer is A.

What was one of the Driving Factors to the Creation of the Federal Reserve?

1. World War I

2. The Great Depression

        c.The Panic of 1900

         d. The Recession of 2008

C) Is the only event that preceded the Fed and that economic crisis drove bankers and the government to great economic safeguards