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Study Guide 2ECO 322 – Money and BankingTimothy D. TerrellStructure of Central Banks and the Federal Reserve SystemStructure of the Federal ReserveThere are three major entities here: the Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee.Board of GovernorsThe board consists of seven members, each appointed for 14 years by the President (though William McChesney Martin served for 28 years [chairman from 1951-1970] by resigning shortly before the end of his first term and being reappointed). The chairman of the board of governors has a four-year term and usually dominates the policy of the whole Federal Reserve System.The Fed is an independent agency and does not take direct orders from the President or Congress.Federal Reserve Districts, Federal Reserve Banks, and member banksThe U.S. is divided into 12 Federal Reserve Districts, each of which has its own Federal Reserve Bank. We are in the 5thDistrict here in South Carolina, and the Federal Reserve Bank for this district is located in Richmond. Dollar bills have a particular Federal Reserve Bank printed on the bill.Each Federal Reserve Bank operates like a branch office of the Federal Reserve. They carry out the rules and functions of the central system and report to the Board of Governors on local economic conditions.All national banks are required to be members of the Federal Reserve System. State-chartered banks may join if they want to. About 1/3 of the commercial banks in the U.S. are members. Until 1980, nonmembers didn’t have to keep reserves as deposits at the Fed—their states imposed their own requirements, which usually allowed banks to hold reserves as interest-bearing securities (no interest is paid on reserves held at the Fed). A decline in Fed membership resulting from the increase in interest rates meant that the Fed had less and less control over the money supply. So the Fed was able to get the Depository ECO 322 Study Guide1
Institutions Deregulation and Monetary Control Act of 1980 passed, which made all depository institutions keep deposits at the Fed and allowed them all to borrow from the Fed.Federal Open Market CommitteeThe FOMC sets U.S. monetary policy. It consists of the seven members of the Board of Governors, the president of the New York Federal Reserve Bank, and, on a rotating basis, four of the presidents of the 11 other district banks. It sets goals regarding the money supply and interest rates, and directs the Open Market Desk. It meets about 8 times a year in Washington, D.C.What does the Fed do?•clear checks•issue (not print) new currency•remove damaged currency from circulation•control money supply•examine and regulate financial institutions (e.g. evaluate mergers)•serve as a lender of last resort•bank for the government•collect data on local business conditions•conduct economic researchClearing house function of the FedSuppose you have a checking account at Compass Bank in Auburn, and you write a check to Lands’ End for $85. But Lands’ End’s bank may be Citibank. So how