Chapter 9 Central Banks and the Federal Reserve System - 1 Central Banks and the Federal Res erve System MISHKIN AND EAKINS 2 Chapter Preview We will

Chapter 9 Central Banks and the Federal Reserve System - 1...

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Central Banks and the Federal Res erve System MISHKIN AND EAKINS 1
Chapter Preview We will examine the role of government authorities over the money supply. We will focus primarily on the role of the U.S. Federal Reserve System, but also examine similar organizations in other nations. Topics include: Origins of the Federal Reserve System Structure of the Federal Reserve System How Independent is the Fed? Should the Fed Be Independent? Structure and Independence of the European Central Banks Structure and Independence of other Foreign Central Banks 2
Origins of the Federal Reserve System Fear of centralized power and distrust of moneyed interests guided central bank activities in the 19 th century. The Bank of the United States was created to function as a central bank, but the Bank rapidly accumulated enemies. Local banks resented the Bank’s supervision of their operations. Congress granted the Bank a 20-year charter in 1791, but without enough Congressional support to renew its charter, the Bank ceased operations in 1811. The Second Bank of the U.S. was disbanded in 1836 when President Andrew Jackson vetoed its renewal. 3
Origins of the Federal Reserve System Severe nationwide financial panics in 1873, 1884, 1893, and 1907— and accompanying economic downturns—raised fears in Congress that the U.S. financial system was unstable without a central bank. Finally, the Federal Reserve Act that created the Federal Reserve System became law in 1913. But Fear of a “central authority” was rampant—people worried that powerful Wall Street interests would manipulate the system. Questions arose as to whether such a monetary authority would be private or a government institution. The Federal Reserve Act of 1913 was a compromise that created the Federal Reserve System, including elaborate checks and balances. 4
Inside the Fed: The Political Genius of the Founders of the FRS 5 The founders decided against concentrating the federal banking system in NYC or D.C. in order to maintain public support for the idea, increasing its effectiveness. The 12 branches are spread across the country to make sure all regions of the country are represented in policy deliberations. The banks are quasi-private institutions, promoting a concern with regional issues.
The Federal Reserve Banks 6
Structure of the Federal Reserve System Design was intended to diffuse power along the following dimensions: Regions of the U.S. Government and private sector interests Needs of bankers, businesses, and the public The system as it exists now includes: Twelve Federal Reserve Banks Board of Governors (BOG) of the Federal Reserve System Federal Open Market Committee (FOMC) Federal Advisory Council Member Banks (around 2,000) 7
Structure of the Federal Reserve System 8 Figure 9.1 Structure and Responsibility for Policy Tools in the Federal Reserve System
Twelve Federal Reserve Banks Each of the twelve districts has a main Federal Reserve

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