U.S. Financial Systems, Markets and Institutions
Econ 350 U.S. Financial Systems, Markets, and Institutions
Central Banks and the Federal Reserve System
Welcome to Part IV!
Here we focus on the implementation of monetary policy.
morning we examine central banks and the structure of the Federal Reserve System.
look at how the historical circumstances surrounding the creation of the Fed have helped
to contribute to its structure, and how this structure has influenced the current
implementation of monetary policy.
For the rest of this Part, we will explore several
models of monetary policy.
Remember from Class 11 that the creation of the Fed was an extremely political process
replete with much debate and compromise.
The Panics of 1893, and especially 1907, had
highlighted the need for a central bank to stabilize the financial system.
Monetary Commission, under the direction of Senator Nelson Aldrich, had recommended
a strong central bank with headquarters in New York City, which would be controlled by
Many progressives, led by William Jennings Bryan, were against a
central bank controlled by banking interests.
They felt that citizens appointed by the
government would do a much better job in serving the public interest than elite bankers.
After Woodrow Wilson was elected President, the debate continued for another year until
the Federal Reserve Act of 1913.
The structure of the Federal Reserve, as we will see, is very much a result of the
compromises between these two factions, those who wanted banker control vs. those who
wanted public control.
After today’s class, you should:
-- know the roles of central banks in different countries around the world.
-- have an appreciation of how the current structure of the Federal Reserve was
influenced by political compromises of 1913.
-- know the different components of the Federal Reserve System, including the
FOMC, Board of Governors, member banks, and Federal Reserve Banks.
-- understand the composition and role of the FOMC.
-- understand the composition and role of the twelve district banks and their
Boards of Directors.
-- know the three tools of monetary policy and which part of the Fed is
responsible for each.
Central Banks Around the World
The United States was fairly late to adopt a central bank compared to most other
The first attempts at central banking in the United States, the First Bank of the
United States in 1791 and the Second Bank of the United States in 1816, were not able to
outlast their original twenty-year charters.
For most of the 1800s, the United States was
without a central bank.