ECON 3303 Review Sheet Exam IV.docx - Ch 13 The Federal...

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Ch. 13 The Federal Reserve and Central BankingThe Structure of the Federal Reserve SystemCreation of the Federal Reserve SystemFederal Reserve BanksBoard of GovernorsFederal Open Market CommitteePower and Authority within the Fed.Changes to the Fed under the Dodd-Frank ActHow the Fed operatesFactors that Motivate the FedPublic - Interest ViewPrincipal - Agent ViewPolitical - Business CycleFed IndependenceArguments for and againstNotes from Review Video/Book:Before the Fed Reserve, there was no central bank. Alexander Hamilton organized the Bank of United States after the U.S. won its independence, and it was meant to function as a central bank but had both government and private shareholders. The Bank attempted to stabilize the financial system by taking steps to ensure that local banks did not extend too many loans relative to their capital. Local banks resented the Bank’s supervision of their operations. (Many distrusted the Bank’s power.)Congress granted the Bank a 20-year charter in 1791, making it the only federally chartered bank. There was not enough Congressional support to renew the charter, so the Bank ceased operations in 1811. Partly because of the federal government’s problems in financing the War of1812, political opinion in Congress shifted back toward the need for a central bank. In 1816 Congress established the Second Bank of the U.S. also under a 20 year charter. The Second Bankencountered many of the same controversies as the First Bank. As the time approached for renewal of the Second Bank’s charter, an epic political battle broke out between the populist President Andrew Jackson and Nicholas Biddle, the president of the Second Bank. In 1832, Congress passed a bill to recharter the Bank, Jackson vetoed the bill, and the Bank’s charter expired in 1836.
The disappearance of the Second Bank left the U.S. without a central bank, and therefore, without an official lender of last resort for banks. Private institutions, such as New York Clearing House, attempted to fill the void, but 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. After a panic and economic recession in 1907, Congress considered options for government intervention. Many officials worried that banks such as New York financier J.P. Morgan, who in the past helped organize loans to banks suffering temporary liquidity problems, would be unstable to manage future crises. Congress appointed the NationalMonetary Commission for help!

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