Lecture 5 Fed and Monetary Policy Part 1.pptx - Lecture 5 The Federal Reserve and Monetary Policy Part I Central Banks and the Federal Reserve System

Lecture 5 Fed and Monetary Policy Part 1.pptx - Lecture 5...

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Lecture 5The Federal Reserve and Monetary Policy
Part ICentral Banks and the Federal Reserve System
TopicsHistory of the Federal Reserve System (FRS)Major functions of the FRSThe structure of the FRS3
History of Federal Reserve SystemFirst Bank of the United States (1791–1811)Disbanded in 1811Originally each bank printed its own money (bank notes)Varied size, amount, looks, etc.4
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History of Federal Reserve System (cont.)No central bank for 4 years.Second Bank of the United States (1816–1836)Disbanded in 1836 when President Andrew Jackson vetoed its renewal.6
History of Federal Reserve System (cont.)No central bank from 1836 – 1913“Free Banking Era” 1837 – 1863National Banks: 1863 - 1913National Bank Act of 1863Allowed only selected nationally chartered banks to issue currencyCollateralized by T-Bonds and silverNo lender of last resort7
Silver Certificate8
History of Federal Reserve System (cont.)No central bank from 1836 – 1913No lender of last resortBanking panics became regular eventsPanics of 1837, 1893, and 1907Thousands of banks failed during this time.9
Banking Panic of 1907A swarm gathers on Wall Street during the bank panic in October 1907. 1.Stock market decline of over 50% led by Augustus Heinz and his company United Copper Company attempting to corner the copper market. Financed by Knickerbocker Trust.2.Contagion spread and other large banks failed.3.J.P. Morgan to the rescue.10
Third U. S. Central BankThird U.S. Central Bank - The Fed (1913 – present)Created by the Federal Reserve Act of 1913President Woodrow Wilson passed to allay public concern over the soundness of the US banking system.11
Federal Reserve Act of 1913Created the Federal Reserve Systemas the central bank and guarantor of the banking system’s liquidityThe Federal Reserve is responsible for:Providing an “elastic currency” which means the Fed can adjust the money supply to support a dynamic economyFRS was lender of last resortto banks with liquidity and capital problems12
Federal Reserve Act of 1913This act established the Federal Reserve System.Headed by 7 Board of Governors/Directors12 Federal Reserve BanksNationally chartered banks required to join; state chartered optional-Gave FRS power to supervise and examine banks13
Federal Reserve SystemFederal Reserve System (1913–)Only 12 federal reserve Banks to issue Federal Reserve NotesThe National Banking Acts of 1934 and 1935 started the issuance of Federal Reserve Notes only.14
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Formal Structure of the Fed16
Board of GovernorsBoard of Governors7 individuals appointed by the U.S. president and confirmed by the SenateServe nonrenewable 14-yeartermsStaggered terms of GovernorsBudget separate from CongressU.S. president appoints one of the 7 as chair whose 4-yearterm is renewableOffices in Washington, D.C.

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