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Chapter02 - Chapter 2 Federal Reserve and its Powers...

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Chapter – 2 Federal Reserve and its Powers
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Purposes of a Central Bank Supervise nation’s money supply and payments system Regulate other financial institutions, especially depository institutions “Lenders of last resort” when financial systems has liquidity problems National government’s fiscal agent
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Historically in United States Banks were unregulated at federal level States feared national consolidation of power “Chartered State Banks” BANKNOTES Issued by individual banks Their IOU’s Currencies used before Fed existed Gold & Silver were primary currency U.S. government had no control over the amount of banknotes in circulation
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National Banking Acts of 1863 &1864 Promoted safe & uniform currency Federal charters for “national” banks Increased capital requirements Created “Comptroller of Currency” Required reserves State banks continued to exist Issued demand deposit liabilities (checking accounts) instead of banknotes No deposit insurance, so there was some risk involved Banks had deposits at other banks counted as parts of required reserve
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Federal Reserve Act of 1913 “Bank Panics” – shortages of currency causes serious panics in 1906 & 1907 This led to: Federal Reserve Act of 1913 1. Control money supply 2. Act as a lender of last resort 3. Promote efficient payment system throughout U.S. 4. Banks supervision to avoid failures
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Structure of the FED Board of Governors advise 12 District Federal Reserve Banks Advisory Councils Federal Open Market Committee Member banks of the Federal Reserve
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Board of Governors Central Controlling Authority Seven members – 14 year terms Appointed by President; confirmed by Senate Cannot be fired only impeached Chairman of the Board of Governors has 4 year term; can be reappointed
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