The Federal Reserve System

ECO 285 – Macroeconomics – Dr. D. Foster

The Origins of U.S. Central Banking

Bank of England The Bank of North America (1781) The First Bank of the United States (1791) The Second Bank of the United States (1816)

1837–1865 The Free-Banking period. The Civil War & Greenbacks - a fiat money.

1791–1836

1865–1912

The Gold Standard (1875).

Brief foray into bimetalism.

Panics of 1873, 1893 and 1907

Federal Reserve Act of 1913

The Federal Reserve Banking System

Board of Governors of the FRS 7 members, equal standing . . . but,

includes Secretary of the Treasury and Comptroller of the Currency.

Problems: Only using discount window, Each District Bank sets its own policy.

Purpose:1. Develop, supervise & control the nation’s

money.2. Serve as a national check-clearing system.3. Serve as depository for federal gov’t.

funds.

The Federal Reserve Banking System

The Early Fed, 1913–1935

The Great Depression - Failure of the FedInitially increased liquidity, but pulled

back.By 1933, 33% of banks fail, MS fallen

33%.

Accommodates the Treasury Dept. during WWI.Buys Treasury bonds to finance G

spending(aka “monetizing the debt”).

From 1916 to 1918, this increases MS by 70%.

Huge risk of inflation.

The Fed - version 2.0, 1935

Serves as a “lender of last resort.”

Board of Governors reconstituted:

All 7 member selected by President/Senate confirms.Can’t include Treasury Sec.

nor Comptroller of Currency.Members serve 14 yr. terms on staggered

basis.Political party diversity.Office of Chairman and Vice Chairman

created.Has authority over district banks.

Federal Open Market Committee (FOMC)

12 members; primary policy-making body.

The Evolution of the Modern Fed

WWII - working “for” the U.S. Treasury Federal Reserve–Treasury Accord (1951) “Leaning Against The Wind”

– Martin (1953-1970) The technocratic Fed

– Burns (1970-1978) . . . the “political business cycle”

Coping with inflation– Volcker (1979-1987)

Keeping the economy stable?– Greenspan (1987-2006)

Coping with recession– Bernanke (2006-2014)– Yellen (2014-?)

The Fed’s Balance Sheet

• THE FED’S ASSETS

– Treasury securities– U.S. agency

securities– Discount window

loans – Gold certificates.– Special Drawing

Right (SDR) certificates

– Foreign currency reserves

– Cash items in the process of collection

• LIABILITIES AND EQUITY CAPITAL

– Federal Reserve notes

– Bank reserve deposits

– U.S. Treasury deposits

– Foreign official deposits

– Deferred availability cash items

– Equity capital

The Fed’s Balance Sheet - 2005

782,003

The Consolidated Balance Sheet of

the Federal Reserve System ($ Millions, as of January 31,

2005)

2012

The Federal Reserve System

ECO 285 – Macroeconomics – Dr. D. Foster