Federal System

central banking system of the United States. Established in 1913, it began to operate in Nov., 1914. Its setup, although somewhat altered since its establishment, particularly by the Banking Act of 1935, has remained substantially the same.

Structure

The Federal Reserve Act created 12 regional Federal Reserve banks, supervised by a Federal Reserve Board. Each reserve bank is the central bank for its district. The boundary lines of the districts were drawn in accordance with broad geographic patterns of business, and the banks were placed in Boston, New York City, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. In addition some of the regional banks have one or more branch banks attached to them.

All national banks must belong to the system, and state banks may if they meet certain requirements. Member banks hold the bulk of the deposits of all commercial banks in the country. Each member bank is required to own stock in the Federal Reserve bank of its district and must maintain legal reserves on deposit with the district reserve bank. The required reserves are proportionate to the member bank's own deposits, the proportion varying according to the location of the member bank and the character of its deposits.

Each reserve bank is managed by a board of nine directors (three appointed by the Federal Reserve Board, six by the local member banks). The Federal Reserve System's Board of Governors designates one of the federally appointed directors as chairman and Federal Reserve agent; it is the chairman's duty to report to the Board. The board of directors appoints the bank's president and other officers and employees. The operations of the Federal Reserve banks, although not conducted primarily for profit, yield an income that is ordinarily sufficient to cover expenses, to pay a 6% cumulative dividend annually on the stock held by member banks, to make additions to surplus, and to provide the U.S. Treasury with over $1 billion a year in revenue.

The Board of Governors of the Federal Reserve System--the national supervisory agency--is composed of seven members appointed for 14-year terms by the President. Its offices are in Washington, D.C. The Federal Open Market Committee, created later (1923) than the system's other divisions, comprises the seven members of the Board of Governors and five representatives of the Federal Reserve banks; it directs the purchases and sales by the reserve banks of federal government securities and other obligations in the open market. The Federal Advisory Council consists of 12 members, one appointed annually by the board of directors of each reserve bank; it confers from time to time with the Board of Governors on general business conditions and makes recommendations with respect to Federal Reserve affairs. In 1976, the Consumer Advisory Council was created; consisting of both consumer and creditor representatives, it advises the Board of Governors on consumer-related matters.

Function

The most important duties of the Federal Reserve authorities relate primarily to the maintenance of monetary and credit conditions favorable to sound business activity in all fields--agricultural, industrial, and commercial. Among those duties are lending to member banks, open-market operations, fixing reserve requirements, establishing discount rates, and issuing regulations concerning those and other functions. In a sense, each Federal Reserve bank is best understood as a bankers' bank. Member banks use their reserve accounts with the reserve banks in much the same way that a bank depositor uses his checking account. They may deposit in the reserve accounts the checks on other banks and surplus currency received