Money Makes the World Go Round

The United States lacked a central bank until the twentieth century, although there were two attempts to establish a central bank in the early 1800s. Without a money manager, the nation's financial system was like the nation itself--diverse and subject to uneven growth. As a result, there were frequent economic depressions and financial panics, and the Bank Panic of 1907 finally convinced the public that a central bank was necessary ____________________. Reform was difficult. In the more established eastern cities, business leaders wanted to create a national financial system. In the West and South, small businesses and farmers feared a national financial system would not provide enough easy credit to support their developing economies. In 1913, after considerable debate, Congress passed the Federal Reserve Act to balance the financial needs of the country ____________________. The nation needs a money manager because money does not manage itself. Money and credit are the lifeblood of the economy; they facilitate commerce, job creation, and business growth. As our nation's money manager, the Fed implements monetary policy to manage the flow of money and credit in the economy. If money and credit expand too rapidly, businesses cannot produce enough goods and services to keep up with increased spending. Prices may rise, causing inflation ____________________. If the flow of money and credit contracts too greatly, spending and business activity may dwindle, workers may lose their jobs, and a recession may result ____________________. As our nation's money manager, the Fed conducts monetary policy to attempt to balance these two extremes to keep prices steady, workers employed, and factories productive. The Federal Reserve System was created as an independent agency of the United States government to provide a safer, more flexible banking and monetary system ____________________. To ensure autonomy and to insulate the central bank from short-term partisan political pressures, the founders stipulated that the Fed's operations would be financed from its own resources. The Fed regularly reports to Congress about its activities and plans for monetary policy. Although Congress has the power to change the laws governing the Fed and its operations, the central bank's day-to-day policy and operational decisions do not require Congressional or Presidential approval ____________________. The seven-member Board of Governors, located in Washington, D.C., oversees the Federal Reserve System ____________________. Appointed by the President of the United States and confirmed by the Senate, Board members serve 14-year terms, which are arranged so that one expires in every even-numbered year ____________________. The terms were designed to be long enough to prevent day-to-day political pressures from influencing the formulation of monetary policy and the supervision of the operations of the 12 regional Reserve Banks. The President of the United States designates a Chairman and Vice Chairman from the Board to serve four-year terms ____________________. These designations are approved by the Senate and can be renewed during the terms of the Board members, subject to Senate confirmation ____________________. There are 12 Federal Reserve Districts, or regions, throughout the United States ____________________. Regional headquarters are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco ____________________. Each of the 12 Reserve Banks has a board of nine directors ____________________. Each Bank's president is appointed by its board of directors and approved by the Board of Governors in Washington, D.C. Reserve Bank directors oversee the operations of their Bank and are subject to the overall supervision of the Board of Governors ____________________. The Fed helps keep the nation's economic wheels rolling in a number of significant ways through services Reserve Banks and Branches provide for depository institutions. The Federal Reserve is charged with ensuring that enough currency and coin are in circulation to meet the public's demand ____________________. New currency and coin are shipped to Federal Reserve Banks and Branches across the country where the money is stored. When people need additional cash, such as during the holidays or at times of natural disaster or crisis, a depository institution may order more currency and coin from its local Federal Reserve Bank or Branch. Each institution pays for these orders by drawing down its reserve account balances held with the Federal Reserve ____________________. The Federal Reserve and state and federal agencies supervise and regulate the nation's financial institutions to ensure their financial soundness and compliance with banking, consumer, and other applicable laws ____________________. The Fed's specific responsibility in this area is monitoring bank holding companies, organizations that own one or more bank, state-chartered banks that are members of the Federal Reserve System, and various international banking operations ____________________. National banks, which by law must be members of the Federal Reserve System, are supervised by the Office of the Comptroller of the Currency (OCC) in the U.S. Treasury Department ____________________. State-chartered banks that are not members of the Federal Reserve System are supervised by the Federal Deposit Insurance Corporation (FDIC) and state authorities ____________________. The Fed also has responsibilities for writing rules and enforcing a number of major laws that offer consumers protection in their financial dealings. The Fed uses three monetary policy tools to influence the availability and cost of money and credit: open market operations, the discount rate, and reserve requirements ____________________. The Fed's most flexible and often-used tool of monetary policy is its open market operations for buying or selling government securities ____________________. The Federal Open Market Committee (FOMC) sets the Fed's monetary policy, which is carried out through the trading desk of the Federal Reserve Bank of New York ____________________. If the FOMC decides that more money and credit should be available, it directs the trading desk in New York to buy securities from the open market ____________________. The Fed pays for these securities by crediting the reserve accounts of banks involved with the sale. With more money in these reserve accounts, banks have more money to lend, interest rates may fall, and consumer and business spending may increase, encouraging economic expansion ____________________. To tighten money and credit in the economy, the FOMC directs the New York trading desk to sell government securities, collecting payments from banks by reducing their reserve accounts ____________________. With less money in these reserve