The Federal Reserve: Central Banking in the Us

The Federal Reserve:

Central Banking in the U.S.

The Federal Reserve as we know it today was created by the Federal Reserve Act of 1913 by President Woodrow Wilson. The Fed, as it is commonly referred, is the central bank for the United States. Primarily, the Fed's job is to manage our nation's money supply. Prior to establishing the central bank, the United States did not have a money manager and the financial system was similar to the nation itself, "diverse and subject to uneven growth" (San Francisco). This led to frequent depressions and financial panics, and after the Bank Panic of 1907, which consisted of heavy withdrawal of funds, large importations of gold, and among other things, a major bank failing, the public realized a central bank was necessary (Herrick).

The Federal Reserve System is composed of four basic components; the Federal Reserve Board of Governors, the Federal Open Market Committee, the Federal Reserve Banks, and member banks.

The Board of Governors of the Federal Reserve System is an independent federal agency that does not receive any funding from Congress. The Board is made up of seven members who are appointed by the president for one term of 14 years that can span multiple presidential and congressional terms. Two of the appointees are designated by the president as the Chairman and Vice Chairman of the Board, to serve four-year terms, subject to Senate Confirmation. The Chairman of the Board of Governors is one of the most important decision-makers in American economic policies. Even though members function independently, the Board is required to make an annual report of operations to the Speaker of the House. If the president sees "cause," a member may be removed from the Board. The Board of Governors is responsible for the formulation of monetary policy, and it also supervises and regulates the operations of the Federal Reserve Banks and the general U.S. banking system.

The Federal Open Market Committee, another component of the Federal Reserve System, is responsible for overseeing open market operations [buying and selling of government securities] in the U.S. and is the primary tool of U.S. national monetary policy. Seven members of the Board of Governors and five representatives selected from the Federal Reserve Banks form the committee. The representative from the 2nd district, New York, is a permanent member, with the other banks rotating on two and three year intervals.

The Federal Reserve Banks are owned by private member banks. These private member banks own nonnegotiable shares of stock in its regional Federal Reserve Bank. A U.S. Court of Appeals case, Lewis v. United States ruled that "the Reserve Banks are not federal instrumentalities for purpose of the FTCA, but are independent, privately owned and locally controlled corporations ("Court Rules")."

Member banks are privately owned corporations which own the Federal Reserve Banks. Some member banks have publicly traded stock.

There are 12 Federal Reserve Districts throughout the U.S., with regional headquarters being in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. There are also Branches of Reserve Banks in 25 other cities (San Francisco).

Each of those 12 Reserve Banks has a local board of nine directors. A Bank President is appointed by its board of directors, and approved by the Board of Governors in Washington, D.C. The Reserve Bank directors oversee operations in their Bank and are supervised overall by the Board of Governors.

Even though member banks hold stock in their regional Reserve Banks, they do not control the Federal Reserve System. Holding the stock does not carry any control or financial interest. Federal Reserve stock cannot be sold or traded, and member banks receive a fixed percentage dividend annually on their stock. They elect six of the nine members on the Reserve Bank's board of directors.

The Federal Reserve is set up like a private corporation, yet it owes its existence to Congress and has a mandate to serve the public. The citizens on the United States technically "own" the Federal Reserve, not the member banks (Fed FAQs).

Open Market Operations are conducted by the Federal Reserve to control the size of the money supply. The Federal Reserve lends or purchases specific types of securities with authorized participants, who are