2. 1775-91
• Continental Congress printed fiat money, which soon
became worthless due to high inflation
1791-1811
1816-36
• First and Second Bank of US charters not renewed
1836-63
• Decentralized banking : state banks began issuing their
own currencies => subject to counterfeiting,
inefficient1
3. CivilWar
• National
Currency Act
allowed for
chartering of
national banks
• Amendment
required taxation
on state bank
notes, but not
national bank
notes
1907: Panic
• Depositors
withdrew
funds, 2nd and
3rd largest
banks closed
• JP Morgan
backed other
banks to
restore faith
1908
• Aldrich
VreelandAct,
Aldrich Plan
• Helped to form
ideas that
became basis
for Federal
ReserveAct ¹
4. Conducting the nation's monetary policy to promote maximum
employment, stable prices, and moderate long-term interest rates
• Supervising and regulating banks and other important
financial institutions
Maintaining the stability of the financial system and containing
systemic risk that may arise in financial markets.
• Fight inflation
Providing certain financial services to the U.S. government, U.S.
financial institutions, and foreign official institutions2
Federal Reserve Act signed byWoodrowWilson in 1913
Federal Reserve Board Established
5. TO EXECUTE MONETARY
POLICY
Open Market Operations: the
buying and selling of US
Treasury Securities
Reserve Requirements: the
required cash a financial
institution must keep at the
Fed ³
Discount Rate*: rate at which
the Fed lends cash to banks =>
the prime rate banks charge
customers for loans 4
*Rate is reviewed every 14 days by each
reserve bank 5
6. Marketable securities can be bought, sold, or transferred
after the original issue
264 auctions conducted in 2012
$7.9 trillion in securities issued in 2012
Competitive bidding (accepted at ascending order of rate
and yield)
Noncompetitive bidding (agrees to accept rate or yield
determined at auction, limited to 5 MM/bid)
Auctions onTreasuryDirect.gov (Bureau of Public Debt)
- traded with broker/ dealer or financial institution6
11. Composed of 7 board of
governor members + 5
reserve bank presidents;
- NY Reserve Bank
president is always a
member, others have 1
year terms
Implements national
monetary policy
Determines holdings of
foreign currencies 7
12. Functions:
- Supervises and
regulates regional
reserve banks
- Thorough analysis of
financial and economic
developments
- Exercises broad
responsibility in
nation’s payment
system
- Carries out other
components Federal
reserve system ²
Chairman:
Ben Bernanke
Vice Chair:
JanetYellen
Appointed by the
President and
confirmed by Senate
- serve 4- year terms
13. Each Regional Reserve
Bank has a 9- member
board
• Implements monetary
policy set by Fed
• Responsible for member
banks* and commercial
banks in district ²
*A member bank is a private institution
that owns stock in its own regional
reserve bank
14.
15. USTreasury
• Prints Currency
• Takes money from Reserve Banks for
tax rebates
The Fed
• Distributes currency to Reserve Banks
• Acts as government’s banker by
accepting payments, issuing payroll,
etc.
• Sells and redeemsTreasury Securities
• After paying its expenses, it gives the
rest of its earnings to theTreasury8
16. Used to meet unexpected
cash outflows, and to
process check and
electronic payments
Can be held as “cash on
hand” or at regional
banks’ reserves, or both
Fed can change the
required reserve amount
at banks
- But Fed changes supply of
reserves through selling or
buying securities9
