Federal Reserve System: Difference between revisions

The '''Federal Reserve System''' (often shortened to the '''Federal Reserve''', or simply '''the Fed''') is the [[central bank]]ing system of the [[United States]]. It was created on December 23, 1913, with the enactment of the [[Federal Reserve Act]], after a series of [[financial panic]]s (particularly the [[panic of 1907]]) led to the desire for central control of the monetary system in order to alleviate financial crises.{{Refn|group=list|name=need|<ref name="mnglass"/><ref name="initial"/><ref>{{Harvnb|BoG|2005 | pp=1–2}}</ref><ref name="FDS-H-04"/><ref name="FDS-H-05"/><ref name="FDS-H-06"/>}} Over the years, events such as the [[Great Depression]] in the 1930s and the [[Great Recession]] during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.<ref name="initial"/><ref>{{Harvnb|BoG|2005 | pp=1}} "It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."; {{Cite book |last=Patrick |first=Sue C. |title=Reform of the Federal Reserve System in the Early 1930s: The Politics of Money and Banking |publisher=Garland |year=1993 |isbn=978-0-8153-0970-3}}</ref>

The [[Federal Open Market Committee]] (FOMC) sets monetary policy by adjusting the target for the [[federal funds rate]], which generally influences [[market interest rate]]s and, in turn, US economic activity via the [[monetary transmission mechanism]]. The FOMC consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time—the president of the [[Federal Reserve Bank of New York|New York Fed]] and four others who rotate through one-year voting terms. There are also various advisory councils.{{Refn|group=list|name=pubpriv|<ref name="who_owns_faq">{{Cite web |title=FAQ – Who owns the Federal Reserve? |url=http://www.federalreserve.gov/faqs/about_14986.htm |access-date=December 1, 2015 |publisher=Federal Reserve website}}</ref><ref>{{Cite magazine |last=Lapidos |first=Juliet |date=September 19, 2008 |title=Is the Fed Private or Public? |url=http://www.slate.com/id/2200411 |magazine=Slate |access-date=August 29, 2011}}</ref><ref>{{Cite web |last=Toma |first=Mark |date=February 1, 2010 |title=Federal Reserve System |url=http://eh.net/encyclopedia/article/toma.reserve |archive-url=https://web.archive.org/web/20110513022656/http://eh.net/encyclopedia/article/toma.reserve |archive-date=May 13, 2011 |access-date=February 27, 2011 |website=EH. Net Encyclopedia |publisher=Economic History Association }}</ref><ref>{{Cite web |title=Federal Reserve System |url=https://eh.net/encyclopedia/federal-reserve-system |website=eh.net}}</ref><ref>{{Cite web |date=March 31, 2008 |title=Who owns the Federal Reserve Bank? |url=http://www.factcheck.org/2008/03/federal-reserve-bank-ownership |access-date=February 26, 2014 |website=FactCheck}}</ref>}} It has a structure unique among central banks, and is also unusual in that the [[United States Department of the Treasury]], an entity outside of the central bank, prints the [[currency]] used.<ref>{{Cite web |date=August 24, 2011 |title=Coins and Currency |url=http://www.treas.gov/topics/currency |archive-url=https://web.archive.org/web/20101203122230/http://www.treas.gov/topics/currency |archive-date=December 3, 2010 |access-date=August 29, 2011 |website=US Dept of Treasury website }}</ref>

The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury,<ref name="frs bog net income press lease">{{Cite news |date=January 11, 2016 |title=Press Release – Federal Reserve Board announces Reserve Bank income and expense data and transfers to the Treasury for 2015 |work=Board of Governors of the Federal Reserve System |url=http://www.federalreserve.gov/newsevents/press/other/20160111a.htm |access-date=March 12, 2016}}</ref> and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.<ref>{{Cite web |last=<!--Not stated--> |date=March 22, 2021 |title=Press Release - Federal Reserve System publishes annual financial statements |url=https://www.federalreserve.gov/newsevents/pressreleases/other20210322a.htm |access-date=January 4, 2022 |website=www.federalreserve.gov |publisher=Board of Governors of the Federal Reserve System}}</ref> Although an instrument of the U.S. government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the president or by anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms."<ref name="auto">{{Cite web |title=FAQ |url=http://www.federalreserve.gov/faqs/about_14986.htm |access-date=December 1, 2015 |website=Who Owns the Federal Reserve? |publisher=Board of Governors of the Federal Reserve System}}</ref> The Federal Reserve has been [[Criticism of the Federal Reserve|criticized by some]] for its approach to managing [[inflation]], perceived lack of transparency, and its role in economic downturns.<ref>{{Cite web |date=2015-01-27 |title=Taylor: Federal Reserve Monetary and the Financial Crisis: A Reply to Chairman Ben Bernanke - WSJ |url=https://www.wsj.com/articles/SB10001424052748703481004574646100272016422 |access-date=2024-08-22 |archive-url=https://web.archive.org/web/20150127185509/https://www.wsj.com/articles/SB10001424052748703481004574646100272016422 |archive-date=January 27, 2015 }}</ref><ref>{{Cite news |date=2024-06-22 |title=The Latest Fed Criticism? Holding on Too Tight |url=https://www.bloomberg.com/news/newsletters/2024-06-22/bloomberg-weekend-reading-the-latest-fed-criticism-holding-on-too-tight |access-date=2024-08-22 |work=Bloomberg.com |language=en}}</ref><ref>{{Cite news |date=2022-05-14 |title=More Than Half of U.S. Wants Fed Curbed or Abolished - Bloomberg |newspaper=Bloomberg |url=https://www.bloomberg.com/news/articles/2010-12-09/more-than-half-of-americans-want-fed-reined-in-or-abolished |access-date=2024-08-22 |archive-url=https://web.archive.org/web/20220514174100/https://www.bloomberg.com/news/articles/2010-12-09/more-than-half-of-americans-want-fed-reined-in-or-abolished |archive-date=May 14, 2022 }}</ref>

* To address the problem of [[bank run|banking panics]]

* To serve as the [[central bank]] for the United States

To supervise and regulate banking institutions

To protect the credit rights of consumers

* To conduct [[monetary policy]] by influencing [[market interest rate]]s to achieve the sometimes-conflicting goals of

maximum employment

stable prices, interpreted as an [[inflation]] rate of 2 percent per year on average<ref name="goals of MP"/>

moderate long-term interest rates

To facilitate the exchange of payments among regions

To respond to local liquidity needs

{{Further|Central bank}}

 

In its role as the [[central bank]] of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the [[United States Department of the Treasury|U.S. Treasury]] keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems [[Treasury security|U.S. government securities]] such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's [[Coins of the United States dollar|coin]] and [[Federal Reserve note|paper currency]]. The U.S. Treasury, through its [[United States Mint|Bureau of the Mint]] and [[Bureau of Engraving and Printing]], actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.<ref name="Fed_currency">{{Cite web |date=June 2008 |title=How Currency Gets into Circulation |url=http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html |access-date=August 29, 2011 |publisher=Federal Reserve Bank of New York}}</ref> During the [[Fiscal Year]] 2020, the Bureau of Engraving and Printing delivered 57.95&nbsp;billion notes at an average cost of 7.4 cents per note.<ref>{{Cite web |title=Annual Production Reports {{!}} Engraving & Printing |url=https://www.bep.gov/currency/production-figures/annual-production-reports |access-date=January 6, 2023 |website=www.bep.gov}}</ref><ref>{{Cite web |last=Board of Governors of the Federal Reserve System |date=2021 |title=2021 Currency Budget |url=https://www.federalreserve.gov/foia/files/2021currency.pdf |publisher=federalreserve.gov}}</ref>

"Obama administration officials [had] regrouped to identify Fed candidates after [[Peter Diamond]], a Nobel Prize-winning economist, withdrew his nomination to the board in June [2011] in the face of Republican opposition. [[Richard Clarida]], a potential nominee who was a Treasury official under [[George W. Bush]], pulled out of consideration in August [2011]", one account of the December nominations noted.<ref>Lanman, Scott; Runningen, Roger (December 27, 2011). [https://www.bloomberg.com/news/2011-12-27/obama-to-nominate-jerome-powell-jeremy-stein-to-fed-s-board-of-governors.html "Obama to Choose Powell, Stein for Fed Board"]. Bloomberg LP. Retrieved December 27, 2011.</ref> The two other Obama nominees in 2011, [[Janet Yellen]] and [[Sarah Bloom Raskin]],<ref>Robb, Greg (April 29, 2010). [http://www.marketwatch.com/story/obama-nominates-3-to-federal-reserve-board-2010-04-29 "Obama nominates 3 to Federal Reserve board"]. ''[[MarketWatch]]''. Retrieved April 29, 2010.</ref> were confirmed in September.<ref>Lanman, Scott (September 30, 2010). [https://www.bloomberg.com/news/2010-09-30/yellen-raskin-win-fed-board-confirmation-as-vote-on-monetary-easing-nears.html "Yellen, Raskin Win Senate Approval for Fed Board of Governors"]. Bloomberg LP. Retrieved December 27, 2011.</ref> One of the vacancies was created in 2011 with the resignation of [[Kevin Warsh]], who took office in 2006 to fill the unexpired term ending January 31, 2018, and resigned his position effective March 31, 2011.<ref>Censky, Annalyn (February 10, 2011). [https://money.cnn.com/2011/02/10/news/economy/fed_official_warsh_resigns/index.htm "Fed inflation hawk Warsh resigns"]. ''[[CNNMoney]]''. Retrieved December 27, 2011.</ref><ref>Chan, Sewell (February 10, 2011). [https://www.nytimes.com/2011/02/11/business/economy/11fed.html "Sole Fed Governor With Close Ties to Conservatives Resigns"]. ''The New York Times''. Retrieved December 27, 2011.</ref> In March 2012, U.S. Senator [[David Vitter]] ([[Republican Party of the United States|R]], [[Louisiana|LA]]) said he would oppose Obama's Stein and Powell nominations, dampening near-term hopes for approval.<ref>Robb, Greg (March 28, 2012). [http://www.marketwatch.com/story/senator-to-block-quick-vote-on-fed-picks-report-2012-03-28?link=MW_latest_news "Senator to block quick vote on Fed picks: report"]. ''MarketWatch''. Retrieved March 28, 2012.</ref> However, Senate leaders reached a deal, paving the way for affirmative votes on the two nominees in May 2012 and bringing the board to full strength for the first time since 2006<ref>Robb, Greg, [http://www.marketwatch.com/story/stein-sworn-in-as-fed-governor-2012-05-30 "Stein sworn in as Fed governor"], ''MarketWatch'', May 30, 2012. Retrieved May 30, 2012.</ref> with Duke's service after term end.  Later, on January 6, 2014, the United States Senate confirmed Yellen's nomination to be chair of the Federal Reserve Board of Governors; she was the first woman to hold the position.<ref>{{Cite news |last=Lowrey |first=Annie |date=January 6, 2014 |title=Senate Confirms Yellen as Fed Chairwoman |work=The New York Times |url=https://www.nytimes.com/2014/01/07/business/economy/Yellen-Senate-Vote.html |url-status=live |url-access=limited |access-date=January 6, 2014 |archive-url=https://ghostarchive.org/archive/20220102/https://www.nytimes.com/2014/01/07/business/economy/Yellen-Senate-Vote.html |archive-date=January 2, 2022}}{{Cbignore}}</ref> Subsequently, President Obama nominated [[Stanley Fischer]] to replace Yellen as the vice-chair.<ref>{{Cite news |last=Puzzanghera |first=Jim |date=January 10, 2014 |title=Obama to nominate Stanley Fischer, 2 others to Federal Reserve seats |url=https://www.latimes.com/business/la-fi-mo-federal-reserve-stanley-fischer-obama-nominate-lael-brainard-20140110-story.html |access-date=December 26, 2021}}</ref>

The first attempt at a national currency was during the [[American Revolutionary War]]. In 1775, the Continental Congress, as well as the states, began issuing paper currency, calling the bills "[[Early American currency|Continentals]]".<ref>{{Cite web |title=Timeline of U.S. Currency History |url=https://uscurrency.gov/history-american-currency |archive-url=https://web.archive.org/web/20161004114334/https://uscurrency.gov/history-american-currency |archive-date=October 4, 2016 |access-date=June 8, 2016 |publisher=U.S. Currency Education Program}}</ref> The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting, caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787,<ref>{{Cite web |title="Mr. Govr. MORRIS moved to strike out "and emit bills on the credit of the U. States" – If the United States had credit such bills would be unnecessary: if they had not, unjust & useless. ... On the motion for striking out N. H. ay. Mas. ay. Ct ay. N. J. no. Pa. ay. Del. ay. Md. no. Va. ay. N. C. ay. S. C. ay. Geo. ay." |url=http://avalon.law.yale.edu/18th_century/debates_816.asp |access-date=April 30, 2012 |publisher=Avalon.law.yale.edu}}</ref> as well as banning such issuance by the various states, and limiting the states' ability to make anything but gold or silver coin legal tender on August 28.<ref>US Constitution Article 1, Section 10. "no state shall ..emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;"</ref>

In 1816, however, Madison revived it in the form of the [[Second Bank of the United States]]. Years later, early renewal of the bank's charter became the primary issue in the reelection of President [[Andrew Jackson]]. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Jackson was the only President to completely pay off the national debt<ref>{{Cite news |last=Gordon |first=John Steele |date=February 19, 2009 |title=A Short History of the National Debt |work=[[The Wall Street Journal]] |url=https://www.wsj.com/articles/SB123491373049303821 }}</ref> but his efforts to close the bank contributed to the [[Panic of 1837]]. The bank's charter was not renewed in 1836, and it would fully dissolve after several years as a private corporation.

The main motivation for the third central banking system came from the [[Panic of 1907]], which caused a renewed desire among legislators, economists, and bankers for an overhaul of the monetary system.<ref name="FDS-H-04"/><ref name="FDS-H-05"/><ref name="FDS-H-06"/><ref name="herrickpanic">{{Cite journal |last=Herrick |first=Myron |date=March 1908 |title=The Panic of 1907 and Some of Its Lessons |url=https://zenodo.org/record/1448652 |journal=Annals of the American Academy of Political and Social Science |volume=31 |issue=2 |pages=8–25 |doi=10.1177/000271620803100203 |jstor=1010701 |s2cid=144195201 |issn = 0002-7162}}</ref> During the last quarter of the 19th century and the beginning of the 20th century, the United States economy went through a series of [[financial panics]].<ref name="EFlaherty"/> According to many economists, the previous national banking system had two main weaknesses: an [[elasticity (economics)|inelastic]] currency and a lack of liquidity.<ref name="EFlaherty">{{Cite web |last=Flaherty |first=Edward |date=June 16, 1997 |title=A Brief History of Central Banking in the United States |url=http://odur.let.rug.nl/~usa/E/usbank/bank00.htm |archive-url=https://web.archive.org/web/20120728104703/http://odur.let.rug.nl/~usa/E/usbank/bank00.htm |archive-date=July 28, 2012 |access-date=November 17, 2007 |publisher=University of Groningen |location=Netherlands}}</ref> In 1908, Congress enacted the [[Aldrich–Vreeland Act]], which provided for an emergency currency and established the [[National Monetary Commission]] to study banking and currency reform.<ref name="mnwarburg">{{Cite web |last=Whithouse |first=Michael |date=May 1989 |title=Paul Warburg's Crusade to Establish a Central Bank in the United States |url=https://www.minneapolisfed.org/pubs/region/89-05/reg895d.cfm |archive-url=https://web.archive.org/web/20080516102112/http://minneapolisfed.org/pubs/region/89-05/reg895d.cfm |archive-date=May 16, 2008 |access-date=August 29, 2011 |publisher=The Federal Reserve Bank of Minneapolis}}</ref> The National Monetary Commission returned with recommendations which were repeatedly rejected by Congress. A revision crafted during a secret meeting on [[Jekyll Island]] by Senator Aldrich and representatives of the nation's top finance and industrial groups later became the basis of the [[Federal Reserve Act]].<ref>{{Cite web |title=For years members of the Jekyll Island Club would recount the story of the secret meeting and by the 1930s the narrative was considered a club tradition |url=http://www.jekyllislandhistory.com/federalreserve.shtml |archive-url=https://web.archive.org/web/20120611221413/http://www.jekyllislandhistory.com/federalreserve.shtml |archive-date=June 11, 2012 |access-date=April 30, 2012 |publisher=Jekyllislandhistory.com}}; {{Cite web |title=Papers of Frank A.Vanderlip "I wish I could sit down with you and half a dozen others in the sort of conference that created the Federal Reserve Act" |url=http://fraser.stlouisfed.org/chfrs/record.php?id=5653 |access-date=April 30, 2012 |format=PDF}}</ref> The House voted on December 22, 1913, with 298 voting yes to 60 voting no. The Senate voted 43–25 on December 23, 1913.<ref>{{Cite web |title=The Federal Reserve Act of 1913 – A Legislative History |url=http://www.llsdc.org/FRA-LH |access-date=April 30, 2012 |publisher=Llsdc.org}}</ref> President [[Woodrow Wilson]] signed the bill later that day.<ref>{{Cite news |date=December 24, 1913 |title=Affixes His Signature at 6:02&nbsp;pm, Using Four Gold Pens. |work=[[The New York Times]] |url=https://timesmachine.nytimes.com/timesmachine/1913/12/24/100414417.pdf |access-date=April 30, 2012}}</ref>