The Federal Reserve System
ECO 285 – Macroeconomics – Dr. D. Foster
The Origins of U.S. Central Banking
Bank of England The Bank of North America (1781) The First Bank of the United States (1791) The Second Bank of the United States (1816)
1837–1865 The Free-Banking period. The Civil War & Greenbacks - a fiat money.
1791–1836
1865–1912
The Gold Standard (1875).
Brief foray into bimetalism.
Panics of 1873, 1893 and 1907
Federal Reserve Act of 1913
The Federal Reserve Banking System
Board of Governors of the FRS 7 members, equal standing . . . but,
includes Secretary of the Treasury and Comptroller of the Currency.
Problems: Only using discount window, Each District Bank sets its own policy.
Purpose:1. Develop, supervise & control the nation’s
money.2. Serve as a national check-clearing system.3. Serve as depository for federal gov’t.
funds.
The Federal Reserve Banking System
The Early Fed, 1913–1935
The Great Depression - Failure of the FedInitially increased liquidity, but pulled
back.By 1933, 33% of banks fail, MS fallen
33%.
Accommodates the Treasury Dept. during WWI.Buys Treasury bonds to finance G
spending(aka “monetizing the debt”).
From 1916 to 1918, this increases MS by 70%.
Huge risk of inflation.
The Fed - version 2.0, 1935
Serves as a “lender of last resort.”
Board of Governors reconstituted:
All 7 member selected by President/Senate confirms.Can’t include Treasury Sec.
nor Comptroller of Currency.Members serve 14 yr. terms on staggered
basis.Political party diversity.Office of Chairman and Vice Chairman
created.Has authority over district banks.
Federal Open Market Committee (FOMC)
12 members; primary policy-making body.
The Evolution of the Modern Fed
WWII - working “for” the U.S. Treasury Federal Reserve–Treasury Accord (1951) “Leaning Against The Wind”
– Martin (1953-1970) The technocratic Fed
– Burns (1970-1978) . . . the “political business cycle”
Coping with inflation– Volcker (1979-1987)
Keeping the economy stable?– Greenspan (1987-2006)
Coping with recession– Bernanke (2006-2014)– Yellen (2014-?)
The Fed’s Balance Sheet
• THE FED’S ASSETS
– Treasury securities– U.S. agency
securities– Discount window
loans – Gold certificates.– Special Drawing
Right (SDR) certificates
– Foreign currency reserves
– Cash items in the process of collection
• LIABILITIES AND EQUITY CAPITAL
– Federal Reserve notes
– Bank reserve deposits
– U.S. Treasury deposits
– Foreign official deposits
– Deferred availability cash items
– Equity capital
The Fed’s Balance Sheet - 2005
782,003
The Consolidated Balance Sheet of
the Federal Reserve System ($ Millions, as of January 31,
2005)
2012
The Federal Reserve System
ECO 285 – Macroeconomics – Dr. D. Foster