HISTORY AND DEVELOPMENT OF THE US FEDERAL RESERVE

Cielo Casteel Jeff Inman

Intro

US FEDERAL RESERVE

Governs U.S. monetary and banking systems

Use monetary policy to bring stability in the money supply and banking system

Government

Households Firms

Goods and services Labor and wages

Goods and services

Taxes and transfer

payments

Goods and services

Taxes & subsidies

Financial Sector

Borrowing & lending

Monetary policy

GOVERNANCE STRUCTURE

Board of Governors (7)

President per district (12)

Chairman of the Federal Reserve

Federal Open Market Committee

FEDERAL RESERVE DISTRICTS

PURPOSE

Maintain U.S. stability of the currency and money supply

Seek to accomplish Stability in price levels High employment Economic growth Stability in foreign currency exchanges

INSTRUMENTS

Bank Reserves Rates affect money supply

Open Market Operations Most effective

Open Market Repurchase Agreements Temporary change in reserve level

Discount Rates Least effective

OPEN MARKET OPERATIONS

FEDERAL RESERVE TIMELINE

1791–1811 First Bank of the United States 1811–1816 No central bank 1816–1836 Second Bank of the United States 1837–1862 Free Bank Era 1863–1913 National Banks

(National Banking Act) (Legal Tender Act of 1862) Panics under national banking system

1873, 1893 and 1907 Demonstrated need for national banking system

1908 National Monetary Commission Recommendations became Federal Reserve Act

1913 Federal Reserve founded

FEDERAL RESERVE EVOLUTION

1929 Great Depression Fed Allowed contraction of money supply initially

Ties to gold limited Feds ability to stimulate economy 40% notes issued required to be coverable by gold

New Deal Credited with enabling economic recovery Stabilized banks by insuring deposits Removed gold standard from dollar

1973 Oil Crisis Cut interest rates to encourage growth

Inflation risk accepted High inflation and low economic growth resulted

FEDERAL RESERVE RECENT ACTIVITY

Late 2000’s Financial Crisis Collapse of US housing

bubble Over leveraging Predatory lending

Responses Bailouts Purchase of $2.5 trillion in

government debt and troubled private assets from banks

FUTURE POLICY CHANGES

Maximum wage is an idea which has been enacted in early 2009 in the United States, where they capped executive pay at $500,000 per year for companies receiving extraordinary financial assistance from the US Taxpayer

Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk

Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification

Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to "discourage them from becoming too big and to offset their competitive advantage

Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance.

SOURCES

Wikipedia Federal Reserve Website Thomson Leaning CNNMoney.com