<Standard E.6.3 .......................................................................................................................................................................................... Standard E.6.5>

Describe the organization and functions of the Federal Reserve System.

A Federal Reserve Note
A Federal Reserve Note

game_icon.svg.pngSo You Want to be in Charge of Monetary Policy? is a game from the Federal Reserve Bank of San Francisco that puts students in the role of the Federal Reserve Chairman.

Janet Yellen (2010).  She is the first woman chair of the Federal Reserve.
Janet Yellen (2010). She is the first woman chair of the Federal Reserve.

Structure of the Federal Reserve
Federal Reserve Act of 1913
  • Created 12 regional banks supervised by a Federal Reserve Board
  • Regions created by geographic regions of business
  • The banks are located in:
    • Boston
    • New York City
    • Philadelphia
    • Cleveland
    • Richmond
    • Atlanta
    • Chicago
    • St. Louis
    • Minneapolis
    • Kansas City
    • Dallas
    • San Francisco
  • Some of the regional banks are actually multiple banks

Requirements of Reserve Banks
  • All national banks have to be part of the Federal Reserve
  • State banks can be if they meet requirements
  • Member banks:
    • Hold most of deposits of all commercial banks
    • Own stock in Federal Reserve Bank in district
    • Maintain legal reserves on deposit with district bank
    • Required reserves proportional to member bank's deposit (varies by location and character of deposits)

  • Each reserve bank managed by board of 9 directors
    • 3 appointed by Federal Reserve Board, 6 by local member banks
  • 1 of these federally appointed directors is chosen by the Board as chairman and Federal Reserve agent
    • This person acts as liaison between Board and bank
  • Board also appoints bank's president, other officers, and employees
  • These banks create an income that
    • covers expenses
    • pays a 6% cumulative dividend annually on the stock held by member banks
    • Add to surplus
    • Provide US Treasury with over $1 billion a year in revenue
  • Board of Governors of Federal Reserve System
    • National Supervisory Agency
    • 7 members appointed for 14 year terms by the President
      • Chairman and vice chairman, who serve 4 year terms, are included in the 7
    • Offices are in Washington, DC
  • Federal Open Market Committee-created in 1923
    • 12 total members, 1 of which is appointed annually by the board of directors of each reserve bank
      • The 7 members of the Board and 5 representatives of the Federal Reserve banks
    • Confers with Board on general business and makes recommendations
    • Directs purchases and sales by reserve banks of federal government in the open market
  • Consumer Advisory Council-created in 1976
    • Consumer and creditor representatives
    • Advises Board on consumer-related matters

Read more: Federal Reserve System: Structure — Infoplease.com http://www.infoplease.com/ce6/bus/A0858087.html#ixzz1KUPOkZF7

federal reserve.jpg
From wikimedia commons

Duties of the Federal Reserve
  • The Federal Reserve is a "banker's bank"
    • Member banks use reserve accounts with reserve banks just like a bank depositor uses his/her checking
    • They can deposit in reserve accounts the checks on other banks
    • Surplus currency from their customers
    • Draw on the reserve to obtain currency and pay checks drawn upon them
  • The Federal Reserve is responsible for:
    • Maintenance of monetary and credit conditions to stay favorable to agriculture, industry, and commerce
    • Lending to member banks
    • Maintaining open-market operations
      • Open-market purchase of securities by authorities supply banks with additional funds
      • Sale of securities can diminish funds
    • Fixing reserve requirements
      • Within limits imposed by law on the Board
      • Raise or lower reserve requirements on the reserves that member banks deposit in reserve banks
      • Can diminish or enlarge the volume of funds that member banks have for lending
      • Directly affect the volume of member funds but don't immediately effect the use of the funds
    • Establishing discount rates
      • By giving discounts, authorities can supply banks with additional reserve funds
      • They also make funds more or less expensive for member banks by either raising or lowering discount rates
      • Discounts usually expand when member banks need to borrow
    • Issuing regulations
  • Reserves allow:
    • The Federal Reserve authorities to influence lending activities of banks
      • If a bank has reserves in excess of requirements, it can lend more
      • Basically, the Federal Reserve controls how much banks can lend out and therefore has a large influence on the country's economy
      • Expanding bank credit can lead to an upswing in the business cycle and inflation
      • Restriction of credit can lead to decreased business growth and deflation
  • The Federal Reserve has control over the use of funds in the stock market speculation field through the use of margin requirements
  • The Federal Reserve also issues Federal Reserve notes for circulation
    • The chief element in the nation's currency
  • Most economists and bankers agree that the Federal Reserve System has approved America's monetary and banking institutions

Read more: Federal Reserve System: Function — Infoplease.com http://www.infoplease.com/ce6/bus/A0858088.html#ixzz1KUM37YC2

Multimedia.pngLearn how money is made. Watch Part 1 and Part 2 or click here to read a description from the US Bureau of Engraving and Printing.

primary_sources.PNGClick here to read the Federal Reserve Act that established the Federal Reserve.

lessonplan.jpgClick here to view lesson plans, classroom activities, and publications on the Federal Reserve from federalreserveeducation.org.

CST Test Question from 2008
One of the key goals of the 1913 Federal Reserve Act was to:
A. Place a banking system under the direct control of Congress
B. Decentralize the banking industry in order to allow for local control of money
C. Protect the banking industry by removing the country from the gold standard
D. Create a banking system that could regulate the amount of money in circulation

The correct answer is D.

MTEL Practice Test Question
How would the Federal Reserve Board most likely use its monetary power during a period of inflation?
A. Increase the interest rate on money borrowed from the Federal Reserve
B. Raise the reserve requirements of member banks
C. Increase the purchase of government bonds in open market operations
D. Raise the margin requirements for the purchase of securities

The correct answer is A.

Seal of the Federal Reserve

federal building.jpg
Federal Reserve Building, located in Washington, DC. from wikimedia commons