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Federal Reserve System

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. As of February 1, 2006, Ben Bernanke serves as the Chairman of the Board of Governors of the Federal Reserve System.

History

Central banking in the United States

The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791 by Alexander Hamilton. Its charter was not renewed in 1811. In 1816, the Second Bank of the United States was chartered; its charter was not renewed in 1836, after it became the object of a major attack by president Andrew Jackson. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907 provided strong demand for the creation of a centralized banking system.

The Federal Reserve System is the third central banking system in the United States. The first two central banking systems didn't last because there was not adequate support from Congress to keep them in existence. The timeline of central banking in the United States is as follows:

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
1913-Present: Federal Reserve System

Creation of a third central bank

The main motivation for the third central banking system came from the Panic of 1907, which renewed demands for banking and currency reform. 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. According to proponents of the Federal Reserve System and many economists, the previous national banking system had two main weaknesses: an "inelastic" currency; and a lack of liquidity. The following year Congress enacted the Aldrich-Vreeland Act which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.

The Federal Reserve Act

The chief of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions — one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central-banking systems and report on them. Aldrich went to Europe opposed to centralized banking, but after viewing Germany's banking system came away believing that a centralized bank was better than the government-issued bond system that he had previously supported. Centralized banking was met with much opposition from politicians, who were suspicious of a central bank and who charged that Aldrich was biased due to his close ties to wealthy bankers such as J.P. Morgan and his daughter's marriage to John D. Rockefeller, Jr.

Aldrich fought for a private bank with little government influence, but conceded that the government should be represented on the Board of Directors. Most Republicans favored the Aldrich Plan, but it lacked enough support in the bipartisan Congress to pass. Progressive Democrats instead favored a reserve system owned and operated by the government and out of control of the "money trust", ending Wall Street's control of American currency supply. Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control. The Federal Reserve Act passed Congress in late 1913 on a mostly partisan basis, with most Democrats in support and most Republicans against it.

Post-Bretton Woods era

In July 1979, Paul Volcker was nominated, by President Carter, as Chairman of the Federal Reserve Board amid roaring inflation. He tightened the money supply, and by 1986 inflation had fallen sharply. In October 1979 the Federal Reserve announced a policy of "targeting" money aggregates and bank reserves in its struggle with double-digit inflation.

In January 1987, with retail inflation at only 1%, the Federal Reserve announced it was no longer going to use money-supply aggregates, such as M2, as guidelines for controlling inflation, even though this method had been in use from 1979, apparently with great success. Before 1980, interest rates were used as guidelines; inflation was severe. The Fed complained that the aggregates were confusing. Volcker was chairman until August 1987, whereupon Alan Greenspan assumed the mantle, seven months after monetary aggregate policy had changed.

Key laws

Key laws affecting the Federal Reserve have been:

Banking Act of 1935
Employment Act of 1946
Federal Reserve-Treasury Department Accord of 1951
Bank Holding Company Act of 1956 and the amendments of 1970
Federal Reserve Reform Act of 1977
International Banking Act of 1978
Full Employment and Balanced Growth Act (1978)
Depository Institutions Deregulation and Monetary Control Act (1980)
Financial Institutions Reform, Recovery and Enforcement Act of 1989
Federal Deposit Insurance Corporation Improvement Act of 1991
Gramm-Leach-Bliley Act (1999)
Emergency Economic Stabilization Act (2008)

Purpose

The primary motivation for creating the Federal Reserve System was to address banking panics. Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. Before the founding of the Federal Reserve, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Fed has broader responsibilities than only ensuring the stability of the financial system.

Current functions of the Federal Reserve System include:

To address the problem of banking panics
To serve as the central bank for the United States
To strike a balance between private interests of banks and the centralized responsibility of government

To supervise and regulate banking institutions
To protect the credit rights of consumers

To manage the nation's money supply through monetary policy to achieve the sometimes conflicting goals of

maximum employment
stable prices
moderate long-term interest rates

To maintain the stability of the financial system and contain systemic risk in financial markets
To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

To facilitate the exchange of payments among regions
To respond to local liquidity needs

To strengthen U.S. standing in the world economy

Addressing the problem of bank panics

Bank runs occur because banking institutions in the United States usually practice fractional-reserve banking and do not have enough cash in reserves to give to all of their depositors simultaneously. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve was designed as an attempt to prevent or minimize the occurrence of bank runs, and to respond appropriately when they do happen.

Elastic currency

One way to prevent bank runs is to have a money supply that can expand when money is needed. The term "elastic currency" in the Federal Reserve Act doesn't just mean the ability to expand the money supply, but also to contract it. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as: Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change. In practice, the Federal Reserve has never contracted the monetary supply since the Great Depression, on the fear that contracting the money supply may cause a deflationary recession, and because according to the operating theory of the Federal Reserve, monetary supply should expand as the economy expands to accommodate larger volumes of transaction.

Check clearing system

Because some banks refused to clear checks from certain other banks during times of economic uncertainty, which increased financial problems, a check-clearing system was created in the Federal Reserve System. It is briefly described in The Federal Reserve System—Purposes and Functions:

Lender of last resort

The Federal Reserve has the authority and financial resources to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.

Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is the discount rate (officially the primary credit rate).

In making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.

For example, on September 16, 2008, the Federal Reserve Board authorized an 85 billion dollar loan to stave off the bankruptcy of international insurance giant American International Group (AIG).

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 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 U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint and Bureau of Engraving and Printing, actually produces the nation's cash supply; the Fed Banks then distribute it to financial institutions.

Federal funds

Federal funds are the reserve balances that private banks keep at their local Federal Reserve Bank. These reserve balances are the "reserves" in "federal reserve", hence the name of the system. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism through which private banks can lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works by influencing how much money the private banks charge each other for the lending of these funds.

Balance between private banks and responsibility of government

The system was designed out of a compromise between the competing philosophies of privatization and government regulation. While planning the design of the system, some people wanted the system to have generally private aspects whereas others wanted more government involvement. The system that resulted ended up being a compromise between these two philosophies. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:

In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is the part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by the Senate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to freely run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

Government regulation and supervision

The Board of Governors is the part of the Federal Reserve System that is responsible for supervising the private banks. A general description of the types of regulation and supervision involved is given by the Federal Reserve:

Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also have regulatory and supervisory responsibilities. For example, a member bank (private bank) is not permitted to give out too many loans to people who cannot pay them back. This is because too many defaults on loans will lead to a bank run. If the board of directors has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors. This policy is described in United States Code, Title 12, Chapter 3, subchapter 7, section 301:

The punishment for making false statements or reports which overvalue an asset is stated in U.S. Code, Title 18, Part 1, Chapter 47, Section 1014:

These aspects of the Federal Reserve System are the parts intended to prevent or minimize speculative asset bubbles which ultimately lead to severe market corrections.

National payments system

The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.

In passing the Monetary Control Act of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

The Federal Reserve plays a vital role in both the nation’s retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution’s retail clients—individuals and smaller businesses. The Reserve Banks’ retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution’s large corporate customers or counterparties, including other financial institutions. The Reserve Banks’ wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution’s failure to make or settle its payments.

The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing. The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.

Structure

Independent within government

The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit. The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system. The System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve has the authority to act on its own without prior approval from Congress or the President. The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations. The Federal Reserve System's unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed's responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent whilst also remaining within the government of the United States, it is often said to be "independent within the government."

The 12 Federal Reserve banks provide the financial means to operate the Federal Reserve. Each reserve bank is organized much like a private corporation so that it can provide the necessary revenue to cover operational expenses and implement the demands of the board. Member banks are privately owned banks that must buy a certain amount of stock in the Reserve Bank within its region to be a member of the Federal Reserve System. This stock "may not be sold, traded, or pledged as security for a loan" and all member banks receive a 6% annual dividend. These member banks must maintain fractional reserves either as vault cash or on account at its Reserve Bank; member banks earn no interest on either of these. The dividends paid by the Federal Reserve Banks to member banks are considered partial compensation for the lack of interest paid on the required reserves. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks (and since shares in ownership of the Federal Reserve Banks are redeemable only at par, the nominal "owners" do not benefit from this surplus capital); the Federal Reserve system contributed over $29 billion to the Treasury in 2006.

Outline

The Federal Reserve System as a whole

The nation's central bank
A regional structure with 12 districts
Subject to general Congressional authority and oversight
Operates on its own earnings

Board of Governors

7 members serving staggered 14-year terms
Appointed by the U.S. President and confirmed by the Senate
Oversees System operations, makes regulatory decisions, and sets reserve requirements

Federal Open Market Committee

The System's key monetary policymaking body
Decisions seek to foster economic growth with price stability by influencing the flow of money and credit
Composed of the 7 members of the Board of Governors and the Reserve Bank presidents, 5 of whom serve as voting members on a rotating basis

Federal Reserve Banks

12 regional banks with 25 branches
Each independently incorporated with a 9-member board of directors, with 6 of them elected by the member banks while the remaining 3 are designated by the Board of Governors.
Set discount rate, subject to approval by Board of Governors.
Monitor economy and financial institutions in their districts and provide financial services to the U.S. government and depository institutions.

Member banks

Private banks
Hold stock in their local Federal Reserve Bank
Elect six of the nine members of Reserve Banks’ boards of directors.

Advisory Committees

carry out varied responsibilities

Board of Governors

The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate., one on Jan. 31 of every even-numbered year, for staggered, 14-year terms. As an independent federal government agency, the Board of Governors does not receive funding from Congress, and the terms of the seven members of the Board span multiple presidential and congressional terms. Once a member of the Board of Governors is appointed by the president, he or she functions mostly independently. The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives. It also supervises and regulates the operations of the Federal Reserve Banks, and US banking system in general.

Membership is generally limited to one term. However, if someone is appointed to serve the remainder of another member's uncompleted term, he or she may be reappointed to serve an additional 14-year term. Conversely, a governor may serve the remainder of another governor's term even after he or she has completed a full term. The law provides for the removal of a member of the Board by the President "for cause."

The current members of the Board of Governors are:

Ben Bernanke, Chairman
Donald Kohn, Vice-Chairman
Kevin Warsh
Randall Kroszner*
Elizabeth A. Duke
Vacancy*
Vacancy*

All current members of the Board of Governors have taken office during the presidency of George W. Bush.

Federal open market committee

Federal Open Market Committee

New York

Timothy Geithner

Transparency issues

Federal Reserve Banks

There are 12 regional Federal Reserve Banks (not to be confused with the "member banks") with 25 branches, which serve as the operating arms of the system. Each Federal Reserve Bank is subject to oversight by a Board of Governors. Each Federal Reserve Bank has a board of directors, whose members work closely with their Reserve Bank president to provide grassroots economic information and input on management and monetary policy decisions. These boards are drawn from the general public and the banking community and oversee the activities of the organization. They also appoint the presidents of the Reserve Banks, subject to the approval of the Board of Governors. Reserve Bank boards consist of nine members: six serving as representatives of nonbanking enterprises and the public (nonbankers) and three as representatives of banking. Each Federal Reserve branch office has its own board of directors, composed of three to seven members, that provides vital information concerning the regional economy.

The Reserve Banks opened for business on November 16, 1914. Federal Reserve Notes were created as part of the legislation, to provide a supply of currency. The notes were to be issued to the Reserve Banks for subsequent transmittal to banking institutions. The various components of the Federal Reserve System have differing legal statuses.

The Federal Reserve Banks have an intermediate status, with some features of private corporations and some features of public federal agencies. Each member bank owns nonnegotiable shares of stock in its regional Federal Reserve Bank—but these shares of stock give the member banks only limited control over the actions of the Federal Reserve Banks, and the charter of each Federal Reserve Bank is established by law and cannot be altered by the member banks. While it is unusual, private individuals and non-bank corporations (with proof of a resolution of the board of directors indicating it intends to do so) may also purchase one or more shares of stock of any of the Federal Reserve Banks. The stock is the same nonnegotiable stock as banks receive, cannot be sold and pays a small dividend. In Lewis v. United States, the United States Court of Appeals for the Ninth Circuit stated that "the Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion also stated that "the Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another decision is Scott v. Federal Reserve Bank of Kansas City in which the distinction between the Federal Reserve Banks and the Board of Governors is made.

Board of directors

classes A, B, and C

Class A:

three members
chosen by and representative of the stockholding banks.
member banks are divided into 3 groups based on size—large, medium, and small banks. Each group elects one member of Class A.

Class B:

three members
represent the public with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.
member banks are divided into 3 groups based on size—large, medium, and small banks. Each group elects one member of Class B.
No director of class B shall be an officer, director, or employee of any bank

Class C:

three members
designated by the Board of Governors of the Federal Reserve System. They shall be elected to represent the public, and with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.
No director of class C shall be an officer, director, employee, or stockholder of any bank
Shall have been for at least two years residents of the district for which they are appointed, one of whom shall be designated by said board as chairman of the board of directors of the Federal reserve bank and as Federal reserve agent.

A list of all of the members of the Reserve Banks' boards of directors is published by the Federal Reserve.

List of Federal Reserve Banks

The Federal Reserve Districts are listed below along with their identifying letter and number. These are used on Federal Reserve Notes to identify the issuing bank for each note. The 25 branches are also listed.

Federal Reserve Bank	Letter	Number	Branches	Website	President
Boston	A	1		http://www.bos.frb.org/	Eric S. Rosengren
New York City	B	2	Buffalo, New York (will be closing after October 31, 2008)	http://www.newyorkfed.org/	Timothy F. Geithner
Philadelphia	C	3		http://www.philadelphiafed.org/	Charles I. Plosser
Cleveland	D	4	Cincinnati, Ohio / Pittsburgh, Pennsylvania	http://www.clevelandfed.org/	Sandra Pianalto
Richmond	E	5	Baltimore, Maryland / Charlotte, North Carolina	http://www.richmondfed.org/	Jeffrey M. Lacker
Atlanta	F	6	Birmingham, Alabama / Jacksonville, Florida / Miami, Florida / Nashville, Tennessee / New Orleans, Louisiana	http://www.frbatlanta.org/	Dennis P. Lockhart
Chicago	G	7	Detroit, Michigan	http://www.chicagofed.org/	Charles Evans
St Louis	H	8	Little Rock, Arkansas / Louisville, Kentucky / Memphis, Tennessee	http://www.stlouisfed.org/	James B. Bullard
Minneapolis	I	9	Helena, Montana	http://www.minneapolisfed.org/	Gary H. Stern
Kansas City	J	10	Denver, Colorado / Oklahoma City, Oklahoma / Omaha, Nebraska	http://www.kansascityfed.org/	Thomas M. Hoenig
Dallas	K	11	El Paso, Texas / Houston, Texas / San Antonio, Texas	http://www.dallasfed.org/	Richard W. Fisher
San Francisco	L	12	Los Angeles, California / Portland, Oregon / Salt Lake City, Utah / Seattle, Washington	http://www.frbsf.org/	Janet L. Yellen

Member banks

Each member bank is a private bank (e.g., a privately owned corporation) that holds stock in one of the twelve regional Federal Reserve banks. All of the commercial banks in the United States can be divided into three types according to which governmental body charters them and whether or not they are members of the Federal Reserve System:

national banks—Those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury); by law, they are members of the Federal Reserve System
state member banks—Those chartered by the states who are members of the Federal Reserve System.
state nonmember banks—Those chartered by the states who are not members of the Federal Reserve System.

All nationally chartered banks hold stock in one of the Federal Reserve banks. State-chartered banks may choose to be members (and hold stock in a regional Federal Reserve bank), upon meeting certain standards.

Holding stock in a Federal Reserve bank is not, however, like owning publicly traded stock. The stock cannot be sold or traded. Member banks receive a fixed, 6 percent dividend annually on their stock, and they do not directly control the applicable Federal Reserve bank as a result of owning this stock. They do, however, elect six of the nine members of Reserve banks’ boards of directors. Federal statute provides (in part):

Other banks may elect to become member banks. According to the Federal Reserve Bank of Boston:

For example, as of October 2006 the member banks in New Hampshire included Community Guaranty Savings Bank; The Lancaster National Bank; The Pemigewasset National Bank of Plymouth; and other banks. In California, member banks (as of September 2006) included Bank of America California, National Association; The Bank of New York Trust Company, National Association; Barclays Global Investors, National Association; and many other banks.

List of member banks

A list of all member banks can be found at the website of the Federal Deposit Insurance Corporation (FDIC). This is a list of all banks that are insured by the FDIC, which means that every member bank of the Federal Reserve System is listed here along with non-members who are FDIC-insured. Commercial banks that are not insured by the FDIC are not included. This is a comprehensive list with many categories describing the characteristics of each bank such as the total assets, bank holding company, charter type, location of headquarters, federal reserve district, and several others. From this list, one can see that most commercial banks in the United States are not members of the Federal Reserve System, but the total value of all the banking assets of member banks is substantially larger than the total value of the banking assets of nonmembers.

Summary of all FDIC insured banks:

FDIC Insured Institutions
Number as of 8/14/2008	8,437
Assets as of 3/31/2008	$13,382,783
Deposits as of 3/31/2008	$8,569,419
(dollar amounts in millions of dollars)

All FDIC-insured U.S. commercial banks by bank charter type (assets in thousands of dollars, data given by FDIC website as of August 15, 2008):

charter type	number of banks	total assets
N	1574	7,944,563,337
SM	877	1,539,852,520
NM	4731	1,908,333,314
OI	11	19,415,230
SA	826	1,535,375,214
SB	419	305,590,834

Each charter type is defined as follows:

N = commercial bank, national (federal) charter and Fed member, supervised by the Office of the Comptroller of the Currency (OCC) – Dept of Treasury
SM = commercial bank, state charter and Fed member, supervised by the Federal Reserve (FRB)
NM = commercial bank, state charter and Fed nonmember, supervised by the FDIC
OI = insured U.S. branch of a foreign chartered institution (IBA)
SA = savings associations, state or federal charter, supervised by the Office of Thrift Supervision (OTS)
SB = savings banks, state charter, supervised by the FDIC

The N and SM are members of the system whereas the rest are not. While the OI, SA, and SB categories are not members of the system, they are sometimes treated as if they were members under certain circumstances.

Advisory Committees

The Federal Reserve System uses advisory committees in carrying out its varied responsibilities. Three of these committees advise the Board of Governors directly:

The Federal Reserve Banks also use advisory committees. Of these advisory committees, perhaps the most important are the committees (one for each Reserve Bank) that advise the Banks on matters of agriculture, small business, and labor. Biannually, the Board solicits the views of each of these committees by mail.

Monetary policy

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.

Interbank lending is the basis of policy

The Federal Reserve implements monetary policy by influencing the interbank lending of excess reserves. Interbank lending occurs when too many withdrawals have been made at a bank and it needs to borrow funds from another bank to make up the difference. The rate that banks charge each other for these loans is determined by the markets but the Federal Reserve influences this rate through the three tools of monetary policy which are described in the "Tools of monetary policy" section below. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve: This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.

Goals

The goals of monetary policy include:

maximum employment
stable prices
moderate long-term interest rates
promotion of sustainable economic growth

Tools

There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:

open market operations: purchases and sales of U.S. Treasury and federal agency securities—the Federal Reserve's principal tool for implementing monetary policy. The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the federal funds rate (the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that was largely complete by the end of the decade.
discount rate: the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window.
reserve requirements: the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.

Open market operations

Open market operations put money in and take money out of the banking system. This is done through the sale and purchase of U.S. government treasury securities. When the U.S. government sells securities, it gets money from the banks and the banks get a piece of paper (I.O.U.) that says the U.S. government owes the bank money. This drains money from the banks. When the U.S. government buys securities, it gives money to the banks and the banks give the I.O.U. back to the U.S. government. This puts money back into the banks. The Federal Reserve education website describes open market operations as follows:

A simpler description is described in The Federal Reserve in Plain English:

Repurchase agreements

To smooth temporary or cyclical changes in the monetary supply, the desk engages in repurchase agreements (repos) with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in a primary dealer’s reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer’s reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.

Federal funds rate and discount rate

The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The late economist Milton Friedman consistently criticized this reverse method of controlling inflation by seeking an ideal interest rate and enforcing it through affecting the money supply since nowhere in the widely accepted money supply equation are interest rates found.

The Federal Reserve System also directly sets the "discount rate", which is the interest rate that banks pay the Fed to borrow directly from it. This rate is generally set at a rate close to 100 points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.

Both of these rates influence the prime rate which is usually about 3 percentage points higher than the federal funds rate.

Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build, but at the cost of promoting the expansion of the money supply and thus greater inflation. Higher interest rates slow the economy by increasing the cost of borrowing. (See monetary policy for a fuller explanation.)

The Federal Reserve System usually adjusts the federal funds rate by 0.25% or 0.50% at a time.

The Federal Reserve System might also attempt to use open market operations to change long-term interest rates, but its "buying power" on the market is significantly smaller than that of private institutions. The Fed can also attempt to "jawbone" the markets into moving towards the Fed's desired rates, but this is not always effective.

Reserve requirements

Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio. The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks, which depository institutions trade in the federal funds market discussed above. The required reserve ratio is set by the Board of Governors of the Federal Reserve System.

Table: Reserve Requirements in the U.S. Federal Reserve System
Type of liability	Requirement
	Percentage of liabilities	Effective date
Net transaction accounts
$0 to $9.3 million	0	12/20/07
More than $9.3 million to $43.9 million	3	12/20/07
More than $43.9 million	10	12/20/07

Nonpersonal time deposits	0	12/27/90

Eurocurrency liabilities	0	12/27/90

New facilities

In order to address problems related to the subprime mortgage crisis and United States housing bubble, three new tools have been created. The first new tool, called the Term Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool but there have been suggestions that this new tool may remain in place for a prolonged period of time. Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008. The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject treasury securities into the banking system. Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008. The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealer's, which was previously against Fed policy. The differences between these 3 new facilities is described by the Federal Reserve:

The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.

Some of the measures taken by the Federal Reserve to address this mortgage crisis haven't been used since The Great Depression. The Federal Reserve gives a brief summary of what these new facilities are all about:

As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation. These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity.
The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.

Term auction facility

The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions. The creation of this facility was announced by the Federal Reserve on December 12, 2007 and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets. The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure. Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure. Foreign exchange swap lines with the European Central Bank and Swiss National Bank were opened so the banks in europe could have access to U.S. dollars. Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008: It is also described in the Term Auction Facility FAQ:

Term securities lending facility

The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. Like the Term Auction Facility, the TSLF was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable. It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns Cos. and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets. The currency swap lines with the European Central Bank and Swiss National Bank were increased.

Primary dealer credit facility

The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally. This new facility marks a fundamental change in Federal Reserve policy because now primary dealers can borrow directly from the Fed when this previously was not permitted.

Uncertainties

A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:

While these policy choices seem reasonably straightforward, monetary policy makers routinely face certain notable uncertainties. First, the actual position of the economy and growth in aggregate demand at any point in time are only partially known, as key information on spending, production, and prices becomes available only with a lag. Therefore, policy makers must rely on estimates of these economic variables when assessing the appropriate course of policy, aware that they could act on the basis of misleading information. Second, exactly how a given adjustment in the federal funds rate will affect growth in aggregate demand—in terms of both the overall magnitude and the timing of its impact—is never certain. Economic models can provide rules of thumb for how the economy will respond, but these rules of thumb are subject to statistical error. Third, the growth in aggregate supply, often called the growth in potential output, cannot be measured with certainty.

In practice, as previously noted, monetary policy makers do not have up-to-the-minute information on the state of the economy and prices. Useful information is limited not only by lags in the construction and availability of key data but also by later revisions, which can alter the picture considerably. Therefore, although monetary policy makers will eventually be able to offset the effects that adverse demand shocks have on the economy, it will be some time before the shock is fully recognized and—given the lag between a policy action and the effect of the action on aggregate demand—an even longer time before it is countered. Add to this the uncertainty about how the economy will respond to an easing or tightening of policy of a given magnitude, and it is not hard to see how the economy and prices can depart from a desired path for a period of time.

The statutory goals of maximum employment and stable prices are easier to achieve if the public understands those goals and believes that the Federal Reserve will take effective measures to achieve them.

Although the goals of monetary policy are clearly spelled out in law, the means to achieve those goals are not. Changes in the FOMC’s target federal funds rate take some time to affect the economy and prices, and it is often far from obvious whether a selected level of the federal funds rate will achieve those goals.

Measurement of economic variables

Total U.S. wealth

Total wealth in the United States is published by the Federal Reserve in a report titled, Flow of Funds. At the end of fiscal year 2007, total wealth of all U.S. households and non-profit organizations was $57.718 trillion.

The money supply

The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
M1: M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

The Federal Reserve ceased publishing M3 statistics in March 2006, explaining that it cost a lot to collect the data but did not provide significantly useful information. The other three money supply measures continue to be provided in detail.

Consumer price index

The consumer price index is used as one measure of the value of the money. It is defined as: The data consists of the US city average of consumer prices and can be found at The US Department of Labor—Bureau of Labor Statistics

The CPI taken alone is not a complete measure of the value of money. For example, the monetary value of stocks, real estate, and other goods and services categorized as investment vehicles are not reflected in the CPI. It is difficult to obtain a full picture of value across the full range of the cost of living, so the CPI is typically used as a substitute. The CPI therefore has powerful political ramifications, and Administrations of both parties have been tempted to change the basis for its calculation, progressively underestimating the true rate of decline in purchasing power.

One of the Fed's main roles is to maintain price stability. This means that the change in the consumer price index over time should be as small as possible. The ability to maintain a low inflation rate is a long-term measure of the Fed's success. Although the Fed usually tries to keep the year-on-year change in CPI between 2 and 3 percent, there has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.

Inflation and the economy

There are two types of inflation that are closely tied to each other. Monetary inflation is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.

The effects of monetary and price inflation include:

Price inflation might make people worse off if their incomes don’t rise as rapidly as prices.
Lenders might lose because they will be repaid with dollars that aren't worth as much.
Savers might lose because the dollar they save today will not buy as much when they are ready to spend it.
Businesses will find it harder to plan and therefore may decrease investment in future projects.
Owners of financial assets suffer.
Interest rate-sensitive industries, like mortgage companies, may suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.

Unemployment rate

The unemployment rate statistics are collected by the Bureau of Labor Statistics. Since one of the stated goals of monetary policy is maximum employment, the unemployment rate is a sign of the success of the Federal Reserve System.

Like the CPI, the unemployment rate is used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world.

Budget

The Federal Reserve is self-funded. The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as “capital gains/losses” that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans. The Board of Governors (Federal Reserve Board) creates a budget report once per year for congress. This report is called Annual Report: Budget Review and lists the income and expenses for each Federal Reserve Bank as well as the total amount of employees. It is a comprehensive report with many details and can be found at the Board of Governors' website under the section Reports to Congress

Net worth

Balance sheet

One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks.

Below is the balance sheet as of May 15, 2008 (in millions of dollars):

ASSETS:
Gold certificate account		11,037
Special drawing rights certificate acct.		2,200
Coin		1,386
Securities, repurchase agreements, term auction credit, and other loans		768,561
Securities held outright		515,656
U.S. Treasury		515,656
Bills		49,610
Notes and bonds		421,816
Repurchase agreements		100,000
Term auction credit		125,000
Other loans		27,905
Items in process of collection		2,282
Bank premises		2,147
Other assets		93,139
Total Assets		880,752

LIABILITIES:
Federal Reserve notes outstanding		982,744
Less: notes held by F.R. Banks		201,956
Federal Reserve notes, net		780,789
Reverse repurchase agreements		39,114
Deposits		14,959
Depository institutions		10,574
U.S. Treasury, general account		4,020
Foreign official		97
Other		268
Deferred availability cash items		2,629
Other liabilities and accrued dividends		2,734
Total liabilities		840,224

CAPITAL (AKA Net Equity)
Capital paid in		19,861
Surplus		18,479
Other capital		2,189
Total capital		40,528
MEMO (off-balance-sheet items)
Marketable securities held in custody for foreign official and international accounts		2,278,674
U.S. Treasury		1,348,648
Federal agency		930,025
Securities lent to dealers		150,541
Overnight facility		12,452
Term facility		138,089

Analyzing the Federal Reserve's Balance Sheet reveals a number of facts:

The Fed has over $11 billion in gold which is a holdover from the days the government used to back US Notes and Federal Reserve Notes with gold.. The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce.

The Fed holds almost a billion dollars in coinage not as a liability but as an asset. The Treasury Department is actually in charge of creating coins and US Notes. The Fed then buys coinage from the Treasury by increasing the liability assigned to the Treasury's account.

The Fed holds at least $515 billion of the national debt. The "securities held outright" value used to directly represent the Fed's share of the national debt, but after the creation of new facilities in the winter of 2007-2008, this number has been reduced and the difference is shown with values from some of the new facilities.

The Fed has about $100 billion in assets from Overnight Repurchase agreements. Repurchase agreements are the primary asset of choice for the Fed in dealing in the Open Market. Repo assets are bought by creating 'Depository institution' liabilities and directed to the bank the Primary Dealer uses when they sell into the Open Market.

The $982 billion in Federal Reserve Note liabilities represents the total value of all dollar bills in existence; over $200 billion is held by the Fed (not in circulation); and the "net" figure of $780 billion represents the total face value of Federal Reserve Notes in circulation.

The $10.5 billion in deposit liabilities of 'Depository institutions' shows that dollar bills are not the only source of government money. Banks can swap 'Deposit Liabilities' of the Fed for 'Federal Reserve Notes' back and forth as needed to match demand from customers, and the Fed can have the 'Bureau of Engraving and Printing' create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).

The $4 billion in Treasury liabilities shows that the Treasury Department does not use a private banks but rather uses the Fed directly (the lone exception to this rule is Treasury Tax and Loan because government worries that pulling too much money out of the private banking system during tax time could be disruptive).

The $97 million Foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.

The $2.7 billion in 'Other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to member banks for the 6% dividend on the 3% of their net capital they are required to contribute in exchange for nonvoting stock their regional Reserve Bank in order to become a member. Member banks are also subscribed for an additional 3% of their net capital, which can be called at the Federal Reserve's discretion. All nationally-chartered banks must be members of a Federal Reserve Bank, and state-chartered banks have the choice to become members or not.

Total capital represents the profit the Fed has earned which comes mostly from the assets they purchase with the deposit and note liabilities they create. Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as "Miscellaneous Revenue".

In addition, the balance sheet also indicates which assets are held as collateral against Federal Reserve Notes.

Federal Reserve Notes and collateral
Federal Reserve notes outstanding		982,744
Less: Notes held by F.R. Banks		201,956
Federal Reserve notes to be collateralized		780,789
Collateral held against Federal Reserve notes		780,789
Gold certificate account		11,037
Special drawing rights certificate account		2,200
U.S. Treasury and agency securities pledged		576,601
Other assets pledged		190,951

Criticisms

A large and varied group of criticisms has been directed against the Federal Reserve System. One critique, typified by the Austrian School, is that the Federal Reserve is an unnecessary and counterproductive interference in the economy. According to this theory, interest rates should be naturally low during times of excessive consumer saving (because lendable money is abundant) and naturally high when high net volumes of consumer credit are extended (because lendable money is scarce). These critics argue that setting a baseline lending rate amounts to centralized economic planning; a hallmark of socialist and communist societies; and inflating the currency amounts to a regressive, incremental redistribution of wealth.

Other critiques include arguments in favor of the gold standard (usually coupled with the charge that the Federal Reserve System is unconstitutional) or beliefs that the centralized banking system is doomed to fail (due to the fractional reserve system's strong resemblance to an unsustainable pyramid scheme). Some critics argue that the Fed lacks accountability and transparency or that there is a culture of secrecy within the Reserve.

Historical criticisms

Criticisms of the Federal Reserve System are not new, and some historical criticisms are reflective of current concerns.

At one end of the spectrum are economists from the Austrian School and the Chicago School who want the Federal Reserve System abolished. They criticize the Federal Reserve System’s expansionary monetary policy in the 1920s, arguing that the policy allowed misallocations of capital resources and supported a massive stock price bubble. They also cite politically motivated expansions or tightening of currency in the 1970s and 1980s.

Handling of The Great Depression

Milton Friedman, leader of the Chicago School, argued that the Federal Reserve System did not cause the Great Depression, but made it worse by contracting the money supply at the very moment that markets needed liquidity. Since its entire existence was predicated on its mission to prevent events like the Great Depression, it had failed in what the 1913 bill tried to enact. Friedman explains his hypothesis on the cause of The Great Depression and the role the Federal Reserve played in it in his book and documentary series Free to Choose. An excerpt of his hypothesis:

This is also the current conventional wisdom on the matter, as both Ben Bernanke and other economists such as the late John Kenneth Galbraith—the latter being an ardent Keynesian—have upheld this reasoning. In an interview with Peter Jaworski (The Journal, Queen's University, March 15, 2002—Issue 37, Volume 129) Friedman also said that ideally he would "prefer to abolish the federal reserve system altogether" rather than try to reform it, because it was a flawed system in the first place. He later said he would like to "abolish the Federal Reserve and replace it with a computer", meaning that it would be a mechanical system in nature that would keep the quantity of money going up at a steady rate. Friedman also believed that, ideally, the issuing power of money should rest with the Government instead of private banks issuing money through fractional reserve lending.

Ben Bernanke agreed that the Fed had made the Great Depression worse, saying in a 2002 speech:

Austrian economists go even further. They argue that in addition to extending the length of the Great Depression, the Federal Reserve System directly caused the Great Depression through monetary inflation in the 1920s. According to the Austrian economic theory of the business cycle, monetary ease results in a boom that becomes a recession or depression, especially quickly when the monetary ease is stopped. Within this theory the Great Depression was simply one of countless booms and busts throughout history that result when the money supply is manipulated. Among other evidence supporting this position is a particularly notorious quote in 1927 from Benjamin Strong, the chairman at the time. Strong said that the American authorities would reduce discount rates as “un petit coup de whisky for the stock exchange.” Austrian economists do not blame unbridled speculators as the primary cause of the roaring twenties, but rather the inflationary monetary policy of the Federal Reserve System.

Inflation

One major area of criticism focuses on the failure of the Federal Reserve System to stop inflation; this is seen as a failure of the Fed's legislatively mandated duty to maintain stable prices. These critics focus particularly on inflation's effects on wages, since workers are hurt if their wages do not keep up with inflation. They point out that wages, as adjusted for inflation, or real wages, have dropped in the past.

Milton Friedman alleged that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve. Friedman discusses the high inflation rate of the 1970s and other periods in Free to Choose:

United States Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy (of the House Banking Committee), has also criticized Federal Reserve policy for creating and downplaying excessive inflation:

Ralph Nader, a consumer activist and presidential candidate in several elections, has criticized the inflation policies of the Federal Reserve for what he says ignores excessive inflation in stock prices and corporate welfare disbursements while showing consistent concern for a rise in ordinary people's wages. In an article he published on his own website in 1999, he stated:

Money issuing power

United States Congressman Dennis Kucinich, at the 2005 Monetary Reform Conference, raised the question of why the Federal Reserve should have the power to issue the United States' currency. He stated:

Kucinich has also questioned the idea that the Federal Reserve should be independent. He suggested that it should be "accountable" instead. He was asked, "You mentioned the Federal Reserve. Do you think it should not be independent, that it should be answerable to...", to which he immediately responded:

Opacity

Some argue that the Federal Reserve System is shrouded in excessive secrecy. Meetings of some components of the Fed are held behind closed doors, and the transcripts are released five years after the meeting was held. Even expert policy analysts are unsure about the logic behind Fed decisions. Critics argue that such opacity leads to greater market volatility, because the markets must guess, often with only limited information, about how the Fed is likely to change policy in the future. The jargon-laden fence-sitting opaque style of Fed communication, especially under the previous Fed Chairman Alan Greenspan, has often been called "Fed speak."

The Federal Reserve System has also been considered reserved in its relations with the media in an effort to maintain its carefully crafted image and resents any public information that runs contrary to this notion. Maria Bartiromo reported on CNBC that during a conversation at the White House Correspondents’ Dinner in April 2006, Federal Reserve Board Chairman Ben Bernanke stated investors had misinterpreted his recent congressional remarks as an indication the Fed was nearly done raising rates. This triggered a drop in stock prices just when the market was about to close.

In 1993, Rep. Henry Gonzalez confirmed that the Fed did have tapes and transcripts of the meetings and could have complied with the FOIA requests, but had misrepresented the existence of the transcripts and chosen to ignore questions from Congress. After the existence of the transcripts was revealed, the Fed agreed to release the transcripts on a five-year time lag. The time period has been extended, so that for example 1992's transcripts were not released until 1998.

Some critics believe the Fed exacerbated this idea when it decided to stop publishing the M3 aggregate of financial data, which details the total amount of money in circulation at a time. Some of them argue that it is a way the Fed could hide an impending economic disaster from the public if it felt the need. The Fed said that economists did not need M3 when they had M2, despite the fact that the M3 was the only aggregate to contain information regarding the most extravagant monetary exchanges, and therefore would be needed to have a complete understanding of the overall monetary policy in the United States.

Ralph Nader has suggested a solution to the transparency problems through an effort that would "democratize Federal Reserve transparency". He presented a 7-point program that he claims could help to democratize the Federal Reserve System as a whole. He compares the Federal Reserve to other parts of government by stating:

The steps to open government would really be “baby steps” for the Federal Reserve. After all, most of the Federal government must live by “open government” laws and rules, and bureaucrats with a grumble or two – still manage to survive.

Business cycles, libertarian philosophy and free markets

Economists of the Austrian School such as Ludwig von Mises contend that the Federal Reserve's operation amounts to an artificial manipulation of the money supply and has led to the boom/bust business cycle occurring over the last century. Many economic libertarians, such as Austrian School economist Murray Rothbard, believe that the Federal Reserve's manipulation of the money supply to stop "gold flight" from England, caused, or was instrumental in causing, the Great Depression. See Austrian Business Cycle Theory. In general, laissez-faire advocates of free banking argue that there is no better judge of the proper interest rate and money supply than the market.

Many libertarians also contend that the Federal Reserve Act is unconstitutional. Congressman Ron Paul, for example, argues that:

"The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy."

Congress

Congressman Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920–31, accused the Federal Reserve of deliberately causing the Great Depression. In several speeches made shortly after he lost the chairmanship of the committee, McFadden claimed that the Federal Reserve was run by Wall Street banks and their affiliated European banking houses. On June 10, 1932, McFadden said:

Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board, a Government board, has cheated the Government of the United States and the people of the United States out of enough money to pay the national debt. These twelve private credit monopolies were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us for our hospitality by undermining our American institutions...The people have a valid claim against the Federal Reserve Board and the Federal Reserve banks.

Quite a few Congressmen who have been involved in the House and Senate Banking and Currency Committees have been open critics of the Federal Reserve, including Chairmen Wright Patman, Henry Reuss, and Henry Gonzalez. Currently, Congressman Paul is the ranking member of the Monetary Policy Subcommittee and he is a staunch opponent of the Federal Reserve System. During each Congress Paul introduces a bill to abolish the Federal Reserve System (H.R. 2755—110th Congress, H.R. 2778—108th Congress, H.R. 5356—107th Congress, H.R. 1148—106th Congress), although he has yet to have any hearings held on his legislation or to gather any cosponsors. It has often been said that the Federal Reserve is a creature of Congress and it is the fluctuating opinion of that body that it answers to.

References

Bibliography

Recent

Epstein, Lita & Martin, Preston (2003). The Complete Idiot's Guide to the Federal Reserve. Alpha Books. ISBN 0-02-864323-2.
Greider, William (1987). Secrets of the Temple. Simon & Schuster. ISBN 0-671-67556-7; nontechnical book explaining the structures, functions, and history of the Federal Reserve, focusing specifically on the tenure of Paul Volcker
R. W. Hafer. The Federal Reserve System: An Encyclopedia. Greenwood Press, 2005. 451 pp, 280 entries; ISBN 4-313-32839-0.
Meyer, Lawrence H (2004). A Term at the Fed: An Insider's View. HarperBusiness. ISBN 0-06-054270-5; focuses on the period from 1996 to 2002, emphasizing Alan Greenspan's chairmanship during the Asian financial crisis, the stock market boom and the financial aftermath of the September 11, 2001 attacks.
Woodward, Bob. Maestro: Greenspan's Fed and the American Boom (2000) study of Greenspan in 1990s.

Historical

J. Lawrence Broz; The International Origins of the Federal Reserve System Cornell University Press. 1997.
Vincent P. Carosso, "The Wall Street Trust from Pujo through Medina", Business History Review (1973) 47:421-37
Chandler, Lester V. American Monetary Policy, 1928-41. (1971).
Epstein, Gerald and Thomas Ferguson. "Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932." Journal of Economic History 44 (December 1984): 957-84. in JSTOR
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (1963)
G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve (1994) ISBN 0-912986-21-2
Paul J. Kubik, "Federal Reserve Policy during the Great Depression: The Impact of Interwar Attitudes regarding Consumption and Consumer Credit." Journal of Economic Issues . Volume: 30. Issue: 3. Publication Year: 1996. pp 829+.
Link, Arthur. Wilson: The New Freedom (1956) pp 199-240.
Livingston, James. Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913 (1986), Marxist approach to 1913 policy
Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." Journal of Economic Issues 17 (June 1983): 353-60.
Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) the standard scholarly history
Roberts, Priscilla. "'Quis Custodiet Ipsos Custodes?' The Federal Reserve System's Founding Fathers and Allied Finances in the First World War", Business History Review (1998) 72: 585-603
Bernard Shull, "The Fourth Branch: The Federal Reserve's Unlikely Rise to Power and Influence" (2005) ISBN 1-56720-624-7
Steindl, Frank G. Monetary Interpretations of the Great Depression. (1995).
Temin, Peter. Did Monetary Forces Cause the Great Depression? (1976).
West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression", Journal of Economic History (1966) 26: 223-238, in JSTOR
Wicker, Elmus. Federal Reserve Monetary Policy, 1917-33. (1966).
Wells, Donald R. The Federal Reserve System: A History (2004)
Wicker, Elmus. The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed Ohio State University Press, 2005.
Wood, John H. A History of Central Banking in Great Britain and the United States (2005)
Wueschner; Silvano A. Charting Twentieth-Century Monetary Policy: Herbert Hoover and Benjamin Strong, 1917-1927 Greenwood Press. (1999)
Mullins, Eustace C. "Secrets of the Federal Reserve", 1952. John McLaughlin. ISBN 0-9656492-1-0