I Chapter 19 Organization of Central Banks A History and Origins First National Bank of the United States started in 1791 Charter lasted for 1 twenty years and expired after that President Andrew Jackson vetoed the Second National Bank 2 3 4 5 Third National Bank survived 1913 A centralized bank provided a lender of last resort Federal bank created the Federal Reserve 6 The Constitution of the United States does not charter a central bank The Federal bank is a creation of Congress However we want a Federal bank that is independent of Congress so that politics and banking do not become mixed J P Morgan and other bankers served as Lenders of Last Resort during the 7 Great Depression not the Federal Reserve We have a dual banking system national and state banks leading to a 8 power struggle B Federal Reserve Banks 1 12 Federal Reserve Districts a b c d In each district there is one Federal Bank None of them are only one state decentralizes power Each district has a president 12 presidents President elected by Board of Directors 9 members A B and C class A 3 Bankers B 3 Industry Commerce or Agriculture C 3 Public Interest 1 2 3 4 These three groups elect the President of the District Bank a b a b a b c d a b 2 Districts specifically created to Contain a mixture of economic interests Cut through the middle of states that have different areas of the economy The District bank is owned by private commercial banks that belong to the 3 Federal Reserve System These private banks own shares of the district bank Not just a private venture because it is highly connected to the government The private banks receive a six percent dividend for being owners of the district c bank 4 Each district bank Board of Directors 9 Members Class A elected by member banks Class B elected by member banks Class C elected by Fed s Board of Governors Lines of districts are altered in order to swing political power in one direction e or another f The Fed s Board of Governors approve the Directors choice for President 5 Member banks All national banks required to be members of the Fed Initially some state banks do not join Cannot maintain reserve requirements because they need the money 1 to loan out in order to make money No interest was paid on the funds that were kept on deposit with the This is a tax on the banks that decide to join 2 Fed 3 c Later law 1 Required all banks to keep reserves on deposit Now every bank has equal access to discount loans and payment 2 system a Allows the banks to be more solvent 6 Board of Governors a b 7 members appointed by the U S President They must be confirmed by the U S Senate We want skilled people who are the best and we don t want them c completely influenced by the President what do we do Long 14 year nonrenewable terms reelection is not an option d Administer monetary policy 1 Open market operations buy and sell treasury notes from banks If the Fed buys a Treasury note then the bank now has money to a lend out more money in the economy If the Fed sells a treasury note then there is less money in the b economy Sets reserve requirements within congressional limits Operates a discount window makes discount loans Banks can borrow these funds so that they have money prevents a runs on banks Financial regulation Set margin requirements for securities purchases a b Buy stock worth more money than you have Buy 200 of stock for 100 leverage riskier 2 3 4 5 e Monetary policy flow of money how strong the banks are 1 Supervised by Board Staff responsible for research 7 Chairman of the Board of Directors a b c d e a b c d e f Appointed by U S President Confirmed by the U S Senate Serves a 4 year term 1 of Directors Can be reappointed or serve out 10 more years as a member of Board 2 Often times they retire after 4 years Very influential some say 2nd most powerful person in the United States Formerly Alan Greenspan Currently Ben Bernanke 8 Federal Open Market Committee 12 members total 7 members are Board of Governors 1 member is always New York District Bank President 4 members are other Presidents of District Banks Board of Governors have majority voting power Directs the Fed s open market operations 1 Determine Federal Funds Rate Interest rate that banks charge each other to borrow money a b c Short term loans sometimes overnight Target range is set by Board of Governors Example The Fed is worried and wants to bring interest rates d down so that banks can lend BoD says we would like interest rates between 5 1 percent FOMC does the trading to affect interest rates 9 Power in the Fed Formal power structure spread decentralized between Board of Governors a the 12 Federal Reserve Banks and Federal Open Market Committee Informal power structure Chairman of the Board of Governors has the most b power Last time the BoD met Bernanke was honest that the economy was not doing c well and then the economy worsened after he said that 10 Handling External Pressure Dealing with the influence of political pressure because Congress created the a Federal Reserve The Fed was originally designed to have independent power Reality Fed operates in a political arena and is subject to political pressure 11 Fed Motivation Public interest view the Fed acts in the interest of the general public Principal agent view the Fed acts to increase its power influence and prestige 1 Implies there may be a political business cycle a Business cycle booms and recessions b Political business cycle The Federal Reserve would increase the money supply so that people feel wealthy when a favorable President is up for reelection A favorable President is one who is unlikely to limit the power of the Fed 2 There is little evidence of political business cycle 12 Fed Independence People don t like the independence when the public negatively views Fed policy Pro independence Monetary policy too important 1 Politicians don t understand it c Argument for less independence for the Fed 1 2 These issues are too important for unelected officials Only elected officials should make public policy The argument is the same economy is too important for independent d Fed dependent Fed b c a b a b The Fed does not have to ask Congress for money The Fed gives money to Congress The Congress can ultimately dissolve the Fed Delicate power balance between the Congress and the Fed II Chapter 20 Monetary Policy Tools A The Business Cycle Regular fluctuations in economic activity 1 st Phase Expansion Growing economy Increased employment income output
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