Federal Reserve System (FED)

The Federal Reserve System is the central banking system of the USA. It regulates the country's financial and monetary system. The Fed includes 12 federal reserve banks located in major cities, about 3,000 commercial banks, the Board of Governors, the Federal Committee on Open Market Operations, and advisory councils.

What Is Federal Reserve System (FED)?

It is an independent federal agency established on December 23, 1913, to perform the functions of the central bank and control the commercial banking system of the United States of America. The Fed was created based on the Federal Reserve Act. The government plays a decisive role in the management of the Fed, although the form of equity ownership is private - joint-stock with a special status of shares.

In terms of governance, the Fed is an independent body in the US government. As a national central bank, the Fed is authorized by the US Congress. Independence in the work is ensured by the fact that the monetary policy decisions do not have to be approved by the US President or by any other executive or legislative branch of government. The Fed does not receive funding from Congress. At the same time, the Fed is controlled by Congress, which often analyzes the activities of the Fed and can change the obligations of the Fed in a legislative manner.

The Federal Reserve is self-funded. The vast majority of its revenues come from open market operations. Specifically, it is the interest in the portfolio of Treasury securities and capital gains/losses that may arise from the purchase or sale of the securities and their derivatives as part of Open Market Operations.

History of the Federal Reserve System

The first institution to serve as the central bank of the United States was the First Bank of the United States, created by Alexander Hamilton in 1791. Its powers were not renewed in 1811. In 1816, the Second Bank of the United States was founded. Its powers were not renewed in 1836 after it was criticized by President Andrew Jackson. From 1837 to 1862, the central bank did not formally exist. This time is referred to as the era of free banks in the US. From 1862 to 1913, a system of national banks operated in the United States. A series of banking panics - in 1873, 1893, and 1907 - created a serious demand for the establishment of a centralized banking system.

During the late 19th century and the early 20th century, the US economy went through a series of financial panic. The banking panic of 1907 was the main reason for the creation of a third central bank. Many economists and supporters of the Federal Reserve System argued that the previous systems had two major shortcomings: an "inelastic" currency and a lack of liquidity. In 1908, after the financial crisis of 1907, Congress adopted the Aldrich-Vreeland Act, under which the National Monetary Commission was set up to work out possible options for monetary and banking reform.

Federal Reserve Act

Senator Nelson W. Aldrich founded two commissions: one for in-depth study of the American monetary system, the other for studying and preparing reports on European banking systems. Having arrived in Europe with a negative attitude towards central banks, Aldrich changed his mind by studying the German banking system. He came to the conclusion about its advantages over the system of government-issued bonds, which Aldrich had preferred earlier.

In 1910, leading US financiers spent ten days on Jekyll Island brainstorming to work out a compromise on the structure and functions of the future central bank. The result was a scheme that Aldrich presented to the US Congress.

Aldrich advocated a fully private central bank with minimal government intervention but made a concession that the state should be represented on the board of directors. Most Republicans approved the Aldrich plan, but their support was not enough to pass the law in Congress. Progressive Democrats preferred a reserve system owned and managed by the state, not under the control of bankers and stockbrokers.

Conservative Democrats defended the idea of ​​a private, but decentralized reserve system, which would be out of control of Wall Street. The Federal Reserve Act, adopted by Congress in 1913, reflected the opinions of the US Democratic Party representatives; most Republicans opposed its adoption. Further chronology is as follows:

• 1923 - the Open Market Investment Committee (OMIC) was created to coordinate the activities of the Fed. It included the governors of the federal reserve banks of New York, Boston, Philadelphia, Chicago, and Cleveland.

• 1930 - The Committee was replaced by the Open Market Policy Conference (OMPC), which included managers and members of the board of directors of the 12 federal reserve banks.

• 1933 - Federal Deposit Insurance Corporation (FDIC) was established. The Federal Reserve Council received the right to make changes to the reserve requirements of banks that were members of the Fed.

• 1935 - after the adoption of the Banking Act, the structure of the Fed took on a form that still exists today. The Council was named the Board of Governors consisting of 7 people, one of whom is the chairman of the Council. The Council no longer included the Minister of Finance and Controller of the Monetary Authority. Governors of reserve banks were renamed presidents, and the Open Market Policy Association was named the Federal Open Market Committee (FOMC).

In July 1979, US President Jimmy Carter appointed Paul Volker as Fed Chairman. Volker managed to curb the galloping inflation, reducing it to 1% by cutting the emission and tightening the monetary policy. As chairman of the Fed, Paul Volker was replaced in 1987 by Alan Greenspan. Since February 2006, Ben Bernanke has served as chairman of the Fed. In February 2014, Janet Yellen took over the post of Fed Chairman. From February 5, 2018, the head of the Federal Reserve is Jerome Powell.

Summary

The Federal Reserve System acts as a central bank of the United States of America. It includes 12 federal reserve banks located in major cities. The Fed was founded in 1913 as a result of a series of financial panic that lasted from the late 19th century up to the early 20th century.