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Parvathy Menon AP Macroeconomics Chapter 14 The Federal Reserve and the Banking System Monetary authorities are the

members of the Board of Governors of the Federal Reserve System o Directs the activities of the 12 Federal Reserve Banks, which control the lending activity of the nations banks and thrift institutions o Major goal: to control the money supply o Since checkable deposits in banks are such a large part of the money supply, an important of duties involves assuring the stability of the banking system

Historical Background - Congress decided that centralization and public control were essential for an efficient banking system - Decentralized, unregulated banking had confusion and inconvenience of numerous private bank notes being used at currency o Monetary mismanagement: ex. Money supply was inappropriate to the needs of the economy o too much money precipitated rapid inflation; too little money hindered production and exchange of goods and services No single governing body was charged with creating and implementing nationally consistent banking policies - There was also problems with banks closing down or insisting on immediate repayment of loans to prevent their own failure o A banking crisis could emerge, with individuals who lost confidence in banks attempting to simultaneously withdraw all of the money, further weakening banks o NMC Federal Reserve Act of 1913 Board of Governors - The central authority of the U.S. money and banking system o The U.S. president appoints the seven Board members with the confirmation of the Senate o Terms are staggered so that one member is replaced every 2 years New members are appointed when resignations occur President selects chairperson and vice-chairperson (4-year terms) Long terms provide Board with continuity, experienced memberships, and independence from political pressures that could result in inflation The 12 Federal Reserve Banks - Blend private and public control collectively serve as the nations central bank and also serve as bankers banks

FOMC - Federal Open Market Committee aids the Board of Governors in conducting monetary policy - 12 individuals o Seven members of the Board of Governors o President of the New York Federal Reserve Bank o Four of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis o Meet regularly to direct the purchase and sale of government securities in the open market in which such securities are bought and sold on a daily basis o

Accommodate the geographic size and economic diversity of the US as well as the nations large number of commercial banks Quasi-public banks blend private ownership and public control o Each Federal Reserve Bank is owned by the private commercial banks in its district o Board of Governors sets basic policies that the Federal Reserve Banks pursue o Despite private ownership, the Federal Reserve Banks are in practice public institutions Not motivated by profit Policies are designed by Board of Governors to promote the wellbeing of the economy as a whole Federal Reserve Banks do not compete with commercial banks, do not deal with the public; interact with the government, commercial banks, and thrifts Bankers Banks o Perform essentially the same functions for banks and thrifts as those institutions perform the public o Central banks accept the deposits of and make loans to banks and thrifts o Lend large sums of money in emergency circumstances (e.g. $45 billion lent to U.S. banks and thrifts after 9/11) o Also issue currency authorized by Congress to put Federal Reserve Notes into circulation, which constitute the economys paper money supply

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