The Weiner Component Vol.2 #6 – Part 2: The Federal Reserve

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

The Federal Reserve System (Fed) was established in December of 1913 as the central banking system of the United States by the passage of the Federal Reserve Act. It came into existence largely in response to a series of financial panics, particularly the Panic of 1907. Its purpose was to establish a semi-independent agency that would control and regulate Monetary Policy within the United States. At that time it meant mainly being able to freely and quickly move currency around as needed in the country.

 

The Fed consists of twelve regional banks that cover the entire nation. They are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Each of the twelve sections has its own Federal Reserve Bank, generally with at least one auxiliary bank. For example: California has the main Fed Bank located in San Francisco and an auxiliary one in Los Angeles. The Federal Reserve Banks are located throughout the United States, with the main branch in Washington, D.C. Each can also handle and make the other branches cognizant of any problems within its region.

 

The Fed was initially establish to devise and implement Monetary Policy. In 1913 this meant to control the supply of currency available throughout the nation. This was and still is its main function. But after 1913 the law establishing it was gradually expanded, generally as the need existed, expanding the definition of Monetary Policy, and giving the Fed numerous other responsibilities.

 

Today Monetary policy remains its primary function but today the Federal Reserve System’s mandate is also to promote economic growth, high levels of employment, stability of prices, to help preserve the stability of the dollar, and to moderate long-term interest rates. We can say that the Fed’s mission is, in addition to regulating Monetary Policy, to foster a sound banking system and a healthy economy throughout the nation. That in order to accomplish this the Fed serves as the banker’s bank, the government’s bank, the regulator of financial institutions, and as the nation’s money manager. We can also say that all of this is the current definition of Monetary Policy.

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The problem here is that economics is not an exact science and that the regulators of the Fed have to continually read and interpret what’s happening in the economy. The different Federal Reserve members do not always agree upon what should be done. The agency is run by consensus with the Fed Chair being in charge.

 

In 1908 Congress enacted the Alrich-Vreeland Act which established the National Monetary Commission to study banking and currency reform. The Bill set up two commissions, one to study the American monetary system in depth and the other to study the European Central Banking system and to report on them. Thereafter Congress took two years to come up with the Federal Reserve Bill. It was passed late in 2013 and signed by President Woodrow Wilson the same day it passed Congress. The Bill was constructed largely by bankers as a necessary reform of the U.S. financial system.. It set up a fairly independent entity, The Federal Reserve.

 

In its initial period it was opposed by agrarian interests. They stated that it favored the mercantile class over the farmers. It has long since passed beyond this period of discontent within the United States. While it is still at times opposed by many Republicans largely for being too independent it has stood the test of time as a necessary entity of the U.S. Federal Government.

 

Interestingly the Republicans who still oppose it feel that it should be under rigid control of the Congress. But Congress is afraid to mess with it. An error on their part could bring about a massive depression. And that would bring about a voter rebellion at the next election.

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As was pointed out even though the Fed has control of the money supply that aspect of the Fed’s power is fairly limited. They cannot always control completely or even handle all the factors that are affecting the economy. It is a very difficult process to predict what is occurring within the nation, virtually from day to day, and to make exact changes that can or will always affect it in a positive fashion.

 

Also Congress, by its actions can strongly affect the economy by, among other things, its spending policies. This is called Fiscal Policy, where Congress can increase or decrease the amount of money it spends upon various programs like decreasing aid to the poor in Affordable Health Care or perceptibly increasing military spending. Decreasing aid programs to the needy takes large amounts of spending out of the overall economy while increased spending on the military will substantially increase the amounts of money that go to the upper class. This can make for a redistribution of income from the poor to the upper class.

 

All these changes, plus others that have not been mentioned, become reasons for differences in the economic flow. They become factors that the Fed has to consider in mapping out its policy. And they are dynamic changes that all always going on. This means that the Fed is in a constant state of studying the economy and continually fine-tuning what is happening in the country. It is a constant process and the changes can take months to come about or not come about. It takes a steady hand to deal with this process.

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The United States Government probably is the largest spender in the world. It has a checking account with the Fed through the U.S. Treasury Department. All revenue generated by Federal taxes, licenses, etc. and all outgoing government payments are handled through this account. In addition the Fed sells and redeems government securities such as savings bonds and Treasury bills, notes, and bonds. It does this to raise money, or to limit the amount of money in the National Cash Flow, and otherwise adjust the economy.

 

The factor that deals with this is the overall rate of inflation in the country. If it starts going up the Fed has to reduce the amount of money in the National Cash Flow. There is too much money chasing too few goods and services, forcing prices up as more and more people bid for the same products and/or services. At this point the Fed sells more bonds and Treasury Bills than it redeems. It does this by raising the interest rate it pays for the money. If, on the other hand, there is not enough money in the National Cash Flow then the Fed will increase the amount by buying back more bonds and Treasury bills than it sells. Or for that matter the Fed can just add money to the National Cash Flow making more cash available for everyone as it did for over two years under the Obama administration.

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The Fed also issues all coins and paper currency. The U.S. Treasury prints and mints the cash and the Fed distributes it to its financial institutions. This includes replacing worn-out and torn bills. In fact if one visits and takes a tour of one of the Federal Reserve Banks, they get a little package a shredded old money as a souvenir.

 

The Federal Reserve Board also has regulatory and supervisory responsibilities that include monitoring banks that are members of the system and the international banking facilities in the U.S., the banking activities of member banks and the U.S. activities of foreign owned banks. In addition the Fed helps to ensure that banks act in the public’s interest by helping to develop federal laws governing consumer credit. Such laws as The Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Truth in Savings Act are examples of this. The Fed is supposed to be the policeman for banking activities for the U.S. and abroad.

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The Chairperson of the Federal Reserve heads this bank. Currently Janet Yellen is the Chairwoman. She has held this position since 2014 when she was appointed by President Barack Obama. The term of this office is four years. President Trump has stated that he will replace her when her term expires in 2018.

 

Chairperson Yellen tends to be overly cautious in her approach. She gradually ended the policy of the Fed contributing money to the National Cash Flow and has been overly cautious in terms of raising the interest rate that the Fed charges it member banks, bring about two quarter of a percent raised while threatening three further quarter of a percent increases. The Fed has gone from a 0% charge to banks borrowing money from it to one half of one percent which it is at present. This has kept interest rate that the banks charge low but has gotten their depositors a rate of one tenth of one percent interest on the money they have deposited into the banks. Consequently the Commercial and Saving Banks are practically getting free money from their depositors, and feeing their depositors for everything thing they do for them, and while charging a lower interest than they used to still making millions in interest. It would seem that the banks are not operating in the interest of their depositors.