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Federal Reserve System
Seal Federal Reserve System headquarters (Eccles Building)
Seal Federal Reserve System headquarters (Eccles Building)
Headquarters Washington, D.C.
Chairman Ben Bernanke
Central Bank of United States
Currency U.S. dollar
ISO 4217 Code USD
Base borrowing rate 0.5%
Base deposit rate 3.5%

The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was conceived by several of the world's leading bankers in 1910[1][2][3][4] and enacted in 1913, with the passing of the Federal Reserve Act. The passing of the Federal Reserve Act was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907.[5][6][7] Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.[6][8] Events such as the Great Depression were some of the major factors leading to changes in the system.[9] Its duties today, according to official Federal Reserve documentation, fall into four general areas:[10]

  1. Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
  2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers.
  3. Maintaining stability of the financial system and containing systemic risk that may arise in financial markets.
  4. Providing 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.

The Federal Reserve System is subject to the Administrative Procedure Act,[11] and so is legally obligated to inform the public about its organization, procedures and rules. In addition, the Act requires the Fed to establish uniform standards for the conduct of formal rule-making and adjudication.

According to the board of governors: "It is not 'owned' by anyone and is 'not a private, profit-making institution'. Instead, it is an independent entity within the government, having both public purposes and private aspects."[12] In particular, the US Government does not own shares in the Federal Reserve System nor its component banks, but does take all of its profits after salaries are paid to employees, a dividend is paid to member banks that is 6% of their capital investment, and surplus is put in a capital account. The government also exercises some control by appointing its highest-level employees and setting their salaries.

According to the Fed, there are presently five parts of the Federal Reserve System:[13]

  1. The presidentially appointed Board of Governors, a governmental agency in Washington, D.C.
  2. The Federal Open Market Committee (FOMC), which oversees Open Market Operations, the principal tool of national monetary policy.
  3. Twelve regional privately-owned Federal Reserve Banks located in major cities throughout the nation, which divide the nation into 12 districts, acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors.
  4. Numerous other private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks.
  5. Various advisory councils.[14]

The structure of the central banking system in the U.S. is unique in the world, in that an entity outside the central bank creates the currency. This other entity is the U.S. Department of the Treasury.




Central banking in the United States

In early 1781 the Articles of Confederation & Perpetual Union were ratified so that Congress had the power to issue bills of credit. It passed an ordinance later that year to incorporate a privately subscribed national bank following in the footsteps of the Bank of England. However, it was thwarted in fulfilling its intended role as a nationwide central bank due to objections of "alarming foreign influence and fictitious credit," favoritism to foreigners and unfair competition against less corrupt state banks issuing their own notes, such that Pennsylvania's legislature repealed its charter to operate within the Commonwealth in 1785.

Four years after the U.S. Constitution was ratified, the government adopted another central bank - the First Bank of the United States - but it was ultimately shut down under President Madison due to a failure in passing a recharter. The Second Bank of the United States, the "second" central bank, met a similar fate when its charter expired under President Jackson. Both banks were, again, based upon the Bank of England,[15] but increased Federal power, granted by the constitution gave them more control over currency. Political opposition to central banking was the primary reason for shutting down the banks, and concerns over corruption lingered. Ultimately, the third national bank was established in 1913 and still exists to this day. The time line of central banking in the United States is as follows:[16][17][18]

  • 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
  • 1846-1921
Independent Treasury System
  • 1863–1913
National Banks
  • 1913–Present
Federal Reserve System.

Creation of First and Second Central Bank

The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791 at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President James Madison.

In 1816, however, Madison revived it in the form of the Second Bank of the United States. Early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. 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.

Creation of 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.[19] 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.[20] 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.[20] 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.[21] The American public believed that the Federal Reserve System would bring about financial stability, so that a panic like the one in 1907 could never happen again; but just twenty-two years later in 1929, the stock market crashed again, and the United States entered the worst depression in its history, the Great Depression. Some economists including Milton Friedman,[22] Thorstein Veblen,[23] Ben Bernanke,[24] Robert Latham Owen, John Kenneth Galbraith and Murray Rothbard[25] believe that the Federal Reserve System helped to cause the Great Depression.

Federal Reserve Act
Newspaper clipping, December 24, 1913

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.[21] Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he 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. Critics were suspicious of a central bank, and charged that Aldrich was biased due to his close ties to wealthy bankers such as J.P. Morgan and his daughter's husband John D. Rockefeller, Jr. Aldrich fought for a private bank with little government influence, but conceded that the public sector should be represented on the Board of Directors. Most Republicans favored the Aldrich Plan,[26] but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment."[5] In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the US's central bank would end Wall Street's control of the American currency supply.[26] Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.[26]

The Federal Reserve Act passed Congress in late 1913[27][28] on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay."[29] The final Act most closely resembled the Aldrich plan, but more control was given to the public sector.[5][29]

1944-1971: Bretton Woods Era

In July 1944, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, to build a new international monetary system, which was in serious threat due to damage incurred during the Great Depression and the mounting debt of the Second World War. Their main objective was the cultivation of trade, which relied on the easy convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade. Planners fundamentally supported a capitalistic approach, but favored tight control on currency values.

The agreement established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Its chief feature was to require that each country adopt a monetary policy that maintained its exchange rate with gold to within plus or minus one percent of a specified value. To do this, they set up a system of fixed exchange rates using the U.S. dollar (which was on the gold standard itself) as a reserve currency. The planners established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) to regulate the newly devised system.

In the face of increasing financial strain, however, the Bretton Woods system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" in the states that had signed the agreement.

1971-Present: Dollar Reserve Standard

Under the dollar reserve standard, the U.S. dollar was the most favored currency for nations of the world to use as reserves, which continued as a trend for over 30 years.[30] At the beginning of the dollar reserve standard, the 1970s became a period of high inflation.[31] As a result, in July 1979 Paul Volcker was nominated by President Carter as Chairman of the Federal Reserve Board. He tightened the money supply, and by 1986 inflation had fallen sharply.[32] In October 1979 the Federal Reserve announced a policy of "targeting" money aggregates and bank reserves in its struggle with double-digit inflation.[33]

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.[34]

Key laws

Key laws affecting the Federal Reserve have been:[35]


The primary motivation for creating the Federal Reserve System was to address banking panics.[6] 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."[36] 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.[37]

Current functions of the Federal Reserve System include:[10][37]

  • 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, including prevention of either inflation or deflation[38]
    • 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 are only required to hold a fraction of their depositors' money in reserve. This practice is called fractional-reserve banking. As a result, most banks invest the majority of their depositors' money. On rare occasion, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating. 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 possibly act as a lender of last resort if a bank run does occur. Many economists, following Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929.[24]

Elastic currency

The monthly changes in the currency component of the U.S. money supply show currency being added into (% change greater than zero) and removed from circulation (% change less than zero). The most noticeable changes occur around the Christmas holiday shopping season as new currency is created so people can make withdrawals at banks, and then removed from circulation afterwards, when less cash is demanded.

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 does not 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:[39]

Currency that can, by the actions of the central monetary authority, expand or contract in amount warranted by economic conditions.

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.

Check Clearing System

Because some banks refused to clear checks from certain others during times of economic uncertainty, a check-clearing system was created in the Federal Reserve system. It is briefly described in The Federal Reserve System—Purposes and Functions as follows:[40]

By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency—that is, a currency that would expand or shrink in amount as economic conditions warranted—but also an efficient and equitable check-collection system.

Lender of last resort


The Federal Reserve has the authority 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.[41]


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).

By 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.[42] For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).[43][44] The Federal Reserve System's role as lender of last resort is criticized for shifting risk and responsibility away from lenders and borrowers and placing them on others in the form of taxes and/or inflation.

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 and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.[45] During the Fiscal Year 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.[46]

Federal funds

Federal funds are the reserve balances (also called federal reserve accounts) that private banks keep at their local Federal Reserve Bank.[47][48] These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to 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.

Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain their bank reserves in federal reserve accounts.

Balance between private banks and responsibility of governments

The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006 Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:[49]

Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

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 a 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 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

Ben Bernanke (lower-right), Chairman of the Federal Reserve Board of Governors, at a House Financial Services Committee hearing on February 10, 2009. Members of the Board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.

Federal Banking Agency Audit Act enacted in 1978 as Public Law 95-320 and Section 31 USC 714 of US Code establish that the Federal Reserve may be audited by the Government Accountability Office (GAO).[50] The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however there are restrictions to what the GAO may in fact audit. Audits of the Reserve Board and Federal Reserve banks may not include:

  1. transactions for or with a foreign central bank or government, or nonprivate international financing organization;
  2. deliberations, decisions, or actions on monetary policy matters;
  3. transactions made under the direction of the Federal Open Market Committee; or
  4. a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3).[51][52]

The financial crisis which began in 2007, corporate bailouts, and concerns over the Fed's secrecy have brought renewed concern regarding ability of the Fed to effectively manage the national monetary system.[53] A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.[54] The Federal Reserve Transparency Act was introduced by congressman Ron Paul in order to obtain a more detailed audit of the Fed. The Fed has since hired Linda Robertson who headed the Washington lobbying office of Enron Corp. and was adviser to all three of the Clinton administration’s Treasury secretaries.[55][56][57][58]

The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:[59]

The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks that are members of the Federal Reserve System, bank holding companies (companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Act and agreement corporations (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervises state banks that are not members of the Federal Reserve System.

Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in Lending, Equal Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policy, banking supervision and regulation, consumer credit protection, financial markets, and other matters.

The Board has regular contact with members of the President’s Council of Economic Advisers and other key economic officials. The Chairman also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chairman has formal responsibilities in the international arena as well.

Preventing asset bubbles

The board of directors of each Federal Reserve Bank District also has 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:[60]

Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.

The punishment for making false statements or reports that overvalue an asset is also stated in the U.S. Code:[61]

Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way...shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

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. The recent bubbles and corrections in energies, grains, equity and debt products and real estate cast doubt on the efficacy of these controls.

National payments system

[62] 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 Depository Institutions Deregulation and 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.[63]


Independent within government

Central bank independence versus inflation. This often cited[64] research published by Alesina and Summers (1993)[65] is used to show why it is important for a nation's central bank (i.e.-monetary authority) to have a high level of independence. This chart shows a clear trend towards a lower inflation rate as the independence of the central bank increases. The generally agreed upon reason independence leads to lower inflation is that politicians have a tendency to create too much money if given the opportunity to do it.[65] The Federal Reserve System in the United States is generally regarded as one of the more independent central banks.

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.[66] The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system.[67] 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 System has the authority to act on its own without prior approval from Congress or the President.[68] The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations.[69] 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.[69] 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 while also remaining within the government of the United States, it is often said to be "independent within the government."[68]

The twelve Federal Reserve banks provide the financial means to operate the Federal Reserve System. 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.[68] No stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm.[70] These member banks must maintain fractional reserves either as vault currency 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 $31.7 billion to the Treasury in 2008.[71]


Organization of the Federal Reserve System
  • 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

Board of Governors seal
Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System.

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 for staggered, 14-year terms.[42] By law, the appointments must yield a "fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country," and as stipulated in the Banking Act of 1935, the Chairman and Vice Chairman of the Board are two of seven members of the Board of Governors who are appointed by the President from among the sitting Governors.[72][73] As an independent federal government agency,[74] 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.[75] It also supervises and regulates the operations of the Federal Reserve Banks, and the US banking system in general.

Membership is by statute limited in term, and a member that has served for a full 14 year term is not eligible for reappointment.[76] There are numerous occasions where an individual was appointed to serve the remainder of another member's uncompleted term, and has been reappointed to serve a full 14-year term.[76] Since "upon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified,"[76] it is possible for a member to serve for significantly longer than a full term of 14 years. The law provides for the removal of a member of the Board by the President "for cause".[76]

The current members of the Board of Governors are[77]

On March 2, 2010, Kohn announced his retirement in June[78] and, on March 12, the Barack Obama's White House identified three as likely nominees. Two economists are "Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, who is the top choice for vice chairman, and Peter A. Diamond, an M.I.T. economist who is an authority on Social Security, pensions and taxation. The lawyer, Sarah Bloom Raskin, is the Maryland commissioner of financial regulation."[79]

A list of every member since 1914 is also available.[80]

Federal Open Market Committee

Modern-day meeting of the Federal Open Market Committee at the Eccles Building, Washington, D.C.

The Federal Open Market Committee (FOMC) created under 12 U.S.C. § 263 comprises the seven members of the board of governors and five representatives selected from the regional Federal Reserve Banks. The FOMC is charged under law with overseeing open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The representative from the Second District, New York, is a permanent member, while the rest of the banks rotate at two- and three-year intervals. All the presidents participate in FOMC discussions, contributing to the committee’s assessment of the economy and of policy options, but only the five presidents who are committee members vote on policy decisions. The FOMC, under law, determines its own internal organization and by tradition elects the Chairman of the Board of Governors as its chairman and the president of the Federal Reserve Bank of New York as its vice chairman. Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in Telephone consultations and other meetings are held when needed.[81]

Federal Reserve Banks

Federal Reserve Districts
Total assets of each Federal Reserve Bank from 1996-2009 (Millions of Dollars).

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 the Board of Governors.[82] 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.[42]

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.

Legal status

The Federal Reserve Banks have an intermediate legal 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. However, holding Fed stock is not like owning publicly traded stock. Fed stock cannot be sold or traded, and they do not control the Fed as a result of owning this stock. They do, however, elect six of the nine members of Reserve Banks’ boards of directors. Furthermore, the charter of each Federal Reserve Bank is established by law and cannot be altered by the member banks.[42] In Lewis v. United States,[83] 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[74], in which the distinction between the Federal Reserve Banks and the Board of Governors is made.

Board of Directors

The nine member board of directors of each district is made up of 3 classes, designated as classes A, B, and C. The directors serve a term of 3 years. The makeup of the boards of directors is outlined in U.S. Code, Title 12, Chapter 3, Subchapter 7:[84]

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
  • No director of class B shall be an officer, director, or employee of any bank
  • 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.
Class C
  • three members
  • No director of class C shall be an officer, director, employee, or stockholder of any bank
  • 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.
  • 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.[85]


The Federal Reserve Act provides that the president of a Federal Reserve Bank shall be the chief executive officer of the Bank, appointed by the board of directors of the Bank, with the approval of the Board of Governors of the Federal Reserve System, for a term of five years.[86]

The terms of all the presidents of the twelve District Banks run concurrently, ending on the last day of February every five years. The appointment of a president who takes office after a term has begun ends upon the completion of that term. A president of a Reserve Bank may be reappointed after serving a full term or an incomplete term.[86]

Reserve Bank presidents are subject to mandatory retirement upon becoming 65 years of age. However, presidents initially appointed after age 55 can, at the option of the board of directors, be permitted to serve until attaining ten years of service in the office or age 70, whichever comes first.[86]

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.[87]

Federal Reserve Bank Letter Number Branches Website President
Boston A 1 Eric S. Rosengren
New York City B 2 Buffalo (closed as of October 31, 2008), New York [88] William C. Dudley
Philadelphia C 3 Charles I. Plosser
Cleveland D 4 Cincinnati, Ohio / Pittsburgh, Pennsylvania Sandra Pianalto
Richmond E 5 Baltimore, Maryland / Charlotte, North Carolina Jeffrey M. Lacker
Atlanta F 6 Birmingham, Alabama / Jacksonville, Florida / Miami, Florida / Nashville, Tennessee / New Orleans, Louisiana Dennis P. Lockhart
Chicago G 7 Detroit, Michigan / Des Moines, Iowa Charles L. Evans
St Louis H 8 Little Rock, Arkansas / Louisville, Kentucky / Memphis, Tennessee James B. Bullard
Minneapolis I 9 Helena, Montana Narayana R. Kocherlakota
Kansas City J 10 Denver, Colorado / Oklahoma City, Oklahoma / Omaha, Nebraska Thomas M. Hoenig
Dallas K 11 El Paso, Texas / Houston, Texas / San Antonio, Texas Richard W. Fisher
San Francisco L 12 Los Angeles, California / Portland, Oregon / Salt Lake City, Utah / Seattle, Washington Janet L. Yellen

Primary Dealers

A primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System of the United States.[89] They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.[90] They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.[91][92]

Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market, for example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in world financial markets.

The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.

Current list of primary dealers

As of July 27, 2009 according to the Federal Reserve Bank of New York the list includes:[93]

The Primary Dealers List is available at the Federal Reserve Bank of New York website. Changes are available at Changes to Primary Dealers List.

Five notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase. On February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.

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:[94]

Type Definition
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.[42] Federal statute provides (in part):

Every national bank in any State shall, upon commencing business or within ninety days after admission into the Union of the State in which it is located, become a member bank of the Federal Reserve System by subscribing and paying for stock in the Federal Reserve bank of its district in accordance with the provisions of this chapter and shall thereupon be an insured bank under the Federal Deposit Insurance Act [. . . .]

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

Any state-chartered bank (mutual or stock-formed) may become a member of the Federal Reserve System. The twelve regional Reserve Banks supervise state member banks as part of the Federal Reserve System’s mandate to assure strength and stability in the nation’s domestic markets and banking system. Reserve Bank supervision is carried out in partnership with the state regulators, assuring a consistent and unified regulatory environment. Regional and community banking organizations constitute the largest number of banking organizations supervised by the Federal Reserve System.

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.[97] 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.[98]

List of member banks

The majority of US banks are not members of the Federal Reserve System.

FDIC-insured banks. N (national banks) and SM (state members) are members of the Federal Reserve System while the rest of the FDIC-insured banks are not members. Each charter type is defined as follows:[99] *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 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.[100]

A list of all member banks can be found at the website of the Federal Deposit Insurance Corporation (FDIC). 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.[99]

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:[101]

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.[102][103]

Interbank lending is the basis of policy

The Federal Reserve implements monetary policy by influencing the interbank lending of excess reserves. 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 described in the "Tools" section below. This is a short-term interest rate the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks...By conducting open market operations, imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.

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.[105]


The goals of monetary policy include:[10][103]

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


There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:[102]

Tool Description
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.[106]
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.[107]
reserve requirements the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.[108]

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:[103]

Open market operations involve the buying and selling of U.S. government securities (federal agency and mortgage-backed). The term 'open market' means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an 'open market' in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy.

Open market operations are the primary tool used to regulate the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Open market operations are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. The transactions are undertaken with primary dealers.

The Fed’s goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer’s bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two. That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. These short-term transactions are called repurchase agreements (repos) – the dealer sells the Fed a security and agrees to buy it back at a later date.

A simpler description is described in The Federal Reserve in Plain English:[109]

How do open market operations actually work? Currently, the FOMC establishes a target for the federal funds rate (the rate banks charge each other for overnight loans). Open market purchases of government securities increase the amount of reserve funds that banks have available to lend, which puts downward pressure on the federal funds rate. Sales of government securities do just the opposite—they shrink the reserve funds available to lend and tend to raise the funds rate.

By targeting the federal funds rate, the FOMC seeks to provide the monetary stimulus required to foster a healthy economy. After each FOMC meeting, the funds rate target is announced to the public.

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.[110]

Federal funds rate and discount rate

The effective federal funds rate charted over more than fifty years.

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.[111]

The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 basis points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.[112] The equivalent operation by the European Central Bank is referred to as the "marginal lending facility."[113]

Both of these rates influence the prime rate, which is usually about 3 percent 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 may 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.[citation needed]

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.[114] The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,[104], which depository institutions trade in the federal funds market discussed above.[115] The required reserve ratio is set by the Board of Governors of the Federal Reserve System.[116] The reserve requirements have changed over a time and some of the history of these changes is published by the Federal Reserve.[117]

Reserve Requirements in the U.S. Federal Reserve System[108]
Type of liability Requirement
Percentage of liabilities Effective date
Net transaction accounts
$0 to $10.3 million 0 01/01/09
More than $10.3 million to $44.4 million 3 01/01/09
More than $44.4 million 10 01/01/09

Nonpersonal time deposits 0 12/27/90

Eurocurrency liabilities 0 12/27/90

NOTE: As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances. The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC.[118]

New facilities

In order to address problems related to the subprime mortgage crisis and United States housing bubble, several 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[119] but there have been suggestions that this new tool may remain in place for a prolonged period of time.[120] Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008.[121] 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.[122] Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008.[123] The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealers, which was previously against Fed policy.[124] The differences between these 3 new facilities is described by the Federal Reserve:[125]

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.[126] The Federal Reserve gives a brief summary of what these new facilities are all about:[127]

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.[119] 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.[128] 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.[129][130][131][132] 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.[133] 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.[133] Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms...TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.[134]

It is also described in the Term Auction Facility FAQ[119]

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.

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.[135] 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.[136] 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.[125] 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.

Interest on reserves

As of October 2008, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp.[137] As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.[138]

Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) is also called the AMLF. Borrower Eligibility:

All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks are eligible to borrow under this facility pursuant to the discretion of the FRBB.

Eligible Collateral:

Collateral eligible for pledge under the Facility must meet the following criteria:

  • was purchased by Borrower on or after September 19, 2008 from a registered investment company that holds itself out as a money market mutual fund;
  • was purchased by Borrower at the Fund’s acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by Borrower;
  • is rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, the ABCP must have been rated within the top rating category by that agency;
  • was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
  • has a stated maturity that does not exceed 120 days if the Borrower is a bank or 270 days for non-bank Borrowers.
Commercial Paper Funding Facility

The Commercial Paper Funding Facility is also called the CPFF. On October 7, 2008 the Federal Reserve further expanded the collateral it will loan against, to include commercial paper. The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.[139]

Money Market Investor Funding Facility

The Money Market Investor Funding Facility is also called the MMIFF. The Federal Reserve introduced a facility on October 21, 2008, whereby money market mutual funds can set up a structured investment vehicle of short-term assets underwritten by the Federal Reserve Bank of New York.[140] The program will run until April 30, 2009, unless extended by the FRB.

Quantitative policy

Another policy that can be used is a little used tool of the Federal Reserve (US central bank) that is known as the quantitative policy. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business. The Federal Reserve Board used this policy in the early nineties when the US economy experienced the Savings and Loan crisis.

Quantitative easing

Quantitative easing is another way to influence monetary policy, only recently begun to be used in the United States. Other countries, such as Japan, have provided a template for some Fed actions. Essentially, quantitative easing provides a method for the central bank to provide funds at lower than zero interest rates, in order to increase the monetary supply and combat deflationary forces. This is accomplished by the Fed purchasing U.S. government debt with newly printed U.S. currency. In essence, the Fed is monetizing the debt. In the current (late 2007 to today) macro-economic environment, the slowing velocity of money has induced U.S. central bankers to pursue a variety of new, and to some radical, policies to produce economic stimulus.


A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:[141]

  • 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 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

A lot of data is recorded and published by the Federal Reserve. A few websites where data is published are at the Board of Governors Economic Data and Research page,[142] the Board of Governors statistical releases and historical data page,[143] and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.[144] The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.[145]

Net worth of households and nonprofit organizations

US household and nonproft net worth 1945-2007.gif

The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled, Flow of Funds.[146] At the end of fiscal year 2008, this value was $51.5 trillion.

Money supply

Components of US money supply (currency, M1, M2, and M3) since 1959

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:

Measure Definition
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.[147] The other three money supply measures continue to be provided in detail.

Consumer price index

US consumer price index 1800–2007.
Year on year change in the US dollar consumer price index 1914–2006. The ability to maintain a low inflation rate is a long-term measure of the Fed's success.

The consumer price index is used as one measure of the value of money. It is defined as:

A measure of the average price level of a fixed basket of goods and services purchased by consumers as determined by the Bureau of Labor Statistics. Monthly changes in the CPI represent the rate of inflation. Core CPI excludes volatile components, i.e., food and energy prices.

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[148]

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.[149] A controversial method used in calculating CPI is "hedonic adjustments". The basic concept applies a discount for the assumed increased utility of products (i.e. faster CPU processing speeds of computers). However, consumers rarely make decisions based upon the price per computer processing cycle. An argument can be made that such hedonic adjustments significantly contribute to understating true inflation experienced by consumers buying everyday goods and services.[150]

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.[151] Although the Fed usually tries to keep the year-on-year change in CPI between 2 and 3 percent,[152] there has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.[153][154][155]

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.[103]

The effects of monetary and price inflation include:[103]

  • Price inflation makes workers worse off if their incomes don’t rise as rapidly as prices.
  • Pensioners living on a fixed income are worse off if their savings do not increase more rapidly than prices.
  • Lenders lose because they will be repaid with dollars that aren't worth as much.
  • Savers lose because the dollar they save today will not buy as much when they are ready to spend it.
  • Businesses and people 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, suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.

Unemployment rate

United States unemployment rates 1950-2005

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.[156]


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.[157] The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress. There are two reports with budget information. The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, Annual Report. It also includes data about employment throughout the system. The other report, which explains in more detail the expenses of the different aspects of the whole system, is called Annual Report: Budget Review. These are comprehensive reports with many details and can be found at the Board of Governors' website under the section Reports to Congress[158]

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. The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.[159][160]

Below is the balance sheet as of April 22, 2009 (in millions of dollars):

Gold certificate account 11,037
Special drawing rights certificate acct. 2,200
Coin 1,870
Securities, repurchase agreements, term auction credit, and other loans 1,525,857
   Securities held outright 967,070
      U.S. Treasury 534,969
         Bills 18,423
         Notes and bonds 516,546
      Federal agency debt securities 64,511
      Mortgage-backed securities 367,590
   Repurchase agreements 0
   Term auction credit 455,799
   Other loans 102,988
Net portfolio holdings of Commercial Paper Funding Facility LLC 242,431
Net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility 0
Net portfolio holdings of Maiden Lane LLC 26,481
Net portfolio holdings of Maiden Lane LLC II 18,253
Net portfolio holdings of Maiden Lane LLC III 27,429
Items in process of collection 1,147
Bank premises 2,191
Central bank liquidity swaps 282,863
Other assets 56,855
Total Assets 2,198,613
Federal Reserve notes outstanding 1,048,136
   Less: notes held by F.R. Banks 185,176
      Federal Reserve notes, net 862,960
Reverse repurchase agreements 64,681
Deposits 1,211,172
   Depository institutions 915,773
   U.S. Treasury, general account 93,533
   U.S. Treasury, supplementary financing account 199,929
   Foreign official 1,594
   Other 343
Deferred availability cash items 4,107
Other liabilities and accrued


Total liabilities 2,152,613
CAPITAL (AKA Net Equity)
Capital paid in 22,611
Surplus 21,181
Other capital 2,209
Total capital 46,000
MEMO (off-balance-sheet items)
Marketable securities held in custody for foreign official and international accounts 2,646,833
   U.S. Treasury 1,838,342
   Federal agency 808,491
Securities lent to dealers 47,980
   Overnight facility 4,430
   Term facility 43,550

Total combined assets for all 12 Federal Reserve Banks.
Total combined liabilities for all 12 Federal Reserve Banks.

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.[citation needed]. The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce. As of March 2009, the market value of that gold is around $247.8 billion.
  • The Fed holds more than $1.8 billion 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 $534 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 no 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 more than $1 trillion in Federal Reserve Note liabilities represents nearly the total value of all dollar bills in existence; over $176 billion is held by the Fed (not in circulation); and the "net" figure of $863 billion represents the total face value of Federal Reserve Notes in circulation.
  • The $916 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 $93.5 billion in Treasury liabilities shows that the Treasury Department does not use 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).[citation needed]
  • The $1.6 billion foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
  • The $9.7 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 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 1,048,136
   Less: Notes held by F.R. Banks 185,176
   Federal Reserve notes to be collateralized 862,960
Collateral held against Federal Reserve notes 862,960
   Gold certificate account 11,037
   Special drawing rights certificate account 2,200
   U.S. Treasury, agency debt, and mortgage-backed securities pledged 849,723
   Other assets pledged 0


The Federal Reserve System has faced criticism throughout its existence.


Transparency has been a primary concern of Federal Reserve critics. Deals with foreign central banks are not published in congressional reports, for instance, and many assets and liabilities of the Federal Reserve Banks are not published anywhere.[citation needed] Some accuse the Fed, along with other western central banks, of suppressing the gold price by covertly lending their massive gold holdings into the markets, without ever asking the indebted banks to pay them back (This supposedly props up confidence in the U.S. dollar). This has in turn led to accusations against U.S. Army and Marine officials for not keeping a close eye on the gold at Fort Knox.[citation needed]

Biased or misleading data

Other criticism involves economic data compiled by the Fed. Some allege that values reported are misleading, exaggerated or altogether falsified to fulfill some type of political gain. The Fed sponsors much of the monetary economics research in the US, and Lawrence H. White objects that this makes it less likely for researchers to publish findings challenging the status quo.[161]

Accountability (too much or too little)

Some allege that the Fed is unaccountable, while others allege that the Fed is not independent enough, following orders from the President of the United States, other powerful politicians, or well-established think tanks etc.

Role in business cycles and inflation

Adherents to the Austrian School of economic theory blame the current[citation needed] economic crisis on the Federal Reserve's policy, particularly the policy of the Fed under the leadership of Alan Greenspan, of credit expansion through historically low interest rates starting in 2001, which they claim enabled the United States housing bubble.

See also


  1. ^ Griffin, G. Edward (1998). The Creature from Jekyll Island : A Second Look at the Federal Reserve. American Media. ISBN 0-912986-21-2. 
  2. ^ Nathaniel Wright Stephenson, Nelson W. Aldrich (1930). Chap. XXIV "Jekyll Island" p. 379. Scribners, N.Y.. 
  3. ^ Paul Warburg (1930). The Federal Reserve System, Its Origin and Growth, Volume I, p. 58. Macmillan, New York. 
  4. ^ Michael A. Whitehouse. "Paul Warburg's Crusade to Establish a Central Bank in the United State". The Federal Reserve Bank of Minneapolis. Retrieved 2010-02-09.  One evening in early November 1910, Warburg and a small party of men from New York quietly boarded Sen. Aldrich's private railway car, ostensibly for a trip south to an exclusive hunting club on an island off the coast of Georgia. In addition to Warburg and Aldrich, the others, all highly regarded in the New York banking community, were: Frank Vanderlip, president of National City Bank; Harry P. Davison, a J.P. Morgan partner; Benjamin Strong, vice president of Banker's Trust Co.; and A. Piatt Andrew, former secretary of the National Monetary Commission and now assistant secretary of the Treasury. The real purpose of this historic "duck hunt" was to formulate a plan for US banking and currency reform that Aldrich could present to Congress.
  5. ^ a b c "Born of a panic: Forming the Federal Reserve System". Minnesota Federal Reserve. 1988-08. 
  6. ^ a b c BoG 2006, pp. 1 "Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to “panics,” in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy."
  7. ^ BoG 2005, pp. 1–2
  8. ^ BoG 2005, pp. 1 "It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."
  9. ^ Reform of the Federal Reserve System in the Early 1930's: The Politics of Money and Banking, by Sue C. Patrick, Garland, 1993.
  10. ^ a b c FRB: Mission
  11. ^
  12. ^ Federal Reserve website -
  13. ^ BoG 2005, pp. v (See structure)
  14. ^ Advisory Councils -
  15. ^ Committee of Finance and Industry 1931 (Macmillan Report) description of the founding of Bank of England "Its foundation in 1694 arose out the difficulties of the Government of the day in securing subscriptions to State loans. Its primary purpose was to raise and lend money to the State and in consideration of this service it received under its Charter and various Act of Parliament, certain privileges of issuing bank notes. The corporation commenced, with an assured life of twelve years after which the Government had the right to annul its Charter on giving one year's notice. Subsequent extensions of this period coincided generally with the grant of additional loans to the State
  16. ^ Remarks by Chairman Alan Greenspan - Our banking history. May 2, 1998
  17. ^ The Fed Today. See the "Lesson Plans" pdf document. pp. 20.
  18. ^ Historical Beginnings...The Federal Reserve. (1999). Chapter 1.
  19. ^ Herrick, Myron (1908-03). "The Panic of 1907 and Some of Its Lessons". Annals of the American Academy of Political and Social Science. 
  20. ^ a b Flaherty, Edward. "A Brief History of Central Banking in the United States". University of Groningen, Netherlands. 
  21. ^ a b Whithouse, Michael (1989-05). "Paul Warburg's Crusade to Establish a Central Bank in the United States". Minnesota Federal Reserve. 
  22. ^ Friedman, Milton (2002). Capitalism and Freedom. University of Chicago Press. p. 38. ISBN 0-226-26421-1. 
  23. ^
  24. ^ a b Bernanke, Ben (2003-10-24). "Remarks by Governor Ben S. Bernanke: At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas" (text). 
  25. ^ Rothbard, Murray (1926-95). "The Mystery of Banking" (PDF). The Ludwig von Mises Institute. Retrieved 2009-06-21.  p.247
  26. ^ a b c "America's Unknown Enemy: Beyond Conspiracy". American Institute of Economic Research. 
  27. ^
  28. ^
  29. ^ a b Johnson, Roger (1999-12). "Historical Beginnings… The Federal Reserve" (PDF). Federal Reserve Bank of Boston. pp. 247. Retrieved 2009-06-21. 
  30. ^ China Takes Aim at Dollar Wall Street Journal. 3-24-2009.
  31. ^ Components of M1 See "Currency" column and calculate annual changes.
  32. ^ Bartlett, Bruce (2004-06-14). "Warriors Against Inflation". National Review. 
  33. ^ Source: A Monetary Chronology of the United States, American Institute for Economic Research, July 2006
  34. ^ A Monetary Chronology of the United States, American Institute for Economic Research, July 2006
  35. ^ BoG 2005, pp. 2
  36. ^ This quote is found on the original paperwork written by congress when the act was debated and passed. It used to be at the top of the official Federal Reserve Act page on the official Federal Reserve Board of Governors website (, but as of the August 2008 website revision, this quote as been removed. It can be found in old copies, which are available in books such as, The Federal reserve act by Clarence Walker Barron (1914). See pp. 151. It reads in full:
    An Act To provide for the establishment of Federal reserve banks, 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.
  37. ^ a b BoG 2006, pp. 1
  38. ^ Deflation: Making Sure "It" Doesn't Happen Here Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002
  39. ^ BoG 2005, pp. 113
  40. ^ BoG 2005, pp. 83
  41. ^ Federal Reserve Bank of Minneapolis—Glossary
  42. ^ a b c d e f The Federal Reserve, Monetary Policy and the Economy—Everyday Economics—FRB Dallas
  43. ^ Press Release: Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) (September 16, 2008). Board of Governors of the Federal Reserve.
  44. ^ Andrews, Edmund L.; Michael J. de la Merced and Mary Williams Walsh (2008-09-16). "Fed’s $85 Billion Loan Rescues Insurer". New York times. Retrieved 2008-09-17. 
  45. ^ Federal Reserve Bank of New York. "How Currency Gets into Circulation", referenced 2010-03-06.
  46. ^ Bureau of Engraving and Printing. "Annual Production Figures", referenced 2010-03-06.
  47. ^ Federal Reserve Bank of New York. Federal Funds
  48. ^ Federal Reserve Bank of Richmond. Instruments of the Money Market: Chapter 2—Federal Funds
  49. ^ FRB: Speech-Kohn, The Evolving Role of the Federal Reserve Banks-November 3, 2006
  50. ^ "Frequently Asked Questions Federal Reserve System". Retrieved 2010-02-19.  The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review. Under the Federal Banking Agency Audit Act (enacted in 1978 as Public Law 95-320), which authorizes the Comptroller General of the United States to audit the Federal Reserve System, the Government Accountability Office (GAO) has conducted numerous reviews of Federal Reserve activities.
  51. ^ "Federal Reserve System Current and Future Challenges Require System wide Attention". United States General Accounting Office. Retrieved 2010-02-19.  Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714(b), our audits of the Federal Reserve Board and Federal Reserve banks may not include (1) transactions for or with a foreign central bank or government, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members ofthe Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits: Restrictions on GAO’s Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher. e real purpose of this historic "duck hunt" was to formulate a plan for US banking and currency reform that Aldrich could present to Congress.
  52. ^ "About The Audit". Retrieved 2010-02-19.  Although the Fed is currently audited by outside agencies, these audits are not thorough and do not include monetary policy decisions or agreements with foreign central banks and governments. The crucial issue of Federal Reserve transparency requires an analysis of 31 USC 714, the section of US Code which establishes that the Federal Reserve may be audited by the Government Accountability Office (GAO), but which simultaneously severely restricts what the GAO may in fact audit. Essentially, the GAO is only allowed to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, etc. The most important matters, which directly affect the strength of the dollar and the health of the financial system, are immune from oversight.
  53. ^ [ "An Open Letter to the US House of Representatives"]. Retrieved 2010-02-19.  Whereas: Congress, the Federal Reserve, and the U.S. Treasury have put the American taxpayer on the hook for over $12 trillion in bailouts and loans; and Whereas: Federal Reserve Chairman Ben Bernanke recently refused to tell Congress who has received trillions in these funds from the Federal Reserve; and Whereas: Allowing the Fed to operate our nation's monetary system in almost complete secrecy leads to abuse, inflation, and a lower quality of life for every American; and Whereas: HR 1207, the Federal Reserve Transparency Act, and S 604, the Federal Reserve Sunshine Act, would require a full audit of the Fed for the first time in its history and would provide answers to the American people about how our money is being spent;
  54. ^ "Congress Grows Fed Up Despite Central Bank's Push". Retrieved 2010-02-19. The Fed's ability to influence Congress is diluted by public anger. A July 2009 Gallup Poll found only 30% Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.
  55. ^ "Fed Intends to Hire Lobbyist in Campaign to Buttress Its Image". Retrieved 2010-02-19. Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.
  56. ^ "Board Actions taken during the week ending July 25, 2009". Retrieved 2010-02-19. Office of Board Members -- appointment of Linda L. Robertson as assistant to the Board. -Announced, July 20, 2009
  57. ^ "VP Linda Robertson to join Federal Reserve System". Retrieved 2010-02-19. Linda Robertson, vice president of government, community and public affairs for the university and vice president for government affairs and community relations at Johns Hopkins Medicine, will become assistant to the Board of Governors of the Federal Reserve System. In that role, which she will assume July 18, she will be senior adviser to Chairman Ben S. Bernanke and the other governors of the Fed on strategic planning and day-to-day issues involving their interactions with the Congress.
  58. ^ Mark Calabria, Bert Ely, Congressman Ron Paul,Gilbert Schwartz. (2009-06-24). Ron Paul: Bringing Transparency to the Federal Reserve. Cato Institute Washington, D.C.. Event occurs at 00:11:04. Retrieved 2010-02-21. "For once, I think its the first time, the Federal Reserve has hired a lobbyist to lobby members of congress against this bill. And guess where the lobbyist came from? She's a hangover from Enron. She lobbied for Enron! So that's very appropriate." 
  59. ^ BoG 2005, pp. 4–5
  60. ^ U.S. Code Title 12, Chapter 3, Subchapter 7, Section 301. Powers and duties of board of directors; suspension of member bank for undue use of bank credit
  61. ^ U.S. Code: Title 18, Part 1, Chapter 47, section 1014. Loan and credit applications generally; renewals and discounts; crop insurance
  62. ^ BoG 2005, pp. 83–85
  63. ^ Federal Reserve Board: Payments Systems
  64. ^ Modern Macroeconomics in Practice: How Theory Is Shaping Monetary Policy Patrick J. Kehoe, V. V. Chari. Federal Reserve Bank of Minneapolis. January 2006.
  65. ^ a b Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence (1993). Alesina and Summers.
  66. ^ BoG 2005, pp. 11
  67. ^ Board of Governors of the Federal Reserve System website - "Although they are set up like private corporations and member banks hold their stock, the Federal Reserve Banks owe their existence to an act of Congress and have a mandate to serve the public". [1]
  68. ^ a b c FRB: FAQs: Federal Reserve System
  69. ^ a b Structure and Functions—The Fed's Structure
  70. ^ Woodward, G. Thomas (1996-07-31). "Money and the Federal Reserve System: Myth and Reality - CRS Report for Congress, No. 96-672 E". Congressional Research Service Library of Congress. Retrieved 2008-11-23. 
  71. ^ Federal Reserve Board (April 23, 2009), Press Release (2008).
  72. ^ See 12 U.S.C. § 241
  73. ^ Federal Reserve (January 16, 2009). "Board of Governors FAQ". Federal Reserve. Retrieved 2009-01-16. 
  74. ^ a b Kennedy C. Scott v. Federal Reserve Bank of Kansas City, et al., 406 F.3d 532 (8th Cir. 2005).
  75. ^ 12 U.S.C. § 247.
  76. ^ a b c d See 12 U.S.C. § 242.
  77. ^ FRB: Board Members
  78. ^ "The Fed's stuck in the penalty box" by Colin Barr,, March 3, 2010, 11:38 AM ET. Retrieved 2010-03-12.
  79. ^ "White House Identifies 3 as Likely Picks for Fed Posts" by Sewell Chan, The New York Times, March 12, 2010 2:30 pm. Retrieved 2010-03-12.
  80. ^ Membership of the Board of Governors of the Federal Reserve System, 1914-Present
  81. ^ BoG 2005, pp. 11–12
  82. ^ See generally 12 U.S.C. § 248.
  83. ^ 680 F.2d 1239 (9th Cir. 1982).
  85. ^ FRB: Directors of Federal Reserve Banks and Branches
  86. ^ a b c FRB: Federal Reserve Bank Presidents
  87. ^ BoG 2005, pp. 7
  88. ^ New York Fed Announces Closing of Buffalo Branch, Effective October 31 - Federal Reserve Bank of New York
  89. ^ Federal Reserve Bank of New York:Primary Dealers. Retrieved April 27, 2007.
  90. ^ Reserve Bank of New York:Primary Dealer Policies. Retrieved March 12, 2008.
  91. ^
  92. ^
  93. ^ "Primary Dealers List". New York Fed. July 27, 2009. Retrieved 2009-09-30. 
  94. ^ BoG 2005, pp. 12
  95. ^ 12 U.S.C. § 222.
  96. ^ FRBB: Federal Reserve Membership
  97. ^
  98. ^
  99. ^ a b Cookies must be enabled to use this interactive website. Choose the "Find Institutions" section. Then leave all of the fields with the default value then choose "find". Wait a few moments to be promted to "save as". It will be a 3.4MB .csv file that will be downloaded. This file can be viewed with a spreadsheet such as or microsoft excel. 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.
  100. ^ US CODE: Title 12,1468. Transactions with affiliates; extensions of credit to executive officers, directors, and principal shareholders
  101. ^ BoG 2005, pp. 13
  102. ^ a b FRB: Federal Open Market Committee
  103. ^ a b c d e Federal Reserve Education—Monetary Policy Basics
  104. ^ a b BoG 2005, pp. 27
  105. ^ The Federal Reserve System In Action—Federal Reserve Bank of Richmond
  106. ^ FRB: Monetary Policy, Open Market Operations
  107. ^ FRB: Monetary Policy, the Discount Rate
  108. ^ a b FRB: Monetary Policy, Reserve Requirements
  109. ^ BoG 2006, pp. 7
  110. ^ Repurchase and Reverse Repurchase Transactions—Fedpoints—Federal Reserve Bank of New York
  111. ^ EconTalk, Podcast Archive, Featuring Milton Friedman: Library of Economics and Liberty
  112. ^ Federal Reserve Bank San Francisco( 2004)
  113. ^ Patricia S. Pollard (February 2003). "A Look Inside Two Central Banks: The European Central Bank And The Federal Reserve". Review (magazine) (St. Louis, Missouri: Federal Reserve Bank of St. Louis) 85 (2): 11–30. doi:10.3886/ICPSR01278. OCLC 1569030. 
  114. ^ BoG 2005, pp. 30
  115. ^ BoG 2005, pp. 29–30
  116. ^ BoG 2005, pp. 31
  117. ^ Reserve Requirements: History, Current Practice, and Potential Reform
  118. ^
  119. ^ a b c FRB: Temporary Auction Facility FAQ
  120. ^ FRB: Press Release-Federal Reserve intends to continue term TAF auctions as necessary-December 21, 2007
  121. ^ Federal Reserve press release—Announcement of the creation of the Term Securities Lending Facility:
  122. ^ "Fed Seeks to Limit Slump by Taking Mortgage Debt". 12 March 2008.  "The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash...Unlike the newest tool, the past steps added cash to the banking system, which affects the Fed's benchmark interest rate...By contrast, the TSLF injects liquidity by lending Treasuries, which doesn't affect the federal funds rate. That leaves the Fed free to address the mortgage crisis directly without concern about adding more cash to the system than it wants"
  123. ^ Federal Reserve Announces Establishment of Primary Dealer Credit Facility—Federal Reserve Bank of New York
  124. ^ Economy
  125. ^ a b Primary Dealer Credit Facility: Frequently Asked Questions—Federal Reserve Bank of New York
  126. ^ Fed Announces Emergency Steps to Ease Credit Crisis - Economy * US * News * Story -
  127. ^ Federal Reserve Bank of Atlanta—Examining the Federal Reserve's New Liquidity Measures
  128. ^ "Announcement of the creation of the Term Auction Facility—FRB: Press Release--Federal Reserve and other central banks announce measures designed to address elevated pressures in short-term funding markets". 12 December 2007. 
  129. ^ "US banks borrow $50bn via new Fed facility". Financial Times. 18 February 2008.  'Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.'
  130. ^ "Fed Boosts Next Two Special Auctions to $30 Billion". 4 January 2008.  "The Board of Governors of the Federal Reserve System established the temporary Term Auction Facility, dubbed TAF, in December to provide cash after interest-rate cuts failed to break banks' reluctance to lend amid concern about losses related to subprime mortgage securities. The program will make funding from the Fed available beyond the 20 authorized primary dealers that trade with the central bank."
  131. ^—A dirty job, but someone has to do it: A quote from the article:
    The Fed's discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market. The quarter-point cuts in its federal funds rate and discount rate on December 11 were followed by a steep sell-off in the stockmarket...The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market.

    But there are risks. The first is that, for all the fanfare, the central banks' plan will make little difference. After all, it does nothing to remove the fundamental reason why investors are worried about lending to banks. This is the uncertainty about potential losses from subprime mortgages and the products based on them, and—given that uncertainty—the banks' own desire to hoard capital against the chance that they will have to strengthen their balance sheets.

  132. ^—Unclogging the system:
  133. ^ a b Fed, top central banks to flood markets with cash
  134. ^ Chairman Ben S. Bernanke—The economic outlook Before the Committee on the Budget, U.S. House of Representatives January 17, 2008:
  135. ^ Term Securities Lending Facility: Frequently Asked Questions:
  136. ^—Fed to Lend $200 Billion, Accept Mortgage Securities:
  137. ^ "Interest on Required Reserve Balances and Excess Balances". Federal Reserve Board. 2008-10-06. Retrieved 2008-10-14. 
  138. ^ "Press Release - October 22, 2008". Federal Reserve Board. 2008-10-22. Retrieved 2008-10-22. 
  139. ^ Fed Action
  140. ^ "Press Release - October 21, 2008". Federal Reserve Board. 2008-10-21. Retrieved 2008-10-21. 
  141. ^ BoG 2005, pp. 18–21
  142. ^ FRB: Economic Research & Data
  143. ^ Federal Reserve Board - Statistics: Releases and Historical Data
  144. ^ St. Louis Fed: Economic Data - FRED
  145. ^ a b Federal Reserve Education - Economic Indicators
  146. ^ FRB: Z.1 Release—Flow of Funds Accounts of the United States, Release Dates See the pdf documents from 1945 to 2007. The value for each year is on page 94 of each document (the 99th page in a pdf viewer) and duplicated on page 104 (109th page in pdf viewer). It gives the total assets, total liabilities, and net worth. This chart is of the net worth.
  147. ^ Discontinuance of M3
  148. ^
  149. ^ Kevin Phillips: Numbers Racket—Why the Economy is Worse than We Know, Harper's, May 2008
  150. ^ [2]
  151. ^ BoG 2006, pp. 10
  152. ^ "These definitions make clear a commitment to low inflation. But they leave open whether, for example, the inflation rate prevailing today--about 2-1/2 percent for the core consumer price index (CPI) measure of consumer prices--is consistent with this definition."
  153. ^ FRB Speech, Bernanke-A perspective on inflation targeting-March 25, 2003
  154. ^ What's The Fuss Over Inflation Targeting?
  155. ^ Bernanke, Ben S.: The Inflation-Targeting Debate
  156. ^ Kevin Phillips: Numbers Racket—Why the Economy is Worse than We Know, Harper's May 2008.
  157. ^ Chicago Fed—Demonstrating Knowledge of the Fed:
  158. ^ Federal Reserve Board—Reports to Congress
  159. ^ Annual Report Page 466 (o) Interest on Federal Reserve Notes
  160. ^ "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks" (HTML, with PDF available). Federal Reserve. Retrieved 2008-03-20. 
  161. ^ White, Lawrence H. 2005. The Federal Reserve System’s Influence on Research in Monetary Economics. Econ Journal Watch 2(2): 325-354. [3]



  • BoG (2005). The Federal Reserve System: Purposes and Functions. Board of Governors. 
  • BoG (2006). The Federal Reserve in Plain English. Board of Governors. 
  • 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.
  • Meltzer, Allan H. A History of the Federal Reserve, Volume 1: 1913-1951 (2004) ISBN 9780226519999 (cloth) and ISBN 9780226520001 (paper)
  • Meltzer, Allan H. A History of the Federal Reserve, Volume 2: Book 1, 1951-1969 (2009) ISBN 9780226520018
  • Meltzer, Allan H. A History of the Federal Reserve, Volume 2: Book 2, 1969-1985 (2009) ISBN 9780226519944; In three volumes published so far, Meltzer covers the first 70 years of the Fed in considerable detail
  • 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.


  • 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
  • Goddard, Thomas H. (1831). History of Banking Institutions of Europe and the United States. Carvill. pp. 48ff. 
  • 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
  • Marrs, Jim (2000). "Secrets of Money and the Federal Reserve System". Rule by Secrecy (HarperCollins): pp. 64–78. 
  • Mayhew, Anne. "Ideology and the Great Depression: Monetary History Rewritten." Journal of Economic Issues 17 (June 1983): 353-60.
  • Mullins, Eustace C. "Secrets of the Federal Reserve", 1952. John McLaughlin. ISBN 0-9656492-1-0
  • 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).
  • Wells, Donald R. The Federal Reserve System: A History (2004)
  • West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923 (1977)
  • Wicker, Elmus. "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).
  • 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)

External links

Official Federal Reserve websites and information

Open Market operations

Repurchase agreements

Discount window

Economic indicators

Federal Reserve publications

Other websites describing the Federal Reserve

Sites critical of the Federal Reserve


Up to date as of January 14, 2010

From Wikiquote

The Federal Reserve System is the central banking system of the United States. Created in 1913, its unique organizational structure combines public regulation and oversight with private banking expertise.



  • We don't know what would have happened had [Federal Reserve Governor Benjamin] Strong lived; but what we do know is that the central bank of the world's economically most important nation in 1929 was essentially leaderless and lacking in expertise. This situation led to decisions, or nondecisions, which might well not have occurred under either better leadership or a more centralized institutional structure. Associated with these decisions, we observe a massive collapse of money, prices, and output. … Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. [1]
    • Ben Bernanke, "Remarks on Milton Friedman's Nintieth Birthday" (8 November 2002)
  • When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.
    • Federal Reserve Bank of Boston, Putting It Simply (1984)
  • Neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value.
    • Federal Reserve Bank of Chicago, Modern Money Mechanics (1975)
  • 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 out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal reserve banks acting together have cost this country enough money to pay the national debt several times over. This evil institution has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government. It has done this through defects of the law under which it operates, through the maladministration of that law by the Federal Reserve Board and through the corrupt practices of the moneyed vultures who control it.
    • Rep. Louis T. McFadden, Chairman of the Committee on Banking and Currency. Congressional Record 12595-12603 (10 June 1932)
  • …the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 billion dollars in 1949 went directly to the private stockholders of the banks.
  • As soon as Mr. [Franklin] Roosevelt took office, the Federal Reserve began to buy government securities at the rate of ten million dollars a week for 10 weeks, and created one hundred million dollars in new currency, which alleviated the critical famine of money and credit, and the factories started hiring people again.
  • The Federal Reserve Banks, while not part of the government, are the central banking sytem for the Nation.… Holdings of Federal debt by the Federal Reserve Banks do not have the same impact on private credit markets as other debt held by the public. Their holdings of Federal debt arise from their role as the country's central bank.
    • Office of Management and Budget, Budget of the United States: Historical Tables, notes to table 7.1 (1991-1992). Recent budgets omit "…while not part of the government…."

Original hearings and debates

Several plans and regulatory measures were discussed during the development of the Federal Reserve System. The following quotations do not necessarily refer to the final Federal Reserve Act passed by Congress.

  • By making money artificially scarce interest rates throughout the country can be arbitrarily raised and the bank tax on all business and cost of living increased for the profit of the banks owning these regional central banks, and without the slightest benefit to the people. These 12 corporations together cover the whole country and monopolize and use for private gain every dollar of the public currency, and all public revenues of the United States.
    • Alfred Owen Crozier, testimony to the Senate Committee on Banking and Currency (23 October 1913), criticizing regional bank control of discount rates
  • The powers vested in the Federal Reserve Board seem to me highly dangerous especially when there is political control of the Board. I should be sorry to hold stock in a bank subject to such dominations. The [Federal Reserve] bill as it stands seems to me to open the way to a vast inflation of the currency.… I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency.
    • Henry Cabot Lodge Sr., 1913
  • It is proposed that the Government shall retain sufficient power over the reserve banks to enable it to exercise a direct authority when necessary to do so, but that it shall in no way attempt to carry on through its own mechanism the routine operations and banking which require detailed knowledge of local and individual credit and which determine the funds of the community in any given instance. In other words, the reserve-bank plan retains to the Government power over the exercise of the broader banking functions, while it leaves to individuals and privately owned institutions the actual direction of routine.
    • H.R. Report No. 69, 63 Cong. 1st Sess. 18-19 (1913), as quoted in Lewis v. United States

Lewis v. United States

From Lewis v. United States 680 F. 2d 1239 9th Circuit (1982), involving a man who was hit by a Federal Reserve Bank vehicle and attempted to sue the federal government.

  • Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA [Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.
  • The Federal Reserve Board regulates the Reserve Banks, but direct supervision and control of each Bank is exercised by its board of directors.
  • The Banks are empowered to sue and be sued in their own name…. They carry their own liability insurance and typically process and handle their own claims. In the past, the Banks have defended against tort claims directly, through private counsel, not government attorneys….
  • The Reserve Banks have properly been held to be federal instrumentalities for some purposes…. This court held that a Federal Reserve Bank employee who was responsible for recommending expenditure of federal funds was a "public official" under the Federal Bribery Statute.
  • The Reserve Banks are deemed to be federal instrumentalities for purposes of immunity from state taxation…. The test for determining whether an entity is a federal instrumentality for purposes of protection from state or local action or taxation, however, is very broad: whether the entity performs an important governmental function…. The Reserve Banks, which further the nation's fiscal policy, clearly perform an important governmental function.
  • Brinks Inc. v. Board of Governors of the Federal Reserve System … held that a Federal Reserve Bank is a federal instrumentality for purposes of the Service Contract Act.… Unlike in Brinks, plaintiffs are not without a forum in which to seek a remedy, for they may bring an appropriate state tort claim directly against the Bank; and if successful, their prospects of recovery are bright since the institutions are both highly solvent and amply insured.


  • I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit….
    • Attributed to Woodrow Wilson in many anti-Federal Reserve works, but the quotation is verifiably fake. See Woodrow Wilson for details.


  • Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States
    • Sen. Barry Goldwater (Rep. AZ)
  • This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill.
    • Charles A. Lindbergh, Sr. , 1913
  • The financial system has been turned over to the Federal Reserve Board. That Board administers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money
    • Charles A. Lindbergh Sr., 1923
  • From now on, depressions will be scientifically created.
    • Congressman Charles A.Lindbergh Sr. , 1913
  • The Federal Reserve system pays the U.S. Treasury $20.60 per thousand notes --a little over 2 cents each-- without regard to the face value of the note. Federal Reserve Notes, incidently, are the only type of currency now produced for circulation. They are printed exclusively by the Treasury's Bureau of Engraving and Printing, and the $20.60 per thousand price reflects the Bureau's full cost of production. Federal Reserve Notes are printed in 01, 02, 05, 10, 20, 50, and 100 dollar denominations only; notes of 500, 1000, 5000, and 10,000 denominations were last printed in 1945.
    • Donald J. Winn, Assistant to the Board of Governors of the Federal Reserve system
  • We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
    • Robert H. Hamphill, Atlanta Federal Reserve Bank

See also


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