The Corner

After the 1907 Panic, congress formed the Pugo Hearings that by December 1913 resulted in the creation of Federal Reserve System (the Fed). The Federal Reserve Act, as it was known, created the central bank of the United States. For over 20 years prior, John Pierpont Morgan had acted as “banker of last resort.”

A network of 12 Federal Reserve Banks (Reserve Districts) and their 24 branches carries out a variety of system functions, including operating a nationwide payments system, distributing the nation’s currency and coin, supervising and regulating member banks and bank holding companies and serving as banker for the U.S. Treasury. Each bank has a president. Each Reserve District is identified by a letter and a number. All U.S. currency carries that letter and number designation of the Reserve Bank that first puts it into circulation. Besides carrying out functions for the system as a whole, such as administering nationwide banking and credit policies, each Reserve Bank acts as a depository for the banks in its own District and fulfills other District responsibilities.

The Federal Open Market Committee (FOMC) consists of the seven Federal Reserve governors plus five of the 12 district Federal Reserve Bank presidents. These presidents alternate on the FOMC with the exception of the New York president who has a permanent seat. The FOMC is required by law to meet at least four times each year. However, in reality it meets twice that much.

Today there are approximately 2,900 federally and state chartered banks that are members of the Federal Reserve. However, not all of the commercial banks in the U.S. are members. Banks holding charters from the federal government are required to join. But many banks hold state government charters; they are permitted but not required to join the Fed. If they choose not to join, they operate in accordance with state definitions of reserves and state-established minimum legal reserves.

The Board of Governors of the Federal Reserve exercises broad authority over the operations and activities of the Federal Reserve Banks and their branches. This authority includes oversight of the Reserve Banks’ services to banks and other depository institutions and of their examination and supervision of various banking institutions. Each Federal Reserve Bank must submit its annual budget to the Board of Governors for approval. Other types of expenditures — such as those for construction or major alterations of Reserve Bank buildings and for the salaries of Reserve Bank presidents and first vice presidents — are also subject to specific board approval.

Congress chartered the Federal Reserve Banks for a public purpose. The Reserve Banks are the operating arms of the central banking system and they combine both public and private elements in their makeup and organization. As part of the Federal Reserve System, the banks are subject to oversight by Congress and like the board members, Reserve Bank presidents may testify before congressional committees. Each Reserve Bank has a staff of full-time officers and employees that manages and operates it.

Quote of the Week: “We pay debts of the last generation by issuing bonds payable by the next generation.” — Lawrence J. Peter

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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