Federal Reserve Board Term Paper

  • Length: 5 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #38941860

Excerpt from Term Paper :

Federal Reserve Board [...] history of the Board, and what its purpose is in the United States. The Federal Reserve Board is an integral part of the Federal Reserve System of the United States, and it creates and maintains much of the monitorial policy of the nation. The board members are responsible for the monetary health and security of the country, and so shoulder a huge responsibility to the country and to the people.

THE EARLY FED

The Federal Reserve Board is the governing element of the Federal Reserve System, which an act of Congress established on December 23, 1913. The board contains seven members, and is referred to as the "Board of Governors." The seven board members are:

Appointed by the President and confirmed by the Senate to serve 14-year terms of office. Members may serve only one full term, but a member who has been appointed to complete an unexpired term may be reappointed to a full term. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman, for four-year terms (Federal Reserve System).

In essence, the Federal Reserve System (known as "The Fed"), serves as the country's central bank, and is made up of the board in Washington D.C., and twelve Federal Reserve Banks across the nation. The Fed web site notes, "The Board sets reserve requirements and shares the responsibility with the Reserve Banks for discount rate policy. These two functions plus open market operations constitute the monetary policy tools of the Federal Reserve System" (Federal Reserve System). Thus, the Board is ultimately responsible for the country's monetary health and well being both here and abroad. Any bank doing business nationally must belong to the system. "All national banks must belong to the system, and state banks may if they meet certain requirements. Member banks hold the bulk of the deposits of all commercial banks in the country" (Editors). Member banks can borrow money from each other at competitive interest rates, and if it is an emergency, they can even borrow money from the Fed itself.

Member banks use their reserve accounts with the reserve banks in much the same way that a bank depositor uses his checking account. They may deposit in the reserve accounts the checks on other banks and surplus currency received from their customers, and they may draw on the reserve for various purposes, especially to obtain currency and to pay checks drawn upon them (Editors).

While the Fed has been in existence since 1913, its history has not been without controversy and change. The Fed does not control fiscal policy for the government, it ultimately controls money policy, and so, it is one of the most important branches of modern government. As the Fed's web site notes, "The seven Board members constitute a majority of the 12-member Federal Open Market Committee (FOMC), the group that makes the key decisions affecting the cost and availability of money and credit in the economy" (Federal Reserve System). The Fed's history is one of controversy and change. One of the biggest alterations to the Fed was the Banking Act of 1935, which came about after the great Stock Market crash of 1929, which helped trigger the Great Depression in the United States.

THE BANKING ACT OF 1935

Congress always has the power to control the Federal Reserve System, and one of the most sweeping reforms of the Federal Reserve Act came in the Banking Act of 1935. Briefly, the legislation was partly written by soon-to-be Federal Reserve Chairman Marriner Eccles and other board members, and the act essentially gave the Fed more authority and control over monetary matters.

The bill went through several revisions. Many who thought it gave too much power to the Fed adamantly opposed it, as they felt it was literally creating a government run bank. However, the revisions finally created a bill that was amenable to all, and the Act was finally passed on July 2, 1935.

T]he revised bill increased the powers of the Federal Reserve Board and gave it a greater degree of supervisory control over the regional Federal Reserve banks. Authority was specifically lodged in Washington. The Senate bill did not streamline the Federal Reserve System in accordance with the provisions originally requested and amended by the House. It endeavored to safeguard the Federal Reserve Board against political domination and to prevent the misuse of Federal Reserve powers by the executive branch of the government

Burns 166).

Thus, the Banking Act of 1935 gave the Fed even more power, but it also hoped to keep big government out of the Fed, while allowing the Board to work free of political power, and keep the monetary health of the country intact, while the country was trying to rebuild from the ravages of the Great Depression. Today, the Fed has more power to control how the nation's economy reacts to slumps in employment and the stock market, and much of this came from the Banking Act of 1935.

THE FED'S POWER

The Fed controls finances in the United States and abroad in a number of complex ways from interest rates to the global banking industry. In fact, its name stems from the fact that member banks must keep some of their deposits in "reserve" to ensure fiscal health, and this reserve is often held by the Federal Reserve Banks across the nation. Banks who do not keep enough reserves face stiff penalties from the System (Martin 159). This is just one area where the Fed exerts its vast powers over the nation's banks, and ultimately the nation's economic health and well being.

Inasmuch as the Federal Reserve authorities have power to increase or decrease the supply of excess funds, they are able to exercise considerable influence over the amount of credit that banks may extend. By controlling the credit market, the Federal Reserve System exerts a powerful influence on the nation's economic life. Federal Reserve activities designed to expand bank credit may lead to an upswing in the business cycle, which tends to lead toward inflation; conversely, a restriction of credit generally results in decreased business growth and deflation (Editors).

Ultimately, the Fed's power lies in its ability to create (or break) the economic outlook of the country. One expert writes about lowered interest rates,

The lower cost of financing a new car prompts consumers like you to go out and replace their hulking, $60-a-fillup SUVs with shiny new subcompacts. Dealerships start running out of cars and order more from their factories. Managers who fired workers months ago when demand slowed suddenly find they can't keep the assembly lines running. They start placing "Help Wanted" ads on the Web and hire more workers, who suddenly find themselves with money to spend, too (Larson).

Thus, the Fed controls how the country borrows money, and can control inflation by raising the cost of borrowing money when there is too much money in circulation, and lowering the cost of borrowing money when there is not enough money in circulation, like the country's present circumstances. This is one reason Fed Chairman Alan Greenspan has continued to lower interest rates as the economy worsens. He is hoping to thwart inflation and keep the economy by sinking even lower, and with rock-bottom interest rates on many consumer purchases and home loans, his strategy has helped keep a shaky economy afloat.

One of the problems with the Fed's power is that it can be controversial just about all the time. If the economy is good and business is booming, the Federal Reserve might get some of the credit, but when the economy suffers a downturn, and business is suffering, it is usually the Fed that gets the blame.

ALAN GREENSPAN'S INFLUENCE

Alan Greenspan has been the Chairman of the Federal Reserve System since 1987, when President Ronald Reagan appointed him. (He filled an unexpired term, and was reappointed in 1992. His current term expires in 2004 (Federal Reserve System).) Some people believe that Greenspan's job is second only to the President in national importance. One expert notes, "Caution, judiciousness, and impartiality are the requisite job requirements. A Fed chairman has to be able to work with the president and Congress, yet remain above the political fray. This is a delicate balancing act. A Fed chairman also has to eat, sleep, and breathe data -- and love it" (Martin 153). Greenspan seems to have all these qualities, which keep presidents reappointing him as Chairman, and keep him in the forefront of the news every time he lowers interest rates again.

However, Greenspan's most important role may be the notoriety he brings to the Federal Reserve. Most of America seems to know his name, and while they may not understand the function of the Federal Reserve System, they know when Alan Greenspan appears, interest rates will again be lowered, and inflation may be kept at bay. In fact, Greenspan's notoriety has brought him a "cult" following who have created…

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