is the Fed?
Research for Online Investors
This article originally appeared in MarketToday on 4/15/10
does the Federal Reserve System do? We throw around names for
institutions and many may not know what they do, why they were created in the first place, and how they
work. Occasionally, we have a new customer to our premium services that
is overwhelmed by all of the jargon in the world of investing.
try to limit this, but it does creep into our lexicon when we deal in the markets every
day. I dare guess, many of us that speak of some entities with authority,
may not have knowledge deeper than passing familiarity.
Federal Reserve System was created by an act of congress in 1913. It was done in the wee hours of the morning, with
Republican’s kept in the dark. Does it sound
The Democrats held a majority in the Senate, and under President Woodrow Wilson (D), were willing
to run over the opposition. Witness the report on The Incredibal Timeline that created the Federal
Reserve in 1913, 96 years ago.
“The Federal Reserve Act was scheduled during the unlikely hours of 1.30 am to 4.30 am…on Monday
22 December 1913, at which 20 to 40 substantial differences in the House and Senate versions were supposedly
described, deliberated upon, debated, reconciled and voted upon in a near-miraculous four-and-a-half to nine
minutes per item…
At 4.30 am, a prepared report of this Committee was handed to the printers. Senator Bristow of
Kansas, the Republican leader, stated on the Congressional Record that the Conference Committee had met without
notifying them (Republicans), and that Republicans were not present and were given no opportunity either to read or
sign the Conference Committee report. The Conference report is normally read on the Senate floor. The Republicans
did not even see the report. Some senators stated on the floor of the Senate that they had no knowledge of the
contents of the Bill.
At 6.02 PM on 23 December, when many members had already left the Capital for the Christmas
holiday, the very same day that the Bill was hurried through the House and Senate, President Woodrow Wilson signed
the Federal Reserve Act of 1913 into law.”
Before the Federal Reserve System, and the resulting fractional banking system, banks maintained
reserves in cash to pay depositors that wanted to withdraw funds. When a “bank run” occurred, the victim bank
could quickly run out of cash. Nationally Chartered banks held treasury bonds, and deposited funds in ‘reserve’
banks. When treasury bonds
declined in value, the bank’s assets were reduced, this is what we call today “mark to
Federal Reserve stated duties are:
Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit
of maximum employment, stable prices, and moderate long-term interest rates.
Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and
financial system and to protect the credit rights of consumers.
Maintaining the stability of the financial system and containing systemic risk that may arise in financial
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.
can argue they have done a woeful job on numbers two and three.
think of the first duty listed as the most nefarious. This is where the
Fed causes the most problems. The tug of war between maintaining high
employment, stable prices (inflation) and moderate long term interest rates is subject to political
calculations. Balancing these different duties is what leads to real
estate bubbles. Inflation in the eighties, to pay for the Vietnam War,
was a result of the Fed trying to serve its master. Inflation let the government pay off debts with cheaper
Federal Reserve follows Keynesian economics, increasing money supply to prime the
pump. The problem is they always talk about taking away the punch
bowl once the party is going, but never do. Again, witness the real
estate bubble we are presently paying for. If you would like to go
back further, read about the roaring ‘20’s. The Federal Reserve
inflated the money supply to pay for WWI, keeping interest rates low. This fueled the stock market to new highs on speculation. When loans were pulled back on the margins, the slide
is the Federal Reserve Organized? There are seven Federal Reserve governors appointed by the President and confirmed by the
Senate. These seven positions
include the Chairman (Bernanke) and a Vice-Chairman. There are twelve independent Federal Reserve
Bank districts that operate 25 branches. Each chooses their district
Federal Open Market Committee (FOMC) overseas monetary policy. The FOMC consists of the seven governors, and
five of the district presidents. The New York Fed President is always one of the five, with the other four positions rotated among
the other eleven Districts.
New York Federal Reserve is always one of the districts represented on the FOMC because they are solely responsible
for all “open market operations.” Open market operations are the process
of managing the money supply. Money supply is managed with buying and
selling in government securities, or until recently mortgage backed securities (MBS). Buying securities increases money supply, selling
securities decreases money supply.
Board of Governors appoints three members to each of the twelve local district boards. The other board members are nominated by member
Federal governors serve a 14 year term. Positions are rotated, so presidents cannot
“stack” the board. Senator
Chris Dodd withheld two appointments by former President Bush. This has allowed Obama to appoint those two,
plus the vice-chair has resigned and must be replaced. These three plus re-appointing Bernanke has
allowed Obama to appoint four board members in his first year.
hope this has helped you understand the Federal Reserve System.
Sources for this article: federalreserve.gov, Wikipedia.org, seekingalpha.com, hubpages.com, lewrockwell.com
Speaking of the creation of the Federal Reserve:
"This Act establishes the most gigantic trust on earth... The
worst legislative crime of the ages is perpetrated by this banking and currency
Bill."-Rep. Charles A. Lindbergh,
The information presented in this newsletter is based on generally available news releases, corporate filings,
current events, interviews and the editor’s opinions. It may contain errors and you should not make investment
decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose
it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any
securities discussed. The editor may have held a position in a security earlier, or in the
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