Chapter 13 Fin 408

Initial Resistance
- Fear of centralized power
- No existing lender of last resort
- Frequent nationwide bank panics
- Panic of 1907 highlighted the need for a central bank
Federal Reserve Act of 1913
- Established to create a system of checks and balances
- Aimed to decentralize power to prevent concentration

Diffusion of Power
- Power spread along regional lines
- Involves private sector and government
- Engages banks, business leaders, and public
Key Components
- Federal Reserve Banks
- Board of Governors of the Federal Reserve System
- Federal Open Market Committee (FOMC)
  - Meets 8 times per year to decide on interest rates
- Federal Advisory Council
- Approximately 2,900 member commercial banks
Decentralization
- Designed to avoid excessive concentration of power

Nature and Ownership
- Quasi-public institutions
- Owned by private commercial banks in their districts
- Member banks elect six directors per district and additional directors are appointed by the Board of Governors
Directorial Structure
- Three A directors: professional bankers
- Three B directors: leaders from industry, labor, agriculture, consumer sector
- Three C directors: appointed by the Board, not affiliated with banking
Appointment of President
- Nine directors appoint the president of each bank, subject to Board of Governors' approval

Core Functions
- Clear checks
- Issue and withdraw currency
- Administer discount loans to district banks
- Evaluate bank mergers and expansion applications
- Act as liaisons with the business community
- Examine bank holding companies and state-chartered banks
- Collect local business data for economic monitoring
- Employ economists for monetary policy research
Special Role of the New York Fed
- Key trading location for the Fed
- Hosts prominent commercial banks in the U.S.
- Active in bond and foreign exchange markets
- Unique member of the Bank for International Settlements (BIS)
- President acts as a permanent voting member of the FOMC

Director Responsibilities
- Establish the discount rate
- Determine eligibility for discount loans
- Select commercial bankers for the Federal Advisory Council
- Five of the twelve bank presidents hold FOMC voting rights
Membership of Banks
- All national banks must be members of the Federal Reserve System
- State-chartered banks can opt for membership
- The Depository Institutions Deregulation and Monetary Control Act of 1980 equalizes reserve requirements across banks

Composition and Appointment
- Seven members based in Washington, D.C.
- Appointed by President and confirmed by Senate
- Serve 14-year nonrenewable terms
- Must represent different districts
- The chairman serves a four-year term

Key Responsibilities
- Set interest rates
- Vote on open market operations
- Set reserve requirements
- Control the discount rate through review
- Set margin requirements
- Review salaries of Fed bank presidents and budgets
- Approve bank mergers and new activities
- Supervise foreign banks operating in the U.S.

Role and Responsibilities
- Advises the president on economic policy
- Testifies in Congress
- Acts as the spokesperson for the Federal Reserve System to the media
- May engage in international economic negotiations

Composition and Frequency of Meetings
- Consists of seven Board members, president of New York Fed, and presidents of four other reserve banks
- Chaired by the Board's chairman
- Meets eight times a year
Meeting Agenda
- Manager's report on market operations
- National economic forecasts from the Board staff
- Discussion of monetary policy scenarios
- Updates on relevant Congressional actions
- Public announcement of meeting outcomes