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A Central Banking System

A Central Banking System

 

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 created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Recently, the Federal Reserve has been in the news as a new chairman is being selected.

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and today include conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions.

The system is headed by a seven-member Board of Governors, led by the chair. Each governor is independently appointed by the president and has every right to dissent when he or she disagrees with a decision, whether on bank regulation or interest rate policy. Similarly, the 12 reserve banks are each run by a president, who in turn is chosen by local boards of directors of each reserve bank, with the selection subject to the approval of the board of governors.

The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.   

According to the its Board of Governors, the Federal Reserve System "is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."

 Nationally chartered commercial banks are required to hold stock in the Federal Reserve Bank of their region; this entitles them to elect some of the members of the board of the regional Federal Reserve Bank. The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained.  For example, in 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.  At the end of 2011, the Federal Reserve transferred $77 billion in profits to the U.S. Treasury Department.

 

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