Alexander Hamilton, as Secretary of the Treasury, persuaded Congress to establish the first centralized banking institution (First Bank of the United States) in American in 1791. It was immediately met with suspicion by the farming community, which constituted the large majority of Americans, of being representative of “big money”; when it came up for renewal 20 years later, Congress let its charter expire (Federal Reserve Education.Org, n.d., p. 1). 223 years later, the Federal Reserve is met with the precise criticism (that they cater to the agenda of powerful private bankers) it received from the early agrarian Americans. Compounding this negative perception is the exodus of the Fed’s ...view middle of the document...
Shortly after the war, the System tried to stop the gold outflow by tightening credit and brought a sharp economic recession in 1920-21. However, they learned a lot from experience, and discovered the effect of open market operations on bank reserve position. The System was so weak that the country was driven to the Great Depression. It suffered the worst in 1933.
These developments led to changes in the Federal Reserve structure and practice. For the first time, there was an authority to regulate stock market margins, and the board was granted the power to vary reserve requirements.
World War II brought inflationary pressures on the economy. The Federal Reserve helped the Treasury borrow at law interest rates. The inflationary impact was restrained by price controls and the issuing of savings bonds. Sharp price hikes were witnessed in 1947 and 1948.
Another period of inflation came with the outbreak of the Korean War in 1950. In 1951, and agreement was reached with the Treasury stipulating that Federal Reserve policy should not be subordinated to Treasury financing. After 1951, the Reserve focused more on domestic economic stabilization. From 1954-1960, price stability and monetary restrictions were emphasized.12 During this period, the Reserve was also concerned with the country’s gold depletion. Thus, in 1969 the Congress abandoned the gold reserve requirements for Reserve liabilities.
There are twelve Federal Reserve banks in different parts of the nation; stock in each Federal Reserve Bank is owned by the member banks of its district. Each bank’s subscription is equal to 3% of its capital and surplus, and another 3% is subject to call.3 The Federal Bank of New York is the wealthiest and chief international link of the system.4
The Federal Reserve banks do not deal with the general public and they do not seek profit. They perform services for commercial banks and for the U.S. Treasury. They maintain substantial control over the supply of money and credit in the economy due to their influence on the reserve positions of commercial banks. This control in turn influences the flow of aggregate demand for goods and services, thus affecting the nation’s output, price level and employment. The Board of Governors is appointed by the President, subject to Senate confirmation, and they serve for a term of fourteen years. The President appoints a chairman from among the Board members.1
Each Federal Reserve Bank has nine directors: district member banks choose six and the Board of Governors choose the other three. The directors of each bank choose their president who should be approved by the Board of Governors, in whom leadership of the bank largely centers.5
The Federal Open Market Committee (FOMC) is the most important the Federal Reserve in respect to monetary policy. The FOMC consists of seven board members and five Reserve bank presidents, always including the New York president. All the Reserve bank presidents...