A Visual Guide to the Federal Reserve

From the folks at Mint.com and WallStats.com VISUAL GUIDE FEDERAL RESERVE The Federal Reserve is a public private decentralized central banking system that is regulated and independent within the US government. Ok, so what does that mean? Good question. The Federal Reserve is quite complex. Let's start from the beginning. By the end of the 19th century people had grown tired of the turbulent banking industry. Panics, bank runs, cash crises and lack of credit were all hindering people's livelihoods. Especially concerned were farmers, who thought that the big Eastern banks were starving them of credit. NYSE falls 50% The Long Depression Unemployment tops 18% Over 10,000 firms fail 1873 1884 1894 1907 The Panic of 1907 prompted Congress to see if there was a better way to go about this banking stuff. Most republicans favored a private banking system with little government interference. Most democrats favored a government run system free from Wall Street's interference. A compromise was struck and the Federal Reserve Act was signed into law in 1913 by Woodrow Wilson, creating the hybrid system we have today. Well I heard from my cousin's friend on the Internet that the Federal Reserve was conceived in secret on Jeckyll Island by a clandestine cabal of bankers as part of the New World Order. THE HORROR OF THE FED! CREATED BY MASTRMINDS TO CONTROL THE WORLD! Well if it was a conspiracy it clearly failed. In 1913 the populist Democrats controlled the White House and both chambers of congress, and were strongly opposed to a Wall Street controlled system. Ok, so how did they set it up? Well the President appoints the 12 people who make up the board of governers. They serve terms of 14 years and make the big decisions. 7 of these people are voting members of Federal Open Market Committee along with 5 of the 12 Reserve Bank presidents. These folks make the key decisions about interest rates and the money supply. The New York Reserve Bank President is a permanent member, the rest just rotate in every few years. ROTATION- These 12 banks ensure regional interests are represented in policy decisions and provide regional banking services. 7. Chicago 1. Boston 2. NewYork City 8. St. Louis 3. Philadelphia 9. Minneapolis 4. Cleveland In addition to the 12 district banks, there are 25 Branch Banks 10. Kansas City spread across the country which offer scaled down services. 5. Richmond 11. Dallas 6 Atlanta 12. San Francisco So that's the decentralized central bank part. Right. So are these banks like regular banks? Can I open a checking account? Not really. The Fed Banks provide banking services to and regulate commercial banks, process checks and other payments, provide banking services for government agencies, collect and analyze economic data, and undertake a host of other activities. So the Fed is where the government and other banks do their banking. Correct. They are non-profit government entities that are owned by thousands of private member banks across the country which have bought shares of their regional Reserve Bank. So that is the public private part? You got it. Ok, well I think I understand the structure of it all, but I still don't get why we need this system. Well the initial purpose of the Fed was to deal with the problem of banking panics and economic uncertainty. This is done in a variety of ways. Customers perceive banks as insolvent Banks perceive each other as insolvent and or not having enough money. refuse to cash checks from other banks. The Fed lowers its dis- Through reserve accounts that member banks have count rate, allowing banks to borrow more, which effectively increases the money supply. with the regional Federal Reserve Banks, billions of checks per year are quickly processed and cleared. It's too late, as banks or other institutions The Fed then acts as a lender of last are perceived as too high risk to borrow from other banks. resort, assuming the risk in an effort to prevent collapse. So it's the bankers bank. But what about the government, does it bank at the Federal Reserve too? Yes, the US Treasury keeps a checking account, of sorts, with the Federal Reserve. Deposits it with the Federal Reserve. The US treasury collects taxes and other income. Outgoing payments are handled by the Fed. Since the Government spends more than it earns, a shortfall is created. Interest on these To cover the shortfall, the Fed does two things. securities is paid by the US Government. It sells and redeems US It buys currency from the US Mint at manufacturing cost, about 4 cents per bill. Government securities such as savings bonds and Treasury Bills. See, it's just like my cousin on the Internet says, the Fed can buy $100 bills for 4 cents and then loan it to the Government, at interest? That's messed up. Well the Fed must provide Treasury securities as collateral for the value of the currency it buys. Also, nearly all of the Fed's net earnings are returned to the Treasury department. Well if the profits go back to the government, how are all these nefarious bankers making money? Member banks who purchase stock in their Federal Reserve Bank receive a 6% annual dividend. Indi- viduals and non-bank firms may not purchase stock. A 6% dividend? That's not much to rule the world on. I lways thought the Fed was all-powerful. Whenever the chairman speaks, the markets move. Well the most important function of the Fed is in set- ting the federal funds rate. This affects the interest rates that banks charge each other and ultimately charge consumers. The movement of this rate can have a tremendous inpact on the economy. The Fed can spur off the economy but also risks inflation. Slowing economy Higher inflation Lower interest rate Federal Growing economy Reserve Lower inflation Or the Fed can stave off inflation but risks slowing the economy. Slowing economy Higher inflation Higher interest rate Federal Growing economy Reserve Lower inflation But they generally try to keep it balanced. Slowing economy Higher inflation Modest rates Modest rates Federal Reserve Growing economy Lower inflation So the Fed is pretty central to our economy then. Of course, the Fed is the central bank for the US. It is a very American hybrid of capitalism, ingenuity, and complication. Ok, so let's recap. The Federal Reserve is run by presidential appointees but is owned by many smaller private banks, who earn a small dividend. It's a central bank which offers services to the government and other banks but is split up into many pieces all over the country. The Fed can issue currency and government securities but the profits are returned to the Treasury. Its most important job is to keep the economy on track but it will also step in as a lender of last resort should things fall apart. You got it. But it's really owned by wealthy European bankers who killed Kennedy to preserve their 6% divided. Right, and Elvis is the shadow chairman calling all the shots from his Graceland bunker. But let's keep that between you, me, and the internet. mint.com/blog/ wallstats.com