Federal Reserve
 Federal Reserve Regions |
The Federal Reserve System (also known as the Federal Reserve or simply "The Fed") is the central bank of the United States. It was created by the United States Congress and enacted on December 23, 1913, when President Woodrow Wilson signed the Owen-Glass Act into law.
"Federal Reserve" was carefully selected name - "Federal" implying that this is a government organization. "Reserve" implying that the Federal Reserve notes (i.e., all United States currency) issued is backed by gold and/or silver. In fact, the Federal Reserve is a private corporation, authorized by Congress but owned by private member banks. Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy and because the government of the United States accepts these notes for payment of taxes.
The Federal Reserve System is composed of a central Board of Governors -- in Washington, D.C, and twelve regional Federal Reserve Banks located in major cities throughout the nation.
America once had a stable dollar backed by gold deposits, a "gold standard" system. Central bankers do not want a gold-backed currency system, because it restricts their ability to stabilize the domestic economy and to avoid deflation.
America's gold-standard system was gradually undermined throughout the last century, until President Nixon finally severed the last tenuous links between the dollar and gold in 1971. Since 1971, the Fed has employed a pure fiat money system, meaning that it can create money whenever it decrees simply by printing more dollars (though of course the practice is more complicated). The "value" of each newly minted dollar is determined by the faith of the public, the total amount of dollars in circulation (the money supply), and the financial markets. It depends on the power of the Fed keep currency artificially scarce.
Since dollars have no intrinsic value, they are subject to currency market fluctuations and government policies, especially Fed inflationary or deflationary policies. Every time new dollars are printed and the money supply increases more than the real amount of production, the average price level rises.
Inflation acts as a hidden tax levied disproportionately on the poor and fixed-income retirees, who find the buying power of their limited dollars steadily diminished. The corporations, bankers, and wealthy Americans suffer far less from this inflation, because they can take advantage of the credit expansion that immediately precedes each new round of currency devaluation.
Alexander Hamilton lobbied for the first privately-owned Federal Bank, and in 1789 Congress chartered the First Bank of the United States for 20 years. In 1811 President Thomas Jefferson refused to renew the charter for the bank stating, "I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies."
In 1816 Congress established the Second Bank of the United States
. But President Andrew Jackson , overiding Congress, closed it in 1836 commenting," The bold effort the present bank had made to control the government ... are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it."
Americans at the time knew of the destruction to the economy the European central banks had caused to their respective countries and to countries who became their debtors. They saw the large-scale government deficit spending and debt creation that occurred in Europe.
In 1886, a group of millionaires purchased Jekyll Island and converted it into a winter retreat and hunting ground, America's most exclusive club. By 1900, the club's roster represented one-sixth of the world's wealth. Names like Astor, Vanderbilt, Morgan, Pulitzer and Gould filled the club's register.
In 1902, Paul Warburg, a friend and associate of the Rothschilds and an expert on European central banking, came to this country as a partner in Kuhn, Loeb and Company. He married the daughter of Solomon Loeb, one of the founders of the firm.
In 1910 a group was formed consisting of the chiefs of major corporations and banks in America. The group left secretly by rail from Hoboken, New Jersey, and traveled anonymously to the hunting lodge on Jekyll Island.
At Jekyll Island, the true draftsman for the Federal Reserve was Paul Warburg. Ostensibly, the bank was to be controlled by Congress, but a majority of its members were to be selected by the private banks that would own its stock. The power over the creation of money was to be taken from the people and placed in the hands of private bankers who could expand or contract credit as they felt best suited their needs.
The Federal Reserve System was established by the federal government in 1913
The organization committee was chartered with selecting the locations of between eight and twelve decentralized Federal Reserve Banks. They decided upon twelve cities, and a centralized "Board of Governors" in Washington, DC:
Alan Greenspan is the current chairman.
The Fed usually lowers or raises its rates by 0.25% or 0.50%. The Economist, Merrill Lynch, Lehman Brothers, HSBC used to make predictions about how the rates will change.
Since 2001, The Fed has lowered its interest rates several times to fight recession : lower rates make credit cheaper and so enable more investment, whereas saving brings less money (see monetary policy for more explanation).
In November 2002, rates were cut to 1.75. Rates are below inflation level.
It is said that the Fed doesn't have much ammunition left, since rates are already below inflation and that 1.25 means that there no much room left for further cuts (in theory five times 0.25)
In March 2003, interest rates were at their lowest in 40 years.
On the 23rd of July 2003 a Federal Reserve committee cut the federal funds rate by one-quarter of a percentage point - to 1 percent.
The federal funds rate is also called the overnight rate because it is what banks charge one another for overnight loans. The last time it was lower was in July 1958, when the overnight rate averaged 0.68 percent. The Fed has cut the overnight rate 13 times since the beginning of 2001, when the rate was 6.5 percent.
As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch 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. However, the Federal Reserve is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government.
The twelve regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized much like private corporations—possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold or traded or pledged as security for a loan; dividends are, by law, limited to 6 percent per year. (see section 3)
The Federal Reserve System, frequently referred to as simply the Federal Reserve Bank, was created via the Federal Reserve Act of 1913 which "established a new central bank designed to add both flexibility and strength to the nation's financial system. The legislation provided for a system that included a number of regional Reserve Banks and a seven-member governing board. All national banks were required to join the system and other banks could join. The Reserve Banks opened for business in November 1914. Congress created Federal Reserve notes to provide the nation with an elastic supply of currency. The notes were to be issued to Reserve Banks for subsequent transmittal to banking institutions in accordance with the needs of the public.
The Federal Reserve Bank is the focus of much criticism and even, at times, conspiracy theories. Some critics say that the name was intentionally chosen to deceive and fool the U.S. citizens into acceptance. Such critics claim that the Federal Reserve's real purposes are (1) to make a profit by "skimming" a small percent of the 10 trillion dollar U.S. economy; (2) to redistribute wealth through the sales and purchase of the U.S. national debt (currently about 7 trillion dollars); and (3) to fix currency exchange rates with other country central banks throughout the world to generate an additional $1 Billion dollars a day in profits.
Some of these critics say that the U.S. Congress was tricked by the world elite into creating the Federal Reserve System in 1913 for the purpose of money control through inflation (invisible taxation of the masses), extremely high and profitable interest rates, and outright taxation through the creation of liens and bonds payed for by U.S. citizens. These critics argue that, through unconstitutional changes in law, the words income (corporations) and wage (peoples job paychecks) were redefined. Taxation enforcement (Internal Revenue Service) could now force U.S. citizens to pay taxes, fees and fines under penalty of law, possible arrest and imprisonment.
Roles and Responsibilities
The main tasks of the Fed are:
The Fed: Gold, Dollars, Inflation and Debt
History
Each of these cities came to be important financial districts due, in large part, to this selection.Organization of the Federal Reserve
The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. The members are elected for a term of 14 years (with no re-appointment possible). The Federal Open Market Committee (FOMC) comprises the 7 members of the board of governors and 5 representatives from the Federal Reserve Banks.Interest rates
The Fed is in charge of setting the federal funds interest rate. This is the rate that banks are forced to charge each other for overnight loans to each other. This in turn influences the Wall Street Journal prime rate which is usually 3 percent higher than the federal funds rate. This prime rate is the relative rate that most banks price their loans at. The Fed and BCE
The Fed, in contrast with the European Central Bank (ECB or BCE), has two goals—keeping growth and fighting inflation—while the BCE has only to fight inflation.Who Owns the Federal Reserve?
The Federal Reserve claims that nobody owns it – that it is an “independent entity within the government.” The Federal Reserve is subject to (or at least subjects itself to) laws such as the Freedom of Information Act and the Privacy Act which cover Federal agencies but not private corporations; yet Congress gave the Federal Reserve the autonomy to carry out its responsibilities insulated from political pressure. Each of the Fed's three parts – the Board of Governors, the regional Reserve banks and the Federal Open Market Committee – operates independently of the federal government to carry out the Fed's core responsibilities. External links