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Tuesday, July 30, 2013

Why do we need Reserve Bank of India at all?If anything is to be privatized next,please do privatize the government of India first and then the RBI.Let it be a direct corporate rule!

Why do we need Reserve Bank of India at all?If anything is to be privatized next,please do privatize the government of India first and then the RBI.Let it be a direct corporate rule!

Palash Biswas

Skype:palash.biswas44Macro report card says rupee rescue act to fizzle out if trade imbalances remain.


Jul 30, 2013

First Quarter Review of Monetary Policy 2013-14


Statement by Dr. D. Subbarao, Governor, Reserve Bank of India on the First Quarter Review of Monetary Policy for the Year 2013-14


Webcasting of First Quarter Review of Monetary Policy Statement 2013-14

Jul 29, 2013

Macroeconomic and Monetary Developments - First Quarter Review 2013-14


Macroeconomic and Monetary Developments - First Quarter Review 2013-14

Press Release

Full Document

Jun 17, 2013

Mid-Quarter Review of Monetary Policy 2013-2014

May 07, 2013

Annual Policy Statement for the Year 2013-14

May 06, 2013

Annual Policy Statement for the Year 2013-14

May 03, 2013

Annual Policy Statement for the Year 2013-14

May 02, 2013

Macro Economic and Monetary Developments 2012-13


Macro Economic and Monetary Developments 2012-13

Press Release

Full Document

Why do we need Reserve Bank of India at all?Our economic management is directed from IMF,World Bank,White house and MNCs worldwide.

India is highly Americanized.

US FED is a private institution.In India, every other thing is privatised.

Why not the Reserve bank of India?

It is reduced to become a tool of market forces and it designs the monetary policies while fiscal policies remain absconding since transfer of power in 1947.

RBI is not the people`s bank as the government of India is not the government of India.

If anything is to be privatised next,please do privatise the government of India first and then the RBI.

Let it be a direct coporate rule.

We have become habitual in the Open Market Economy.Purchasing capacity is our status.

We have no privacy,no sovereignty as citizen.Believe me ,it would be no difference at all.

At least, we would get rid of this power politics so disgusting!

We would get rid of all sets of scams as  ingredient  part and parcels of the public republic!

At least, the governance would be professional!

Nevertheless,we have to buy everything in the open market.

Those who stand out of the open market economy, they have always been subjected to ethnic cleansing!

The Reserve Bank of India (RBI) in its first quarter review of monetary policy kept both the repo rate and Cash Reserve Ratio ( CRR) unchanged. This is in line with market expectations.

Maintaining an extremely hawkish stance,RBI also cut the GDP growth forecast for FY14 to 5.5% from 5.7% earlier. RBI Governor Subbarao cited various risks that are likely to hamper economic growth. Both domestic and global uncertainty were admitted to be a deterrent for economic recovery.

RBI said that it can revert to supporting growth with continuing vigil on inflation. The RBI will endeavour to keep inflation, which is under threat from a depreciating rupee, at 5 per cent by March end.

It also said that the recent liquidity tightening measures, taken to support the rupee, will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling it to revert to the policy of supporting growth with continuing vigil on inflation.

"The policy stance is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets," Subbarao said.

The effect of the Reserve Bank's recent interest rate increase and liquidity tightening to bolster the rupee will fizzle out if the government does not move to reduce external trade imbalances, a central bank policy review says.

Giving the policy guidance, the governor said "monetary policy going forward will be shaped by the consideration of supporting growth, anchoring inflation expectations and maintaining external sector stability."

The current situation of low headline inflation, prospects of softening food inflation on a good monsoon and decelerating growth warranted a pro-growth policy stance, but for the difficulties on the external front, as reflected in the almost 10 per cent depreciation in the rupee and the rising current account deficit, he said.

Stating that the external sector was the "biggest risk to macroeconomic stability," Subbarao called for urgent policy steps from the government to curtail the CAD to a sustainable level of 2.5 per cent of GDP and said that the RBI is ready to use all instruments under its command help in the efforts.

"It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring CAD down to sustainable levels," the Governor said.

The recent liquidity tightening measures, brought in to reduce speculative pressures on the rupee, which had hit a record low of 61.21 to the dollar on July 8, will be rolled back once the currency stabilises, which will lead to a shift in the monetary policy to be more accommodative and pro-growth, he added.

On inflation, while Subbarao acknowledged the ongoing rupee depreciation would create trouble for the price rise scenario, he stressed that the RBI will use all instruments at its disposal to contain it to 5 per cent by March.

Inflation as measured by wholesale prices increased marginally to 4.86 per cent in June.

Only reforms can put economy on track says Reserve Bank of India!

How does RBI spell such a verdict?

Is it replaced the Supreme court of India?

Is Indian Parliament vested in the Reserve bank of India?

Is the Government of India reincarnated in the RBI mode?

What is it?

The revival of capital inflows into India could signal the rollback of Reserve Bank of India's recent liquidity measures, C. Rangarajan, the prime minister's economic adviser, said on Tuesday.

India needs to find adequate capital inflows to finance the wide current account deficit, Rangarajan, chairman of the prime minister'sEconomic Advisory Council, told a news channel.

Reserve Bank of India left interest ratesunchanged on Tuesday as it supports a battered rupee but said it will roll back recent liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.



RBI issues Policy Document for Regulation and Supervision of Financial Market Infrastructures


Recruitment of Firemen


Online examination for the post of Assistant - 2013 - Rescheduling of examination/Relocation of candidates


Address of Dr. (Smt.) Deepali Pant Joshi, ED, RBI, at National Seminar on Consumer Protection – Agenda for Inclusive Growth, New Delhi on July 24, 2013


RBI announces Additional measures to address Exchange Market Volatility


Financing Strategies for Urban Infrastructure: Trends and Challenges – Inaugural address delivered by Shri H R Khan, DG, RBI, at Mumbai on July 18, 2013


Revised Scheme for Import of Gold


Basic Statistical Returns of Scheduled Commercial Banks in India - Volume 41, March 2012


Online examination for the post of Assistant to be held at Srinagar and Baramulla on July 20 and 21, 2013 postponed


Financing Strategies for Urban Infrastructure: Trends and Challenges – A presentation by Shri H R Khan, DG, RBI at Mumbai on July 18, 2013


Central Banking in Emerging Economies Emerging Challenges - Speech delivered by Dr. Duvvuri Subbarao, Governor, RBI, at the EEFC, London on July 17, 2013


RBI's Special Repo Window for Liquidity Requirements of Mutual Funds


Performance of the Private Corporate Business Sector during Fourth Quarter of 2012-13 - Data Release


Compliance Function in Banks: Back to the basics - Inaugural address by Dr. K. C. Chakrabarty, DG, RBI on July 12, 2013


RBI announces Measures to address Exchange Rate Volatility


RBI penalises 22 Banks


Inaugural Address of Dr. (Smt.) Deepali Pant Joshi, ED, RBI, at the Conference of PCCOs of RRBs organised by BCSBI, at Mumbai, on July 15, 2013


Internationalisation and Integration of Asian Capital Markets: Expanded Role for Asian Currencies, including the Renminbi - Comments by Shri G. Padmanabhan. ED, RBI at Singapore on July 12, 2013


Recruitment for the post of Manager (Technical – Electrical) in Grade 'B' – List of admitted candidates


Call Letters for Assistant Exam


Recruitment for the post of Manager (Technical - Civil) in Grade 'B' – List of admitted candidates


Survey on Foreign Collaboration in Indian Industry: 2007-2010


Golden Jubilee Celebration Function of RBSC, Chennai – Speaking Notes by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India


RBI releases its monthly Bulletin for July 2013


Recruitment for the post of Rajbhasha Officer in Grade 'A' – List of admitted candidates


Risk Management and Inter Bank Dealings


Engagement of Medical Consultant (MC) on contract basis with fixed hourly remuneration


Credit Information Companies: Seeking New Frontiers - Inaugural address by Dr. K. C. Chakrabarty, DG, RBI, at the Experian India Conclave 2013 organized in Mumbai on July 5, 2013


India's Exports of Computer Services 75.2 per cent of Total Software Services Exports in 2011-12: RBI Survey


RBI Board meets in Chennai

Now, only 22 per cent Indians below poverty line: Planning Commission

24 Jul, 2013

: The number of India's poor fell to less than a quarter of its population in 2011-12, according to a Planning Commission estimate, giving the government a reason to cheer amid the recent raft of disappointing macro economic data.

The commission said on Tuesday the number of those below the poverty line declined to 21.9% of the population in 2011-12, from 29.8% in 2009-10 and 37.2% in 2004-05.

The estimate, based on a survey of household consumer expenditure, showed rural poverty declined to 25.7% from 41.8% in 2004-05, while in urban areas it fell to 13.7% from 25.7%.

The sharp drop was attributed to the high real growth in recent years, which raised the consumption capacity.

The data showed that nearly 2 crore people were pulled out of poverty every year from 2004-05 onwards, which resulted in a sharp drop in those below the Tendulkar poverty line to 27 crore in 2011-12 from 40.7 crore in 2004-05.

The national level poverty ratio is based on Suresh Tendulkar methodology, which uses the mixed reference period after National Sample Survey Office (NSSO) tabulated expenditure of about 1.2 lakh households across the country.

The national poverty line has been fixed at Rs 816 per capita per month for rural areas and Rs 1,000 for urban areas.

"Thus, for a family of five, the all-India poverty line in terms of consumption expenditure would amount to about 4,080 per month in rural areas and 5,000 per month in urban areas," the Planning Commission said.

The government has set up a committee under C Rangarajan to review the Tendulkar methodology that has been criticised in the past for fixing poverty lines that were too low at 22.42 per person in rural areas and 28.65 in urban areas.


"Since the data from the NSS (National Sample Survey) 68th round (2011-12) of household consumer expenditure survey is now available, and the Rangarajan committeerecommendation will only be available a year later, the Planning Commission has updated the poverty estimates for the year 2011-12 as per the methodology recommended byTendulkar committee," the Planning Commission said in a release.

The release showed there would still be a decline in the poverty rates from 2004-05 levels even if a method other than the Tendulkar methodology was used to determine the poverty line.

Data from the survey in 2009-10 has not been used for comparison as the year was a drought year. In 2004-05, 37.2% of the country's population was below the poverty line with ratios for rural and urban areas at 41.8% and 25.7%.

The rate of decline was 0.74% per annum during the 11-year period from 1993-94 to 2004-05.

Uttar Pradesh had the highest number of poor people at 598.19 lakh, which is 29.4% of the state's total population followed by Bihar at 358.15 lakh (33.7%), Madhya Pradesh at 234.06 lakh (31.6%), Maharashtra at 197.92 lakh (17.3%) and West Bengal at 184.98 lakh (19.9%).

Prime minister Manmohan Singh had last week highlighted the UPA government's record in poverty reduction, contrasting with the lower fall in the NDA regime and earlier.

"The percentage of population below the poverty line declined at 0.75 percentage points per year before our government came to office in 2004-05. It has fallen more than 2 percentage points per year between 2004-05 and 2011-12," Singh said at an industry association function last week.

Just see the Economic Times story!

MUMBAI: The effect of the Reserve Bank's recent interest rate increase and liquidity tightening to bolster the rupee will fizzle out if the government does not move to reduce external trade imbalances, a central bank policy review says.

It will be a hard road to economic recovery as business confidence is low, and rising globalinterest rates may throw the financial markets out of gear, says the June quarter Macroeconomic and Monetary Developments review by RBI.

"While recent liquidity tightening measures instituted by the Reserve Bank to curb volatility in the exchange rate provide at best some breathing time, it is important to push through structural reforms necessary to inspire the trust and confidence of both domestic and foreign investors," says the review by the central bank's research team.


Governor DuvvuriSubbarao's interest rate action need not reflect his research team's view.

The rupee's fall to a record low of 61.20 to the US dollar on July 8 triggered a series of measures from RBI that raised short-term interest rates on bonds and commercial paper by as much as 300 basis points. A basis point is 0.01 percentage point. The currency also gained past 59 to the greenback, but has since fallen to end Monday at 59.41.

Blaming the excess liquidity in the system for speculation on the currency, RBI has capped the amount available under the liquidity adjustment facility to 0.5% of total liabilities.

Mixed picture of economy

It has raised penal interest rates under the Marginal Standing Facility by 200 basis points to 10.25%, effectively making it the repo rate for the short term.

"Right now the focus for RBI is on rupee," said Ananth Narayan, head of treasury at Standard Chartered Bank. "There is only so much that RBI can do, and it expects the government to take steps."

Delays in project clearances and policy imbroglio such as foreign direct investment in multi-brand retail have eroded business confidence. Although it has succeeded in reducing gold imports that accounted for more than half the current account deficit, the lack of exports push is reducing US dollar inflows.

"This strategy will succeed only if reinforced by structural reforms to reduce current account deficit and step up savings and investment," said RBI.

Current account deficit moderated to 3.8% of GDP in the fourth quarter from a high of 6.5% in the December quarter. Some estimate it to climb again for the June quarter.

The assessment of the economy reveals a mixed picture. While RBI's own industrial outlook survey indicates a marginal improvement in the level of business optimism, surveys by private agencies point to weak business expectations.

Professional economists have scaled down their growth forecast for the year to 5.7%, from 6%.

"Leading indicators do not suggest immediate improvement in production activity and a slow-paced recovery is likely to shape only later in 2013-14, supported by a good monsoon that could shore up rural demand," said the RBI report.

The central bank has also warned of a possible disruption in global financial markets with the Federal Reserve likely to taper off its quantitative easing by reducing $85 billion of bond purchases.

RBI can't afford to frighten equity investors

One can only hope that having done what it did over the past fortnight, RBI will now weigh its words carefully to prevent the carnage in the bond market from boiling over to stocks.

Having indirectly raised interest rates by 300 basis points and the cash reserve ratio by half a point, Governor Subbarao cannot give up his hawkish stance. But, if he's ultra hawkish, he could end up frightening the stock market that has fallen continuously since the last round of measures.

Till now, FII selling in equities has not been alarming; this is because the equity investorsstrongly believe that RBI's tightening measures are short-term and aimed at stabilising currency (not taming inflation). This belief has to be preserved at all cost, simply because if FIIs start dumping stocksno amount of tightening and pep talk can rein in the rupee.

Not that the measures have had a significant impact (with the rupee still closing well below 59). It's possible that the rupee's modest appreciation could have been achieved even without choking the money market, just as other emerging markets that have seen their currencies gain without tightening. RBI, nonetheless, may try to communicate that it's the actions that are working to stabilise the outlook on rupee.

But what if the measures stop working? Unwinding them too soon could put the rupee again under pressure. What was partly successful in '98 when RBI had adopted similar measures could be less effective today: India is far more liberalised and exposed to international markets than it was in '98, and the scope of stabilizing rupee through monetary measures is more limited today than it was then.

The macro-economic environment too was different: forex coverage of external debt is three-times as much today compared with 1997-98; growth in 2013 is slower and inflation more benign than what it was 1997-98; so are deposit and money supply growth which rule out concerns of overheating.

The off shore non-deliverable market for rupee in '97/98 was a fraction of what it is today when a flourishing offshore market, like the proverbial tail wagging the dog, often influences the exchange rate at home. And most importantly, the gap between US and Indian interest rates is much wider today than what it was 15 years ago.

Those were also the days when government could privately place bonds with RBI and keep its borrowing cost well below the market rates. Not any more; today, the market will demand a competitive rate from the government similar to what it would charge any other borrower.

The changed realities make one wonder whether the measures were warranted at all. However, the more important task at hand is finding an orderly way to unwind them and lining up new dollar inflows through FDI, and sovereign bonds or NRI deposits.

Poverty line low, need to revisit methodology, says Montek Singh Ahluwalia

NEW DELHI: Planning commission deputy chairman Montek Singh Ahluwalia on Monday admitted that the latest poverty estimates released last week is indeed low and needs to be revised upward.

The commission said last week that only 21.9% of the population was poor, based on a per capita spending of 33.33 day in cities and 27.20 rural India, causing widespread outrage for being too low.

"As the country becomes richer and the per capita income goes up, there is need to redefine the poverty line. The latest numbers that planning commission have released, based on the Tendulkar Committee report, are absolutely rock-bottom numbers and gives us the number of poor who are actually the weakest group and therefore, should be the priority of the government," Ahluwalia said.

Based on this cut off, there were 269.3 million poor in India in 2011-12 against 407.1 million in 2004-05. If the poverty cut off is revised, the number of poor could increase again.

Ahulwalia said poverty has fallen at a faster pace during UPA regime and even the absolute numbers have come down as compared to the previous government. The last poverty estimates, based on the National Sample Survey, had come in 2004-05 and 2009-10. However, government did not consider the numbers of 2009-10 saying that it was a drought year and would not convey the real picture.


Hence, NSSO conducted a survey once again, based on which planning commission released the poverty estimates for 2011-12, the last year of the 11th plan period. According to latest estimates of the Planning Commission, the poverty ratio, or population of poor in the country, dipped to 21.9% in 2011-12 from 37.2% in 2004-05 due to an increase in per capita consumption.

This was a decline of 2.2% per annum since 2004-05 vis-a-vis 0.74% in the tenure of previous government, the Planning Commission had said. Besides, the absolute poverty numbers also declined, pulling out nearly 130 million people out of poverty in seven years of UPA regime.

The plan panel had used the Suresh Tendulkar Committee's methodology, which factors in spending on health and education besides calorie intake to arrive at a poverty line for cities and villages. Accordingly, those whose daily consumption of goods and services exceed 33.33 in cities and 27.20 in villages are not poor.

This has drawn lot of criticism from the opposition and from within the party. Since there has been similar criticism in the past, government has already set up a committee under Prime Minister's Economic Advisory Council chairman C Rangarajan to revisit the methodology for tabulating poverty.

The committee is expected to submit its report by middle of next year and Ahulwalia says he is confident of seeing an increase in absolute poverty numbers when the Rangarajan committee's recommendations are out.

Planning Commission sticks to old formula to define poor

By Mahendra Singh, TNN | 24 Jul, 2013, 10.51AM IST

NEW DELHI: People spending more than Rs 27.2 per day in villages and Rs 33.3 in cities are not poor, according to latest data released by the government.

The proportion of the poor has come down to 21.9% of the country's population in 2011-12 from 37.2% in 2004-05, a decline of 2.18 percentage points every year during seven years of UPA rule.

The absolute number of poor declined by nearly 137.4 million between 2004-05 and 2011-12 and by around 85 million between 2009-10 and 2011-12.

However, there are still 269.7 million poor — 217.2 million in villages and 53.1 million in cities — across the country as against 407.3 million in 2004-05.

The percentage of persons below the poverty line in 2011-12 has been estimated at 25.7% in rural areas and 13.7% in urban areas.

The sharp decline in poverty levels across the country is based on the benchmark of a fresh poverty line. But the timing and the methodology for estimating poverty is questionable as the fresh estimates are based on the Tendulkar methodology, which was junked by the Planning Commission last year after a huge public outcry.

The plan panel's earlier figures showed that poverty was declining by 1.5 percentage points from 37.2% to 29.8% between 2004-05 and 2009-10, but the data was disowned after it was criticized for pegging the poverty line too low at Rs 22.42 per person per day in rural areas and Rs 28.65 in urban areas.

After intervention from the UPA's top leadership, the government set up another committee headed by C Rangarajan to look at a methodology for determining poverty lines and estimating poverty.

The commission justified the release of the data using the old methodology saying the data from the National Sample Survey (NSS) 68th round (2011-12) was now available and theRangarajan committee recommendation will only be available in mid-2014 so it had updated the poverty estimates for the year 2011-12 as per the methodology recommended by theTendulkar committee.

After the controversy, a special survey was conducted by the NSSO to determine poverty, an exercise which taken up after a gap of five years.

The official argument is that whatever be the poverty line, there will be a decline in poverty in percentage terms.

The commission argued that it is important to note that although the declining trend is based on the Tendulkar poverty line, which is being reviewed and may be revised by the Rangarajan committee, an increase in the poverty line will not alter the fact of a decline. "While the absolute levels of poverty would be higher, the rate of decline would be similar," it said.

Reserve Bank of India

From Wikipedia, the free encyclopedia

Reserve Bank of India

भारतीय रिज़र्व बैंक

* *

RBI seal

RBI headquarters in Mumbai


Mumbai, Maharashtra


1 April 1935


Duvvuri Subbarao


Indian rupee (₹)

ISO 4217 Code



US$302.1 billion [1][Note 1]

Base borrowing rate


Base deposit rate



The Reserve Bank of India (RBI) is India's central banking institution, which formulates the monetary policy with regard to the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934.[2] The share capital was divided into shares of ₹100 each fully paid, which was entirely owned by private shareholders in the beginning.[3] Following India's independence in 1947, the RBI was nationalised in the year 1949.



Purposes and structure[edit]

RBI assumes an important part in the development strategy of the Government of India, and as a leading member of the Alliance for Financial Inclusion (AFI), a global network of financial policymakers from developing and emerging countries working together to increase access to appropriate financial services for the poor. RBI is also a member of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 21-member-strong Central Board of Directors—the Governor (currentlyDuvvuri Subbarao), four Deputy Governors, two Finance Ministry representatives, ten government-nominated directors to represent important elements from India's economy, and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of five members who represent regional interests, as well as the interests of co-operative and indigenous banks.



The old RBI Building in Mumbai

The Reserve Bank of India (RBI) was founded on 1 April 1935 to respond to economic troubles after the First World War. The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the Hilton Young Commission[4]. It began according to the guidelines laid down by Dr. B. R. Ambedkar, whose guidelines, working style and outlook were presented to the Hilton Young Commission. When this Commission came to India, under the name of "Royal Commission on Indian Currency and Finance", every member of this Commission was holding Dr. Ambedkar's book titled The problem of the rupee: its origin and its solution.[5] The Commission also was advised by John Maynard Keynes, a member of the Commission.[6][7]

The original choice for the seal of RBI was The East India Company Double Mohur, with the sketch of the Lion and Palm Tree. However it was decided to replace the lion with the tiger, the national animal of India. The Preamble of the RBI describes its basic functions to regulate the issue of bank notes, keep reserves to secure monetary stability in India, and generally to operate the currency and credit system in the best interests of the country.

The Central Office of the RBI was initially established in Calcutta (now Kolkata), but was permanently moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's central bank, except during the years of the Japanese occupation of Burma (1942–45), until April 1947, even though Burma seceded from the Indian Union in 1937. After the Partition of India in 1947, the Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders' bank, the RBI has been fully owned by the Government of India since its nationalization in 1949.[8]


In the 1950s, the Indian government, under its first Prime Minister Jawaharlal Nehru, developed a centrally planned economic policy that focused on the agricultural sector. The administration nationalized commercial banks[9] and established, based on the Banking Companies Act of 1949 (later called the Banking Regulation Act), a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans.[10]


As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan "Developing Banking". The government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector.


In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon Gandhi's return to power in 1980, a further six banks were nationalized.[11] The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s.[12] The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits.[13] These measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies.[14]

The branch was forced to establish two new offices in the country for every newly established office in a town.[15] The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects.[16]


A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw).[17] The Discount and Finance House of India began its operations on the monetary market in April 1988; theNational Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.[18]


The national economy came down in July 1991 and the Indian rupee was devalued.[19] The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal.[20] The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.[21] This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998.[22]

The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes.[23]

Since 2000[edit]

The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowedonline banking in 2001 and established a new payment system in 2004–2005 (National Electronic Fund Transfer).[24] The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.[25]

The national economy's growth rate came down to 5.8% in the last quarter of 2008–2009[26] and the central bank promotes the economic development.[27]


RBI runs a monetary museum in Mumbai

Central Board of Directors[edit]

The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, fifteen directors to represent the regional boards, one from the Ministry of Finance and ten other directors from various fields. The Government nominated Arvind Mayaram, as a director of the Central Board of Directors with effect from August 7, 2012 and vice R Gopalan, RBI said in a statement on August 8, 2012. .[28] The Central Government has nominated Shri Rajiv Takru, Secretary, Department of Financial Services, Ministry of Finance, New Delhi as a director on the Central Board of Directors of the Reserve Bank of India vice Shri D. K. Mittal. Shri Takru's nomination is with effect from February 4, 2013 and until further orders.[29] IJI0-0==0-990YFYU


The current Governor of RBI is Duvvuri Subbarao. The RBI extended the period of the present governor up to 2013. There are four deputy governors presently, Deputy Governor K C Chakrabarty, Urjit patel, Anand Sinha and H.R. Khan. Deputy Governor K C Chakrabarty's term has been extended further by 2 years.[30]

Supportive bodies[edit]

The Reserve Bank of India has ten regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and serve—beside the advice of the Central Board of Directors—as a forum for regional banks and to deal with delegated tasks from the central board.[31] The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems.

The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999–2000.

On 1 July 2007, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India created a new customer service department.

Offices and branches[edit]

The Reserve Bank of India has four zonal offices.[32] It has 19 regional offices at most state capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur,Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has 09 sub-offices at Agartala,Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shillong, Shimla and Srinagar.

The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training Centres at Mumbai, Chennai, Kolkata and New Delhi.

Main functions[edit]

Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[33]

The RBI Regional Office in Delhi.

The regional office of RBI (in sandstone)in front of GPO(in white) at Dalhousie Square,Kolkata.

Bank of Issue[edit]

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department.

Monetary authority[edit]

The Reserve Bank of India is the main monetary authority of the country and beside that, in its capacity as the central bank, acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system[edit]

The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions.Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.[34]

Management of foreign exchange[edit]

The RBI is in charge of facilitating the achievement of the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency[edit]

The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation. The objectives are to give the public an adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objectives of price stability as well as economic development, because both objectives are diverse in themselves


This article may be confusing or unclear to readers.Please help us clarify the article; suggestions may be found on the talk page. (July 2013)


Banker of banks[edit]

Nagpur branch holds most of India's gold deposits

RBI also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks.[35]Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations. As the bankers' bank, the RBI facilitates the clearing of cheques between the commercial banks and helps inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and take action against it if need arises.

Detection of fake currency[edit]

In order to curb the fake currency menace, RBI has launched a website to raise awareness among masses about fake notes in the provides information about identifying fake currency.[36]

Developmental role[edit]

The central bank has to perform a wide range of promotional functions to support national objectives and industries.[10] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.[37]

Related functions[edit]

The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.[38] The institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking system is resilient enough to face the stress caused by the drought like situation because of poor monsoon this year.[39]

Policy rates and reserve ratios[edit]

Bank Rate


Repo Rate


Reverse Repo Rate


Cash Reserve Ratio (CRR)


Statutory Liquidity Ratio (SLR)


Base Rate


Reserve Bank Rate


Deposit Rate


Bank Rate[edit]

RBI lends to the commercial banks through its discount window to help the banks meet depositor's demands and reserve requirements for long term. The Interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 16 July 2013, the bank rate was 10.25%.

Reserve requirement cash reserve ratio (CRR)[edit]

Every commercial bank has to keep certain minimum cash reserves with RBI. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate, [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 5% and 20% of total of their demand and time liabilities]. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. Due to a Reduction in CRR by 0.25% (25 basis points cut in Cash Reserve Ratio(CRR)) on 17 September 2012, Rs 17,000 crore was released into the system/market. The RBI lowered the CRR by 25 basis points to 4.25% on 30 October 2012, a move it said would inject about 175 billion rupees into the banking system in order to pre-empt potentially tightening liquidity. The latest CRR is 4% (wef 09/02/2013).

Statutory Liquidity ratio (SLR)[edit]

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market operations—buying and selling of eligible securities by central bank in the money market—to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.

Generally RBI uses three kinds of selective credit controls:

  1. Minimum margins for lending against specific securities.

  2. Ceiling on the amounts of credit for certain purposes.

  3. Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

  1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set.

  2. Banks are mandatory required to keep 23% of their deposits in the form of government securities.

  3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

Further reading[edit]

  • S. L. N. Simha. History of the Reserve Bank of India, Volume 1: 1935–1951. RBI. 1970. ISBN 81-7596-247-X. (2005 reprint PDF)

  • G. Balachandran. The Reserve Bank of India, 1951–1967. Oxford University Press. 1998. ISBN 0-19-564468-9. (PDF)

  • A. Vasudevan et al. The Reserve Bank of India, Volume 3: 1967–1981. RBI. 2005. ISBN 81-7596-299-2. (PDF)

  • Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.

  • Findlay G. Shirras: The Reserve Bank of India. In The Economic Journal. Vol. 44, No. 174 (Jun., 1934), pp. 258–274.

  • Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of India's Balance Sheet: Analytics and Dynamics of Evolution, November 2004.


  1. ^ In 2011 dollars as of 2011.[1]


  1. ^ a b Press Trust of India (25 December 2011 16:20). "India's forex reserves slump by $4.67 billion". Mumbai: New Delhi Television Limited. Retrieved 5 January 2012.

  2. ^ "Reserve Bank of India Act, 1934". p. 115. Retrieved August 6, 2012.

  3. ^ "RESERVE BANK OF INDIA ACT, 1934 (As modified up to 27 February 2009)". Reserve Bank of India (RBI). Retrieved 20 November 2010.

  4. ^ Royal Commission on Indian Currency and Finance, H. M. Stationery Office (1926)

  5. ^ B. R. Ambedkar, The problem of the rupee: its origin and its solution. P. S. King & Son, London (1923).

  6. ^ The London Gazette: no. 28711. p. 2809. 18 April 1913. Retrieved 4 August 2009.

  7. ^ See Keynes, John Maynard (1913), Indian Currency and Finance, London: Macmillan & Co.

  8. ^ "History". RBI. 1935-04-01. Retrieved 2010-08-20.

  9. ^ Beth Anne Wilson und Geoffrey N. Keim: India and the Global Economy in Business Economics, January 2006, S.29.

  10. ^ a b Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of India's Balance Sheet: Analytics and Dynamics of Evolution, November 2004, S.. 16.

  11. ^ "Reserve Bank of India: Platinum Jubilee (PDF)". 2010. Retrieved on 15 April 2012.

  12. ^ Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37, Number 3 / May, 2002, p. 253.

  13. ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:47–84, p. 47-48.

  14. ^ Panicos O. Demetriades, Kul B. Luintel: Financial Development, Economic Growth and Banking Sector Controls: Evidence from India. in The Economic Journal. Vol. 106, No. 435 (March 1996), pp. 359–374, p. 360.

  15. ^ Alpana Killawala: "History of The Reserve Bank of India – Summary", Reserve Bank of India Press Release, 18.03.2006 (RBI)

  16. ^ Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of India's Balance Sheet: Analytics and Dynamics of Evolution, November 2004, S. 40.

  17. ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:47–84, p. 48.

  18. ^ Chronology of Events, Developing the Markets: Seeds of Liberalization- 1985 to 1991 (RBI)

  19. ^ Amal Kanti Ray: India's Social Development in a Decade of Reforms: 1990–91/1999–2000 in Social Indicators Research, Volume 87, Number 3 / July, 2008, p. 410.

  20. ^ Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37, Number 3 / May, 2002, p. 257.

  21. ^ Raghbendra Jha, Ibotombi S. Longjam: Structure of financial savings during Indian economic reforms in Empirical Economics (2006) 31:861–869, p.862.

  22. ^ Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in Int Rev Econ (2009) 56:47–84, p. 49,

  23. ^ Chronology of Events, Crisis and Reforms- 1991 to 2000(RBI)

  24. ^ "RBI History – Spanning 7 Decades of Public Service". 1935-04-01. Retrieved 2010-08-20.

  25. ^ Security Printing &Minting Corporation of India, About Us(SPMCIL)

  26. ^ Second Quarter Review of Monetary Policy for the Year 2009–10, Punkt 15., (RBI)

  27. ^ Macroeconomic and Monetary Developments – Second Quarter Review 2009–10, S.94, (RBI)

  28. ^ "Arvind Mayaram nominated as director in RBI board". 08-08-2012.

  29. ^ "Rajiv Takru nominated as a director on the Central Board of Directors in RBI board". 04-04-2013.

  30. ^ "Chakrabarty re-appointed RBI Deputy Governor". 13June 2012.

  31. ^ "About us, Organisation and Functions". RBI. Retrieved 2010-08-20.

  32. ^ "Reserve Bank of India". Retrieved 2011-09-16.

  33. ^ "History of Reserve Bank". Retrieved 2009-02-24.

  34. ^ RBI, Frequently Asked Questions, Currency Matters (RBI)

  35. ^[ Bank of India, brochure,]

  36. ^ "RBI launches website to explain detection of fake currency". Times of India. 8 July 2012.

  37. ^ Samarjit Das, Kaushik Bhattacharya: Price convergence across regions in India in Empirical Economics (2008) 34:299–313, S. 312.

  38. ^ Alpana Sivam, Sadasivam Karuppannan: Role of state and market in housing delivery for low-income groups in India in Journal of Housing and the Built Environment 17: 69–88, 2002, S.85.

  39. ^ "Indian banks can weather impact of drought: RBI". 07-08-2012.

External links[edit]


Wikimedia Commons has media related to: Reserve Bank of India

  • Official website

  • Reserve Bank of India Ombudsman site


    Indian currency


    • Central banks

    • Buildings and structures in Mumbai

    • Organisations based in Mumbai

    • Executive branch of the Indian government

    • Banks of India

    • Banks established in 1935

    • Financial regulatory authorities of India

    • Economy of Mumbai

    • Reserve Bank of India

    • 1935 establishments in India

      Federal Reserve System

      From Wikipedia, the free encyclopedia
      Federal Reserve System
      Seal of the Federal Reserve System Flag of the Federal Reserve System
      Seal of the Federal Reserve SystemFlag of the Federal Reserve System
      Headquarters Eccles BuildingWashington, D.C.
      Established December 23, 1913 (99 years ago)
      Chairman Ben Bernanke
      Central bank of United States
      Currency United States dollar
      ISO 4217 Code USD
      Base borrowing rate0%–0.25%[1]

      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 severepanic in 1907.[2][3][4][5][6][7] Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.[3][8]Events such as the Great Depression were major factors leading to changes in the system.[9]

      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.[10] The first two objectives are sometimes referred to as the Federal Reserve's dual mandate.[11] Its duties have expanded over the years, and today, according to official Federal Reserve documentation, 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.[12] The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.

      The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.[13][14][15] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time (the president of the New York Fed and four others who rotate through one-year terms). 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.[16] According to the 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."[17]

      The authority of the Federal Reserve System is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chairman and vice-chairman, are chosen by the Presidentand confirmed by the Senate. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. 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. Thus the Federal Reserve system has both public and private aspects.[18][19][20][21] 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. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to theU.S. Treasury.[22] This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury Department.[23]




      The Eccles Building in Washington, D.C., which serves as the Federal Reserve System's headquarters.

      The primary motivation for creating the Federal Reserve System was to address banking panics.[3] Other purposes are stated in the Federal Reserve Act, such as "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes".[24] Before the founding of the Federal Reserve System, the United States underwent several financial crises. A particularly severe crisis in 1907 led Congress to enact the Federal Reserve Act in 1913. Today the Federal Reserve System has responsibilities in addition to ensuring the stability of the financial system.[25]

      Current functions of the Federal Reserve System include:[12][25]

      • To address the problem of banking panics
      • To serve as the central bank for the United States
      • To strike a balance between private interests of banks and the centralized responsibility of government
        • To supervise and regulate banking institutions
        • To protect the credit rights of consumers
      • To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of
        • maximum employment
        • stable prices, including prevention of either inflation or deflation[26]
        • moderate long-term interest rates
      • To maintain the stability of the financial system and contain systemic risk in financial markets
      • To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
        • To facilitate the exchange of payments among regions
        • To respond to local liquidity needs
      • To strengthen U.S. standing in the world economy

      Addressing the problem of bank panics[edit]

      Banking institutions in the United States are required to hold reserves – amounts of currency and deposits in other banks – equal to only a fraction of the amount of the banks' deposit liabilities owed to customers. This practice is called fractional-reserve banking. As a result, banks usually invest the majority of the funds received from depositors. On rare occasion, too many of the bank's customers will withdraw their savings and the bank will need help from another institution to continue operating; this is called a bank run. Bank runs can lead to a multitude of social and economic problems. The Federal Reserve System was designed as an attempt to prevent or minimize the occurrence of bank runs, and possibly act as a lender of last resort when a bank run does occur. Many economists, following Milton Friedman, believe that the Federal Reserve inappropriately refused to lend money to small banks during the bank runs of 1929.[27]

      Elastic currency[edit]

      The monthly changes in the currency component of the U.S. money supply show currency being added into (% change greater than zero) and removed from circulation (% change less than zero). The most noticeable changes occur around the Christmas holiday shopping season as new currency is created so people can make withdrawals at banks, and then removed from circulation afterwards, when less cash is demanded.

      One way to lessen the likelihood and the effect of bank runs is to have a money supply that can expand when money is needed. The use of the term "elastic currency" in the Federal Reserve Act does not imply only the ability to expand the money supply, but also the ability to contract the money supply. Some economic theories have been developed that support the idea of expanding or shrinking a money supply as economic conditions warrant. Elastic currency is defined by the Federal Reserve as:[28]

      Currency that can, by the actions of the central monetary authority, expand or contract in amount warranted by economic conditions.

      Monetary policy of the Federal Reserve System is based partially on the theory that it is best overall to expand or contract the money supply as economic conditions change.

      Check clearing system[edit]

      Because some banks refused to clear checks from certain others during times of economic uncertainty, a check-clearing system was created in the Federal Reserve system. It is briefly described in The Federal Reserve System – Purposes and Functions as follows:[29]

      By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency – that is, a currency that would expand or shrink in amount as economic conditions warranted – but also an efficient and equitable check-collection system.

      Lender of last resort[edit]

      In the United States, the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.


      According to the Federal Reserve Bank of Minneapolis, "the Federal Reserve has the authority and financial resources to act as 'lender of last resort' by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy."[30] The Federal Reserve System's role as lender of last resort has been criticized because it shifts the risk and responsibility away from lenders and borrowers and places it on others in the form of inflation.[31]


      Through its discount and credit operations, Reserve Banks provide liquidity to banks to meet short-term needs stemming from seasonal fluctuations in deposits or unexpected withdrawals. Longer term liquidity may also be provided in exceptional circumstances. The rate the Fed charges banks for these loans is the discount rate (officially the primary credit rate).

      By making these loans, the Fed serves as a buffer against unexpected day-to-day fluctuations in reserve demand and supply. This contributes to the effective functioning of the banking system, alleviates pressure in the reserves market and reduces the extent of unexpected movements in the interest rates.[32] For example, on September 16, 2008, the Federal Reserve Board authorized an $85 billion loan to stave off the bankruptcy of international insurance giant American International Group (AIG).[33][34]

      Central bank[edit]

      Obverse of Federal Reserve $1 noteissued in 2009.

      In its role as the central bank of the United States, the Fed serves as a banker's bank and as the government's bank. As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars. Just as an individual might keep an account at a bank, the U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency. The U.S. Treasury, through its Bureau of the Mint andBureau of Engraving and Printing, actually produces the nation's cash supply and, in effect, sells the paper currency to the Federal Reserve Banks at manufacturing cost, and the coins at face value. The Federal Reserve Banks then distribute it to other financial institutions in various ways.[35] During the Fiscal Year 2008, the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.[36]

      Federal funds[edit]

      Federal funds are the reserve balances (also called federal reserve accounts) that private banks keep at their local Federal Reserve Bank.[37][38] These balances are the namesake reserves of the Federal Reserve System. The purpose of keeping funds at a Federal Reserve Bank is to have a mechanism for private banks to lend funds to one another. This market for funds plays an important role in the Federal Reserve System as it is what inspired the name of the system and it is what is used as the basis for monetary policy. Monetary policy works partly by influencing how much interest the private banks charge each other for the lending of these funds.

      Federal reserve accounts contain federal reserve credit, which can be converted into federal reserve notes. Private banks maintain theirbank reserves in federal reserve accounts.

      Balance between private banks and responsibility of governments[edit]

      The system was designed out of a compromise between the competing philosophies of privatization and government regulation. In 2006Donald L. Kohn, vice chairman of the Board of Governors, summarized the history of this compromise:[39]

      Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation's bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees. The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.

      In the current system, private banks are for-profit businesses but government regulation places restrictions on what they can do. The Federal Reserve System is a part of government that regulates the private banks. The balance between privatization and government involvement is also seen in the structure of the system. Private banks elect members of the board of directors at their regional Federal Reserve Bank while the members of the Board of Governors are selected by the President of the United States and confirmed by theSenate. The private banks give input to the government officials about their economic situation and these government officials use this input in Federal Reserve policy decisions. In the end, private banking businesses are able to run a profitable business while the U.S. government, through the Federal Reserve System, oversees and regulates the activities of the private banks.

      Government regulation and supervision[edit]

      Ben Bernanke (lower-right), Chairman of the Federal Reserve Board of Governors, at a House Financial Services Committeehearing on February 10, 2009. Members of the Board frequently testify before congressional committees such as this one. The Senate equivalent of the House Financial Services Committee is the Senate Committee on Banking, Housing, and Urban Affairs.

      The Federal Banking Agency Audit Act, enacted in 1978 as Public Law 95-320 and 31 U.S.C. section 714 establish that the Board of Governors of the Federal Reserve System and the Federal Reserve banks may be audited by the Government Accountability Office(GAO).[40] The GAO has authority to audit check-processing, currency storage and shipments, and some regulatory and bank examination functions, however there are restrictions to what the GAO may audit. Audits of the Reserve Board and Federal Reserve banks may not include:

      1. transactions for or with a foreign central bank or government, or nonprivate international financing organization;
      2. deliberations, decisions, or actions on monetary policy matters;
      3. transactions made under the direction of the Federal Open Market Committee; or
      4. a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3).[41][42]

      The financial crisis which began in 2007, corporate bailouts, and concerns over the Fed's secrecy have brought renewed concern regarding ability of the Fed to effectively manage the national monetary system.[43] A July 2009 Gallup Poll found only 30% of Americans thought the Fed was doing a good or excellent job, a rating even lower than that for the Internal Revenue Service, which drew praise from 40%.[44] The Federal Reserve Transparency Act was introduced by congressman Ron Paul in order to obtain a more detailed audit of the Fed. The Fed has since hired Linda Robertson who headed the Washington lobbying office of Enron Corp. and was adviser to all three of the Clinton administration's Treasury secretaries.[45][46][47][48]

      The Board of Governors in the Federal Reserve System has a number of supervisory and regulatory responsibilities in the U.S. banking system, but not complete responsibility. A general description of the types of regulation and supervision involved in the U.S. banking system is given by the Federal Reserve:[49]

      The Board also plays a major role in the supervision and regulation of the U.S. banking system. It has supervisory responsibilities for state-chartered banks[50] that are members of the Federal Reserve System, bank holding companies(companies that control banks), the foreign activities of member banks, the U.S. activities of foreign banks, and Edge Actand "agreement corporations" (limited-purpose institutions that engage in a foreign banking business). The Board and, under delegated authority, the Federal Reserve Banks, supervise approximately 900 state member banks and 5,000 bank holding companies. Other federal agencies also serve as the primary federal supervisors of commercial banks; the Office of the Comptroller of the Currency supervises national banks, and the Federal Deposit Insurance Corporation supervisesstate banks that are not members of the Federal Reserve System.

      Some regulations issued by the Board apply to the entire banking industry, whereas others apply only to member banks, that is, state banks that have chosen to join the Federal Reserve System and national banks, which by law must be members of the System. The Board also issues regulations to carry out major federal laws governing consumer credit protection, such as the Truth in LendingEqual Credit Opportunity, and Home Mortgage Disclosure Acts. Many of these consumer protection regulations apply to various lenders outside the banking industry as well as to banks.

      Members of the Board of Governors are in continual contact with other policy makers in government. They frequently testify before congressional committees on the economy, monetary policybanking supervision and regulationconsumer credit protectionfinancial markets, and other matters.

      The Board has regular contact with members of the President's Council of Economic Advisers and other key economic officials. The Chairman also meets from time to time with the President of the United States and has regular meetings with the Secretary of the Treasury. The Chairman has formal responsibilities in the international arena as well.
      Regulatory and oversight responsibilities[edit]

      The board of directors of each Federal Reserve Bank District also has regulatory and supervisory responsibilities. If the board of directors of a district bank has judged that a member bank is performing or behaving poorly, it will report this to the Board of Governors. This policy is described in United States Code:[51]

      Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.

      National payments system[edit]

      The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.[52]

      In passing the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.

      The Federal Reserve plays a vital role in both the nation's retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution's retail clients – individuals and smaller businesses. The Reserve Banks' retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. By contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution's large corporate customers or counterparties, including other financial institutions. The Reserve Banks' wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution's failure to make or settle its payments.

      The Federal Reserve Banks began a multi-year restructuring of their check operations in 2003 as part of a long-term strategy to respond to the declining use of checks by consumers and businesses and the greater use of electronics in check processing. The Reserve Banks will have reduced the number of full-service check processing locations from 45 in 2003 to 4 by early 2011.[53]


      Organization of the Federal Reserve System

      The Federal Reserve System has a "unique structure that is both public and private"[54] and is described as "independent within the government" rather than "independent of government".[55] The System does not require public funding, and derives its authority and purpose from the Federal Reserve Act, which was passed by Congress in 1913 and is subject to Congressional modification or repeal.[56] The four main components of the Federal Reserve System are (1) the Board of Governors, (2) the Federal Open Market Committee, (3) the twelve regional Federal Reserve Banks, and (4) the member banks throughout the country.

      Board of Governors[edit]

      The seven-member Board of Governors is a federal agency. It is charged with the overseeing of the 12 District Reserve Banks and setting national monetary policy. It also supervises and regulates the U.S. banking system in general.[57] Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms.[32] One term begins every two years, on February 1 of even-numbered years, and members serving a full term cannot be renominated for a second term.[58] "[U]pon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified." The law provides for the removal of a member of the Board by the President "for cause".[59] The Board is required to make an annual report of operations to the Speaker of the U.S. House of Representatives.

      The Chairman and Vice Chairman of the Board of Governors are appointed by the President from among the sitting Governors. They both serve a four-year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire.[60]

      List of members of the Board of Governors[edit]

      The current members of the Board of Governors are as follows:[58]

      CommissionerEntered office[61] Term expires
      Ben Bernanke
      February 1, 2006January 31, 2020
      January 31, 2014 (as Chairman)
      Janet Yellen
      (Vice Chairman)
      October 4, 2010January 31, 2024
      October 4, 2014 (as Vice Chairman)
      Elizabeth A. Duke August 5, 2008January 31, 2012
      Daniel Tarullo January 28, 2009January 31, 2022
      Sarah Bloom Raskin October 4, 2010January 31, 2016
      Jerome H. Powell May 25, 2012January 31, 2014
      Jeremy C. Stein May 30, 2012January 31, 2018

      Nominations and confirmations[edit]

      In late December 2011, President Barack Obama nominated Stein, a Harvard University finance professor and a Democrat, and Powell, formerly of Dillon ReadBankers Trust[62] and The Carlyle Group[63] and a Republican. Both candidates also have Treasury Departmentexperience in the Obama and George H.W. Bush administrations respectively.[62]

      "Obama administration officials [had] regrouped to identify Fed candidates after Peter Diamond, a Nobel Prize-winning economist, withdrew his nomination to the board in June [2011] in the face of Republican opposition. Richard Clarida, a potential nominee who was a Treasury official under George W. Bush, pulled out of consideration in August [2011]", one account of the December nominations noted.[64] The two other Obama nominees in 2011, Yellen and Raskin,[65] were confirmed in September.[66] One of the vacancies was created in 2011 with the resignation of Kevin Warsh, who took office in 2006 to fill the unexpired term ending January 31, 2018, and resigned his position effective March 31, 2011.[67][68] In March 2012, U.S. Senator David Vitter (RLA) said he would oppose Obama's Stein and Powell nominations, dampening near-term hopes for approval.[69] However Senate leaders reached a deal, paving the way for affirmative votes on the two nominees in May 2012 and bringing the board to full strength for the first time since 2006[70] with Duke's service after term end.

      Federal Open Market Committee[edit]

      The Federal Open Market Committee (FOMC) consists of 12 members, seven from the Board of Governors and 5 of the regional Federal Reserve Bank presidents. The FOMC oversees open market operations, the principal tool of national monetary policy. These operations affect the amount of Federal Reserve balances available to depository institutions, thereby influencing overall monetary and credit conditions. The FOMC also directs operations undertaken by the Federal Reserve in foreign exchange markets. The president of the Federal Reserve Bank of New York is a permanent member of the FOMC; the presidents of the other banks rotate membership at two- and three-year intervals. All Regional Reserve Bank presidents contribute to the committee's assessment of the economy and of policy options, but only the five presidents who are then members of the FOMC vote on policy decisions. The FOMC determines its own internal organization and, by tradition, elects the Chairman of the Board of Governors as its chairman and the president of the Federal Reserve Bank of New York as its vice chairman. It is informal policy within the FOMC for the Board of Governors and the New York Federal Reserve Bank president to vote with the Chairman of the FOMC; anyone who is not an expert on monetary policy traditionally votes with the chairman as well; and in any vote no more than two FOMC members can dissent.[71] Formal meetings typically are held eight times each year in Washington, D.C. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in telephone consultations and other meetings are held when needed.[72]

      Federal Advisory Council[edit]

      Federal Reserve Banks[edit]

      Federal Reserve Districts

      There are 12 Federal Reserve Banks located in BostonNew YorkPhiladelphiaClevelandRichmondAtlantaChicago,St. LouisMinneapolisKansas CityDallas, and San Francisco. Each reserve Bank is responsible for member banks located in its district. The size of each district was set based upon the population distribution of the United States when the Federal Reserve Act was passed. Each regional Bank has a president, who is the chief executive officer of their Bank. Each regional Reserve Bank's president is nominated by their Bank's board of directors, but the nomination is contingent upon approval by the Board of Governors. Presidents serve five-year terms and may be reappointed.[73]

      Each regional Bank's board consists of nine members. Members are broken down into three classes: A, B, and C. There are three board members in each class. Class A members are chosen by the regional Bank's shareholders, and are intended to represent member banks' interests. Member banks are divided into three categories large, medium, and small. Each category elects one of the three class A board members. Class B board members are also nominated by the region's member banks, but class B board members are supposed to represent the interests of the public. Lastly, class C board members are nominated by the Board of Governors, and are also intended to represent the interests of the public.[74]

      A member bank is a private institution and owns stock in its regional Federal Reserve Bank. All nationally chartered banks hold stock in one of the Federal Reserve Banks. State chartered banks may choose to be members (and hold stock in their regional Federal Reserve bank), upon meeting certain standards. About 38% of U.S. banks are members of their regional Federal Reserve Bank.[75] The amount of stock a member bank must own is equal to 3% of its combined capital and surplus.[76][77] However, holding stock in a Federal Reserve bank is not like owning stock in a publicly traded company. These stocks cannot be sold or traded, and member banks do not control the Federal Reserve Bank as a result of owning this stock. The charter and organization of each Federal Reserve Bank is established by law and cannot be altered by the member banks. Member banks, do however, elect six of the nine members of the Federal Reserve Banks' boards of directors.[32][78] From the profits of the Regional Bank of which it is a member, a member bank receives a dividend equal to 6% of their purchased stock.[18] The remainder of the regional Federal Reserve Banks' profits is given over to the United States Treasury Department. In 2009, the Federal Reserve Banks distributed $1.4 billion in dividends to member banks and returned $47 billion to the U.S. Treasury.[79]

      Legal status of regional Federal Reserve Banks[edit]

      The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[80] In Lewis v. United States,[81] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [theFederal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[80] in which the distinction is made between Federal Reserve Banks, which are federally created instrumentalities, and the Board of Governors, which is a federal agency.

      Regarding the structural relationship between the twelve Federal Reserve banks and the various commercial (member) banks, political science professor Michael D. Reagan has written that:[82]

      ... the "ownership" of the Reserve Banks by the commercial banks is symbolic; they do not exercise the proprietary control associated with the concept of ownership nor share, beyond the statutory dividend, in Reserve Bank "profits." ... Bank ownership and election at the base are therefore devoid of substantive significance, despite the superficial appearance of private bank control that the formal arrangement creates.

      Member banks[edit]

      According to the web site for the Federal Reserve Bank of Richmond, "[m]ore than one-third of U.S. commercial banks are members of the Federal Reserve System. National banks must be members; state chartered banks may join by meeting certain requirements."[83]


      The Board of Governors of the Federal Reserve System, the Federal Reserve banks, and the individual member banks undergo regular audits by the GAO and an outside auditor. GAO audits are limited and do not cover "most of the Fed's monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee" ...[nor may the GAO audit] "dealings with foreign governments and other central banks." [84] Various statutory changes, including the Federal Reserve Transparency Act, have been proposed to broaden the scope of the audits.

      As of August 27, 2012, the Federal Reserve Board began publishing unaudited financial reports for the Federal Reserve banks. Reports are released every quarter.[85] This is an expansion of prior financial reporting practices. Greater transparency is offered with more frequent disclosure and more detail.

      November 7, 2008, Bloomberg L.P. News brought a lawsuit against the Board of Governors of the Federal Reserve System to force the Board to reveal the identities of firms for which it has provided guarantees during the Late-2000s financial crisis.[86] Bloomberg, L.P. won at the trial court[87] and the Fed's appeals were rejected at both the United States Court of Appeals for the Second Circuit and the U.S. Supreme Court. The data was released on March 31, 2011.[88][89]

      Monetary policy[edit]

      The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. What happens to money and credit affects interest rates (the cost of credit) and the performance of an economy. The Federal Reserve Act of 1913 gave the Federal Reserve authority to set monetary policy in the United States.[90][91]

      Interbank lending is the basis of policy[edit]

      The Federal Reserve sets monetary policy by influencing the Federal funds rate, which is the rate of interbank lending of excess reserves. The rate that banks charge each other for these loans is determined in the interbank market but the Federal Reserve influences this rate through the three "tools" of monetary policy described in the Tools section below.

      The Federal Funds rate is a short-term interest rate that the FOMC focuses on directly. This rate ultimately affects the longer-term interest rates throughout the economy. A summary of the basis and implementation of monetary policy is stated by the Federal Reserve:

      The Federal Reserve implements U.S. monetary policy by affecting conditions in the market for balances that depository institutions hold at the Federal Reserve Banks...By conducting open market operations, imposing reserve requirements, permitting depository institutions to hold contractual clearing balances, and extending credit through its discount window facility, the Federal Reserve exercises considerable control over the demand for and supply of Federal Reserve balances and the federal funds rate. Through its control of the federal funds rate, the Federal Reserve is able to foster financial and monetary conditions consistent with its monetary policy objectives.[92]

      This influences the economy through its effect on the quantity of reserves that banks use to make loans. Policy actions that add reserves to the banking system encourage lending at lower interest rates thus stimulating growth in money, credit, and the economy. Policy actions that absorb reserves work in the opposite direction. The Fed's task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.[93]


      There are three main tools of monetary policy that the Federal Reserve uses to influence the amount of reserves in private banks:[90]

      Open market operations Purchases and sales of U.S. Treasury and federal agency securities – the Federal Reserve's principal tool for implementing monetary policy. The Federal Reserve's objective for open market operations has varied over the years. During the 1980s, the focus gradually shifted toward attaining a specified level of the federal funds rate (the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed), a process that was largely complete by the end of the decade.[94]
      Discount rateThe interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility – the discount window.[95]
      Reserve requirements The amount of funds that a depository institution must hold in reserve against specified deposit liabilities.[96]

      Federal funds rate and open market operations[edit]

      The effective federal funds rate charted over more than fifty years.

      The Federal Reserve System implements monetary policy largely by targeting the federal funds rate. This is the interest rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. This rate is actually determined by the market and is not explicitly mandated by the Fed. The Fed therefore tries to align the effective federal funds rate with the targeted rate by adding or subtracting from the money supply through open market operations. The Federal Reserve System usually adjusts the federal funds rate target by 0.25% or 0.50% at a time.

      Open market operations allow the Federal Reserve to increase or decrease the amount of money in the banking system as necessary to balance the Federal Reserve's dual mandates. Open market operations are done through the sale and purchase of United States Treasury security, sometimes called "Treasury bills" or more informally "T-bills" or "Treasuries". The Federal Reserve buys Treasury bills from its primary dealers. The purchase of these securities affects the federal funds rate, because primary dealers have accounts at depository institutions.[97]

      The Federal Reserve education website describes open market operations as follows:[91]

      Open market operations involve the buying and selling of U.S. government securities (federal agency and mortgage-backed). The term 'open market' means that the Fed doesn't decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an 'open market' in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price. Open market operations are flexible and thus, the most frequently used tool of monetary policy.

      Open market operations are the primary tool used to regulate the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Open market operations are carried out by the Domestic Trading Desk of the Federal Reserve Bank of New York under direction from the FOMC. The transactions are undertaken with primary dealers.

      The Fed's goal in trading the securities is to affect the federal funds rate, the rate at which banks borrow reserves from each other. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer's bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed does not want to increase or decrease reserves permanently so it usually engages in transactions reversed within a day or two. That means that a reserve injection today could be withdrawn tomorrow morning, only to be renewed at some level several hours later. These short-term transactions are called repurchase agreements (repos) – the dealer sells the Fed a security and agrees to buy it back at a later date.
      Repurchase agreements[edit]

      To smooth temporary or cyclical changes in the money supply, the desk engages in repurchase agreements (repos) with its primary dealers. Repos are essentially secured, short-term lending by the Fed. On the day of the transaction, the Fed deposits money in aprimary dealer's reserve account, and receives the promised securities as collateral. When the transaction matures, the process unwinds: the Fed returns the collateral and charges the primary dealer's reserve account for the principal and accrued interest. The term of the repo (the time between settlement and maturity) can vary from 1 day (called an overnight repo) to 65 days.[98]

      Discount rate[edit]

      The Federal Reserve System also directly sets the "discount rate", which is the interest rate for "discount window lending", overnight loans that member banks borrow directly from the Fed. This rate is generally set at a rate close to 100 basis points above the target federal funds rate. The idea is to encourage banks to seek alternative funding before using the "discount rate" option.[99] The equivalent operation by the European Central Bank is referred to as the "marginal lending facility".[100]

      Both the discount rate and the federal funds rate influence the prime rate, which is usually about 3 percent higher than the federal funds rate.

      Reserve requirements[edit]

      Another instrument of monetary policy adjustment employed by the Federal Reserve System is the fractional reserve requirement, also known as the required reserve ratio.[101] The required reserve ratio sets the balance that the Federal Reserve System requires a depository institution to hold in the Federal Reserve Banks,[92] which depository institutions trade in the federal funds market discussed above.[102] The required reserve ratio is set by the Board of Governors of the Federal Reserve System.[103] The reserve requirements have changed over time and some of the history of these changes is published by the Federal Reserve.[104]

      Reserve Requirements in the U.S. Federal Reserve System[96]
      Liability TypeRequirement
      Percentage of liabilitiesEffective date
      Net transaction accounts
      $0 to $11.5 million 0December 29, 2011
      More than $11.5 million to $71 million 3December 29, 2011
      More than $71 million10December 29, 2011
      Nonpersonal time deposits0 December 27, 1990
      Eurocurrency liabilities 0December 27, 1990

      As a response to the financial crisis of 2008, the Federal Reserve now makes interest payments on depository institutions' required and excess reserve balances. The payment of interest on excess reserves gives the central bank greater opportunity to address credit market conditions while maintaining the federal funds rate close to the target rate set by the FOMC.[105]

      New facilities[edit]

      In order to address problems related to the subprime mortgage crisis and United States housing bubble, several new tools have been created. The first new tool, called the Term Auction Facility, was added on December 12, 2007. It was first announced as a temporary tool[106] but there have been suggestions that this new tool may remain in place for a prolonged period of time.[107] Creation of the second new tool, called the Term Securities Lending Facility, was announced on March 11, 2008.[108] The main difference between these two facilities is that the Term Auction Facility is used to inject cash into the banking system whereas the Term Securities Lending Facility is used to inject treasury securities into the banking system.[109] Creation of the third tool, called the Primary Dealer Credit Facility (PDCF), was announced on March 16, 2008.[110] The PDCF was a fundamental change in Federal Reserve policy because now the Fed is able to lend directly to primary dealers, which was previously against Fed policy.[111] The differences between these three new facilities is described by the Federal Reserve:[112]

      The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.

      Some of the measures taken by the Federal Reserve to address this mortgage crisis have not been used since The Great Depression.[113] The Federal Reserve gives a brief summary of these new facilities:[114]

      As the economy has slowed in the last nine months and credit markets have become unstable, the Federal Reserve has taken a number of steps to help address the situation. These steps have included the use of traditional monetary policy tools at the macroeconomic level as well as measures at the level of specific markets to provide additional liquidity. The Federal Reserve's response has continued to evolve since pressure on credit markets began to surface last summer, but all these measures derive from the Fed's traditional open market operations and discount window tools by extending the term of transactions, the type of collateral, or eligible borrowers.

      A fourth facility, the Term Deposit Facility, was announced December 9, 2009, and approved April 30, 2010, with an effective date of June 4, 2010.[115] The Term Deposit Facility allows Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. Term deposits are intended to facilitate the implementation of monetary policy by providing a tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thus drain reserve balances from the banking system.

      Term auction facility[edit]

      The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions.[106] The creation of this facility was announced by the Federal Reserve on December 12, 2007, and was done in conjunction with the Bank of Canada, theBank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets.[116] The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure.[117][118][119][120] Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.[121] Foreign exchange swap lines with the European Central Bank and Swiss National Bank were opened so the banks in Europe could have access to U.S. dollars.[121] Federal Reserve Chairman Ben Bernanke briefly described this facility to the U.S. House of Representatives on January 17, 2008:

      the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms...TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.[122]

      It is also described in the Term Auction Facility FAQ[106]

      The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress. In short, the TAF will auction term funds of approximately one-month maturity. All depository institutions that are judged to be in sound financial condition by their local Reserve Bank and that are eligible to borrow at the discount window are also eligible to participate in TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the broad range of collateral that is accepted for other Federal Reserve lending programs to secure TAF credit. The same collateral values and margins applicable for other Federal Reserve lending programs will also apply for the TAF.
      Term securities lending facility[edit]

      The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York's primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally.[123] Like the Term Auction Facility, the TSLF was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank. The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable. It is anticipated by Federal Reserve officials that the primary dealers, which include Goldman Sachs Group. Inc., J.P. Morgan Chase, and Morgan Stanley, will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets.[citation needed] The currency swap lines with the European Central Bank and Swiss National Bank were increased.

      Primary dealer credit facility[edit]

      The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.[112] This new facility marks a fundamental change in Federal Reserve policy because now primary dealers can borrow directly from the Fed when this previously was not permitted.

      Interest on reserves[edit]

      As of October 2008, the Federal Reserve banks will pay interest on reserve balances (required & excess) held by depository institutions. The rate is set at the lowest federal funds rate during the reserve maintenance period of an institution, less 75bp.[124] As of October 23, 2008, the Fed has lowered the spread to a mere 35 bp.[125]

      Term deposit facility[edit]

      The Term Deposit Facility is a program through which the Federal Reserve Banks will offer interest-bearing term deposits to eligible institutions. By removing "excess deposits" from participating banks, the overall level of reserves available for lending is reduced, which should result in increased market interest rates, acting as a brake on economic activity and inflation. The Federal Reserve has stated that:

      Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.[126]

      The Federal Reserve initially authorized up to five "small-value offerings are designed to ensure the effectiveness of TDF operations and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures."[127] After three of the offering auctions were successfully completed, it was announced that small-value auctions would continue on an on-going basis.[128]

      The Term Deposit Facility is essentially a tool available to reverse the efforts that have been employed to provide liquidity to the financial markets and to reduce the amount of capital available to the economy. As stated in Bloomberg News:

      Policy makers led by Chairman Ben S. Bernanke are preparing for the day when they will have to start siphoning off more than $1 trillion in excess reserves from the banking system to contain inflation. The Fed is charting an eventual return to normal monetary policy, even as a weakening near-term outlook has raised the possibility it may expand its balance sheet.[129]

      Chairman Ben S. Bernanke, testifying before House Committee on Financial Services, described the Term Deposit Facility and other facilities to Congress in the following terms:

      Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on balances that banks hold at the Federal Reserve Banks. By increasing the interest rate on banks' reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in higher longer-term interest rates and in tighter financial conditions more generally....

      As an additional means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. A proposal describing a term deposit facility was recently published in the Federal Register, and the Federal Reserve is finalizing a revised proposal in light of the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary thereafter. The use of reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

      When these tools are used to drain reserves from the banking system, they do so by replacing bank reserves with other liabilities; the asset side and the overall size of the Federal Reserve's balance sheet remain unchanged. If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve's balance sheet as well as further reducing the quantity of reserves in the banking system. Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies. In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve's dual mandate of maximum employment and price stability.

      In sum, in response to severe threats to our economy, the Federal Reserve created a series of special lending facilities to stabilize the financial system and encourage the resumption of private credit flows to American families and businesses. As market conditions and the economic outlook have improved, these programs have been terminated or are being phased out. The Federal Reserve also promoted economic recovery through sharp reductions in its target for the federal funds rate and through large-scale purchases of securities. The economy continues to require the support of accommodative monetary policies. However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus. We have full confidence that, when the time comes, we will be ready to do so.[130]
      Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility[edit]

      The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF) was also called the AMLF. The Facility began operations on September 22, 2008, and was closed on February 1, 2010.[131]

      All U.S. depository institutions, bank holding companies (parent companies or U.S. broker-dealer affiliates), or U.S. branches and agencies of foreign banks were eligible to borrow under this facility pursuant to the discretion of the FRBB.

      Collateral eligible for pledge under the Facility was required to meet the following criteria:

      • was purchased by Borrower on or after September 19, 2008 from a registered investment company that held itself out as a money market mutual fund;
      • was purchased by Borrower at the Fund's acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by Borrower;
      • was rated at the time pledged to FRBB, not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, the ABCP must have been rated within the top rating category by that agency;
      • was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
      • had a stated maturity that did not exceed 120 days if the Borrower was a bank or 270 days for non-bank Borrowers.
      Commercial Paper Funding Facility[edit]

      On October 7, 2008, the Federal Reserve further expanded the collateral it will loan against to include commercial paper using the newCommercial Paper Funding Facility (CPFF). The action made the Fed a crucial source of credit for non-financial businesses in addition to commercial banks and investment firms. Fed officials said they'll buy as much of the debt as necessary to get the market functioning again. They refused to say how much that might be, but they noted that around $1.3 trillion worth of commercial paper would qualify. There was $1.61 trillion in outstanding commercial paper, seasonally adjusted, on the market as of October 1, 2008, according to the most recent data from the Fed. That was down from $1.70 trillion in the previous week. Since the summer of 2007, the market has shrunk from more than $2.2 trillion.[132] This program lent out a total $738 billion before it was closed. Forty-five out of 81 of the companies participating in this program were foreign firms. Research shows that Troubled Asset Relief Program (TARP) recipients were twice as likely to participate in the program than other commercial paper issuers who did not take advantage of the TARP bailout. The Fed incurred no losses from the CPFF.[133]

      Quantitative policy[edit]

      A little-used tool of the Federal Reserve is the quantitative policy. With that the Federal Reserve actually buys back corporate bonds and mortgage backed securities held by banks or other financial institutions. This in effect puts money back into the financial institutions and allows them to make loans and conduct normal business. The Federal Reserve Board used this policy in the early 1990s when the U.S. economy experienced the savings and loan crisis.[citation needed]

      The bursting of the United States housing bubble prompted the Fed to buy mortgage-backed securities for the first time in November 2008. Over six weeks, a total of $1.25 trillion were purchased in order stabilize the housing market, about one-fifth of all U.S. government-backed mortgages.[134]


      Central banking in the United States[edit]

      In 1690, the Massachusetts Bay Colony became the first to issue paper money in what would become the United States, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade.[135] Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies.[136] However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate.[135] The Currency Act of 1751 set limits on the issuance of Bills of Credit by the New England states and set requirements for the redemption of any bills issued. This Act was in response to the overissuance of bills by Rhode Island, eventually reducing their value to 1/27 of the issuing value.[137] The Currency Act of 1764 completely banned the issuance of Bills of Credit (paper money) in the colonies and the making of such bills legal tender because their depreciation allowed the discharge of debts with depreciated paper at a rate less than contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects. The ban proved extremely harmful to the economy of the colonies and inhibited trade, both within the colonies and abroad.[138]

      The first attempt at a national currency was during the American Revolutionary War. In 1775 the Continental Congress, as well as the states, began issuing paper currency, calling the bills "Continentals". The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787.[139] as well as banning such issuance by the various states, and limiting the states ability to make anything but gold or silver coin legal tender on August 28.[140]

      In 1791, the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811.[135] The First Bank of the United States came to an end under President Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later underPresident Jackson when its charter expired. Both banks were based upon the Bank of England.[141] Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.

      Timeline of central banking in the United States[edit]

      Sources: "Remarks by Chairman Alan Greenspan – "Our banking history"". May 2, 1998. "History of the Federal Reserve"."Chapter 1. Early Experiments in Central Banking" (PDF). Historical Beginnings... The Federal Reserve. 1999.

      Creation of First and Second Central Bank[edit]

      The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791, at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President Madison, because Congress refused to renew it.[142]

      In 1816, however, Madison revived it in the form of the Second Bank of the United States. Years later, early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies[citation needed]. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873,1893, and 1907,[5][6][7] provided demand[who?] for the creation of a centralized banking system.[citation needed]

      Creation of Third Central Bank[edit]

      The main motivation for the third central banking system came from the Panic of 1907, which caused renewed demands[who?] for banking and currency reform.[5][6][7][143] During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics.[144] According to many economists, the previous national banking system had two main weaknesses: an inelastic currency and a lack of liquidity.[144] In 1908, Congress enacted the Aldrich-Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.[145] The National Monetary Commission returned with recommendations which were repeatedly rejected by Congress. A revision crafted during a secret meeting on Jekyll Island by Senator Aldrich and representatives of the nation's top finance and industrial groups later became the basis of the Federal Reserve Act.[146][147] The House voted on December 22, 1913, with 298 yeas to 60 nays, and the Senate voted 43–25 on December 23, 1913.[148] President Woodrow Wilson signed the bill later that day.[149]

      Federal Reserve Act[edit]
      Newspaper clipping, December 24, 1913

      The head of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions – one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them.[145] Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

      In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg, an attendee of the meeting and longtime advocate of central banking in the U.S., later wrote that Aldrich was "bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties".[150] After ten days of deliberation, the bill, which would later be referred to as the "Aldrich Plan", was agreed upon. It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible.[150] The compromise involved representation of the public sector on the Board of Directors.[151]

      Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as J. P. Morganand John D. Rockefeller, Jr., Aldrich's son-in-law. Most Republicans favored the Aldrich Plan,[151] but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment".[2] In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.[151] Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.[151]

      The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress.[150] Nonetheless, President Woodrow Wilson believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator Robert Owen in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government.[2][142] The bill passed Congress on December 23, 1913,[152][153] on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay".[142]

      Key laws[edit]

      Key laws affecting the Federal Reserve have been:[154]

      Measurement of economic variables[edit]

      The Federal Reserve records and publishes large amounts of data. A few websites where data is published are at the Board of Governors Economic Data and Research page,[155] the Board of Governors statistical releases and historical data page,[156] and at the St. Louis Fed's FRED (Federal Reserve Economic Data) page.[157] The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy.[158]

      Some criticism involves economic data compiled by the Fed. The Fed sponsors much of the monetary economics research in the U.S., and Lawrence H. White objects that this makes it less likely for researchers to publish findings challenging the status quo.[159]

      Net worth of households and nonprofit organizations[edit]

      Total Net Worth – Balance Sheet of Households and Nonprofit Organizations 1949-2012

      The net worth of households and nonprofit organizations in the United States is published by the Federal Reserve in a report titled Flow of Funds.[160] At the end of the third quarter of fiscal year 2012, this value was $64.8 trillion.

      Money supply[edit]

      Components of the United States money supply2.svg

      The most common measures are named M0 (narrowest), M1, M2, and M3. In the United States they are defined by the Federal Reserve as follows:

      Measure Definition
      M0The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
      M1M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
      M2M1 + most savings accountsmoney market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
      M3M2 + all other CDs, deposits of eurodollars andrepurchase agreements.

      The Federal Reserve stopped publishing M3 statistics in March 2006, saying that the data cost a lot to collect but did not provide significantly useful information.[161] The other three money supply measures continue to be provided in detail.

      Personal consumption expenditures price index[edit]

      The Personal consumption expenditures price index, also referred to as simply the PCE price index, is used as one measure of the value of money. It is a United States-wide indicator of the average increase in prices for all domestic personal consumption. Using a variety of data including U.S. Consumer Price Index and Producer Price Index prices, it is derived from the largest component of theGross Domestic Product in the BEA's National Income and Product Accounts, personal consumption expenditures.

      One of the Fed's main roles is to maintain price stability, which means that the Fed's ability to keep a low inflation rate is a long-term measure of the their success.[162] Although the Fed is not required to maintain inflation within a specific range, their long run target for the growth of the PCE price index is between 1.5 and 2 percent.[163] There has been debate among policy makers as to whether or not the Federal Reserve should have a specific inflation targeting policy.[164][165][166]

      Inflation and the economy[edit]

      There are two types of inflation that are closely tied to each other. Monetary inflation is an increase in the money supply. Price inflation is a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over many months (monetary inflation), the result will usually be price inflation. Price inflation does not always increase in direct proportion to monetary inflation; it is also affected by the velocity of money and other factors. With price inflation, a dollar buys less and less over time.

      The second way that inflation can occur and the more frequent way[citation needed] is by an increase in the velocity of money. This has only been measured since the mid-'50s. A healthy economy usually has a velocity of 1.8 to 2.3. If the velocity is too high, then this means that people are not holding on to their money and spending it as fast as they get it. Inflation happens when too many dollars are chasing too few goods. If people are spending as soon as they get it, then there are more "active" dollars in the marketplace, as opposed to sitting in a bank account. This will also cause a price increase.[91]

      The effects of monetary and price inflation include:[91]

      • Price inflation makes workers worse off if their incomes don't rise as rapidly as prices.
      • Pensioners living on a fixed income are worse off if their savings do not increase more rapidly than prices.
      • Lenders lose because they will be repaid with dollars that aren't worth as much.
      • Savers lose because the dollar they save today will not buy as much when they are ready to spend it.
      • Debtors win because the dollar they borrow today will be repaid with dollars that aren't worth as much.
      • Businesses and people will find it harder to plan and therefore may decrease investment in future projects.
      • Owners of financial assets suffer.
      • Interest rate-sensitive industries, like mortgage companies, suffer as monetary inflation drives up long-term interest rates and Federal Reserve tightening raises short-term rates.
      • Developed-market currencies become weaker against emerging markets.[167]

      In his 1995 book The Case Against the Fed, economist Murray N. Rothbard argues that price inflation is caused only by an increase in the money supply, and only banks increase the money supply, then banks, including the Federal Reserve, are the only source of inflation.

      Adherents of the Austrian School of economic theory blame the economic crisis in the late 2000s on the Federal Reserve's policy, particularly under the leadership of Alan Greenspan, of credit expansion through historically low interest rates starting in 2001, which they claim enabled the United States housing bubble.[168]

      Most mainstream economists favor a low, steady rate of inflation.[169] Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[170] The task of keeping the rate of inflation low and stable is usually given to monetary authorities.

      Unemployment rate[edit]

      United States unemployment rates 1975–2010 showing variance between the fifty states

      One of the stated goals of monetary policy is maximum employment. The unemployment rate statistics are collected by the Bureau of Labor Statistics, and like the PCE price index are used as a barometer of the nation's economic health, and thus as a measure of the success of an administration's economic policies. Since 1980, both parties have made progressive changes in the basis for calculating unemployment, so that the numbers now quoted cannot be compared directly to the corresponding rates from earlier administrations, or to the rest of the world.[171]


      The Federal Reserve is self-funded. The vast majority (90%+) of Fed revenues come from open market operations, specifically the interest on the portfolio of Treasury securities as well as "capital gains/losses" that may arise from the buying/selling of the securities and their derivatives as part of Open Market Operations. The balance of revenues come from sales of financial services (check and electronic payment processing) and discount window loans.[172] The Board of Governors (Federal Reserve Board) creates a budget report once per year for Congress. There are two reports with budget information. The one that lists the complete balance statements with income and expenses as well as the net profit or loss is the large report simply titled, "Annual Report". It also includes data about employment throughout the system. The other report, which explains in more detail the expenses of the different aspects of the whole system, is called "Annual Report: Budget Review". These are comprehensive reports with many details and can be found at the Board of Governors' website under the section "Reports to Congress"[173]

      Net worth[edit]

      Balance sheet[edit]

      One of the keys to understanding the Federal Reserve is the Federal Reserve balance sheet (or balance statement). In accordance with Section 11 of the Federal Reserve Act, the Board of Governors of the Federal Reserve System publishes once each week the "Consolidated Statement of Condition of All Federal Reserve Banks" showing the condition of each Federal Reserve bank and a consolidated statement for all Federal Reserve banks. The Board of Governors requires that excess earnings of the Reserve Banks be transferred to the Treasury as interest on Federal Reserve notes.[174][175]

      Below is the balance sheet as of July 6, 2011 (in billions of dollars):

      NOTE: The Fed balance sheet shown in this article has assets, liabilities and net equity that do not add up correctly. The Fed balance sheet is missing the item "Reserve Balances with Federal Reserve Banks" which would make the figures balance.

      Gold Stock 11.04
      Special Drawing Rights Certificate Acct.5.20
      Treasury Currency Outstanding (Coin) 43.98
      Securities Held Outright2647.94
         U.S. Treasury Securities 1623.78
            Notes and Bonds, nominal1530.79
            Notes and Bonds, inflation-indexed65.52
            Inflation Compensation9.04
         Federal Agency Debt Securities 115.30
         Mortgage-Backed Securities908.85
      Repurchase Agreements 0
      Primary Credit12
      Secondary Credit 0
      Seasonal Credit53
         Credit Extended to AIG Inc.0
         Term Asset-Backed Securities Loan Facility 12.67
         Other Credit Extended0
      Commercial Paper Funding Facility LLC 0
      Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 60.32
      Preferred Interest in AIG Life-Insurance Subsidiaries0
      Net Holdings of TALF LLC 0.75
      Central Bank Liquidity Swaps 0
      Other Assets133.56
      Total Assets2914.51
      Currency in Circulation1031.30
      Reverse repurchase agreements68.09
      Deposits 91.12
         Term Deposits0
         U.S. Treasury, general account76.56
         U.S. Treasury, supplementary financing account5
         Foreign official0.17
         Service Related 2.53
         Other Deposits6.85
      Funds from AIG, held as agent0
      Other Liabilities73.06
      Total liabilities1263.73
      CAPITAL (AKA Net Equity)
      Capital Paid In26.71
      Other Capital 4.16
      Total Capital56.78
      MEMO (off-balance-sheet items)
      Marketable securities held in custody for foreign official and international accounts3445.42
         U.S. Treasury Securities2708
         Federal Agency Securities737.31
      Securities lent to dealers 30.46

      Total combined assets for all 12 Federal Reserve Banks
      Total combined liabilities for all 12 Federal Reserve Banks

      Analyzing the Federal Reserve's balance sheet reveals a number of facts:

      • The Fed has over $11 billion in gold stock (certificates), which represents the Fed's financial interest in the statutory-determined value of gold turned over to the U.S. Treasury in accordance with the Gold Reserve Act on January 30, 1934.[176] The value reported here is based on a statutory valuation of $42 2/9 per fine troy ounce. As of March 2009, the market value of that gold is around $247.8 billion.
      • The Fed holds more than $1.8 billion in coinage, not as a liability but as an asset. The Treasury Department is actually in charge of creating coins and U.S. Notes. The Fed then buys coinage from the Treasury by increasing the liability assigned to the Treasury's account.
      • The Fed holds at least $534 billion of the national debt. The "securities held outright" value used to directly represent the Fed's share of the national debt, but after the creation of new facilities in the winter of 2007–2008, this number has been reduced and the difference is shown with values from some of the new facilities.
      • The Fed has no assets from overnight repurchase agreementsRepurchase agreementsare the primary asset of choice for the Fed in dealing in the open market. Repo assets are bought by creating depository institution liabilities and directed to the bank theprimary dealer uses when they sell into the open market.
      • The more than $1 trillion in Federal Reserve Note liabilities represents nearly the total value of all dollar bills in existence; over $176 billion is held by the Fed (not in circulation); and the "net" figure of $863 billion represents the total face value of Federal Reserve Notes in circulation.
      • The $916 billion in deposit liabilities of depository institutions shows that dollar bills are not the only source of government money. Banks can swap deposit liabilities of the Fed for Federal Reserve Notes back and forth as needed to match demand from customers, and the Fed can have the Bureau of Engraving and Printing create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).
      • The $93.5 billion in Treasury liabilities shows that the Treasury Department does not use private banks but rather uses the Fed directly (the lone exception to this rule is Treasury Tax and Loan because the government worries that pulling too much money out of the private banking system during tax time could be disruptive).[citation needed]
      • The $1.6 billion foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
      • The $9.7 billion in 'other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to member banks for the 6% dividend on the 3% of their net capital they are required to contribute in exchange for nonvoting stock their regional Reserve Bank in order to become a member. Member banks are also subscribed for an additional 3% of their net capital, which can be called at the Federal Reserve's discretion. All nationally chartered banks must be members of a Federal Reserve Bank, and state-chartered banks have the choice to become members or not.
      • Total capital represents the profit the Fed has earned, which comes mostly from assets they purchase with the deposit and note liabilities they create. Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as "Miscellaneous Revenue".

      In addition, the balance sheet also indicates which assets are held as collateral against Federal Reserve Notes.

      Federal Reserve Notes and Collateral
      Federal Reserve Notes Outstanding1128.63
         Less: Notes held by F.R. Banks 200.90
         Federal Reserve notes to be collateralized927.73
      Collateral held against Federal Reserve notes 927.73
         Gold certificate account11.04
         Special drawing rights certificate account5.20
         U.S. Treasury, agency debt, and mortgage-backed securities pledged911.50
         Other assets pledged0


      The Federal Reserve System has faced various criticisms since its inception in 1913. These criticisms include the assertions that the Federal Reserve System violates the United States Constitution and that it impedes economic prosperity. Critic Miranda Fleschert contends that the twelve regional Federal Reserve banks (as opposed to the entire Federal Reserve System) consider themselves to be private corporations with private funding.[177] The movement to audit the Federal Reserve System has gained national traction; a bill related to the movement was passed through the House of Representatives in 2012.[178] Many critics see auditing the Federal Reserve System as a means of gaining insight into an institution they contend has historically had little to no transparency, that has acted without congressional approval or oversight, and that has the power to create and loan U.S. dollars based on a monetary policy determined by its own interests[179]

      See also[edit]


      1. ^ "Open Market Operations". Federal Reserve. Retrieved August 29, 2011.
      2. a b c "Born of a panic: Forming the Federal Reserve System". The Federal Reserve Bank of Minneapolis. August 1988.
      3. a b c BoG 2006, pp. 1 "Just before the founding of the Federal Reserve, the nation was plagued with financial crises. At times, these crises led to 'panics,' in which people raced to their banks to withdraw their deposits. A particularly severe panic in 1907 resulted in bank runs that wreaked havoc on the fragile banking system and ultimately led Congress in 1913 to write the Federal Reserve Act. Initially created to address these banking panics, the Federal Reserve is now charged with a number of broader responsibilities, including fostering a sound banking system and a healthy economy."
      4. ^ BoG 2005, pp. 1–2
      5. a b c Panic of 1907: J.P. Morgan Saves the Day
      6. a b c Born of a Panic: Forming the Fed System
      7. a b c The Financial Panic of 1907: Running from History
      8. ^ BoG 2005, pp. 1 "It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."
      9. ^ Patrick, Sue C. (1993). Reform of the Federal Reserve System in the Early 1930s: The Politics of Money and Banking. Garland.ISBN 978-0-8153-0970-3.
      10. ^ 12 U.S.C. § 225a
      11. ^ "The Congress established two key objectives for monetary policy-maximum employment and stable prices-in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve's dual mandate". January 25, 2012. Retrieved April 30, 2012.
      12. a b "FRB: Mission". November 6, 2009. Retrieved October 29, 2011.
      13. ^ BoG 2005, pp. v (See structure)
      14. ^ "Federal Reserve Districs". Federal Reserve Online. Retrieved August 29, 2011.
      15. ^ Advisory Councils –
      16. ^ "Coins and Currency"US Dept of Treasury website. August 24, 2011. Retrieved August 29, 2011.
      17. ^ From "Who owns the Federal Reserve?", Current FAQs, Board of Governors of the Federal Reserve System, at [1].
      18. a b "FAQ – Who owns the Federal Reserve?". Federal Reserve website.
      19. ^ Lapidos, Juliet (September 19, 2008). "Is the Fed Private or Public?". Slate. Retrieved August 29, 2011.
      20. ^ Toma, Mark (February 1, 2010). "Federal Reserve System".EH. Net Encyclopedia. Economic History Association. Retrieved February 27, 2011.
      21. ^ "Who owns the Federal Reserve Bank?"FactCheck. March 31, 2008. Retrieved February 27, 2011.
      22. ^ Appelbaum, Binyamin (March 22, 2011). "Fed Had Profit From Investments of $82 Billion Last Year"The New York Times. Retrieved March 22, 2011.
      23. ^ Fed Gives $77 Billion in Profits to Treasury Department Binyamin Appelbaum
      24. ^ "Federal Reserve Act". Board of Governors of the Federal Reserve System. May 14, 2003. Archived from the original on May 17, 2008.
      25. a b BoG 2006, pp. 1
      26. ^ Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. (November 21, 2002)."Deflation: Making Sure "It" Doesn't Happen Here". Board of Governors of the Federal Reserve System. Retrieved October 29, 2011.
      27. ^ Bernanke, Ben (October 24, 2003). "Remarks by Governor Ben S. Bernanke: At the Federal Reserve Bank of Dallas Conference on the Legacy of Milton and Rose Friedman's Free to Choose, Dallas, Texas" (text).
      28. ^ BoG 2005, pp. 113
      29. ^ BoG 2005, pp. 83
      30. ^ lender of last resortFederal Reserve Bank of Minneapolis, Retrieved May 21, 2010
      31. ^ Griffin, G. Edward (2002). The Creature from Jekyll Island: A Second Look at the Federal Reserve. American Media.ISBN 978-0-912986-39-5.
      32. a b c "The Federal Reserve, Monetary Policy and the Economy – Everyday Economics – FRB Dallas". Retrieved August 29, 2011.
      33. ^ "Press Release: Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG)". Board of Governors of the Federal Reserve. September 16, 2008. Retrieved August 29, 2011.
      34. ^ Andrews, Edmund L.; de la Merced, Michael J.; Walsh, Mary Williams (September 16, 2008). "Fed's $85 Billion Loan Rescues Insurer"The New York Times. Retrieved September 17, 2008.
      35. ^ "How Currency Gets into Circulation". Federal Reserve Bank of New York. June 2008. Retrieved August 29, 2011.
      36. ^ "Annual Production Figures". Bureau of Engraving and Printing. Retrieved August 29, 2011.
      37. ^ "Federal Funds". Federal Reserve Bank of New York. August 2007. Retrieved August 29, 2011.
      38. ^ Cook, Timothy Q.; Laroche, Robert K., eds. (1993)."Instruments of the Money Market". Federal Reserve Bank of Richmond. Retrieved August 29, 2011.
      39. ^ "FRB: Speech-Kohn, The Evolving Role of the Federal Reserve Banks". November 3, 2006. Retrieved August 29, 2011.
      40. ^ "Frequently Asked Questions Federal Reserve System". Retrieved February 19, 2010. "The Board of Governors, the Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review. Under the Federal Banking Agency Audit Act, the Government Accountability Office (GAO) has conducted numerous reviews of Federal Reserve activities"[dead link]
      41. ^ "Federal Reserve System Current and Future Challenges Require System wide Attention: Statement of Charles A. Bowsher". United States General Accounting Office. July 26, 1996. Retrieved August 29, 2011. Under the Federal Banking Agency Audit Act, 31 U.S.C. section 714(b), our audits of the Federal Reserve Board and Federal Reserve banks may not include (1) transactions for or with a foreign central bank or government, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items (1), (2), or (3). See Federal Reserve System Audits: Restrictions on GAO's Access (GAO/T-GGD-94-44), statement of Charles A. Bowsher. The real purpose of this historic "duck hunt" was to formulate a plan for U.S. banking and currency reform that Aldrich could present to Congress.
      42. ^ "About The Audit". Audit the Fed Coalition. 2009. Retrieved August 29, 2011. The Audit the Fed Coalition asserts that although the Fed is currently audited by outside agencies, these audits are not thorough and do not include monetary policy decisions or agreements with foreign central banks and governments. According to the Coaliition, the crucial issue of Federal Reserve transparency requires an analysis of 31 USC 714, the section of U.S. Code which establishes that the Federal Reserve may be audited by the Government Accountability Office (GAO), but which simultaneously severely restricts what the GAO may in fact audit. The coalition argues that the GAO is allowed to audit only check-processing, currency storage and shipments, and some regulatory and bank examination functions, etc. The Coalition contends that the most important matters, which directly affect the strength of the dollar and the health of the financial system, are immune from oversight.
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      119. ^ "A dirty job, but someone has to do it". December 13, 2007. Retrieved August 29, 2011. "The Fed's discount window, for instance, through which it lends direct to banks, has barely been approached, despite the soaring spreads in the interbank market. The quarter-point cuts in its federal funds rate and discount rate on December 11 were followed by a steep sell-off in the stockmarket...The hope is that by extending the maturity of central-bank money, broadening the range of collateral against which banks can borrow and shifting from direct lending to an auction, the central bankers will bring down spreads in the one- and three-month money markets. There will be no net addition of liquidity. What the central bankers add at longer-term maturities, they will take out in the overnight market. But there are risks. The first is that, for all the fanfare, the central banks' plan will make little difference. After all, it does nothing to remove the fundamental reason why investors are worried about lending to banks. This is the uncertainty about potential losses from subprime mortgages and the products based on them, and – given that uncertainty – the banks' own desire to hoard capital against the chance that they will have to strengthen their balance sheets."
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