Page 337 - Encyclopedia of Business and Finance

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Financial Institutions

not fulfilled by the commercial banking industry. Similar Congress. Nevertheless, it actively coordinates its research
institutions were created to finance agriculture and hous- and analysis with the White House and the secretary of
ing in rural areas, public works, and education. Laws and the U.S. Department of Treasury in formulating policy.
regulations recognized and strengthened the separation, The regional Federal Reserve banks’ Board of Directors is
and thus specialization, of the financial function different also structured to represent banking, industry and com-
intermediaries performed in the financial system. merce, and the general public. There is a formal statutory
The system was further strengthened by establishing requirement to have three directors from the three groups
government and semigovernment intermediaries to in the district area on the board.
increase liquidity in the market, manage maturity risk, The monetary policy-making body within the Fed-
and broaden the sharing of the market (price) risk through eral Reserve is the Federal Open Market Committee
secondary markets for mortgages, agency (government (FOMC), which meets regularly (generally eight times per
and sponsored) securities, and other asset-based securities. year). Its voting members are the seven governors of the
Examples of these institutions are: Commodity Credit board of governors and five presidents of the regional
Corporation, Farm Credit Banks, Farm Credit Financing
banks. The president of the Federal Reserve Bank of New
Assistance Corporation, Farmers Home Administration,
York is a permanent member of FOMC, and the other
Federal Home Loan Mortgage Corporation, Federal four presidents serve on annual rotation from among four
Financing Corporation, Federal National Mortgage Asso-
groups formed from the remaining eleven regional banks.
ciation, Federal Housing Administration, Federal Home
The regional banks are located in Boston, New York,
Loan Banks, Government National Mortgage Associa-
tion, Resolution Funding Corporation, Small Business Philadelphia, Richmond, Atlanta, Cleveland, Chicago,
Dallas, St. Louis, Kansas City, Minneapolis, and San
Administration, and Student Loan Marketing Associa-
Francisco. These cities were chosen as representatives of
tion.
the regional economies of the United States in 1913. It
was thought at the time that the regional economies had
THE MONETARY SYSTEM
different characteristics in terms of the type and level of
The U.S. monetary system is based on credit. The U.S. economic activity, so they needed different accommoda-
currency is issued by its central bank, the Federal Reserve
tion with respect to supply of money and finance, redis-
System, as a liability on itself. The value of the currency is
counting mechanisms, and interest rates. In other words,
based on its purchasing power in the economy and around it was thought that there were twelve different money
the world and has not been linked to or defined in terms
markets in the U.S. economy, so each one needed special
of any particular commodity or an index since 1968. The attention for its needs.
issuance of currency was tied to the U.S. gold holdings
This structure of the Federal Reserve System contin-
prior to 1968. The U.S. money supply consists of cur-
ues to this day, even though the money market has
rency and coins and checkable public deposits in the
banking system. become one market because of institutional and techno-
logical advancements. Now there are truly national finan-
The Federal Reserve System, created in 1913, was
established to furnish elastic currency to the economy and cial institutions, not just in terms of their national charter,
to supervise the banking system. Prior to 1913 there had with interstate deposit taking and lending of commercial
been financial crises that were due to absence of a system- and numerous other types of loans to businesses and
atic way to provide money and credit in the economy. households.
Large bank failures—due to fraud and mismanagement, The Federal Reserve policy serves the needs of the
as well as economic fluctuations and boom and bust in entire economy and all its parts by taking into account
commodity prices—had also occurred. economic and financial information concerning all eco-
The Federal Reserve System consists of the Board of nomic segments and activities in the U.S. economy. There
Governors of the Federal Reserve and the twelve regional are many advisory committees, such as the Federal Advi-
or district Federal Reserve banks. The Board of Governors sory Committee representing the interests of the banking
in Washington, D.C., is the central decision-making industry, the Consumer Advisory Committee represent-
organization. The board has seven members who are nom- ing consumer interests, and similar other committees rep-
inated by the president of the United States and con- resenting interests of other segments to the Federal
firmed by the Senate. Each board member is appointed Reserve System. Legislative, regulatory, monetary policy,
for fourteen years, so as to ensure that the board remain and day-to-day operations of the central bank consider
immune from political influence of any administration in relevant details in their deliberations and policy decisions,
office. The board is set up as an independent agency; it including research from a wide variety of sources—private
does not report to the president, but it does report to and public—about the economy.

314 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION