The purpose of this post is mostly just to provide the basic structure of the Federal Reserve System. This can turn into a deep topic very fast with all that happens and politics and everything else that is involved in this system. There will most likely be many more posts about the Federal Reserve and the banking system.
Inception of the Federal Reserve
The Federal reserve system was established in 1913 when President Woodrow Wilson signed the Federal Reserve Act. Essentially, the system involves a board of governors that resides in Washington D.C. that reports to congress, 12 regional Federal Reserve Banks, and the commercial banks that are members of the reserve banks.
Structure of the Federal Reserve
The Federal Reserve system was designed to have both private and public characteristics. Even though all of the member banks and the district banks are private, the Board of Governors is public in that it must report to congress, even though they are not directly funded by congress. Appointed by the President and confirmed by the senate, like the positions of the Cabinet of each Presidential administration, the Board is supposed to provide guidance and oversee the 12 regional banks. Twice a year, the Board of Governors submits an extensive Monetary Policy Report to congress on recent developments of the economy and monetary policy.
The next part of the system is the 12 regional banks that are spread throughout the nation. Below is a picture of the United States divided into the 12 regions. As you can see, it is mostly dependent on state, however some states are split between regions. The Reserve banks oversee the member banks belonging to their region, as well as try to maintain their regions economic interests.
Commercial banks are another part of the Federal Reserve system when they are a member of their regional reserve bank. They are considered a member of a reserve bank when they hold stock in their district’s reserve bank. It is important to note that this is not like owning stock in a private company. This can be confusing since they use the same word. However, all this means is that the commercial bank most hold a certain percentage of their total capital and assets within their district bank, and this capital can not be used for collateral or anything else.
The final part of the Federal Reserve system that I will talk about is the Federal Open Market Committee (FOMC). This committee is responsible for the open market operations of the Fed. It consists of 12 members which include: the 7 members of the Board of Governors, the president of the New York Federal Reserve, and 4 of the remaining 11 district reserve banks that rotate serving 1-year terms on the committee. This is the committee that controls the Federal Funds rate which is the interest rate that the member commercial banks can lend their excess reserves to each other overnight.
Final thoughts
The two most powerful man-made forces on the planet are governments and central banks. This makes this a very important topic of study, especially for those who are concerned about their financial future. A lot of this information can be found directly on the website of the Federal reserve, and I will provide some links to the parts that are directly related to this post.
For anyone who is curious about the banking system, I would highly recommend the George Gammon YouTube channel. He does an amazing job explaining the concepts with picture on a whiteboard in a way that is relatively easy to understand considering the topic. I would also recommend the book The Creature from Jekyll Island by G Edward Griffin. I have not read it yet, but It has been recommended to me many times by different people and I have also watched the author being interviewed a few times and I am excited to read it in the near future.
To your wealth and future,
James Forsythe
For more on the banking system
https://jamesdforsythe.com/category/banking-system/
Sources and Recommendations
Federal Reserve History
https://www.federalreserve.gov/aboutthefed/centennial/about.htm
https://www.federalreserve.gov/faqs/about_14986.htm
https://www.investopedia.com/articles/investing/061515/what-do-federal-reserve-banks-do.asp
https://www.federalreserve.gov/monetarypolicy/fomc.htm
George Gammon YouTube Channel
