It is important for us to understand the roles of the Federal Reserve Bank, Federal Open Market Committee, and the US Treasury Department. In Part 1, we gave you a brief history of the Federal Reserve, the country’s national bank. We did not explore the roles and responsibilities of the Federal Reserve System, Federal Open Market Committee or the US Treasury.
Let’s start with the US Treasury. The US Treasury was mandated by the US Congress to be the sole source of our currency. The Treasury prints our dollars and mints our coins at several US Mints around the United States. It is Treasury’s responsbility to protect the integrity of our printed money from counterfeiters and to assure the quality of the currency in circulation. It is our banks that hold the currency in accounts established by customers of each bank. We have banks that are chartered by the US Treasury and generally are known as “National” banks with National in their name. Every State is guaranteed under the “state’s right doctrine” of the US Constitution the right to charter and control non-National banks in their state. We refer to them as “State ” banks. All banks must be members of the Federal Deposit Insurance Corporation (FDIC) and be members of the regional Federal Reserve Bank.
US Treasury also authorizes the issuance of bonds and notes to borrow money to pay the expenses of the United States in excess of the revenues it collects in the form of the many various taxes levied by Congress. The bonds and notes issued by the US Treasury comprise what we know as the national debt. We have a whole series of “rants” about the increasing national debt. The Federal Reserve monitors the national debt and the amount of new bonds and notes issued by the US Treasury, but it does not control the issuances or amount of the nation’s debt. The US Congress holds the authority to set the level of our nation’s debt through approval of an authorized debt level which has been the center of controversy over the last 4 years. The Treasurry cannot borrow more than the authorized debt limit.
In summary, the US Treasury prints and controls the volume of dollars in circulation and authorizes the sale of bonds and notes backed by the strength of the US Government. The US Dollar is the base currency in most world markets. The Federal Reserve Bank, in partnership with US Treasury knows how much currency is in circulation.
The Federal Reserve System is an independent agency of the Federal government. Beginning in 1913, in addition to being the national bank to individual banks, the Federal Reserve was mandated to control the amount of non-governmental credit available in the economy. As documented in Part 1, the Federal Reserve System is managed by the Federal Reserve Board made up of 7 members, who serve 14 year terms, appointed by the President and confirmed by the US Senate . One new member is appointed every two years at the end of an expiring term. Each member is from different geographic regions of the United States. The Chairman of the Board is the public spokesperson for the Board.
The Federal Reserve System includes 12 Regional Federal Reserve Banks that serve the national and state banks in their region. All monetary transactions of member banks are processed “cleared” by the Federal Reserve Bank. All member bank operations are reported to the Federal Reserve Bank, State Banking Commissions, FDIC, and if a “National” bank, the US Treasury. All bank are subject to audit by the FDIC, and the State Banking Commission or US Treasury, depending on how the bank was chartered.
The most important function of a member of the Redral Reserve Board is to also serve as a member of the Federal Open Market Committee (FOMC). The FOMC functions as a committee of the Federal Reserve System and was created in 1933, in response to the economic crisis of the “Great Depression.” In legislation after 1913, the US Congress also manadated that the actions of Federal Reserve Board to include taking actions to maintain full employment within the US Economy.
The FOMC is comprised of the seven members of the Federal Reserve Board and the Presidents from 5 of the Regional FRB’s also serve on the FOMC for one year. Membership from the Regional FRB’s is rotated between the 12 regional banks. The President of the New York FRB is a permanent member. Chairman of the FRB serves as Chairman of the FOMC and also is the Committee’s public spoksman. The FOMC is required by law to meet a minimum of 8 times per year with 4 of the meeting held in Wahsington D. C. In recent years, the FOMC meets every 4 to 6 weeks depending on the state of the US economy.
The FOMC has several important functions to assure the US economy remains strong. First, the FOMC takes action to assure financial institutions maintain sufficient liquidity to remain financially solvent. This requires the FOMC to monitor the quality of credit offered in the US Economy and the businesses that desire to participate in our nation’s free interprise system. The FOMC has the authority from the US Congress to purchase and sell US Treasury securities and buy securities of US corporations and other governmental entities, such as states and local governments to assure the financial system of the country has the cash available to encourage financial growth and stability.
Since its formation in 1933, the FOMC main responsibility is to assure full employment within the economy of the United States. How does it normally attempt to do this? As stated above, the FOMC must assure that the US banking system has sufficient funds to stay liquid and to also make available to US businesses funds in the form loans or credit to prosper the individual business whether large or small.
Up until the mid-1950’s, Americans looked to their local bank for credit. If they wanted to buy a car and didn’t have the money, they borrowed it from the bank. If a business wanted to build a new building or buy new equipment, they borrowed from the bank. The FOMC could maintain tight control of credit and support the growth of the US economy. In the late 1950’s, oil companies started issuing “credit cards” to customers at their gasoline stations. Large retailers started doing the same for use in their stores. Soon, automobile manufacturers created credit lending subsidiaries and made loans directly to auto dealers to finance inventories and to the buyers of their autos. Large corporations, like General Electric, formed large credit businesses to provide credit to buyers of their goods, equipment, and materials. In the mid-1960’s, subsidiaries of bank holding companies formed credit card companies and offered credit cards to the general public, frequently at will. Mortgage loan companies were formed to originate, package and sell home mortgages to the investment markets. The sum of this is “the FOMC lost full control over the volume of credit available in the US economy.” It also meant that all of these non-bank entities were not regulated by the Federal Reserve System, the US Treasury, the FDIC, or any State banking commissions.
The loss of full control of US credit, the FOMC can only attempt to fulfill its mandate of maintaining full employment within the US economy and assuring our financial institutions remain liquid by attempting to control the interest rate within the financial system. We will discuss this delimna in Part 3.
The Redneck Economist