A (Kind Of) Brief History of Central Banking

Thursday, September 10, 2009 , , , 0 Comments

Philadelphia Fed is kind enough to sum it up for us. Awww, so nice of them, isn't it?

The Federal Reserve System was not initially thought of as a central bank. Indeed, much of the legislative debate in 1913 about establishing the Fed was about whether the Federal Reserve would be a central bank or a collection of Reserve Banks. Initially, the Fed operated as a system of Reserve Banks, with a substantial amount of decentralized decision-making. In the 1920s, for instance, some Reserve Banks sold Treasury securities at times when other Reserve Banks were buying Treasury securities.

To improve the coordination of such open market purchases and sales of securities, the Reserve Banks eventually formed the Open Market Committee in the 1920s. This was the predecessor of the FOMC (Federal Open Market Committee), which was established by congressional action in the Banking Act of 1933. The FOMC conducts monetary policy as we know it today. In 1935, Congress put all seven members of the Federal Reserve Board of Governors on the FOMC and limited the Reserve Banks to only five voting members at any one time.

Unlike the First and Second Banks, the Federal Reserve was not designed to make business loans or accept deposits from the general public. Instead it is a “bankers’ bank,” holding deposits and making loans to depository financial institutions. Like the First and Second Banks, however, the Fed issues notes that circulate as currency. Also, just as its predecessors had branches, the Fed has 12 Reserve Banks plus branches throughout the country.

Like the nation’s two previous central banks, the Fed is the federal government’s fiscal agent, receiving its revenues, holding its deposits, and making its payments. Originally, the third central bank also had only a 20-year charter from Congress. But the McFadden Act of 1927 gave it permanence. So, unlike its predecessors, the Fed has lasted beyond its initial charter period. National banks and those state-chartered banks that choose to be members of the Federal Reserve System receive non-tradable stock in their District Reserve Bank, in contrast to the publicly owned and traded stock of the First or Second Bank. By law, the stock earns a fixed 6 percent dividend. Stockholders elect six of the nine members of a Reserve Bank’s board of directors, while the remaining three (including the chairman of each board) are appointed by the Federal Reserve’s Board of Governors.

Well that's all well and good but the real story is slightly seedier.

Would anyone care to contribute to that particular story? Show of hands now... no one? Don't worry, we'll revisit.

Perhaps Philadelphia Fed would care to edit its statement to reflect, uh, current events?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.