The Federal Reserve System administers economic policy in the United States through complex monetary tools and simple laws of supply and demand.
There is a clear cut winner to that cordial business question, “Paper or plastic?” and it is plastic by a mile, according to recent news from the Federal Reserve System. The growing popularity among Americans for debit/credit card purchases, electronic bill payments, and direct deposit paydays has seen the Fed reduce its number of check processing centers from 45 in 2003 to a proposed four in the next few years.
To the general public the Fed is an afterthought that appears in the news periodically throughout the year to tweak interest rates. Homeowners with adjustable rate mortgages tune in to learn if their monthly budgets will require tweaking as well.
The Federal Reserve System was created by the Federal Reserve Act in 1913 to provide stability to the United States economy. During the presidency of Woodrow Wilson the Federal Reserve provided financial support for the Allied forces in World War I. A decade later the Fed received much criticism and blame for the depths of the Great Depression. These peaks and valleys have kept the Fed in a state of evolution over the last century.
The Federal Reserve System is headed by the Board of Governors. Each board member is appointed by the President with Senate confirmation to serve a single, staggered 14-year term. A Chairman and Vice-Chairman are selected in similar fashion from this group. The body of the Fed consists of 12 Federal Reserve Banks, 25 Branch banks, and approximately 3000 member banks.
The seven members of the Board of Governors join the New York Reserve Bank president and four rotating Reserve Bank presidents to form the Federal Open Market Committee. The FOMC establishes monetary policy that the Fed executes in various ways.
Government securities are bought and sold on the open market, which influences the availability of money in the economy. Purchased securities add money to the economy, while the sale of securities reduces available funds.
The Fed also sets the discount rate that determines the interest banks must pay each other for short-term loans. The markup on this figure reflects the prime rate credit worthy customers pay for loans.
Member banks of the Federal Reserve System are required to keep a percentage of capital on deposit with the Fed. Increasing or decreasing the amount of the required deposit also affects the money supply.
The Federal Reserve Banks distribute funds to the member banks to meet the public’s need for currency. The money supply is increased during high-spending seasons such as the Christmas and summer holidays.
The Fed provides for wire transfer of large sums of money, supervises recurring transactions such as payroll deposits, and issues savings bonds and Treasury bills for public investors.
The Federal Reserve vault is the holding cell for payroll deductions, unemployment taxes, and income tax withholdings for corporations and private citizens.
One interesting aspect of Reserve Bank work is the accumulation, accounting, and destruction of millions of dollars each day. Often 25% of the paper currency that flows through a Reserve Bank will be targeted for shredding due to its deteriorated condition. The bill with shortest shelf life is good old George, the one dollar bill.