Go to the Federal Reserve Web site, www.federalreserve.gov, and select About the

Question

Go to the Federal Reserve Web site, www.federalreserve.gov, and select About the Fed, then The Federal Reserve System, and then Districts and Banks. Find your Federal Reserve District. Next, return to the Fed home page and select Monetary Policy, then Reports, and then Beige Book. What is the Beige Book? Locate the current Beige Book report and compare consumer spending for the entire U.S. economy with consumer spending in your Federal Reserve District. What are the economic strengths and weaknesses in both? Are retailers reporting that recent sales have met their expectations? What are their expectations for the future?

Explanation / Answer

The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907.[2][3][4] Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.[3][5] Events such as the Great Depression were major factors leading to changes in the system.[6]

The Congress established three key objectives for monetary policy—maximum employment, stable prices, and moderate long-term interest rates—in the Federal Reserve Act.[7] The first two objectives are sometimes referred to as the Federal Reserve's dual mandate.[8] Its duties have expanded over the years, and today, according to official Federal Reserve documentation, include conducting the nation's monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions.[9] The Fed also conducts research into the economy and releases numerous publications, such as the Beige Book.

The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors (or Federal Reserve Board), the Federal Open Market Committee (FOMC), twelve regional Federal Reserve Banks located in major cities throughout the nation, numerous privately owned U.S. member banks and various advisory councils.[10][11][12] The FOMC is the committee responsible for setting monetary policy and consists of all seven members of the Board of Governors and the twelve regional bank presidents, though only five bank presidents vote at any given time. The Federal Reserve System has both private and public components, and was designed to serve the interests of both the general public and private bankers. The result is a structure that is considered unique among central banks. It is also unusual in that an entity outside of the central bank, namely the United States Department of the Treasury, creates the currency used.[13]

According to the Board of Governors, the Federal Reserve is independent within government in that "its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government." Its authority is derived from statutes enacted by the U.S. Congress and the System is subject to congressional oversight. The members of the Board of Governors, including its chairman and vice-chairman, are chosen by the President and confirmed by the Senate. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system's highest-level employees. Thus the Federal Reserve has both private and public aspects.[14][15][16][17] The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury.[18] This was followed at the end of 2011 with a transfer of $77 billion in profits to the U.S. Treasury DepartmentCentral banking in the United States
Main article: History of central banking in the United States

In 1690, the Massachusetts Bay Colony became the first to issue paper money in what would become the United States, but soon others began printing their own money as well. The demand for currency in the colonies was due to the scarcity of coins, which had been the primary means of trade.[20] Colonies' paper currencies were used to pay for their expenses, as well as a means to lend money to the colonies' citizens. Paper money quickly became the primary means of exchange within each colony, and it even began to be used in financial transactions with other colonies.[21] However, some of the currencies were not redeemable in gold or silver, which caused them to depreciate.[20] The Currency Act of 1751 set limits on the issuance of Bills of Credit by the New England states and set requirements for the redemption of any bills issued. This Act was in response to the overissuance of bills by Rhode Island, eventually reducing their value to 1/27 of the issuing value.[22] The Currency Act of 1764 completely banned the issuance of Bills of Credit (paper money) in the colonies and the making of such bills legal tender because their depreciation allowed the discharge of debts with depreciated paper at a rate less than contracted for, to the great discouragement and prejudice of the trade and commerce of his Majesty's subjects. The ban proved extremely harmful to the economy of the colonies and inhibited trade, both within the colonies and abroad.[23]

The first attempt at a national currency was during the American Revolutionary War. In 1775 the Continental Congress, as well as the states, began issuing paper currency, calling the bills "Continentals". The Continentals were backed only by future tax revenue, and were used to help finance the Revolutionary War. Overprinting, as well as British counterfeiting caused the value of the Continental to diminish quickly. This experience with paper money led the United States to strip the power to issue Bills of Credit (paper money) from a draft of the new Constitution on August 16, 1787.[24] as well as banning such issuance by the various states, and limiting the states ability to make anything but gold or silver coin legal tender.[25]

In 1791 the government granted the First Bank of the United States a charter to operate as the U.S. central bank until 1811.[20] The First Bank of the United States came to an end under President Madison because Congress refused to renew its charter. The Second Bank of the United States was established in 1816, and lost its authority to be the central bank of the U.S. twenty years later under President Jackson when its charter expired. Both banks were based upon the Bank of England.[26] Ultimately, a third national bank, known as the Federal Reserve, was established in 1913 and still exists to this day.
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Timeline of central banking in the United States
1791–1811: First Bank of the United States
1811–1816: No central bank
1816–1836: Second Bank of the United States
1837–1862: Free Bank Era
1846–1921: Independent Treasury System
1863–1913: National Banks
1913–Present: Federal Reserve System
Sources: "Remarks by Chairman Alan Greenspan – "Our banking history"". May 2, 1998., "History of the Federal Reserve"., "Historical Beginnings...The Federal Reserve" (PDF). 1999., Chapter 1
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Creation of First and Second Central Bank

The first U.S. institution with central banking responsibilities was the First Bank of the United States, chartered by Congress and signed into law by President George Washington on February 25, 1791 at the urging of Alexander Hamilton. This was done despite strong opposition from Thomas Jefferson and James Madison, among numerous others. The charter was for twenty years and expired in 1811 under President Madison, because Congress refused to renew it.[27]

In 1816, however, Madison revived it in the form of the Second Bank of the United States. Years later, early renewal of the bank's charter became the primary issue in the reelection of President Andrew Jackson. After Jackson, who was opposed to the central bank, was reelected, he pulled the government's funds out of the bank. Nicholas Biddle, President of the Second Bank of the United States, responded by contracting the money supply to pressure Jackson to renew the bank's charter forcing the country into a recession, which the bank blamed on Jackson's policies[citation needed]. Interestingly, Jackson is the only President to completely pay off the national debt. The bank's charter was not renewed in 1836. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907, provided strong demand for the creation of a centralized banking system.
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Creation of Third Central Bank
Main article: History of the Federal Reserve System

The main motivation for the third central banking system came from the Panic of 1907, which caused renewed demands for banking and currency reform.[28] During the last quarter of the 19th century and the beginning of the 20th century the United States economy went through a series of financial panics.[29] According to many economists, the previous national banking system had two main weaknesses: an inelastic currency and a lack of liquidity.[29] In 1908, Congress enacted the Aldrich-Vreeland Act, which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform.[30] The National Monetary Commission returned with recommendations which were repeatedly rejected by Congress. A revision crafted during a secret meeting on Jekyll Island by Senator Aldrich and representatives of the nations top finance and industrial groups later became the basis of the Federal Reserve Act.[31][32] The House voted on December 22, 1913 with 298 yeas to 60 nays and 76 not voting and the Senate voting on December 23, 1913 with 43 yeas to 25 nays and 27 not voting.[33] President Woodrow Wilson signed the bill later that day at 6:02pm.[34]
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Federal Reserve Act
Main article: Federal Reserve Act

Newspaper clipping, December 24, 1913

The head of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions—one to study the American monetary system in depth and the other, headed by Aldrich himself, to study the European central banking systems and report on them.[30] Aldrich went to Europe opposed to centralized banking, but after viewing Germany's monetary system he came away believing that a centralized bank was better than the government-issued bond system that he had previously supported.

In early November 1910, Aldrich met with five well known members of the New York banking community to devise a central banking bill. Paul Warburg, an attendee of the meeting and long time advocate of central banking in the U.S., later wrote that Aldrich was "bewildered at all that he had absorbed abroad and he was faced with the difficult task of writing a highly technical bill while being harassed by the daily grind of his parliamentary duties".[35] After ten days of deliberation, the bill, which would later be referred to as the "Aldrich Plan", was agreed upon. It had several key components, including a central bank with a Washington-based headquarters and fifteen branches located throughout the U.S. in geographically strategic locations, and a uniform elastic currency based on gold and commercial paper. Aldrich believed a central banking system with no political involvement was best, but was convinced by Warburg that a plan with no public control was not politically feasible.[35] The compromise involved representation of the public sector on the Board of Directors.[36]

Aldrich's bill met much opposition from politicians. Critics charged Aldrich of being biased due to his close ties to wealthy bankers such as J. P. Morgan and John D. Rockefeller, Jr., Aldrich's son-in-law. Most Republicans favored the Aldrich Plan,[36] but it lacked enough support in Congress to pass because rural and western states viewed it as favoring the "eastern establishment".[2] In contrast, progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.[36] Conservative Democrats fought for a privately owned, yet decentralized, reserve system, which would still be free of Wall Street's control.[36]

The original Aldrich Plan was dealt a fatal blow in 1912, when Democrats won the White House and Congress.[35] Nonetheless, President Woodrow Wilson believed that the Aldrich plan would suffice with a few modifications. The plan became the basis for the Federal Reserve Act, which was proposed by Senator Robert Owen in May 1913. The primary difference between the two bills was the transfer of control of the Board of Directors (called the Federal Open Market Committee in the Federal Reserve Act) to the government.[2][27] The bill passed Congress on December 23, 1913,[37][38] on a mostly partisan basis, with most Democrats voting "yea" and most Republicans voting "nay".[27]

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