U.S. Federal Reserve System
- K.C. Adams -
Originally published in TML Daily, July 3,
2002.
The U.S. Federal Reserve System (Fed) was
established as a federal government agency in 1913
by an act of Congress. The Fed consists of a Board
of Governors (BoG) in Washington and twelve
Reserve Banks situated throughout the country. The
BoG overseas all the operations of the Fed
including the twelve Reserve Banks. The most
important bank with the greatest responsibilities
is the Federal Reserve Bank of New York. The Board
of Governors consists of seven members appointed
by the President of the United States and
confirmed by the U.S. Senate. The full term of a
Board member is fourteen years; the Chairman and
the Vice Chairman of the Board are also appointed
by the President, confirmed by the Senate and must
be members of the Board. A Washington staff
numbering about 1,700 supports the Board of
Governors.
Shareholders privately own the twelve Reserve
Banks. The shares are owned by banks that are
members of the federal reserve system. Member
banks must subscribe to stock in their regional
Federal Reserve Bank in an amount at least equal
to 3 per cent of their capital and surplus. The
holding of this stock is a legal obligation that
goes along with membership, and the stock may not
be sold or pledged as collateral for loans. Member
banks receive a 6 per cent dividend annually on
their stock, as specified by law, and vote for the
Class A and Class B directors of the Reserve Bank
in their district. The BoG appoints Class C
directors. The stock is not available for purchase
by individuals.
The presidents and directors of the Reserve Banks
are powerful members of the Fed, holding key
positions on committees that decide U.S. fiscal
and monetary policy. They also participate in
selecting nominees to the BoG. Studies that chart
the history of Reserve Bank directorships and
members of the BoG since 1913 reveal a "who's who"
of the U.S. (and European) financial and
industrial elite. (See charts below) The most
powerful families of the financial oligarchy were
responsible for the original design of the Fed and
at its inception manoeuvred to own a controlling
interest of stock in the Reserve Banks.
The Fed is a powerful arm of the U.S. capitalist
state controlled directly by the richest families.
It is only marginally accountable to elected
representatives. The Fed is somewhat unusual as a
U.S. state institution as it makes no attempt to
hide its control by the monopoly capitalist class.
Most state institutions try to create an illusion
of being above classes, operating in the interests
of all the people regardless of social class --
not the Fed. The most powerful U.S. capitalists
have never allowed any interference with the
workings of the Fed. Most proceedings of the BoG
and the Reserve Banks are secret even from
Congress and the Executive Branch. Only a small
sector of its financial accounts are subject to
audit by the General Accounting Office (GAO) and
its decisions cannot be overturned by the
President, the Senate or House of Representatives.
The Chairman of the BoG routinely reports to a
Senate Oversight Committee and publishes reports
on the activities and decisions of the Fed but
that is about the extent of elected political
contact. The Congress usually receives the
Chairman of the BoG as a paramount leader with
such influence that no individual or group dare
criticise him. The Fed is extremely profitably in
its own right returning 95 per cent of its
earnings after expenses to the U.S. Treasury. Only
five per cent of earnings is needed to pay the
established annual six per cent dividend to
shareholders of the Reserve Banks.
Activities of the Federal Reserve System
The Fed conducts U.S. monetary policy,
distributes currency within the U.S. and abroad,
operates a payments system, supervises the banking
industry, has international responsibilities and
serves as central banker for the U.S. Treasury.
The Fed's activities fall into four general
areas:
1) Conducting the nation's monetary and economic
policy by influencing the money and credit
conditions in the economy; 2) Supervising and
regulating banking institutions; 3) Maintaining the
stability of the financial system and containing
systemic risk (collapse) that may arise in
financial markets and monopolies; and 4) Providing certain
financial services to the U.S. government, to the
public, to financial institutions, and to foreign
official institutions, including playing a major
role in operating the nation's payments system.
Monetary Policy
The Federal Reserve System conducts monetary
policy using three major tools:
1) Open market operations-the buying and selling of
U.S. government (mainly Treasury) securities in
the open market to influence the level of reserves
in the depository system; 2) Reserve
requirements-deciding the amount of funds
commercial banks and other depository institutions
must hold in reserve against deposits; 3) Discount
rate-the interest rate charged commercial banks
and other depository institutions when they borrow
reserves from a regional Federal Reserve Bank.
These activities all influence and control the
amount of money circulating within the U.S.
economy and abroad, the amount of hard currency
and coins needed at home and abroad, the level of
borrowing, the foreign exchange rate and the
credit rate. Monetary policy also affects economic
activity generally, prices of most commodities,
the real income of the working class, the
purchasing power of consumers and the level of
capital flowing from within the U.S. and abroad
into the stock markets, bonds or other interest
bearing securities.
Federal Open Market Committee
The Federal Open Market Committee (FOMC) consists
of twelve members: the seven members of the Board
of Governors of the Federal Reserve System; the
president of the Federal Reserve Bank of New York;
and, for the remaining four memberships, which
carry a one-year term, a rotating selection of the
presidents of the eleven other Reserve Banks. The
FOMC holds eight regularly scheduled meetings per
year to direct the conduct of open market
operations by the Federal Reserve Bank of New
York. The FOMC is charged under law with
overseeing open market operations, the principal
tool of national monetary policy. These operations
influence the amount of reserves available to
depository institutions, the amount of money in
the economy and interest rates. The FOMC sets
ranges for the growth of the monetary aggregates
and directs operations undertaken by the Fed in
foreign exchange markets. Decisions in the FOMC
directly influence money market conditions and the
growth or contraction of money and credit. The
actions of the Fed affect the volume of money and
credit and their price-interest rates, thus
influencing the level of prices generally in the
economy.
Controlling "Systemic" Disruptions
The Fed is charged by the ruling class with
containing wide-scale "systemic" (complete)
disruptions, such as those that can occur during a
plunge in stock prices, recession at home or
abroad or the serious difficulties of a monopoly
such as the Long-term Capital Management in 1998,
a hedge fund with great influence in the Fed.
Monopolies are a combination of banking and
industrial capital and through their financial arm
have direct access to the resources of the Fed. If
a threatening disturbance develops, the Fed can
sometimes cushion its effects on the monopoly or
monopolies involved, the financial markets and the
economy by providing liquidity through its
monetary policy tools, mainly capital to cover
debts of a troubled monopoly or monopolies.
Covering shortfalls of capital by a monopoly
within a federal reserve bank are highly guarded
secrets and extremely difficult to confirm. Even
borrowing by financial institutions at the Fed
discount window is secret. In order to contain
rumours, no accounting of Fed monetary actions is
allowed by any other state agency including the
powerful General Accounting Office. The Fed argues
that secrecy is important, as the stock price of a
monopoly would fall if emergency borrowing were
confirmed, or worse, a panic removal of deposits
from financial institutions may occur as happened
in Argentina. The ability to provide almost
unlimited emergency capital to financial
institutions has made the Fed one of the most
powerful and influential agencies in the United
States. Control of the Fed and its most important
decisions by certain wealthy families has
guaranteed their leading position within the U.S.
ruling class. A monopoly's relations, good or bad,
with the BoG, especially its chairman and the
president of the Reserve Bank of New York, may
determine its survival or demise during a crisis.
This may explain the dearth of criticism of the
Fed by official political circles or academics
even though the Fed is grossly undemocratic by
modern standards and unaccountable to the people
in any way, shape or form.
The Reserves Market
The Fed's policies influence the demand for or
supply of reserves at banks and other depository
institutions. The demand for reserves has two
components: required reserves and excess reserves.
Congress expanded the Fed's role in the payment
system with the enactment of the Monetary Control
Act of 1980 (MCA). The MCA subjected all
depository institutions, not just member banks, to
reserve requirements and also gave all depository
institutions access to the Federal Reserve's
payment services. All depository
institutions-commercial banks, saving banks,
savings and loan associations, and credit
unions-must retain a percentage of certain types
of deposits to be held as reserves (subject to
reserve requirements set by the Fed) in specified
assets, either as cash in their vaults or as
non-interest-bearing balances at the Federal
Reserve. At the end of 1993, 4,148 member banks,
6,042 non-member banks, 495 branches and agencies
of foreign banks, 61 Edge Act and agreement
corporations, and 3,238 thrift institutions were
subject to reserve requirements. Since the early
1990s, reserve requirements have been applied only
to transaction deposits (basically,
interest-bearing and non- interest-bearing
checking accounts). Required reserves are a
fraction of such deposits; the fraction-the
required reserve ratio-is set by the BoG.
The BoG has tremendous power to impose reserve
requirements on transaction deposits and on
non-personal time deposits solely for the purpose
of implementing monetary policy. The MCA also
empowers the BoG under extraordinary circumstances
to establish a supplemental reserve requirement of
up to 4 percentage points on transaction accounts
if such an action is deemed essential for the
conduct of monetary policy.
Changes in Required Reserve Ratios
Increasing the ratios reduces the volume of
deposits that can be supported by a given level of
reserves and, in the absence of other actions,
reduces the money stock and raises the cost of
credit. Decreasing the ratios leaves depositories
initially with excess reserves, which can induce
an expansion of bank credit and deposit levels and
a decline in interest rates; it also lowers the
costs of bank funding by reducing the amount of
non-interest- bearing assets that must be held in
reserve.
Total required reserves expand or contract with
the level of transaction deposits and with the
required reserve ratio set by the Board.
Depository institutions hold required reserves in
one of two forms: vault cash (cash on hand at the
bank) or, more important for monetary policy,
required reserve balances in accounts with the
Reserve Bank for their Federal Reserve District.
Depositories use their accounts at Federal Reserve
Banks not only to satisfy their reserve
requirements but also to clear many financial
transactions. Given the volume and
unpredictability of transactions that clear
through their accounts every day, depositories
need to maintain a cushion of funds to protect
themselves against debits that could leave their
accounts overdrawn at the end of the day and
subject to penalty. Depositories that find their
required reserve balances insufficient to provide
such protection may open supplemental accounts for
required clearing balances. Some depository
institutions choose to hold reserves even beyond
those needed to meet their reserve and clearing
requirements. These additional balances, which
provide extra protection against overdrafts and
deficiencies in required reserves, are called
excess reserves; they are the second component of
the demand for reserves.
Supply of Reserves
The Federal Reserve supplies reserves to
the banking system in two ways:
1) Lending through the Federal Reserve discount
window Buying government securities (open market
operations).
2) Reserves obtained through the first channel are
called borrowed reserves. The Fed supplies these
directly to depository institutions that are
eligible to borrow through the discount window.
Access to such credit by banks and thrift
institutions is established by rules set by the
BoG, and loans are made at a rate of interest-the
discount rate-set by the Reserve Banks and
approved by the BoG.
Basic Discount Rate
The basic discount rate that each Federal Reserve
Bank charges on its loans is established by the
Bank's board of directors, subject to review and
determination by the BoG. In the past the U.S.
banking system was fragmented and state-based. The
Fed has fought this feature on behalf of the
largest financial institutions. Gradually, smaller
local banks have been eliminated as big banks and
the Fed gained power and influence. Regional
credit markets are almost a thing of the past as a
national credit market has been created with a
national discount rate. Today, the Federal Reserve
maintains a uniform structure of discount rates
across all districts of the Reserve Banks.
Discount Window
Institutions eligible to borrow at the Fed's
discount window include domestic commercial banks,
U.S. branches and agencies of foreign banks,
savings banks, savings and loan associations, and
credit unions. Many depository institutions meet
the eligibility criteria -- about 11,000 banks
(including U.S. branches and agencies of foreign
banks) and 16,000 thrift institutions (including
credit unions) at the end of 1993. Any institution
holding deposits subject to reserve requirements
(such as transaction accounts and non-personal
time deposits) whether it is a Fed member or not
have access to the discount window.
All discount window credit must be secured to the
satisfaction of the Federal Reserve Bank that is
providing the credit. Satisfactory collateral
generally includes U.S. Treasury and federal
agency securities and, if of acceptable quality,
mortgage notes covering one to four -- family
residences; state and local government securities;
and business, consumer, and other customer notes.
Types of Credit
The three basic types of discount window credit
are adjustment credit, seasonal credit, and
extended credit.
Adjustment credit helps depository institutions
meet short-term liquidity needs. For example, an
institution experiencing an unexpectedly large
withdrawal of deposits may request adjustment
credit overnight or for a few days until it finds
other sources of funding. Seasonal credit assists
institutions in managing liquidity needs that
arise from regular, seasonal swings in loans and
deposits, such as those at agricultural banks
associated with the spring planting season or
during the Christmas gift buying season when
people traditionally drain their accounts.
Extended credit may be provided to depositories
experiencing somewhat longer-term liquidity needs
that result from exceptional circumstances. The
Fed sometimes provides credit to troubled
depositories to facilitate an orderly closure of
the institution and stop "contagion" to other
companies or allow a takeover.
Buying Government Securities (Open Market
Operations)
The other source of reserve supply is
non-borrowed reserves. The Fed exercises a certain
control over this supply through open market
operations-the purchase or sale of securities by
the Domestic Trading Desk at the Federal Reserve
Bank of New York. When the Fed buys securities in
the open market, it creates reserves to pay for
them, and the supply of non-borrowed reserves
increases. Conversely, when it sells securities,
it absorbs reserves in exchange for the
securities, and the supply of non-borrowed
reserves falls. In other words, the Federal
Reserve adjusts the supply of non-borrowed
reserves by purchasing or selling securities in
the open market, and the purchases are effectively
paid for by additions to or subtractions from a
depository institution's reserve balance at the
Federal Reserve. A Federal Reserve securities
transaction changes the volume of reserves in the
depository system: A purchase adds to non-borrowed reserves, and a sale reduces them.
When the Federal Reserve buys securities from any
seller, it pays, in effect, by issuing a check on
itself. When the seller deposits the check in its
bank account, the bank presents the check to the
Federal Reserve for payment. The Fed, in turn,
honours the check by increasing the reserve
account of the seller's bank at the Federal
Reserve Bank. The reserves of the seller's bank
rise with no offsetting decline in reserves
elsewhere; consequently, the total volume of
reserves increases (the amount of money in the
economy). Just the opposite occurs when the Fed
sells securities: The payment reduces the reserve
account of the buyer's bank at the Federal Reserve
Bank with no offsetting increase in the reserve
account of any other bank, and the total reserves
of the banking system decline (less money in the
economy). This characteristic-the
dollar-for-dollar change in the reserves of the
depository system with a purchase or sale of
securities by the Fed makes open market operations
the most common tool of monetary policy
(controlling the money supply).
The only financial instrument that is suitable
for open market operations is U.S. government
securities. The Fed carries out the greatest part
of its open market operations in that market. The
U.S. government securities market, in which
overall trading averages more than $100 billion a
day, is the broadest and most active of U.S.
financial markets. Transactions are handled over
the counter (that is, not on an organized stock
exchange), with the great bulk of orders placed
with specialized dealers (both bank and non-bank).
Although most dealer firms are in New York City, a
network of telephone and wire services links
dealers and customers regardless of their location
to form a worldwide market.
Most Fed purchases and sales of securities to
adjust conditions in the reserves markets are not
undertaken as a result of a general policy
decision. Rather they are made to offset other
influences on reserves. Certain factors beyond the
immediate control of the Fed stimulate purchasing
of securities such as the amount of currency in
circulation and the size of Treasury balances at
Federal Reserve Banks. The amount of currency in
circulation rises late in the year because
individuals tend to hold more currency during the
holiday shopping season. This rise in currency in
circulation drains reserves from the depository
system because, when a depositor withdraws
currency from a bank, the bank turns to the
Federal Reserve to replenish its depleted vault
cash and pays for the shipment of currency by
drawing down its reserve account. In contrast, a
decline in currency in circulation provides added
reserves.
Effects on Other Rates
The Fed's monetary policy works through the
market for reserves and involves the federal funds
rate. A change in the reserves market will trigger
a chain of events that affect other short- term
interest rates, foreign exchange rates, long-term
interest rates, the amount of money and credit in
the economy, even levels of employment, output,
and prices. For example, if the Federal Reserve
reduces the supply of reserves, the resulting
increase in the federal funds rate tends to spread
quickly to other short- term market interest
rates, such as those on Treasury bills and
commercial paper. Because interest rates paid on
many deposits in the money stock adjust only
slowly, holding balances in money (in a form
counted in the money stock) becomes less
attractive. As investors pursue higher yields
available in the market (for example, on Treasury
bills), the money stock declines. Moreover, as
bank reserves and deposits shrink, the amount of
money available for general lending may also
decline.
Bank Supervision
The Federal Reserve also plays a major
role in the supervision and regulation of the
U.S. banking system. The Fed's supervisory
responsibilities extend to all national banks,
which by law are automatically members of the
Reserve System, the roughly 1,000 state banks
that are members of the Federal Reserve System,
all bank holding companies, the foreign
activities of member banks, the U.S. activities
of foreign banks, and Edge Act and agreement
corporations (institutions that engage in a
foreign banking business). One member of the BoG
serves as the Fed's representative to the
Federal Financial Institutions Examination
Council (FFIEC), which is responsible for
coordinating, at the federal level, examinations
of depository institutions and related policies.
International Responsibilities
The Fed Chairman has formal responsibilities in
the international arena. He is the alternate U.S.
member of the Board of Governors of the
International Monetary Fund, a member of the board
of the Bank for International Settlements (BIS),
and a member, along with the heads of other
relevant U.S. agencies and departments, of the
National Advisory Council on International
Monetary and Financial Policies. Fed staff
represent U.S. and Fed interests at meetings at
the BIS in Basle and at the Organisation for
Economic Co-operation and Development in Paris.
The Chairman is also a member of U.S. delegations
to key international meetings, such as those of
the finance ministers and central bank governors
of the seven largest industrial countries-the
Group of Seven, or G7.
Federal Reserve Banks
A network of twelve Federal Reserve Banks and
their twenty-five Branches operates a nationwide
payments system, distributes the nation's currency
and coin, supervises and regulates member banks
and bank holding companies, and serves as banker
for the U.S. Treasury. All U.S. currency carries
the letter and number designation of the Reserve
Bank that first puts it into circulation. Each
Reserve Bank acts as a central depository for the
banks in its own District. The income of the
Federal Reserve System is derived primarily from
the interest on U.S. government securities that it
has acquired through open market operations. Other
major sources of income are the interest on
foreign currency investments held by the System;
interest on loans to depository institutions (the
rate on which is the so-called discount rate); and
fees received for services provided to depository
institutions, such as check clearing, funds
transfers, and automated clearinghouse operations.
The twelve Federal Reserve Banks are privately
owned through stocks by member banks. Stockholders
and the BoG choose the leadership of the Reserve
Banks. Theoretically the Reserve Banks have
unlimited access to U.S. securities for use in
emergencies. They are accountable to the BoG and
in a more limited way to a Congressional Oversight
Committee.
Member Banks of the Fed System
U.S. banks can be divided into three
types according to which governmental body
charters them and whether or not they are
members of the Federal Reserve System. Those
chartered by the federal government (through the
Office of the Comptroller of the Currency in the
Department of the Treasury) are national banks;
by law, they are members of the Federal Reserve
System. Banks chartered by the states are
divided into those that are members of the
Federal Reserve System (state member banks) and
those that are not (state non-member banks).
State banks are not required to join the Federal
Reserve System, but they may elect to become
members if they meet the standards set by the
BoG. At the end of 1993, 4,338 banks were
members of the Federal Reserve System -- 3,360
national banks and 978 state banks -- out of 11,212
commercial banks nationwide.
Payment System
The U.S. payments system is the largest in the
world. Each year billions of transactions, valued
in the trillions of dollars, are conducted between
payers (purchasers of goods, services, or
financial assets) and payees (sellers of goods,
services, or financial assets). The Fed is an
active intermediary in clearing and settling
interbank payments. The Fed Banks play this role
because they maintain reserve or clearing accounts
for the majority of depository institutions. They
can settle payment transactions by debiting the
accounts of the depository institutions making
payments and by crediting the accounts of
depository institutions receiving payments. The
Reserve Banks, as the mandated central bank, are
immune from liquidity problems (not having
sufficient funds to complete payment transactions)
and credit problems. Payments received in accounts
maintained at the Federal Reserve are free of
liquidity and default risk. For depository
institutions, the Fed Banks maintain reserve and
clearing accounts and provide various payment
services including collecting checks,
electronically transferring funds, and
distributing and receiving currency and coin. For
the federal government, they act as fiscal agents,
maintaining the U.S. Treasury Department's
transaction account, paying Treasury checks,
processing electronic payments, and issuing,
transferring and redeeming U.S. government
securities. The Fed Banks also perform numerous
specialized services for the federal government
and its agencies, such as redeeming food coupons
and monitoring special accounts -- Treasury tax and
loan accounts -- in which tax receipts are held until
the Treasury needs funds to make payments.
Providing Guarantees to the Largest Banks
The Fed's direct and ongoing participation in the
operation of the payments system lessens the risks
for individual banks. For example, the Fed's final
and irrevocable Fedwire funds transfer service
reduces the risk that failure of one institution
could be transmitted rapidly to other
institutions. One of the most controversial and
powerful weapons of the Fed is to provide
emergency funds to U.S. financial institutions in
trouble such as the billions of dollars loaned to
the Long-term Capital Management hedge fund in
1998. The Fed states that this is necessary to
"ensure that the inability of a depository
institution to make or process payments will not
trigger its insolvency and that the institution's
problems can be resolved in an orderly fashion
with minimum disruptive effects." This ability to
furnish large amounts of capital in emergencies
has long been a major weapon in the hands of those
wielding influence at the Fed.
Providing Currency and Coins
The Federal Reserve, the nation's central bank,
distributes, processes, and accounts for U.S.
currency and coin in the United States and abroad.
The Federal Reserve Act delegates the Fed "to
furnish an elastic currency," or to ensure that
there is enough currency and coin to meet demand.
According to the U.S. Constitution, Article I,
Section 8, the Congress has the power "to coin
Money, regulate the Value thereof, and of foreign
Coin, and fix the Standard of Weights and
Measures." In 1913, the Congress delegated this
authority to the Fed, a private institution
controlled by the financial oligarchy. The thirty-seven Federal Reserve Bank cash offices provide
cash services to more than 9,600 of the 22,000
banks, savings and loans, and credit unions in the
United States. The remaining depository
institutions obtain currency and coin from
correspondent banks rather than directly from the
Federal Reserve. The amount of currency in
circulation as cash is a decision of the Fed.
Domestic demand largely results from the use of
currency in transactions and is influenced
primarily by prices for goods and services, income
levels, and the availability of alternative
payment methods. International demand for U.S.
currency is high due to neo-liberal globalisation
and the annexation of other economies by the U.S.
Recent estimates show that about two-thirds of the
value of currency in circulation is held abroad.
Currency and Coin
Ninety-nine per cent of U.S. currency in
circulation is composed of Federal Reserve notes;
the remainder is composed of United States notes,
national bank notes, and silver certificates, all
of which remain legal tender. Each year the Fed
determines the need for new currency and submits a
print order to the Treasury's Bureau of Engraving
and Printing (BEP). Typically, most of the newly
printed currency replaces currency destroyed by
the Reserve Banks because it is unfit for further
circulation. The remainder is printed to meet Fed
increases in the amount of currency in circulation
if any. The Federal Reserve pays the BEP the cost
of printing new currency and arranges and pays the
cost of transporting the currency from the BEP
facilities in Washington, D.C., and Fort Worth,
Texas, to the Federal Reserve cash offices across
the country. Before the Reserve Banks issue
currency to the banking system, the currency must
be secured by legally authorized collateral, most
of which is in the form of U.S. Treasury and
federal agency securities held by the Reserve
Banks. The notes are a first lien on the assets of
the issuing Reserve Bank and are obligations of
the U.S. government. The Federal Reserve System
pays the Bureau of Engraving and Printing only for
the cost of printing the notes. The Fed
distributes a large amount of currency to overseas
markets through its Extended Custodial Inventory
(ECI) program, which was established in 1996 to
introduce the Series-1996 $100 notes to the
international community. ECI locations are
selected overseas depository institutions that
hold U.S. currency in their vaults but carry the
inventory on the books of the Federal Reserve Bank
of New York.
From 1990 to 2001, the number of Federal Reserve
notes in circulation increased 61.6 per cent,
which represents an average annual growth rate of
3.8 per cent. Over the past several decades, the
value of currency in circulation has risen
dramatically -- from $31.2 billion in 1955 to $365.3
billion in 1993. The total number of notes in
circulation (15.5 billion at the end of 1993) and
the demand for larger denominations ($20, $50, and
$100 notes) have also increased.
The Federal Reserve's role in coin operations is
more limited than its role in currency. The U.S.
Mint determines the annual coin production and
monitors the Federal Reserve coin inventories
weekly to identify trends in coin demand.
Federal Reserve Accounting for Currency and Coin
Federal Reserve notes are liabilities on the
Fed's balance sheet. The Fed pledges collateral,
usually U.S. Treasury securities, equal to the
face value of currency in circulation. As payments
to and receipts from depository institutions
change the value of currency in circulation on a
daily basis, the Fed ensures that the currency in
circulation is fully collateralised. When a
Reserve Bank makes a currency payment to a
depository institution, the Reserve Bank charges
the depository institution's account (or the
account of the bank that acts as the settlement
agent) for the amount of the order. Similarly,
when a depository institution returns excess
currency to a Federal Reserve Bank, it receives a
corresponding credit to its account.
Unlike currency, coin is represented on the
Federal Reserve's balance sheet as an asset. Coin
is a direct obligation of the U.S. Treasury; the
Fed buys coin from the Mint at face value. When a
depository institution orders and deposits coin,
its Reserve Bank adjusts the institution's account
accordingly.
Non-Cash Transactions
Checks continue to account for the
largest share of non-cash payments by number
(about 90 per cent in 1993) but for a minor
share in terms of value (less than 4 per cent).
Fedwire funds transfers, in contrast, accounted
for less than 1 per cent of the number of
non-cash transactions processed by the Federal
Reserve in 1993 but nearly 55 per cent of the
value.
In 1993, an estimated 59 billion checks were
written in the United States. The Fed collected 19
billion checks with a value of $14.1 trillion.
Also in 1993, the Fed, acting as fiscal agent for
the U.S. Treasury, paid 480 million checks and 192
million postal money orders.
Federal Reserve Automated Clearinghouse
Operations
The automated clearinghouse (ACH) is a nationwide
mechanism that processes electronically originated
batches of credit and debit transfers. ACH credit
transfers include direct deposit payroll payments
and payments to contractors and vendors. ACH debit
transfers include consumer payments on insurance
premiums, mortgage loans, and other kinds of
bills. Debit transfers also include new
applications such as the point-of-sale (POS)
check conversion pilot program. The Federal
Reserve Banks are collectively the nation's
largest automated clearinghouse operator and in
2000 processed more than 80 per cent of commercial
interbank ACH transactions.
Fedwire Funds Transfers
The Fedwire funds transfer system is a real-time
gross settlement system in which more than 9,000
depository institutions initiate funds transfers
that are immediate, final, and irrevocable when
processed. Depository institutions that maintain a
reserve or clearing account with a Federal Reserve
Bank may use Fedwire to send payments to, or
receive payments from, other account holders
directly. Through the Fedwire service, depository
institutions typically transfer large dollar
payments (the average value of a Fedwire transfer
in 1993 was approximately $3 million). Depository
institutions generally use the ACH for
small-dollar payments. In 1993, the Reserve Banks
processed 70 million Fedwire payments having a
total value of $208 trillion. When the Fed
processes a funds transfer, it electronically
debits the account of the sending institution and
credits the account of the receiving institution.
The Fed guarantees the payment to the bank
receiving the transfer and assumes any risk if the
bank sending the payment has insufficient funds in
its Fed account to complete the transfer.
Fedwire also allows depository institutions to
transfer the ownership of U.S. Treasury securities
and the securities of various federal agencies,
such as the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation,
for themselves and for their customers. Most of
these securities are held in safekeeping by the
Reserve Banks as book entries (as electronic
records of securities holdings rather than as
paper certificates). The Federal Reserve Banks
safekeep and transfer U.S. government securities
in their capacity as fiscal agents for the U.S.
Treasury. They carry out these functions for
government agencies as a service to depository
institutions. In 1993, 12.7 million book-entry
securities transfers with a value of $154 trillion
were transferred using Fedwire.
When the Fed receives a request to transfer a
security, it determines that the security is held
in safekeeping for the institution requesting the
transfer and withdraws the security from the
institution's safekeeping account. It then
electronically credits the proceeds of the sale to
the account of the depository institution,
deposits the book-entry security into the
safekeeping account of the receiving institution,
and electronically debits that institution's
account for the purchase price. The Fed guarantees
payments to institutions sending book-entry
securities transfers.
Fiscal Agency Functions
As fiscal agents of the United States, the
Federal Reserve Banks function as the federal
government's bank and perform several services for
the U.S. Treasury. These services include the
following:
- Maintaining the
Treasury's funds account
- Clearing Treasury checks drawn on that account
- Conducting nationwide auctions of Treasury
securities
- Issuing, servicing, and redeeming Treasury
securities
Federal Reserve Banks also perform fiscal agency
services for various federal and federally
sponsored agencies. One service performed by the
Reserve Banks on behalf of the Treasury is the
daily monitoring of federal tax receipts. Taxes
paid by businesses and individuals flow into
special, interest-earning accounts, called
Treasury tax and loan (TT&L) accounts, at more
than 12,000 depository institutions (TT&L
depositaries) nationwide. The TT&L
depositaries accept tax payments directly from
employers and individuals and report the amount
received to a Fed office.
The Reserve Banks also handle the weekly,
monthly, and quarterly auctions of Treasury
securities, through which the Treasury raises
money to finance government spending and to
refinance the national debt. The Reserve Banks
announce the sales, accept the bids (called
tenders), communicate the bids to the Treasury,
issue the securities in book- entry form once the
Treasury has chosen the successful bids, collect
payment from the successful bidders, and deposit
the money in the Treasury's funds account at the
Fed. The Federal Reserve Banks provide another
unique securities service for the Treasury: They
maintain a separate safekeeping system, called
Treasury Direct, which holds book- entry Treasury
securities purchased by individuals who wish to
hold their securities directly with the Treasury
instead of with a depository institution. At
year-end 1993, 1.2 million investor accounts were
maintained on the Treasury Direct system, and the
securities holdings had a par value of more than
$60 billion. The Federal Reserve Banks also issue,
service, and redeem tens of millions of U.S.
savings bonds each year on behalf of the Treasury.
As authorized by the Treasury, they also qualify
depository institution and corporations as issuing
agents and paying agents for savings bonds.
The federal government disburses funds to the
public from the account it maintains with the Fed.
These disbursements can be made as Fedwire funds
transfers, ACH payments, or checks. Fedwire
disbursements are typically associated with, but
not limited to, the redemption of Treasury
securities. Certain recurring payments, such as
social security benefits and government employee
salaries, are increasingly processed by the ACH
and electronically deposited directly to the
recipients' accounts at their depository
institutions. Other government payments, such as
income tax refunds, are usually made using
Treasury checks drawn on the Treasury's funds
account at the Federal Reserve.
International Services
As the central bank of the United States, the Fed
performs services for foreign central banks and
for international organizations, such as the
International Monetary Fund, the World Bank, and
the Bank for International Settlements. The
Federal Reserve Bank of New York generally
provides these services. At the Federal Reserve
Bank of New York, a foreign official institution
can establish a non-interest-bearing funds account
(in U.S. dollars), safekeeping accounts for
book-entry and definitive securities, and an
account for safekeeping gold.
The following charts
and comments are from: Federal Reserve Directors:
A Study of Corporate and Banking Influence --
Published 1976; and from, Federal Reserve
Directors: A Study of Corporate and Banking
Influence -- Published 1983.
Chart 1
Source: "Federal Reserve Directors: A Study of
Corporate and Banking Influence"-- Published 1976 (Click on image to enlarge)
Chart 1 reveals the linear connection between the
Rothschilds and the Bank of England, and the
London banking houses which ultimately control the
Federal Reserve Banks through their stockholdings
of bank stock and their subsidiary firms in New
York. The two principal Rothschild representatives
in New York, J. P. Morgan Co., and Kuhn, Loeb
& Co. were the firms which set up the Jekyll
Island Conference at which the Federal Reserve Act
was drafted, who directed the subsequent
successful campaign to have the plan enacted into
law by Congress, and who purchased the controlling
amounts of stock in the Federal Reserve Bank of
New York in 1914. These firms had their principal
officers appointed to the Federal Reserve Board of
Governors and the Federal Advisory Council in
1914. In 1914 a few families (blood or business
related) owning controlling stock in existing
banks (such as in New York City) caused those
banks to purchase controlling shares in the
Federal Reserve regional banks. Examination of the
charts and text in the House Banking Committee
Staff Report of August, 1976 and the current
stockholders list of the 12 regional Federal
Reserve Banks show this same family control.
Chart 2 
Source: "Federal Reserve Directors: A Study of
Corporate and Banking Influence" -- Published 1983 (Click on image to enlarge)
The J. Henry Schroder Banking Company chart
encompasses the entire history of the twentieth
century, embracing as it does the program (Belgium
Relief Commission) which provisioned Germany from
1915-1918 and dissuaded Germany from seeking peace
in 1916; financing Hitler in 1933 so as to make a
Second World War possible; backing the
Presidential campaign of Herbert Hoover; and even
at the present time, having two of its major
executives of its subsidiary firm, Bechtel
Corporation serving as Secretary of Defense and
Secretary of State in the Reagan Administration.
The head of the Bank of England since 1973, Sir
Gordon Richardson, Governor of the Bank of England
(controlled by the House of Rothschild) was
chairman of J. Henry Schroder Wagg and Company of
London from 1963-72, and director of J. Henry
Schroder, New York and Schroder Banking
Corporation, New York, as well as Lloyd's Bank of
London, and Rolls Royce. He maintains a residence
on Sutton Place in New York City, and as head of
"The London Connection," can be said to be the
single most influential banker in the world.
Chart 3
 Source:
"Federal Reserve Directors: A Study of Corporate
and Banking Influence" --
Published 1976 (click on image to enlarge)
The David Rockefeller chart shows the link
between the Federal Reserve Bank of New York,
Standard Oil of Indiana, General Motors and Allied
Chemical Corporation (Eugene Meyer family) and
Equitable Life (J. P. Morgan). Chart 4
Source: "Federal Reserve
Directors: A
Study of
Corporate and Banking Influence"
-- Published 1976
This chart shows the interlocks between the
Federal Reserve Bank of New York J. Henry Schroder
Banking Corp., J. Henry Schroder Trust Co.,
Rockefeller Center, Inc., Equitable Life Assurance
Society ( J.P. Morgan), and the Federal Reserve
Bank of Boston.
Chart 5
Source: "Federal Reserve
Directors: A
Study of
Corporate and Banking Influence"
-- Published 1976
This chart shows the link between the Federal
Reserve Bank of New York, Brown Brothers Harriman,
Sun Life Assurance Co. (N.M. Rothschild and Sons),
and the Rockefeller Foundation.
This article was published in
Volume 50 Number 36 - September 26, 2020
Article Link:
U.S. Federal Reserve System - K.C. Adams
Website: www.cpcml.ca
Email: editor@cpcml.ca
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