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The Federal Reserve System

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The Federal Reserve System was founded by Congress in 1913, it began to operate in Nov., 1914. Its setup, although somewhat altered since its establishment, particularly by the Banking Act of 1935, has remained substantially the same.

Structure

The Federal Reserve Act created 12 regional Federal Reserve banks, supervised by a Federal Reserve Board. Each reserve bank is the central bank for its district. The boundary lines of the districts were drawn in accordance with broad geographic patterns of business, and the banks were placed in Boston, New York City, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. In addition some of the regional banks have one or more branch banks attached to them.

All national banks must belong to the system, and state banks may if they meet certain requirements. Member banks hold the bulk of the deposits of all commercial banks in the country. Each member bank is required to own stock in the Federal Reserve bank of its district and must maintain legal reserves on deposit with the district reserve bank. The required reserves are proportionate to the member bank’s own deposits, the proportion varying according to the location of the member bank and the character of its deposits.

Each reserve bank is managed by a board of nine directors (three appointed by the Federal Reserve Board, six by the local member banks). The Federal Reserve System’s Board of Governors designates one of the federally appointed directors as chairman and Federal Reserve agent; it is the chairman’s duty to report to the Board. The board of directors appoints the bank’s president and other officers and employees. The operations of the Federal Reserve banks, although not conducted primarily for profit, yield an income that is ordinarily sufficient to cover expenses, to pay a 6% cumulative dividend annually on the stock held by member banks, to make additions to surplus, and to provide the U.S. Treasury with over $1 billion a year in revenue.

The Board of Governors of the Federal Reserve System—the national supervisory agency—is composed of seven members appointed for 14-year terms by the President. Its offices are in Washington, D.C. The Federal Open Market Committee, created later (1923) than the system’s other divisions, comprises the seven members of the Board of Governors and five representatives of the Federal Reserve banks; it directs the purchases and sales by the reserve banks of federal government securities and other obligations in the open market.
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