The History and Structure of the Federal Reserve System

Jerome Powell

The Federal Reserve’s structure reflects a long-standing desire in America to ensure that power over our nation’s monetary policy and financial system is not concentrated in a few hands, whether in Washington or in high finance or in any single group or Courtesy of the Federal Reserve. constituency. Rather, Americans have long wanted decisions about these matters to be influenced by diverse voices from all parts of the country and the economy. In 1791, Congress created the Bank of the United States, a forerunner of the Federal Reserve. It was created in part to conduct financial transactions by the federal government, a typical responsibility of central banks then Jerome Powell, chair of the Board of Governors of the Federal Reserve System, listens to a and today. It was also designed to reporter’s question at a January 30, 2019, press conference. help America’s financial system meet the needs of a growing economy—the rienced one serious financial crisis federal government. Others proposed same purpose behind the founding of after another, with major crises in that power be distributed to regional the Federal Reserve more than 100 1839, 1857, 1873, 1893, and in 1907. bodies with no central or coordinating years later. The last of these, dubbed the Panic of board. Still others resisted any sort of Like other early central banks, the 1907, caused inflation-adjusted gross central bank. Bank of the United States was privately national product to decline by 12 The resulting institution was a com- owned, and that fed suspicions that it percent—more than twice the decline promise, created by the Federal Reserve favored certain interests over others. recorded during the Great Recession Act in 1913. The Federal Reserve was Interest rates and credit conditions of 2007 to 2009—and was a catalyst not structured to be entirely private in continued to vary by region, and that leading to the creation of the Federal its ownership and operation. Instead, led to allegations that the Bank was not Reserve. a more federated system was created, allocating credit fairly. After 20 years, After the panic ended, there was a establishing the Federal Reserve Board Congress did not renew the Bank’s broad sense that reform was needed, in Washington, D.C., and the 12 Reserve charter. A second Bank of the United although consensus on the nature of Banks located around the country. States met a similar fate in 1836. that reform was elusive. Some called The seven-member Board is the Over time, the lack of a central bank for an institution similar in structure part of the System intended to be most contributed to financial instability to the Bank of England at the time, directly accountable to the public. The and interfered with the creation of with centralized power, owned and Board is an independent agency within a truly national economy and finan- operated by private banks. Some the federal government, and members cial system. The United States expe- wanted control to be lodged with the of the Board—now called governors—

March / April 2019 81 are appointed by the president and has ensured a diversity of views and Policy Report and the Chair testifies to confirmed by the Senate. Governors promotes a healthy debate over policy. Congress on those occasions. In 2018, I are appointed to 14-year terms that Members of the Board of Governors and announced an increase in the number expire at 2-year intervals not linked to presidents of the Reserve Banks arrive of the Chair’s regular press conferences, election cycles. The Federal Reserve at their own independent conclusions from four to eight per year, after each Board is charged with overseeing the about the economy and the appropriate FOMC meeting, effective in January Reserve Banks. path for monetary policy. 2019. The FOMC releases statements The Reserve Banks combine both Congress has assigned the FOMC the after its meetings that explain the eco- public and private elements in their task of achieving maximum employment nomic outlook and the rationale for its makeup and organization. Like the Board and stable prices; however, policymak- policy decisions. Detailed minutes of of Governors, the Reserve Banks operate ers may disagree on the best way to the Committee’s meetings are published with the public interest in mind. In the achieve those goals. The FOMC works three weeks later. Since 2007, FOMC System’s early years, the decentralized to achieve a consensus policy by blend- participants have submitted quarterly structure gave the Reserve Banks consid- ing the perspectives of the members of macroeconomic projections that are erable scope to make independent deci- the Board of Governors and the Reserve published in the Summary of Economic sions that applied to their own districts, Bank presidents under the leadership of Projections. Since 2012, the FOMC which made it difficult to effect policy the Chair. By tradition, the Chair of the has laid out the goals and strategy for for the benefit of the country as a whole. Board has been chosen as the Chair of monetary policy in a detailed state- For example, as the market for securi- the FOMC and has had a central role ment. Transcripts of FOMC meetings ties became more national in scope, one in setting the agenda for the FOMC are released to the public after about five Reserve Bank’s purchases of securities, in and developing consensus among the years. Federal Reserve Board Governors order to influence local credit conditions, Committee’s members. In addition, the and Reserve Bank presidents contrib- could be offset by another Bank’s sale. Chair is the most visible public face of ute to the Federal Reserve’s transparency As a result, the Reserve Banks created the Federal Reserve System. with frequent public speeches and other a committee to coordinate these “open The Fed is accountable to Congress communications. I believe that support market operations.” But in these early and the public for its activities and deci- for the Federal Reserve as a public insti- years, the Reserve Banks were not bound sions. Historically, the activities of cen- tution is sustained by the public expres- by that committee’s decisions and could tral banks were shrouded in mystery. In sion of our diverse views. derail any attempt at coordinated action. the modern era, all that has changed, as These communications with Congress This decentralization was thought central banks have come to see transpar- and the public are critical parts of the by some to have undermined the ency both as a requirement of demo- Federal Reserve’s institutional account- Federal Reserve’s response to the Great cratic accountability and as a way of ability and transparency, and are essen- Depression. With that experience in supporting the efficacy of their policies. tial complements to its independence. mind, the Banking Act of 1935 modi- Over recent decades, the Fed has It is important that Federal Reserve fied the distribution of power within the significantly augmented its public com- officials regularly demonstrate that the Federal Reserve System, giving the Board munications, as have other major cen- Fed has been appropriately pursuing its of Governors seven of the twelve votes tral banks. Twice a year, the Federal mandated goals. Transparency can also on the Federal Open Market Committee Reserve Board prepares a Monetary make monetary policy more effective by (FOMC). The other five votes are held by Reserve Bank presidents—the president of the Federal Reserve Bank of New York and a group of four others Federal Reserve Education Resources that rotates annually. While individual FOMC members are free to dissent The Federal Reserve System provides services to the education community by producing from the majority decision about open K-12 economics and personal finance curriculum, providing professional development market operations, all Reserve Banks workshops, and hosting educational museums and visitors centers. Information about are nevertheless required to adhere to these K-12 education resources can be found at www.federalreserveeducation.org, or that decision. by visiting the education webpages on any of the 12 Federal Reserve Bank websites. The organizational structure set out In addition, several Federal Reserve Banks have contributed to www.econlowdown. in 1935 has been essentially unchanged org, an online learning platform for teachers and students that includes online learn- to this day and has served the country ing modules, videos, podcasts, and publications. You can stay up to date by following well. As intended by the Fed’s fram- @FedEconED on Twitter. ers, the federated nature of the system

Social Education 82 helping to guide the public’s expecta- and both the existence and the structure Federal Reserve, and to its democratic tions and clarify the Committee’s policy of the Federal Reserve are products of legitimacy. The structure continues to intentions. that historical experience. Our structure serve our country well and achieves Throughout our history, Americans is fundamentally a compromise, shaped a practical balance that should not be have debated the structure and even, at by experience stretching back to the first changed lightly. times, the need for a central bank. But it Bank of the United States and, later, by is important to understand that history the lessons of the Great Depression. The in both advanced and emerging econo- balance between national and regional Jerome Powell is Chair of the Board of mies across the world has consistently interests is critical to the spirit of the Governors of the Federal Reserve System. demonstrated the need for a central bank, original compromise that created the

Federal Reserve Banks

The 12 Federal Reserve Banks and their 24 branches are the operating arms of the Federal Reserve System. Reserve Banks examine and supervise financial institutions, act as lenders of last resort, and provide U.S. payment system services, among other things. In addition, each Reserve Bank gathers data and information to report on economic conditions within its district. That information is factored into monetary policy decisions made by the Federal Open Market Committee (FOMC). The presidents of the Federal Reserve Banks also contribute to monetary policy decisions by serving on the FOMC.

District 1: Federal Reserve Bank of Boston District 7: Federal Reserve Bank of Chicago District 2: Federal Reserve Bank of New York District 8: Federal Reserve Bank of St. Louis District 3: Federal Reserve Bank of Philadelphia District 9: Federal Reserve Bank of Minneapolis District 4: Federal Reserve Bank of Cleveland District 10: Federal Reserve Bank of Kansas City District 5: Federal Reserve Bank of Richmond District 11: Federal Reserve Bank of Dallas District 6: Federal Reserve Bank of Atlanta District 12: Federal Reserve Bank of San Francisco

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