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Chapter 2 - The federal reserve and its powers. The purpose of this chapter is to explain what the Federal Reserve (the Fed) is, what it does, and why it is so powerful. The Federal Reserve System is the most important financial institution in our country. As our nation's central bank, it regulates our major financial institutions and controls the nation's money supply. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University And Lanny R. Martindale, Texas A&M University CHAPTER 2 THE FEDERAL RESERVE AND ITS POWERS Purposes of a Central Bank Supervise nation’s money supply and payments system Regulate other financial institutions, especially depository institutions “Lender of last resort” when financial system has liquidity problems National government’s “fiscal agent” (i.e. depository bank) Two early central banking institutions did not survive the politics of their time. Bank of the United States, 1791-1811 Brainchild of Alexander Hamilton Federal charter Privately owned Public and private functions banknotes international transactions Second Bank of the United States, 1816-1836 Major issue in presidential politics. Andrew Jackson vetoed re-charter bill in 1832 Weaknesses in the 19th-Century Banking System Unstable . | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University And Lanny R. Martindale, Texas A&M University CHAPTER 2 THE FEDERAL RESERVE AND ITS POWERS Purposes of a Central Bank Supervise nation’s money supply and payments system Regulate other financial institutions, especially depository institutions “Lender of last resort” when financial system has liquidity problems National government’s “fiscal agent” (i.e. depository bank) Two early central banking institutions did not survive the politics of their time. Bank of the United States, 1791-1811 Brainchild of Alexander Hamilton Federal charter Privately owned Public and private functions banknotes international transactions Second Bank of the United States, 1816-1836 Major issue in presidential politics. Andrew Jackson vetoed re-charter bill in 1832 Weaknesses in the 19th-Century Banking System Unstable money supply— No standard currency, mostly private banknotes “Hard currency” (gold/silver) hoarded, unevenly distributed No coordinated payments system Banks were state-chartered and unregulated— No deposit insurance or minimum capital requirements No supervision of lending or accounting practices Frequent bank failures Disruptions of business credit from bank failures prolonged and intensified economic downturns Exaggerated business cycle– “boom & bust” National Banking System Currency Acts & National Banking Acts-1862, 1863, 1864 First federally standardized currency First systematic federal regulation of banking Key Provisions: Federally chartered “National Banks” Periodic bank examinations Minimum capital and reserve requirements Maximum lending limits Standard banknotes- printed by US Treasury secured by U.S. bonds Federal tax on state banknotes Early National Banking System failed to address 3 related problems Demand deposits (checking accounts) became highly popular as
