Instead of setting up a single powerful central bank, however, the act divided the nation into twelve districts and established a regional central bank in each. The nine-member boards of directors of the district Federal Reserve banks are subject to the direction of a seven-member Board of Governors appointed (since 1935) by the president and sitting in Washington. The system’s prime instrument of governance is its Open Market Committee, which meets about every three weeks to determine the monetary policy mix it believes best calculated to promote economic growth while dampening inflationary pressures.
Although far from infallible, these determinations are highly influential because most of the country’s banking resources are subject to the board’s regulations. (National banks were required by law to become members of the system.) Member banks – now classified as «reserve city» and «other» banks – are required to keep their reserves in the Federal Reserve Bank of the district in which they are located. The amount of reserves may range, for reserve city banks, between 10 and 22 percent of their demand deposits, and for «other» banks, between 7 and 14 percent. By raising or lowering percentages within these ranges the Board of Governors can either discourage or encourage member bank credit expansion.
But this is a blunt instrument that is seldom used. More sensitive are two other techniques available to the Fed. One is known as «open market operations,» which consist of purchases or sales of government securities by the manager of the system’s Open Market Committee, a vice president of the Federal Reserve Bank of New York. Purchases automatically increase and sales decrease the reserves of the member banks, thus permitting loan expansion or compelling contraction, respectively. The other involves altering the interest rate charged on loans and advances by Federal Reserve banks to member banks. These techniques affect the quantity of money and its cost – factors of great importance to the investment decisions of business managers, and hence to the tone of the national economy.
The present-day powers of the Federal Reserve System owe much to legislation enacted in response to the system’s inability to prevent widespread bank failures in the early years of the Great Depression. (President Franklin D. Roosevelt’s initial reaction to the failures was to issue an executive order in March 1933 temporarily suspending banking activities throughout the country and forbidding dealings in gold. No bank could reopen for business until its condition had been examined by the secretary of the treasury – in the case of member banks of the Federal Reserve – or by state authorities – in the case of state-chartered nonmember banks. Congress then followed with a law designed to get at the roots of the failures.)
The Glass-Steagall Banking Act of 1933 established the Federal Deposit Insurance Corporation and required all members of the Federal Reserve System to insure their deposits. The act also increased the authority of the twelve Federal Reserve district banks to control the amount of credit extended to their members and prohibited the payment of interest on demand deposits to discourage outlying banks from sending large sums to New York – where they might feed speculation in securities by being re-lent on the call loan market. In addition, the act required that banks belonging to the Federal Reserve divorce themselves from their security affiliates – necessitating that they choose between deposit and investment banking – and empowered the Federal Reserve Board to regulate bank loans secured by the collateral of stocks or bonds. Finally, partners or executives of security firms were barred from serving as directors or officers of commercial banks. For more than half a century this legislation secured bank depositors from loss. Regretfully, massive failures in the nation’s savings and loan institutions in the late 1980s – many of them tinctured by fraud and mismanagement – revealed deficiencies in federal deposit insurance, requiring both a huge federal bailout of more than $150 billion and structural changes in the insurance program. At the beginning of the 1990s the latter had not yet been provided.
Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (1963); Bray Hammond, Banks and Politics in America from the Revolution to the Civil War (1957).
Stuart Bruchey
EXERCISES
Exercise 1. Words and expressions.
charter of incorporation – свидетельство о регистрации
Loan on real estate – ссуда под недвижимость
merchant banking houses – торговые банкирские дома
Pyramiding – финансовые пирамиды (многоступенчатое, многоярусное участие капитала одних компаний в финансовой системе других компаний)
wandering peddler
Cash reserves – резервы денежной наличности
wholesaler
Open Market Committee – Комитет открытого рынка, комитет по операциям на открытом рынке (в Федеральной резервной системе США)
retailer
Board of Governors – совет управляющих
create a deposit in the name of the borrower – оформлять вклад на имя ссудополучателя
Amount of reserves – сумма резервов
depreciated paper money – обесцененные деньги
Open market operations – операции на открытом рынке
bills of credit
Government securities – государственные ценные бумаги
Accommodation – зд. взаимные расчеты
Demand deposits – бессрочные вклады
Balance sheet
Interest rate – процентная ставка
Capital stock – основной капитал
Enact legislation – принимать законодательство
Authorized capital stock – уставный капитал
Federal Deposit Insurance Corporation – Федеральная корпорация по страхованию депозитов
Imposts – сборы
Call loan – ссуда до востребования
Redeem – осуществлять оплату
Demand deposit – бессрочный вклад
At par – по номиналу
Affiliate – филиал, отделение
Fiscal
Deposit