Federal Reserve System

Federal Reserve System

Federal Reserve System, the central bank of the U.S.A. All national banks (or incorporated commercial banks) in the U.S.A. are members of the system; state banks (unincorporated banks doing business under state rather than federal laws) have the option of being members. Nearly 7,000 banks (accounting for about 85 per cent of total deposits) make up the membership. The system comprises a Board of Governors, an Open Market Committee, an Advisory Council, twelve federal reserve banks (representing the twelve federal reserve districts) and member banks. The capital of each of the reserve banks is subscribed by the member banks of the region, which also elect directors on their boards. Reserve banks account for such a large part of the banking system that they can control the quantity of money.

Fundamental banking operations are under the control of a central body the Board of Governors of the Federal Reserve System, which act as the central bank of the U.S.A. The Board of Governors has final authority over discount rates (corresponding to the British Bank rate) and other interest rates in the system; it can preserve legal minimum cash ratios for member banks; it supervises foreign business; it prescribes rates of interest on time deposits; and it appoints one-third of the directors of each federal reserve bank. The Open Market Committee, consisting of the Board of Governors and five representatives of the reserve banks, may require any federal bank to engage in specified open market operations.

Member banks have direct access to the central bank as lender of last resort, and cash and liquid asset ratios are prescribed by law, In - most other essential respects the Federal Reserve System works in much the same way as the British banking system: in both the main actions of the central bank are aimed at controlling the supply of money, and the Bank depends for this control on its position as the ultimate source of cash.

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