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United States Federal Reserve & Economic Theories |
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From 1935 to the present, the decision-making structure of the Fed has been the Federal Open Market Committee (FOMC), a body which is composed of the seven-member Federal Reserve Board, and five of the 12 Federal Reserve Bank presidents (Timberlake). Members of the board are appointed by the President for fourteen- year terms. The terms are staggered, with a vacancy occurring only every other year, so no president can unduly influence the board. Resignations and deaths can increase the frequency of appointments, but not on a regular schedule. The presidents of 11 of the 12 Federal Reserve Banks take turns being on the FOMC, with the president of the Reserve Bank of New York being a permanent member. The reserve bank presidents are elected to office by their boards of directors, and reach the office by working their way up through the officer staffs of the reserve bank organizations. The main difference between the presidents of reserve banks and the board members is that the former are essentially heads of quasi business organizations and not constantly involved or concerned with monetary policy. In practice, the board generally defines monetary policy in the FOMC, and the bank presidents go along with the expertise of the board. This reflects that fact that monetary policy is set in Washington, which was not the intent of the original Fe |
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Qu. 3 The Fed did not cause the Great Depression and at no time did it pull money out of the out of the system, contracting the money supply (What). Between October 1929 and February 1930, the Fed actually pumped money into the economy. The Federal Reserve can increase the money supply by buying U.S. debt from commercial banks in the form of U.S. securities or by cutting the prime interest rate the Fed charges to commercial banks. After the sudden infusion of money from the Fed, it made only very modest purchases of securities, and cut the interest rate only twice between March 1930 and September 1931. It briefly raised the rate twice at the end of 1931, but then cut it again in 1932. The modest securities purchased balanced the interest rate raises, so there was no significant change in the amount of money available to the public. This inactivity on the part of the Fed may have prolonged the depression, but did not cause it. In 1932, the Fed once again made large purchases of securities. It was the public run on the banks that caused the 31 percent contraction in the money supply in late 1930 and early 1931, which caused more than 10,000 banks to go out of business and $2 billion in deposits to be lost. |
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