The Function of the Federal Reserve System in the US Economy

The Function of the Federal Reserve System in the US Economy When countries issue currency, especially fiat currency that is not specifically backed by any commodity, it is necessary to have a central bank whose job it is to monitor and regulate the supply, distribution, and transacting of currency. In the United States, the central bank is called the Federal Reserve. The Federal Reserve currently consists of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve banks located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis. Created in 1913, the history of the Federal Reserve represents the federal government’s   ongoing effort to achieve the goals of any central banking system - ensure a secure American financial system by maintaining a stable currency backed by the benefits of high employment and minimal inflation.   Brief History of the Federal Reserve System The Federal Reserve was created on December 23, 1913, with the enactment of the Federal Reserve Act. In crafting the landmark legislation, Congress was responding to a series of economic panics, bank failures, and credit scarcity that had plagued the nation for decades. When President Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913, it stood as a classic example of an all-too-rare politically bipartisan compromise balancing the need for a consistently regulated centralized national banking system with the competing interests of established private banks backed by a strong â€Å"will of the people† populist sentiment. Over the more than 100 years since its creation, responding to economic disasters, such as the Great Depression in the 1930s and the Great Recession during the 2000s, have required the Federal Reserve to expand its roles and responsibilities. The Federal Reserve and the Great Depression As U.S. Representative Carter Glass had warned, years of speculative investments led to the disastrous â€Å"Black Thursday† stock market crash of October 29, 1929. By 1933, the resulting Great Depression had resulted in the failure of nearly 10,000 banks, leading newly inaugurated President Franklin D. Roosevelt to declare a banking holiday. Many people blamed the crash on the Federal Reserve’s failure to stop the speculative lending practices quickly enough and for its lack of an in-depth understanding of monetary economics necessary to implement regulations that might have lessened the devastating poverty resulting from the Great Depression.  Ã‚   In response to the Great Depression, Congress passed the Banking Act of 1933, better known as the Glass-Steagall Act. The Act separated commercial from investment banking and required collateral in the form of government securities for Federal Reserve notes. In addition, Glass-Steagall required the Federal Reserve to examine and certify all banking and financial holding companies. In a final financial reform, President Roosevelt effectively ended the long-standing practice of backing U.S. currency by physical precious metals by recalling all gold and paper silver certificates, effectively ending the gold standard. Over the years since the Great Depression, the duties of the Federal Reserve expanded significantly. Today, its responsibilities include supervising and regulating banks, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. How Does the Federal Reserve System Work? The Federal Reserve system is overseen by a seven-member board of governors, with one member of this committee chosen as the chairman (commonly known as the Chairman of the Fed). The president of the United States is responsible for appointing Fed chairmen to four-year terms (with confirmation from the Senate), and the current Fed chair is Janet Yellen. (The regular members of the board of governors serve fourteen-year terms.) The presidents of the regional banks are appointed by each individual branchs board of directors. The Federal Reserve system serves a number of functions, which generally fall into a couple of categories: first, it is the Feds job to ensure that the banking system stays responsible and solvent. While this does sometimes mean that the Fed has to work with the three branches of government to think about explicit legislation and regulation, it more often means that the Fed works in a transactional sense to clear checks and to act as a lender to banks that want to borrow money themselves. (The Fed does this mainly to keep the system stable and is referred to as the lender of last resort, since the process is not really encouraged.) The other function of the Federal Reserve system is to control the money supply. The Federal Reserve can control the amount of money (highly liquid assets such as currency and checking deposits) in a number of ways. The most common way is to increase and decrease the amount of money in the economy via open-market operations. Open-Market Operations Open-market operations simply refer to the process of the Federal Reserve buying and selling U.S. government bonds. When the Federal Reserve wants to increase the money supply, it simply purchases government bonds from the public. This works to increase the money supply because, as the buyer of the bonds, the Federal Reserve is giving out dollars to the public. The Federal Reserve also keeps government bonds in its portfolio and sells them when it wants to decrease the money supply. Selling decreases the money supply because the buyers of the bonds give currency to the Federal Reserve, which takes that cash out of the hands of the public. There are two important things to note about open-market operations: first, the Fed itself isnt directly responsible for printing money. Printing money is handled by the Treasury, and there are multiple channels by which the money gets into circulation. (Sometimes, for example, the new money just replaces worn-out currency.) Second, the Federal Reserve doesnt actually create or issue the government bonds, it just handles them in secondary markets. (Technically, open-market operations could be conducted with a number of different assets, but it makes sense for the government to manipulate the supply and demand of an asset that was issued by the government itself.) Other Monetary Policy Tools Although not used nearly as frequently as open-market operations, there are other tools that the Federal Reserve can use to change the amount of money in the economy. One option is to change the reserve requirement for banks. Banks create money in an economy when they loan out customers deposits (since both the deposit and the loan count as money), and the reserve requirement is the percentage of deposits that banks have to keep on hand rather than lending out. An increase in the reserve requirement, therefore, restricts the amount that banks can lend out and thus reduces the money supply. Conversely, a decrease in the reserve requirement increases the number of loans that banks can make and increases the money supply. (This, of course, assumes that banks want to lend more when they are allowed to do so.) The Federal Reserve can also change the money supply by changing the interest rate that it charges banks when it acts as the lender of last resort. The process by which banks borrow from the Federal Reserve is called the discount window, and the interest rate that the Federal Reserve charges is called the discount rate. When the discount rate is increased, it is more expensive for banks to borrow in order to cover their reserve requirements. Therefore, a higher discount rate causes banks to be more careful about reserves and make fewer loans, which reduces the money supply. On the other hand, lowering the discount rate makes it cheaper for banks to rely on borrowing from the Federal Reserve and increases the number of loans they are willing to make, thus increasing the money supply. Decisions regarding monetary policy are handled by the Federal Open Market Committee, which meets approximately every six weeks in Washington in order to discuss changing the money supply and other economic issues. Updated by Robert Longley

Carthage - The Founding

Carthage - The Founding What Is Carthage? Carthage was a prosperous ancient city on the north coast of Africa (in modern Tunisia) that was founded by Phoenicians. A commercial empire, Carthage made its fortune through trade and expanded its domain across northern Africa, the area that is now Spain, and into the Mediterranean where it came into contact and conflict with the Greeks and Romans. What Does Punic Mean?PhoenicianPhoenician Traits The Legend of Carthage: Dido and the other Pygmalion The romantic legend of the founding of Carthage is that a merchant-prince or king of Tyre gave his daughter Elissa (usually called Dido in Vergils in marriage to his brother, her uncle, a priest of Melqart named Sichaeus, along with the kingdom. Elissas brother, Pygmalion [note: there is another ancient Pygmalion], had thought the kingdom would be his, and when he discovered that he had been thwarted, secretly killed his brother-in-law/uncle. Sichaeus, as a ghost, came to his widow to tell her that her brother was dangerous and that she needed to take her followers and the royal wealth that Pygmalion had appropriated, and flee. Although certainly, the supernatural element raises questions, clearly Tyre did send out colonists. The next part of the legend plays on the characterization of Phoenicians as tricky. After stopping at Cyprus, Elissa and her followers landed in north Africa where they asked the locals if they could stop to rest. When they were told that they could have the area that an ox hide would cover, Elissa had an ox hide cut into strips and lay them out end-to-end in a crescent circumscribing a sizeable area of land. Elissa had taken an area of the shoreline opposite Sicily that would allow the emigrants from the mercantile city of Tyre to continue to ply their expertise in trade. This ox-hide enclosed area was known as Carthage. Eventually, the Phoenicians of Carthage branched out into other areas and started to develop an empire. They came into conflict first with the Greeks [see: Magna Graecia] and then with the Romans. Although it took three (Punic) wars with the Romans, the Carthaginians were eventually annihilated. According to another story, the Romans sprinkled the fertile land on which they lived with salt in 146 B.C. A century later, Julius Caesar proposed the establishment of a Roman Carthage on the same spot. Points to NoteAbout the Carthage Founding Legend: The Greeks and Romans considered the Phoenicians to be treacherous. In the Odyssey, Rhys Carpenter (1958: Phoenicians in the West) says Homer calls them polypaipaloi of many tricks. The term Punic fides Punic faith means bad faith or betrayal.Cicero said of the Carthaginians that Carthage would not have held an empire for six hundred years had it not been governed with wisdom and statecraft.Cadmus (Kadmos) of Tyre was a Phoenician of legend who brought the alphabet to the Greeks when he went in search of his sister Europa whom Zeus had carried off on a white bull. Cadmus founded Thebes.The salting of Carthage is a legend. R.T. Ridley in To be Taken with a Pinch of Salt: The Destruction of Carthage, Classical Philology Vol 81, No. 2 1986 says the first reference he can find to the salting of Carthage comes from the twentieth century. Evidence for Carthage:The Romans actively set out to obliterate Carthage in 146 B.C., following the Third Punic War, and then they built a new Carthage on top of the ruins, a century later, which was itself destroyed. So there are few remains of Carthage in the original location. There are tombs and burial urns from a sanctuary to the fertility mother goddess Tanit, a stretch of the wall fortifying the city that is visible from the air, and the remains of two harbors.(1) Date of the Founding of Carthage: According to Polybius (born c. 204 B.C.), the Greek historian Timaeus of Tauromenion (c. 357-260 B.C.), dated the founding of Carthage to 814 or 813 B.C.Other ancient authors who wrote about Punic Carthage were: Appian,Diodorus,Justin,Polybius andStrabo. Dionysius of Halicarnassus (Antiq. Roman. 1.4), basing his opinion on Timaeus, said that Carthage was founded 38 years before the First Olympiad (776 B.C.).Velleius Paterculus (c. 19 B.C. to  c. A.D. 30) said Carthage lasted 667 years.Recent carbon-14 dating confirms the late part of the ninth century B.C. as the date of the founding of Carthage.(2) References: (1)Scullard: Carthage,  Greece Rome  Vol. 2, No. 3. (Oct. 1955), pp. 98-107. (2)The Topography of Punic Carthage, by D.B. Harden,  Greece Rome  Vol. 9, No. 25, p.1.