The Federal Reserve Bank was established on December 23, 1913, under the authority of Section 5 of the U.S. Congress Joint Resolution of June 15, 1917 (Public Law 64-283). Its purpose is to provide a central banking system for the United States.
In addition to its role as a bank, the Federal Reserve System serves as the nation’s primary banker to local banks, credit unions, and other depository institutions; provides financial services to government agencies, including the federal government, state governments, and municipalities; maintains the national money supply; and conducts foreign exchange operations on behalf of commercial users and governmental entities.
The Federal Reserve Banks are located throughout the country and are governed by boards of directors composed of 12 members appointed by the President of the United States, subject to confirmation by the Senate. The term of office for these individuals is staggered, with four members serving three year terms, six members serving two year terms, and four members serving single year terms.
Federal Reserve Banks are organized into districts consisting of seven member banks. Each district elects one member of the Board of Governors who serves a 4-year term. The remaining six members serve staggered 6-year terms.
Each Federal Reserve Bank is authorized to issue notes payable at par value, redeemable in lawful money on demand, and backed by a pledge of the full faith and credit of the United States. These notes are known as reserve bank notes and have been issued since 1914.
The Federal Reserve Act authorizes the Board of Governors of the Federal Reserve System to borrow funds from any Federal Reserve Bank. The funds borrowed may be used only to pay interest on outstanding issues of Treasury securities held by the Reserve Bank, to purchase additional Treasury securities, or to make payments to member banks.
In order to facilitate the issuance of reserve bank notes, the Federal Reserve Banks have the power to discount bills drawn by them upon their respective member banks and to receive deposits. Discounting and receiving deposits are accomplished through the use of reserves deposited with the Reserve Banks.
Reserves consist of cash and balances due to the Reserve Banks from member banks. Member banks deposit their excess reserves with the Reserve Banks and receive interest on those reserves.
Deposits of member banks are not loans to the Federal Reserve Banks. Rather, they are investments made by member banks in return for the privilege of using the Fed’s facilities. Member banks’ deposits earn interest at the rate paid on the Federal Funds market.
The Federal Reserve System operates independently of fiscal authorities. However, the Federal Reserve Banks are financed primarily through the sale of Treasury securities. As a result, the amount of currency in circulation is always equal to the sum of the currency held by the public plus the currency held by the Federal Reserve Banks.
The Federal Reserve is not a government agency. It is a private corporation owned by member banks, whose shares are privately held.
The Federal Reserve does not control monetary policy. Instead, it sets the rates at which member banks lend to each other overnight. These rates are called the discount rate and the fed funds rate.
The Federal Reserve’s discount window is open to member banks 24 hours per day, 365 days per year. A member bank seeking to borrow funds from the Federal Reserve need only submit a written request to the Federal Open Market Committee (FOMC) and wait for approval.
A member bank may borrow funds from the Federal Open Market Committee at any time. If the FOMC decides to extend a loan, it will set the interest rate at which the loan will be offered. The FOMC determines the interest rate charged on loans extended to member banks based on current economic conditions.
When the Federal Reserve makes a loan, it receives a promissory note from the borrower. The note is payable to bearer on demand. The Federal Reserve pays interest on the loan at a specified rate.