FEDERAL RESERVE AND BANK RESERVE REQUIREMENTS
This research paper deals with the subject of the role of the American Federal Reserve System (the FRS or Fed) in setting reserve requirements for its member banks and manipulating the level of those reserves. It focuses on the later cited 1997 policy bulletin issued by the Federal Reserve Bank of New York, "Fedpoint 45: Reserve Requirements (Bulletin). The Bulletin is a good summary of the origins, practices and policies of FRS in the area of bank reserves, but fails to evaluate the policies it summarizes or to link them to the basis in monetary theory which underlie its actions.
Founded by Congress in 1913 as the nation's central bank, FRS was handicapped until the Depression by the control exercised over it by the commercial bankers it was supposed to regulate and its failure to take effective action to anticipate or control the speculative excesses involving banks which helped produce the Depression. Its independence was assured by the Banking Act of 1935. Robertson (1955), reviewing the earlier period, said: "the people wanted government control instead of banker control and in the early 1930s they got it" (p. 501). Since 1935, FRS has been managed by a seven member Board of Governors headed by a Chairman (since 1987 Alan Greenspan) who are appointed by the President, subject to confirmation by the Senate. The Board of Governors oversees the operations of its 12 District Federal Reserve Banks and the member banks, nationally-chartered banks and many state-chartered banks. In addition to its many other responsibilities, the Board of Governors acts as "the creator and controller of the money supply" (Mayer, 1996, p. 400). Congress defined its role in 1977 as to "pursue maximum employment, stable prices and moderate long-term interest rates" (Yellen, 1996, p. 43). The most important component of the money supply is M-1 (currency in circulation and demand deposits).
Monetar...