FEDERAL RESERVE AND BANK RESERVES T

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

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r deposited as reserves at a Federal Reserve Bank. The power to raise or lower reserve requirements can have a powerful multiplier effect on the money supply (Bulletin, 1997, p. 2). Becker (1996) says that "if the system was flush with reserves, banks would be more inclined to make loans on good terms and low rates, whereas if reserve conditions were tighter, banks would be less inclined to lend" (p. 427). According to Schroeder (1997), "the Board of Governor's authority to adjust reserve requirements is an important tool in carrying out monetary policy" (p. 3-29). However, the Bulletin acknowledges that "the Fed changes reserve requirements for monetary purposes only infrequently" (p. 2). Becker (1996) said that until Greenspan took over as Chairman, manipulation of reserve requirements "had long been almost an afterthought of monetary policy, something that had gathered rust at the bottom of the Fed's tool chest" (p. 209). Greenspans' Fed has lowered reserve requirements twice --in 1990 by eliminating the three percent of reserve requirements on non-personal time deposits and on net Eurocurrency liabilities and in 1992 by cutting the rate of transaction deposits from 12 percent to 10 percent. The current requirements, effecti
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Some common words found in the essay are:
Board Governors, Greenspans' Fed, Bulletin Bulletin, Relevance Bulletin, Reserve Banks, Reserve Bank, Nicholas Kalder, Founded Congress, Paul Volcker-Greenspan, Board Governor's, reserve requirements, money supply, federal reserve, monetary policy, board governors, federal reserve bank, depository institutions, bank reserves, reserve bank, schroeder 1997, transaction deposits, percent transaction deposits, controlling money supply, reserve bank york, 2 becker 1996,
Approximate Word count = 1521
Approximate Pages = 6 (250 words per page)

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