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Museum of Trade, Finance, and the Fed

Exhibit 5: Everything You Wanted to Know about the Fed

Photo of Exhibit 5 - Everything You Wanted to Know about the FedMore Fed History: The Federal Reserve System and the New Orleans Branch
The Federal Reserve System was designed to have a broad perspective on the economy and on economic activity in all parts of the nation. It is a federal system, composed of a central government agency—the Board of Governors—in Washington, DC, and 12 regional Federal Reserve Banks, located in major cities throughout the nation.

When the decision was made in 1914 to make Atlanta the head office of the Sixth Federal Reserve District (which comprises Alabama, Florida, and Georgia, and parts of Louisiana, Mississippi, and Tennessee), bankers and business leaders in the city of New Orleans were indignant. Although many people recognized that New Orleans was the financial center of the South, Atlanta made the case, successfully, that it was the geographic center of the South's cotton industry, a financial capital in its own right, and a critical transportation hub. The city of New Orleans staged a mass protest on April 5, and the Daily Picayune carried an angry cartoon (shown in the exhibit). The book A History: The Federal Reserve Bank of Atlanta contains more information on the controversy of this early decision. Ultimately, in September 1915, the Atlanta Fed opened its first branch office in New Orleans.

Today, the New Orleans Branch is one of five branches of the Atlanta Fed. The other branches of the Atlanta Fed are in Birmingham, Alabama; Jacksonville, Florida; Miami, Florida; and Nashville, Tennessee.

Questions and answers about the Federal Reserve

What does it mean to be a quasi-governmental institution?
Because of its hybrid model of government agency plus independent banks, the Federal Reserve System is considered to be a quasi-governmental institution. These components share responsibility for supervising and regulating certain financial institutions and activities; providing banking services to depository institutions and to the federal government; and ensuring that consumers receive adequate information and fair treatment in their business with the banking system.

Who owns the Federal Reserve?
The Federal Reserve System fulfills its public mission as an independent entity within government. It is not "owned" by anyone, and it is not a private, profitmaking institution.

The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized similarly to private corporations, possibly leading to some confusion about ownership. For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan. Dividends are, by law, 6 percent per year.

You can find more information about the structure and functions of the Federal Reserve on the Atlanta Fed's website.

What gives the Federal Reserve its authority?
As the nation's central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because:

  • Its monetary policy decisions do not have to be approved by the president or anyone else in the executive or legislative branches of government.
  • It does not receive funding appropriated by the Congress.
  • At 14 years, the terms of the members of the Board of Governors span multiple presidential and congressional terms.

However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve's activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as "independent within the government" rather than "independent of government."

Who is the Federal Reserve accountable to?
The Federal Reserve is accountable to the public and the U.S. Congress. The Fed has long viewed transparency as a fundamental principle of central banking that supports accountability. In the area of monetary policy, the Federal Reserve reports twice annually on its plans for monetary policy. In addition, the chairman and other Federal Reserve officials often testify before the Congress.

How does the FOMC communicate its decisions?
To further foster transparency and accountability in monetary policy, the Federal Open Market Committee (FOMC) publishes a statement immediately following every FOMC meeting that describes the Committee's views regarding the economic outlook, and provides a rationale for its policy decision. Full minutes for each meeting are published three weeks after each FOMC meeting. Full verbatim transcripts of the FOMC meetings are made available with a five-year lag. In 2011, Federal Reserve Chairman Ben Bernanke began holding four press conferences a year, after selected meetings, to discuss the monetary policy outlook.

How does the Federal Reserve Act as "lender of last resort"?
The Federal Reserve lends to banks and other depository institutions—in a process called "discount window lending"—to address temporary problems they may have in obtaining funding. Those problems can range from garden variety issues, such as funding pressures associated with unexpected changes in a bank's loans and deposits, to extraordinary events, such as those that occurred after the September 11, 2001, terrorist attacks or during the financial crisis in 2008 and 2009. In all such cases, the Federal Reserve provides loans when normal market funding cannot meet banks' funding needs. The discount window is not intended for ongoing use in normal market conditions, but it is available to cover unexpected developments.

To encourage banks to first seek funding from market sources, the Federal Reserve lends at a rate that is higher, and thus more expensive, than the short-term rates that banks could obtain in the market under usual circumstances. To minimize the risk that the Federal Reserve will incur losses from lending, borrowers must pledge collateral, such as loans and securities. Since 1913, when the Federal Reserve was established, it has never lost a cent on its discount window loans to banks.

Why does the Federal Reserve aim for 2 percent inflation?
The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term, judging that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public's ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling, a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken.

Does legal tender mean a business must accept my dollars in payment?
Section 31 U.S.C. 5103, titled "Legal tender," states: "United States coins and currency [including Federal Reserve notes and circulating notes of Federal Reserve Banks and national banks] are legal tender for all debts, public charges, taxes, and dues."

This statute means that all U.S. money as identified above is a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no federal statute mandating that a private business, person, or organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.

What is the life span of a Federal Reserve note?
Life span varies by denomination, largely because the public uses denominations differently. For example, $100 notes are often used as a store of value. This means that they pass between users less frequently than lower denominations, such as $5 notes, which are more often used for transactions. Thus, $100 notes typically last longer than $5 notes.


Denomination

Estimated life span*

$1

4.8 years

$5

3.8 years

$10

3.6 years

$20

6.7 years

$50

9.6 years

$100

17.9 years

Does the Federal Reserve get audited?
Yes, the Board of Governors, the 12 Federal Reserve Banks, and the Federal Reserve System as a whole are all subject to several levels of audit and review.

In addition, all the Reserve Banks are subject to annual examination by the Board. The Board's financial statements and the combined financial statements for the Reserve Banks are published in the Board's Annual Report.

For more questions and answers, please go to the website of the Federal Reserve Board