Extra Credit (Fall 2005)

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Frequently Asked Questions

Money
Q: Does the Federal Reserve Bank print money?
Federal Reserve Structure and Operations
Q: Who owns the Federal Reserve Banks?
Q: Where does a Federal Reserve Bank receive its operating income?
Q: Why can’t the public keep checking or savings accounts at a Federal Reserve Bank?
Money
Q: Does the Federal Reserve Bank print money?
A: Currency is printed by the Bureau of Engraving and Printing at its facilities in Washington, D.C., and Fort Worth, Texas. The Treasury ships new paper money to Federal Reserve Banks, which pay it out to commercial financial institutions.
Federal Reserve Structure and Operations
Q: Who owns the Federal Reserve Banks?
A: Federal Reserve Banks were created by an act of Congress and are corporations operated in the public interest rather than for profit or the benefit of any private group. Member banks are owners of their particular Federal Reserve Bank’s capital stock but do not control the Federal Reserve Bank. They do not occupy the same position of ownership that stockholders of private corporations do. For example, stock in a Reserve Bank cannot be sold or pledged as security for a loan. Member banks are limited in their subscription to stock in a Reserve Bank to an amount equal to 6 percent of their own capital and surplus. The member banks receive an annual dividend of 6 percent on their stock and may elect six of the nine members of the board of directors. Reserve Banks perform many services for the U.S. Treasury and for various government agencies, but Reserve Banks are not government agencies in the sense that the U.S. Secret Service is, for example.
Q: Where does a Federal Reserve Bank receive its operating income?
A: The great bulk of the earnings of the Federal Reserve Banks comes from interest payments made by the federal government on U.S. Treasury securities held by Reserve Banks. These securities are held in the portfolio of the Federal Open Market Committee and are physically housed at the Federal Reserve Bank of New York. Each of the 12 Federal Reserve Banks owns a part of these securities, the proportion of ownership being based on each bank’s total assets. A smaller portion of each Reserve Bank’s earnings comes from interest on borrowing by member banks. The earnings from discount operations varies from year to year, depending on member bank borrowing and the discount rate. In addition, the Monetary Control Act of 1980 has required the Federal Reserve Banks to price most of their services beginning in 1981. Therefore, the Federal Reserve receives direct income from fees paid by financial institutions using its services. Earnings in excess of expenses are returned to the Treasury.
Q: Why can’t the public keep checking or savings accounts at a Federal Reserve Bank?
A: One role of Federal Reserve Banks is to serve as a bank for banks. In addition, Reserve Banks act as a fiscal agent for the federal government. The Fed is not a bank for individuals and therefore does not offer the services, such as checking and savings accounts, to individuals that are offered by commercial banks.

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