Federal Reserve Essay, Research Paper
Greenspan and the Federal Reserve: Methods and Resources
The United States of America was founded as a capitalist nation dependent on independent trade by privately owned businesses. This system of economics stays as far away as possible from a centralized government controlled economy. However, as generations of economists, politicians, and businessmen carried out the principles of the Constitution, it became apparent that some centralized bank was required to maintain stability and order in the national economy. This central bank is known as the Federal Reserve, and its Chairman is responsible for maintaining a positive economy through several powers. The current Chairman is Alan Greenspan, a man responsible for controlling a stable economy through several checks and balances.
The Federal Reserve was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today the Federal Reserve’s duties fall into four general areas: conducting the nation’s monetary policy; supervising and regulating banking institutions and protecting the credit rights of consumers; maintaining the stability of the financial system; and providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions. It consists of twelve regional banks that are owned and controlled by member banks in their region. Overseeing the twelve regional banks is the seven member Board of Governors based in Washington. The primary policy making body in the Federal Reserve is the Federal Open Market Committee (FOMC). The FOMC has twelve members, all seven governors and the presidents of five regional banks (Martin 23-25).
The Fed has three tools it can use to moderate the economy. The most common one is open market operations. Open market operations is just the selling or buying of government securites on the open market. The second tool is the discount rate. The Fed can raise or lower the interest rate it charges other banks for overnight loans. The third and most powerful tool is the reserve requirement. The reserve requirement is the percentage of deposits that a bank is required to have in cash (Grieder 47).
Open market operations affect the economy by increasing or reducing the supply of money. If the Fed wants to increase the supply of money (thereby reducing interest rates) it will buy government securities on the open market. The Fed is then replacing government securities, which are not counted in the primary money supply, with money. To reduce the supply, the Fed does just the opposite, selling government securities (Grieder 48-49).
The discount rate is the amount of interest the Fed charges banks for overnight loans. The Federal Reserve sets a percentage of deposits that all banks must keep in cash, this is called the reserve requirement. If a bank loans out to much money, they have to borrow from the Fed to meet the requirement. If the discount rate is lower than the rates banks can charge on loans, they will loan out more money, increasing the money supply. If the discount rate is higher, banks will loan out less money (Grieder 50).
The reserve requirement is a percentage of deposits that banks are required to hold in cash. If the reserve requirement is high, banks must keep more money in their vaults, instead of loaning it out. If the reserve requirement is low, banks can make more loans and increase the money supply (Grieder 50-51).
The independence of the Federal Reserve is considered crucial to the success of our economy. If Congress or the President had more control over the Federal Reserve they might seek to alter policy for their own gain. For example, a president might choose to relax credit restrictions to spur growth during an election year, regardless of the inflationary consequences. The independence of the Fed prevents this. In 1992, President Bush wanted the Fed to encourage growth, regardless of the consequences. Alan Greenspan and the FOMC refused, knowing it could be harmful to the US Economy. Likewise, if the members of the Board of Governors had to worry about re-election, they might not make the right choices for the long term (Woodward 112-113).
The whole idea of a Federal Reserve is an example of Keynesian Economics. John Maynard Keynes had a significant impact on the post world-war economy. Keynesian Economics also played a role in bringing about an end to the Great Depression. According to Keynes, the government’s duty is to act as employer of last resort during a time of recession. Keynes believed in an extended business cycle, with periods of high employment oscillating with periods of low employment. During times of low employment, the government should spend money, even if it means creating a deficit. A primary problem during a recession is not the lack of money, but the lack of demand. In other words, people have money, but they’re not spending it. According to Keynes, the government can spur demand by spending. Example: During a recession, the government signs a contract to buy 200 fighter planes. The manufacturer of the planes then must hire additional workers. The workers, now that they are employed are going to begin spending more money. This spending will lead other businesses to hire more workers. This is the primary argument against a balanced budget amendment that would require the federal government not to run a deficit. During a time of recession, tax revenues will be down. In order for the government to spend and create demand, they must run a deficit. The risk of Keynesian philosophy is “crowding out” when government spending can harm private business. Crowding out occurs when the government releases bonds to finance deficit spending. These bonds compete with corporate bonds on the open market and may prevent private borrowers from raising the money they need (Theories).
Another principle behind the Federal Reserve is the Phillips curve. Named for economist William Phillips, the Phillips curve demonstrates an inverse relationship between inflation and unemployment. Its main implication is that low inflation and low unemployment are incompatible. This theory holds true most of the time, but has had some significant failures. Most recently in the US, we had high inflation and high unemployment during the administration of Jimmy Carter. And during the Bush and Clinton administrations, largely due to Alan Greenspan we have achieved low inflation and “frictional unemployment”. Frictional unemployment occurs when everyone who wants to be employed is (Mullins 89).
Fiscal policy refers to the method of using spending and taxation to control the economy. Fiscal policy gives governments the ability to regulate economic growth by attempting to influence demand. If the government raises taxes, people will have less money to spend, therefore reducing demand. If the government lowers taxes, people will be more inclined to spend money. The government can also spend money to influence demand, as explained above. Taxation is especially powerful with regards to capital gains. If the government reduces the capital gains tax, more people will be likely to invest. Investments spur production and employment (Mullins 93-95).
Monetary policy attempts to influence the economy by controlling the money supply. This is another aspect of the economy controlled by the Federal Reserve. Monetary policy can influence the economy by altering interest rates. By reducing the supply of money, monetary policy can raise interest rates and discourage lending. Decreased lending results in less investment and less production. By increasing the supply of money, the opposite will occur. Monetary policy in the US is controlled with the use of three tools. They are open market operations, the discount rate and reserve requirements (Grieder 68-71).
Open market operations affect the economy by increasing or reducing the supply of money. If the Fed wants to increase the supply of money (thereby reducing interest rates) it will buy government securities on the open market. The Fed is then replacing government securities, which are not counted in the primary money supply, with money. To reduce the supply, the Fed does just the opposite, selling government securities (Mullins 101-104).
The discount rate is the amount of interest the Fed charges banks for overnight loans. The Federal Reserve sets a percentage of deposits that all banks must keep in cash; this is called the reserve requirement. If a bank loans out too much money, they have to borrow from the Fed to meet the requirement. If the discount rate is lower than the rate banks can charge on loans, they will loan out more money, increasing the money supply. If the discount rate is higher, banks will loan out less money (Woodward 106-108).
The reserve requirement is a percentage of deposits that banks are required to hold in cash. If the reserve requirement is high, banks must keep more money in their vaults, instead of loaning it out. If the reserve requirement is low, banks can make more loans and increase the money supply (Mullins 99-101).
Another method Greenspan and company use is price control. Price controls occur whenever the government tries to set a price above or below the market price. They are refereed to as price floors and price ceilings. A price floor is a legal minimum price set above the market price. An example is minimum wage. Minimum wage sets a higher hourly wage then most employers would normally pay. This has the effect of reducing the number of jobs, because employers will have to pay more for the same work. With a higher price on labor, employers will demand fewer workers. Price ceilings have the opposite effect. They are a legal maximum price normally set beneath the market price. Rent controls are a perfect example. When the government sets a maximum rent, landlords are likely to find another way to make money with their property. The government lowers the price, so landlords will be willing to supply less room for rent (Martin 67-68).
Works Cited
Martin, Justin. Greenspan: The Man Behind the Money. Perseus Press, New York: 2000.
Woodward, Bob. Maestro: Greenspan s Fed and the American Boom. Simon & Schuster, New York: 2000.
The Theories of John Maynard Keyes. bizednet.bris.ac.uk/virtual/economy/library/economists/keynesth.htm
Mullins, Eustance Clarence. Secrets of the Federal Reserve. Bankers Research Inst., Washington: 1991.
Grieder, William. Secrets of the Temple: How the Federal Reserve Runs the Country. Touchstone Books, San Fransisco: 1989.
Другие работы по теме:
The Wonderful Wizard Of Oz As A
Populist Allegory Essay, Research Paper The Populist Party came about in the late 19th century, at which time farmers were suffering from declining agricultural prices. Many believed that the federal government’s currency policy favored eastern banks and industrialists at the expense of farmers and workers.
Jefferson Essay Research Paper I feel that
Jefferson Essay, Research Paper I feel that I would be considered a Jeffertonian because I think the common man should run the federal government, like Jefferson thought. I think the federal government
Dollarization Essay Research Paper Richard W Stevenson
Dollarization Essay, Research Paper Richard W. Stevenson s article Greenspan View on Wider Use of Dollar discusses a process he refers to as dollarization. According to Mr. Stevenson, A number of countries have been considering abandoning their national currencies and adopting the American dollar the accepted international benchmark of stability as a way of reducing interest rates, inflation, and exchange rate volatility.
Legal And Illegal Essay Research Paper Ok
Legal And Illegal Essay, Research Paper Ok, there are 3 types of people that live in the country, Residents (both legal and illegal), citizens of the U.S., and Citizens of the
Germany
’s Government: Chancellor Democracy Essay, Research Paper Germany’s Government: Chancellor Democracy Steve Rice Political Science 90 Computer Project
Fed Vs Recession Essay Research Paper The
Fed Vs Recession Essay, Research Paper The economy of the United States of America is the largest in the world. In 2000, the U.S. had a Gross Domestic Product (GDP) of 9,318.5 billion dollars. (Real Gross Domestic Product, 2001) The United States has an economy that is market driven but government regulated.
The Economy During Election 2000 Essay Research
Paper The General State of the United States Economy There are various reasons for the result of the recent stock market tumble. There is not just one direct cause, for instance, the recent presidential election. It is a result of both the 2000 election and simply just a natural course of events that generally approaches once prosperity reaches a certain level.
Cdn Provinces
&Federalsystem Essay, Research Paper The Provinces and the Federal System The three areas of federal and provincial relations where decentralization is made evident are as follows:
Progressivism Essay Research Paper The Progressive Era
Progressivism Essay, Research Paper The Progressive Era – Federal Legislation The Progressive Era was a period in which the federal government increased its legislation and its grasp of the nation. There were three distinct pieces of federal legislation that seem to stick out, The Meat Inspection Act The Federal Reserve Act,, and The Hepburn Act.
Preventing Counterfeit Money Essay Research Paper Do
Preventing Counterfeit Money Essay, Research Paper Do you even know how to determine whether or not currency is counterfeit? According to the Federal Reserve, Because US currency is universally accepted and trusted, it is widely counterfeited. Many people have attempted to copy the patterns of US currency in an effort to create their own counterfeit money.
Mexican Economy Essay Research Paper For the
Mexican Economy Essay, Research Paper For the fourth time in the past 20 years, the Mexican economy is in financial distress, largely because of bad monetary policies pursued by Mexican officials. The United States has responded in all four instances by lending money to the Mexican government as a short-term palliative.
Greenspan Essay Research Paper Since Alan Greenspan
Greenspan Essay, Research Paper Since Alan Greenspan became chairman of the FED, the country’s economy has reflected many positive results. He has done a terrific job. Allan is a very bright man who is always thinking of ways to prevent problems before they happen in the economic sector of the nation. All economists have been very content with his job just until now.
Alan Greenspan S Effect On Ame Essay
, Research Paper Congress established the Federal Reserve, the central bank of the United States, in 1913 to provide the country with a more secure, more flexible, and more stable monetary and financial system. Presently, the Federal Reserve’s duties fall into four general areas: (1) conducting the nation’s monetary policy; 2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions, including playing a major role in operating the nation’s payments system.
Greenspan Essay Research Paper Federal Reserve Board
Greenspan Essay, Research Paper Federal Reserve Board Chairman Alan Greenspan vows to promote ?low and stable inflation.? The main goal of the U.S. economy is to maintain price stability. This reduces the likelihood that imbalances could develop that would ultimately undermine the record economic expansion that the U.S. is currently having.
Econ Essay Research Paper The federal progressive
Econ Essay, Research Paper The federal progressive income tax has been an issue that has been argued on the floors of Congress, in front of the United States Supreme Court, in front of television cameras, and around the dinner table. The tax served its purpose in supplementing revenue during the Civil War and World War I, but continued taking from Americans’ income in peacetime, allowing fewer dollars to be spent on goods and services.
The Fed Essay Research Paper Federal Reserve
The Fed Essay, Research Paper Federal Reserve and the Economic Bubble On Tuesday, November 16, 1999, the Federal Reserve Board will decide whether or not to tighten monetary policy at the Federal Open Market Committee meeting. Throughout the year the Fed has been somewhat hesitant to raise rates, which could slow the economy.
Critiques On Wall Street Essay Research Paper
The article, "Greenspan gets another Fed term," in the New York Times discussed Alan Greenspan’s success and failures during his term. The article was fairly easy reading. I found some statements to be quite amusing however, there were some issues discussed that was a little ambiguous.
Social Democracy Essay Research Paper Austria is
Social Democracy Essay, Research Paper Austria is a democratic, federal republic. The constitution of Austria provides for a distinct division of power among the executive, legislative and judicial branches of government. Basic human rights and liberties are granted by the constitution and so are the rights of minorities granted as well.
Federalism Essay Research Paper Due to the
Federalism Essay, Research Paper Due to the immense power of our federal government, people often argue that it is too powerful and should be lessened. Since the 1990?s there has been an effort to shift power
The Politics Of Boom Essay Research Paper
The Economist published an article on September 30, 2000 entitled “The Politics of Boom”. This article brings up several issues that we have discussed in Economics 103 this
The Federal Reserve Essay Research Paper The
The Federal Reserve Essay, Research Paper The Federal Reserve System ?The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.?
US Monetary Policy Essay Research Paper US
U.S. Monetary Policy Essay, Research Paper U.S. Monetary Policy Economic policy dictates the lives of many people. Economic regulation affects everyone, if the economy falters then people lose money, inflation runs rampant, and unemployment rates rise. Controlling U.S. monetary policy, or at least having some influence, ranks high on the agenda of many political actors from the president and Congress, to the private sector like the credit industry.
Alan Greenspan Chairman Of The Federal Reserve
Board: Essay, Research Paper Alan Greenspan, chairman of the Federal Reserve Board: President Clinton appointed Alan Greenspan, a well-known chairman of the Federal Reserve Board, to his fourth term as the chairman of the nation’s central bank. Alan Greenspan accepted the chance to lead the Federal Reserve Board for another four-year term beginning June of 2000.
Economic 2 Essay Research Paper IntroductionThe American
Economic 2 Essay, Research Paper Introduction The American economy has many components which contribute to its growth and which affect its rate of inflation, but the overriding stimuli stem from the monetary and fiscal controls imposed by the Federal Reserve and government, respectively. The economy has enjoyed modest growth for several years, and that can be expected to continue.
Fiscal Policy Essay Research Paper Supposing the
Fiscal Policy Essay, Research Paper Supposing the status quo of the United States today states that: there is no real unemployment, the consumer price index is rising at 2 percent annually, and the federal government budget deficit, 200 billion dollars, is equal to 5 percent of the gross national product.
Got Those Opec Blues Again And
Rational Exuberance Essay, Research Paper Got those OPEC Blues Again and Rational Exuberance SUMMARY Since March of 1999, when the price of West Texas Intermediate crude oil was at $13 a barrel, we have seen a steady increase in prices in all phases of the economy. OPEC, the organization that is largely responsible for setting production goals in the Middle East, was under fire to find ways to increase prices.
Stock Market Rally Essay Research Paper Wow
Stock Market Rally Essay, Research Paper Wow, what a day on the market today. Technology stocks soared on the news of the new gigahertz processor release. Computer makers like Gateway and Dell saw their shares increase by 68 and 42 percent respectively. Both companies expect the release of this new computer chip to boost sales tremendously.
US Monetary Policy In 1995 Essay Research
Paper U.S Monetary Policy in 1995 When Alan Greenspan presented the Federal Reserve’s semi-annual report on monetary policy to the Subcommittee on Domestic and International Monetary
Us Economy Essay Research Paper US Economy
Us Economy Essay, Research Paper U.S. Economy Shrinks During the third quarter, a falling GDP has the economists worried that the U. S. economy is heading towards a recession. The GDP (Gross National Product) fell at a rate
Monetary And Fiscal Policy Essay Research Paper
Monetary and Fiscal Policy The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary.
Federal Monetary And Fiscal Policy Essay Research
Paper The management of the money supply and interest rates is what is known as monetary policy, The Federal Reserve System (the Fed) was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, D.C., and twelve Federal Reserve District Banks.
Critical Analysis Essay Research Paper The case
Critical Analysis Essay, Research Paper The case involving the hog mega-farms in Tatnall County raises interesting questions as to who has proper jurisdiction over such cases. While all sides, federal, state, and local, can claim that they should have jurisdiction, the state has the most power in this situation.