VOICE ONE:
I’m Shirley Griffith.
VOICE TWO:
And I’m Sarah Long with the VOA Special English program THIS ISAMERICA. Today, we tell about America’s Central Bank, the UnitedStates Federal Reserve.
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VOICE ONE:
On October second, the Federal Reserve Open Market Committeereduced federal interest rates for the ninth time this year. Federalinterest rates are now at their lowest level sinceNineteen-Sixty-Two. The action was taken because of the damage tothe American economy caused by the terrorist attacks last month.Experts believe that reducing interest rates can help the economygrow.
Most people know that the Federal Reserve controls interestrates. Yet, fewer people know how the Federal Reserve influencesbanking and the economy.
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America’s Central Bank is part of a larger financial systemcalled the United States Federal Reserve System. It is not a singlebank, but a banking system with operations that are both public andprivate. Its purpose is to control the flow of money in the economy,to supervise banking activity and to protect the financial system.
The Federal Reserve System includes the Federal Reserve Board ofGovernors and the twelve Federal Reserve banks. The Board ofGovernors is, in fact, a government agency that reports to Congress.The Board of Governors is a committee of seven people. However, onlyfive members currently are serving on the Federal Reserve Board.
VOICE ONE:
The president of the United States appoints Federal Reserve Boardmembers to fourteen-year terms. Members may serve only one term. Thepresident also appoints the chairman and vice chairman of the boardto four-year terms.
The chairman is often reappointed several times. The currentchairman, Alan Greenspan, has served since Nineteen-Eighty-Seven.There have been only thirteen chairmen since the Federal ReserveSystem was created in Nineteen-Thirteen.
The Federal Reserve Board chairman has national responsibilities,such as reporting to Congress on the economy. He also serves as aninternational representative of the American banking system.
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The Board of Governors supervises the general activities of theFederal Reserve System. However, the Federal Open Market Committeemakes decisions that change the economy. The committee has twelvemembers. They are the seven members of the Federal Reserve Board andfive Reserve Bank Presidents. By law, the Open Market Committee mustmeet four times every year. However, it has met at least eight timesa year since Nineteen-Eighty.
The Open Market Committee makes decisions about America’s moneysupply. It considers reports from special committees and a hugeamount of economic information provided by the Reserve Banks. Thisinformation is presented to committee members during their meetings.Often, the meetings are not open to the public because thediscussions could have unwanted effects on the economy.
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VOICE ONE:
The twelve Federal Reserve Banks are the other part of theFederal Reserve System. They are called the “twelve districtbranches” and serve large areas of the country. These banks lendmoney to other banks that are part of the Federal Reserve System.But, fewer than half of America’s banks are members of the FederalReserve System.
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When the Federal Reserve System began, each District Bank set itsown interest rate. The lawmakers who wrote the legislation thatcreated the system wanted each area of the country to be financiallyindependent. Virginia Senator Carter Glass was one of thosecongressmen. He once said that the purpose of the Federal ReserveAct was to avoid creating a central bank. Yet today, all the reservebanks keep the same rates and are closely supervised by the Board ofthe Federal Reserve.
VOICE ONE:
The Open Market Committee controls two important rates ofinterest. One is the rate charged by the Federal Reserve. Banks mayborrow directly from the Federal Reserve at a reduced rate to changethe level of their money reserves.
Lending at a reduced rate was the most common way for the FederalReserve to influence the supply of money early in its history. Thespecial rate was designed to help troubled banks pay people whowithdrew money in times of crisis.
The most important interest rate controlled by the Open MarketCommittee is called the “Federal Funds rate.” Banks pay this ratewhen they borrow from other banks in the Federal Reserve System forvery short periods. The Open Market Committee does not change theFederal Funds rate in one action. The committee announces a targetrate and slowly reduces the rate until the target is reached.
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One way that the Federal Reserve changes interest rates isthrough “open market operations.” The Open Market Committee ordersthe Federal Reserve to buy or sell government debt in financialmarkets in New York. The government does business with more thanthirty companies that trade government debt.
The financial instruments used in this process are calledgovernment securities. Government securities are loans to thegovernment that are “secured” by the government’s ability to tax.Government securities are bought and sold in huge amounts infinancial markets. In fact, more than ten-thousand-million dollarsin government securities are traded every day.
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The Federal Reserve buys government securities when it wants tolower interest rates. Interest rates generally go down because thereis an increased supply of money for lending.
However, the Federal Reserve requires banks to hold more money”in reserve” as the amount of money they hold increases. Money heldin reserve cannot be loaned out. It must be kept in some safe formin case of an emergency. Reserve requirements help to balanceinterest rates as the Federal Reserve buys or sells debt in the openmarket.
The Federal Reserve can also affect interest rates by changingrequirements for banks. Banks can be required to increase or reducethe percentage of money they hold in reserve. Increasing thepercentage of reserve money that banks must hold can cause interestrates to go up.
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VOICE TWO:
The idea of a central bank is not a recent one. The first CentralBank was started in Sweden in Sixteen-Fifty-Six. The Riksbank was aprivate bank. Yet the Swedish legislature gave it the power to printmoney. The Federal Reserve is like that first central bank in manyways.
American dollars are “Federal Reserve Notes.” All of the FederalReserve Branch banks are private banks owned by the owners of theirstock. And, the Federal Reserve Board reports to Congress as agovernment agency.
Yet the Federal Reserve System is always changing to meet theneeds of America’s financial community. For example, inNineteen-Eighty, Congress passed the Monetary Control Act. Itrequired all financial institutions to keep reserve money with theCentral Bank. At the time, only banks that were members of theFederal Reserve System had to hold reserves with it. However, by theNineteen-Seventies many member banks were leaving the system becausethe federal requirements reduced the amount of money they couldlend. The Monetary Control Act expanded the power of the FederalReserve to control non-member banks.
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The Federal Reserve has become more powerful and centralizedsince it was created in Nineteen-Thirteen. Yet the Federal Reservehas increased the amount of information it makes public. BeforeNineteen-Seventy-Eight, the chairman of the Federal Reserve Boarddid not speak to Congress often. An act of Congress directed thechairman to speak to Congress twice a year to report on the economy.
The Federal Reserve now makes public much of the large amount ofeconomic information it gathers. For example, the Federal OpenMarket Committee began to announce a “target rate” inNineteen-Ninety-Five. In many ways, America’s Central Bank hasbecome more important as it has become more open to the public.
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VOICE TWO:
This program was written Mario Ritter. It was produced by CynthiaKirk. I’m Sarah Long.
VOICE ONE:
And I’m Shirley Griffith. Join us again next week for anotherreport about life in the United States on the VOA Special Englishprogram THIS IS AMERICA.