On the night of November 22, 1910, a delegation of the nation’s leading financiers, led by Senator Nelson Aldrich, left New Jersey for a very secret ten-day meeting on Jekyll Island, Georgia.
After the Jekyll Island visit the National Monetary Commission wrote the Aldrich Plan which formed the basis for the Federal Reserve system.
After several failed attempts to push the Federal Reserve Act through Congress, a group of bankers funded and staffed Woodrow Wilson's campaign for President. He had committed to sign a slightly different version of the Federal Reserve Act than Aldrich’s Plan.
In 1913, Senator Aldrich pushed the Federal Reserve Act through Congress just before Christmas when much of Congress was on vacation.
In the Federal Reserve Act Congress established three key objectives for monetary policy:
- Maximum employment
- Stable prices
- Moderate long-term interest rates
The first two objectives are often referred to as the Federal Reserve's dual mandate.
Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved.
According to official Federal Reserve documentation today’s duties are:
- Conduct the nation's monetary policy
- Supervise and regulate banking institutions
- Maintain the stability of the financial system
- Provide financial services for depository institutions, the US government, and foreign official institutions
- Conduct research into the economy and publish results ie the Beige Book
The Federal Reserve’s structure is composed of a board of governors who – including its chairman and vice-chairman – are chosen by the President and confirmed by the Senate, the Federal Open Market Committee (FOMC), twelve regional Federal Reserve banks, privately owned US banks and advisory councils.
The only stockholders of the 12 regional Federal Reserve banks are the national banks (the ones chartered by the federal government) and those state-chartered banks that wish to join and can meet certain requirements. Roughly 38% of the country’s plus 8,000 banks are members of the Fed system, and they own the 12 Fed banks.
The FOMC is the committee responsible for setting monetary policy, the committee regulates the nation’s money supply and sets targets for short-term interest rates. The FOMC consists of all seven members (a voting majority) of the board of governors and the twelve regional bank presidents. Only five of the bank presidents vote at any given time – the president of the New York Fed is a permanent seat and four seats are rotated among the eleven other regional bank presidents.
The US Federal Reserve System is unique:
- According to its board of governors: "Its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government."
- Also unusual is that an entity outside of the US central bank – the United States Department of the Treasury – creates the currency used.
"When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check, there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money." Federal Reserve Bank of Boston, Putting it Simply (1984)
The Fed is highly profitable, since it can create the money that it needs at no cost the return on its investments flows directly to the bottom line. Federal Reserve banks are also exempt from state and Federal taxes.
The Fed's investment portfolio grew in 2011, it’s now approaching $3 trillion. Almost 97% of the Fed’s income is generated by interest payments on its investmentportfolio – the Fed is the largest single investor in federal government debt and securities issued by the government owned mortgage finance companies Fannie Mae and Freddie Mac.
Most of the money flowing into the Fed’s coffers comes from US taxpayers and the US government receives all of the system's annual profits, after a statutory dividend of 6% percent on member banks' capital investment is paid, operating expenses are paid (since no one audits the Fed its operating expenses have never seen the light of day and are what the Fed says they are) and an account surplus is maintained.