Central Banking - The organisation of the FED and their politics within the last years (esp. in comparison to the ESCB)

Central Banking - The organisation of the FED and their
politics within the last years (esp. in comparison to the ESCB)

von: Simone Weinert

Contents

1 PREFACE 5

2 INTRODUCTION 6

3 THE FEDERAL RESERVE SYSTEM (FED) IN THE USA 8

3.1 The History 8
3.2 The Structure 11

4 THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB) 19

4.1 The History 21
4.2 The Structure 21

5 THE COMPARISON 26

6 CONCLUSION 31

7 LITERATURE 32

1 Preface

The following essay with the title „Central Banking – The organisation of the Fed and their politics within the last years (esp. in comparison to the ESCB)“ is part of the final examination of the course International and Baltic Finance at the University of Applied Sciences Stralsund. This paper will explain central banking in general and than have a closer look on the U.S. Federal Reserve System. After that it will have a look on the European System of Central Banks, continuing with comparing the two systems, looking for the similarities and differences.

During my research I read quiet a lot of books and articles and after some time I really got interested in the topic. I really wanted to know how all this central banking works, and what kind of system (the American or the European) is the better one. But I also recognised that there are of course plenty of books, dealing with this topic, but everybody seems to have a different opinion, of what is better, what suits the society best. So while writing this essay, I tried to give back what I found interesting and what seems to be the opinion of several people. Unfortunately I could not stick to the required 3000 words, because my topic was so complex and wide, that it forced me to write some more words on it. University of Applied Sciences Stralsund International and Baltic Finance

2 Introduction

The rapidly changing development within financial markets requires that governments and their banks react, by reformulating or re -evaluation of their current practices. Central Banking seems to be the answer to that development. Fifteen years ago, only the German Bundesbank, the Swiss National Bank and the Federal Reserve System in the USA enjoyed legal independence. Nowadays more and more countries are establishing independent central banks, from Chile and New Zealand (in 1989) to Argentina (1992) and the Philippines (1993). Developed as well as developing countries are getting aware of the great importance of a central and independent bank 1.

But what is a central bank? What is typical for it? To say it in general a central bank is a government sanctioned bank that has specific duties related to the performance of the macro economy. Mostly these central banks are charged by the national governments to control the money supply, so that they may promote the economic stability. Of course it is possible that a central bank has other duties as well, such as regulating the financial system, operating as check-clearing institutions or just performing general banking services for the government. As already mentioned there are quite a lot central banks existing today, and of course each central bank is having its own structures and powers. But nonetheless every central bank shares the responsibility of controlling the nation’s money supply.2

But why do central banks exist? They are public institutions with a variety of different tasks, depending on the country. To fully understand how and why a central bank in a specific country is operating, one has to have knowledge of the country’s history. Governments have changed their views of what and how central banks should operate over times. So in normal times central banks were supposed to promote economic stability. But the definition of that stability measurement can of course change from country to country and from time to time. 

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1 Lastra, R.M., (1996) Central Banking and Banking Regulation, Wilson Moss Limited, London, p. 9
2 Flaherty (2001)