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.
At a glance
- Examines contrasting assessments of central bank transparency by De Grauwe and Fase and Vanthoor
- 40 sources in the bibliography
Contents
1 PREFACE
2 INTRODUCTION
3 THE FEDERAL RESERVE SYSTEM (FED) IN THE USA
3.1 The History
3.2 The Structure
4 THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB)
4.1 The History
4.2 The Structure
5 THE COMPARISON
6 CONCLUSION
Objectives and Themes
This work explains central banking and examines how the Federal Reserve System and the European System of Central Banks are organised. It asks how their histories, institutional structures and approaches to monetary policy compare, drawing on published literature and institutional sources.
- Central bank functions and independence
- The history and organisation of the Federal Reserve
- The origins and governing bodies of the European System of Central Banks
- Monetary policy instruments and objectives
- Decision-making, transparency and accountability
Excerpt from the Book
The Federal Open Market Committee (FOMC)
The FOMC is considered the most important (the decision making) body of the Fed. It consists of twelve voting members - the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. Some of the Reserve Bank presidents are always sitting within the Committee (f. e. the New York one), while others have rotating seats on a one-year term basis. Within this rotating group the seats are filled with one president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. All of the Reserve Bank presidents, even those who are not currently voting members of the FOMC, are attending the meetings of the Committee. They participate in the discussions, and contribute to the Committee's assessment of the economy and policy options. These Committee meetings take place every six weeks. So under its eight meetings a year it sets the most important interest rates that the Fed controls – the short-term feds fund rates. This function is now known as the Fed’s power key over the American economy. Furthermore the Fed has the legal power to trade in the bond market. So by having trade desks in New York that buy U.S. Treasury bonds, the Fed is able to direct the “easing” of credits. This mechanism pumps money into the banking system and by that eventually into the larger economy as well. With more money in circulation the fed funds rate drops, making it easier for businesses and consumers to borrow money. If the Fed wants to avert or has to fight a recession it lowers the fed funds rate and helps to prevent such occasions. Additionally to that the Fed is able to tighten credit by selling Treasury bonds. By doing that they withdraw money from the banking system as well as from the economy as a whole. So, with less money out there, the fed funds rates rise, leading to greater differences when borrowing. By doing that the Fed reacts on inflations. This buying and selling of Treasury bonds is also known as open market operations. So this tool makes the Fed an important institution, because these changes in the fed funds rate are also affecting the long-term interest rates on loans paid by consumers, homeowners and businesses. This monopole, gives the Fed a strong position – controlling the credit conditions, the real engine of capitalism.
Chapter Summaries
1 PREFACE: The author introduces the purpose and scope of the essay and explains the interest behind its comparison of the two systems.
2 INTRODUCTION: The chapter introduces central banking, including money supply management, payment systems, financial stability and lender-of-last-resort functions.
3 THE FEDERAL RESERVE SYSTEM (FED) IN THE USA: This chapter traces the Fed’s development and describes its governing bodies, regional banks, advisory bodies and monetary policy responsibilities.
4 THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB): The chapter outlines the origins of the European Central Bank and the ESCB, their objectives and their principal decision-making bodies.
5 THE COMPARISON: The author compares the two systems’ historical origins, powers, policy objectives, transparency and approaches to monetary policy, drawing on published analyses.
6 CONCLUSION: The final chapter reflects on the similarities and differences between the institutions and their development.
Keywords
central banking, Federal Reserve System, European System of Central Banks, European Central Bank, monetary policy, central bank independence, price stability, Federal Open Market Committee, open market operations, transparency, monetary targeting, financial stability
Frequently Asked Questions
What is this work about?
It examines central banking through the organisation and policies of the Federal Reserve System and the European System of Central Banks.
What are its main themes?
The main themes include institutional history, central bank independence, decision-making, monetary policy instruments, transparency and policy objectives.
What is the primary question?
The work asks how the American and European central banking systems compare in their organisation and monetary policy.
What research method does the author use?
The author uses a comparative discussion based on published books, articles and institutional sources.
What does the main body cover?
It describes the history and structure of each system before comparing their institutions and policy approaches.
Which keywords characterise the work?
Key terms include central banking, the Federal Reserve, the European Central Bank, monetary policy, independence, price stability and transparency.
How does the work explain the Federal Open Market Committee?
It describes the committee’s membership, meetings and role in open market operations and monetary policy.
Which European decision-making bodies are discussed?
The discussion covers the Governing Council, the Executive Board and the General Council, alongside the roles of the European Central Bank and national central banks.
How does the author approach transparency?
The comparison considers differing assessments by De Grauwe and by Fase and Vanthoor of the transparency of the American and European systems.
- Quote paper
- Simone Weinert (Author), 2003, Central Banking - The organisation of the FED and their politics within the last years (esp. in comparison to the ESCB), Munich, GRIN Verlag, https://www.grin.com/document/23713
