Money On The Move - The Federal Reserve Today (1963)

In 1626, Minuit purchased Manhattan Island from the Algonquin Indian nation. No deeds to sign, no mortgage, no checks. It was a simple exchange, $24 worth of trinkets for the island of Manhattan. Today, with the tremendous growth of our nation, the same transaction would be enormously complex, involving real estate men, lawyers, and the bankers. Years later, in 1781, the first bank was founded in Philadelphia. Since its founding, banks have kept pace with growing America, increasing in size, in services, and in numbers. Today, there are over 13,000 banks in the United States. Over 6,000 of them, with almost 85% of the banking assets, are members of the Federal Reserve System, a nationwide banking organization with 12 banks and 24 branches throughout the United States. This is the Federal Reserve Bank of Cleveland, Ohio. An economics class from a local university is supplementing its class work with a visit to the Cleveland Bank. The group will be addressed by one of to bank's staff economists, Dr. Haket. Good morning and welcome to the Federal Reserve Bank of Cleveland. The Federal Reserve System was created by an act of Congress in December 1913. Its original objectives were to provide for an elastic currency and to improve the supervision of banking. These objectives recognized that the existing money system did not work satisfactorily and that a central bank was needed for money to do its job. Over the years, the system has been entrusted with much broader responsibilities either through usage or through amendments to the original act. The Federal Reserve System consists of a Board of Governors in Washington and 12 banks, each serving a different region of the country. Each Federal Reserve District is served by a Reserve Bank located in a key city. Each Reserve Bank is a corporation organized and operated for public service. Most Reserve Banks also have branches in other major cities within their district. The Board of Governors consists of seven members appointed by the President of the United States and confirmed by the Senate. They are appointed for terms of 14 years. The President designates one of the seven as chairman of the board for a term of four years. The Board of Governors supervises the operations of the Federal Reserve System and has major responsibility for formulating national monetary policy. Not all commercial banks are members of the Federal Reserve System. National banks are required by law to be members. State chartered banks may become members if they wish to upon meeting certain requirements. Each Reserve Bank has nine directors chosen for three-year terms. Six directors are elected by member banks in the district. Three of these are bankers. Three come from industry, trade, or agricultural activities. And three directors are appointed by the Board of Governors in Washington. They may not be bankers. Through the powers granted by Congress, the Federal Reserve's responsibilities toward furthering the nation's economic objectives have grown. These objectives include economic growth, maximum employment, reasonably steady prices for the goods we buy, a rising standard of living, improvement in the position of the United States in world markets. To promote these objectives, the government employs a variety of economic tools. For example, by changing the tax structure, it can directly influence the spending of individuals and business concerns. The volume and nature of government spending also has a direct effect on the economy. The effect of Federal Reserve action on the economy is indirect. Its job is to be sure the economy has enough money and credit to operate effectively. The Federal Reserve can't tell people how or why to spend their money. It can only add to or subtract from the total amount of money in the country. Part of the effect of Federal Reserve actions is on the cost and availability of credit. This is important to this family and to thousands of others who buy homes with borrowed money. The Federal Reserve is constantly observing and analyzing economic trends and financial conditions. They must translate these facts and analyses into decisions on the proper course of monetary policy. To this end, the Federal Reserve is continuously collecting and studying facts and figures from all over the world. Also, vital information is provided by the 12 Federal Reserve banks and their branches. Here in Chicago, the Federal Reserve Bank analyzes all kinds of local economic activity. These figures deal with real people and real events. To the researcher, they are packed with meaning. Automobile production is up, but steel sales to automobile producers are down. What are the implications concerning inventories of finished goods and materials? Retail food sales are larger than a year ago, but a smaller share of consumers' income. What does this indicate about future consumer spending? How does it affect business? The industrial use of electric power is accelerating in Chicago. Does this reflect a rise in industrial output? When information such as this has been evaluated, it is used to brief staff members, the bank's Board of Directors, and in particular, the president of the Reserve Bank. Each Federal Reserve Bank sends similar information to the Board of Governors and to other Reserve Banks and makes it available to the public, to schools, trade associations, newspapers, to everyone who wants to be informed about economic developments in this Federal Reserve District. In another district, the staff economists of the Federal Reserve Bank of Atlanta review the studies of business and financial conditions in their district. They submit their findings to the president of the Atlanta Bank who reviews their report with them in preparation for meetings of the Federal Open Market Committee in Washington, D.C. Other sources of information are the men on the boards of directors of the Federal Reserve Banks across the country. Outstanding men from various and diversified fields of business. Men who because of their positions of leadership in their respective fields and their familiarity with the region's economy provide the Reserve Bank's presidents with an on-the-spot interpretation of the latest business developments. Developments which may not have been reflected in the current statistics. In Washington, this information is presented to the Federal Reserve Open Market Committee. The committee is composed of seven members of the Board of Governors the president of the New York Reserve Bank, and the presidents of four other Reserve Banks on a rotating basis. They meet in Washington every 3 weeks to interpret the significance of the information for national economic conditions. They give this and similar reports of other Reserve Banks careful consideration when they determine the monetary action for the next few weeks, particularly the buying and selling of government securities. The facilities of the Federal Reserve Bank of New York are used to carry out the decisions of the Open Market Committee. Here US government securities are bought and sold through specialized dealers. These transactions have a direct effect on the amount of money in the hands of the public. When the system buys securities, it pays for them with a check drawn on the New York Reserve Bank. The seller of the security who receives the check has newly created money. What the Federal Reserve has done is substitute money for government securities in the hands of the public. When the system sells securities, the buyer pays for them with a check drawn on his account at a commercial bank. The New York Reserve Bank collects on the check by deducting the amount from the account that the bank maintains with the Federal Reserve. What the system does is to remove from circulation the money received while the purchaser substitutes securities for money in his holdings. Boston, Massachusetts, the historic city on the Charles River. The home of the Federal Reserve Bank of Boston. Serving Federal Reserve District 1, made up of the six New England states, over 10 million people. People like Mr. and Mrs. Blake. The Blakes are about to start off on their annual vacation. They have everything they need for 2 weeks of fun and travel. Everything, that is, except cash. Mr. Blake depends on his neighborhood bank to provide him with cash when he needs it. His bank depends on the Federal Reserve Bank of Boston. When the bank's supply of cash gets low, it orders more from the Reserve Bank. Or when the bank has more cash than it needs, the excess is deposited into its account at the Reserve Bank. Both bills and coins that come back to Reserve Banks are carefully inspected. Unfit bills are taken out of circulation. They are carefully counted and wrapped in packs of 100, then each pack is canceled. Later, the canceled notes are incinerated at the Reserve Banks or at the Treasury in Washington. A dollar bill has an average life of about 13 months. Coins are also carefully inspected. Worn or bent coins are rejected at the Reserve Bank and are returned to the mint for remelting. The average amount of cash in circulation is about 35 billion dollars. The amount changes with the time of year and the level of business activity. Generally, it rises over most holidays and in the second half of the year. It reaches its peak at Christmas when it's usually 2 billion dollars larger than in January. Reserve Banks always keep large stocks of currency on hand ample for any need. This type of currency, called Federal Reserve notes, makes up about 85% of our paper money. New currency is supplied to meet the demands of people like the vacationing Blakes. Soon their money will be hard at work in the cash registers, pocketbooks, and payrolls of America. Halfway across America is Federal Reserve District number nine with headquarters in Minneapolis. In this district is the town of Owatonna with its famous bank designed by the father of American architecture, Louis Sullivan. New to Owatonna are the Johnsons, Cliff and Mary. Today they're opening an account. The reserve required of their bank as a member of the Federal Reserve System helps to assure them of the bank's ability to redeem their deposits whenever they should need the money. They probably haven't noticed this man working a few feet away. He's a bank examiner for the Federal Reserve Bank of Minneapolis, but he doesn't spend much time there. Each Federal Reserve Bank examines state member banks at least once a year. Other banks are examined by other governmental agencies. The bank examiner is primarily a fact-finder and appraiser. He wants to know the financial condition of the bank and that it is complying with necessary laws and regulations. Sound banking practices not only benefit the banks themselves, but also help to safeguard the funds entrusted to them by their depositors like the Johnsons. 400 miles downriver from Owatonna is the headquarters of another Federal Reserve District, St. Louis, Missouri. Here in a midtown office building, a local businessman is transferring funds through Federal Reserve facilities. Jack, I've been trying for weeks to get Smith to sell me that store of his out in Southeast Kansas. He just told me he's willing to sell if he receives the cash down payment immediately before the close of business today. And you'll give the instructions for the transfer to the St. Louis Federal Reserve. Okay. And they'll transfer the money via the Federal Reserve telegraphic network to the Federal Reserve Bank in Kansas City. I understand. Then the money will be credited to the account of Smith's bank, which in turn will credit his checking account. All before the close of business today. Fine. Thanks very much, Jack. Bye. The nerve center of this nation-wide telegraphic network is located in the Federal Reserve Bank of Richmond. Here messages are received and relayed to and from the 12 district banks, the 24 branch banks, and the Board of Governors in Washington, D.C. Through this vast telegraphic network, each element of the system can communicate quickly, efficiently, and confidentially. Although large sums are transferred daily this way, a more common method is sending a check. Here in California, this grandmother has sent a check to her granddaughter in Texas. Her granddaughter, Patricia Collins, is celebrating her 10th birthday with a party. Soon she will make use of the Federal Reserve System's check clearing facilities because one of her presents is that check from her grandmother. When Patricia cashes the check, her bank will start it immediately on its way back to California. First, it will be sent to the Federal Reserve Bank of Dallas. The check will be sorted and added to other checks drawn on banks in the 12th Federal Reserve District with headquarters in San Francisco. When it arrives, it will be delivered to the Federal Reserve Bank. By reading the special language at the bottom of the check, this electronic machine will sort, record, and add it to other checks drawn on grandmother's bank. With a final sorting, it will finally reach its starting place after a round trip of more than 1,500 miles. If the 16 million checks cleared by the Federal Reserve every day were put end-to-end, they'd reach all the way from grandmother's house in California to Patricia Collins' house in Oakcliff, Texas. Through these millions of checks, the payments that keep our economy running are made between checking accounts of banks. This is money, checkbook money on the move. The costs of providing this service, like most Federal Reserve services, are covered for the most part by earnings on its securities. Large surpluses are returned by the Federal Reserve Banks to the United States Treasury each year. 3,000 miles east of San Francisco in Allentown, Pennsylvania, this young man is about to make an important investment. Peter Zimmerman distributes the local newspaper. He's been saving his money, and now he's going to invest it in a United States Savings Bond. Like other commercial banks, this bank sells savings bonds as a public service. When Pete pays for his bond, the money will be included in a credit to the government's account here in the Federal Reserve Bank of Philadelphia. Like the other Reserve Banks, the Philadelphia Bank keeps the checking account of the US Treasury for its district and performs many other banking services for the United States government. One of them is issuing savings bonds. Along with the record of bond sales, the duplicate cards are sent to the Treasury Department. This protects the owner's property rights if the bond is lost or accidentally destroyed. The Federal Reserve also redeems savings bonds. When a bond is redeemed, the amount will be deducted from the government's account. The Federal Reserve Banks hold for safekeeping large amounts of government securities for the US Treasury and for member banks. Securities in denominations as large as $1 million. Every year Reserve Banks issue, exchange, and redeem more than 500 billion dollars worth of government securities. Sorting, counting, and redeeming coupons from government securities is part of the job of helping the government with its borrowing operations. Handling the government's checking account is another important job. Payments received for taxes, social security, and sales of saving bonds are deposited into government accounts at the 12 Federal Reserve Banks. The government then writes checks against those accounts to pay operating expenses. Reserve banks handle more than a million government checks every day. More than 100 billion dollars worth every year. Whether the sum involved is Pete Zimmerman's $18.75 or a million dollars, the Federal Reserve handles the transaction with equal care and dispatch. In the future, about eight years from now, when Pete Zimmerman's bond matures, it will have a face value of $25. At one time, more than enough to pay for the entire island of Manhattan, but times have changed. Our nation is growing. Symbols of growth are everywhere. To help keep the American economy healthy is the primary function of the Federal Reserve System. The nation, through Congress, has delegated to the Federal Reserve the task of regulating our monetary system in a way that will result in attaining the national goals of full employment, reasonably steady prices, and continued economic growth. Economic growth, which must extend into the marketplaces of the world. By harmonizing the conflicting interests of a free economy, the Federal Reserve helps to maintain our nation's economic leadership throughout the world.