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Myths, tall tales, and urban legends: A lesson on the facts behind the Fed
Interactive Simulation with SMART Board Application
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Lesson by
Amy B. Hennessy, economic and financial education specialist, Federal Reserve Bank of Atlanta
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Lesson Description
The lesson introduces students to common myths about the Federal Reserve and the reality behind the
misconceptions. Students are given a card with a statement about the Federal Reserve that is either a myth or
reality. Students circulate and survey one another in order to pair the myth cards with the reality cards. The
student pairs then identify which statement is the reality versus the myth. Students will analyze statements from
primary source materials about the structure and/or functions of the Federal Reserve System.
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Grade Level
Grades 11–12
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Time Required
55 minutes
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Content Standards
National Content Standards in Economics
Standard 11: Students will understand that money makes it easier to trade, borrow, save, invest, and
compare the value of goods and services. The amount of money in the economy affects the overall price
level. Inflation is an increase in the overall price level that reduces the value of money.
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Benchmark 1, Grade 12: The basic money supply in the United States consists of currency, coins,
and checking account deposits.
Benchmark 2, Grade 12: In many economies, when banks make loans, the money supply
increases; when loans are paid off, the money supply decreases.

Standard 20: Students will understand that federal government budgetary policy and the Federal Reserve
System’s monetary policy influence the overall levels of employment, output, and prices.
•

Benchmark 1, Grade 12: In the long run, inflation results from increases in a nation's money
supply that exceed increases in its output of goods and services.
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•

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Benchmark 2, Grade 12: Monetary policies are decisions by the Federal Reserve System that lead
to changes in the supply of money and the availability of credit. Changes in the money supply can
influence overall levels of spending, employment, and prices in the economy by inducing changes
in interest rates charged for credit and by affecting the levels of personal and business investment
spending.
Benchmark 3, Grade 12: The major monetary policy tool that the Federal Reserve System uses is
open market purchases or sales of government securities. Other policy tools used by the Federal
Reserve System include increasing or decreasing the discount rate charged on loans it makes to
commercial banks and raising or lowering reserve requirements for commercial banks.

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Concepts
Discount rate
Federal Reserve Act
Federal Reserve System
Fiat money
Money
Myth
Open market operations
Reality
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Objectives
Students will:
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Categorize and evaluate common statements about the Federal Reserve System as either myth or reality
Analyze primary source documents related to the Federal Reserve System
Explain important facts about the Federal Reserve System
Define discount rate, fiat money, money, myth, reality, and open market operations

Materials
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•
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A copy of Handout 1 on white card stock, laminated and cut apart(10 cards)
A copy of Handout 2 on white card stock, laminated and cut apart(10 cards)
A copy of Handout 3 on white card stock, laminated and stacked in order from 1 to 10.
Transparency of Visual 1 and a copy for each student
A copy of Handout 4 for each student
A copy of Handout 5 for each student
SMART Notebook file “Myth vs. Reality” (This is an extension for educators with SMART Boards. Use
the instructions in the SMART file for the procedures.)
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Preparation
Mix the cards from Handouts 1 and 2 to create a deck for random distribution.

Procedure
1. Ask the students if they can give you a definition or an example of a myth. (Answers will vary.
Students might suggest a myth is an untrue story and may discuss Greek gods or Santa Claus as
examples.)
2. Tell the students that a myth is an unproved or false collective belief. Define reality as the state of
being a verifiable thing or fact. Explain that, historically, myths explained unexplainable events to
people. For example, before a proper understanding of how diseases spread, people may have
explained them as punishment from the gods.
3. Ask the students if they have heard of the Federal Reserve System, the central bank of the United
States. (Answers will vary.) Tell students that there are many myths and misperceptions about the
Federal Reserve System, the U.S. central bank. Explain that the creation of the Federal Reserve
System was a response to the demands of a complex financial system manifested in a series of money
panics in the late 19th and early 20th century. Emphasize that nations have established central banks to
address the needs associated with a modern economy.
4. Tell the students that just as people tend to use myths to explain events that they don’t have good
information about—such as that the stock market crash of October 29, 1929, caused the Great
Depression—people might attribute things to the Federal Reserve System that are not factual. Some
current attributions to the Fed are misperceptions not based on fact.
5. Explain to the students that they will participate in an inquiry to uncover the truth behind some
common myths about the Federal Reserve.
6. Distribute one card to each student from the deck of cards created by mixing Handouts 1 and 2
together (20 cards). For classes with more than 20 students, pair extra students. If there are fewer than
20 students, give a few students more than one card to ensure that all 20 cards have been handed out.
7. Instruct students to read the statements on their cards. Explain that half the cards have factual
statements related to the Federal Reserve System while the other half contain common myths
associated with the Fed.
8. Ask students to circulate in the room surveying other students to find the statement that is
complementary to the statement on their card.
9. Tell the students that when they have found the student with the complementary statement, they
should stand together and decide which statement is the reality and which is the myth.
10. When students have found their partners, have each pair of students read their statements aloud and
identify which statement is the myth and which is the reality. They should also explain why they
reached that conclusion. (Refrain from commenting during this portion of the lesson to foster a
nonthreatening environment for student inquiry.)
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11. After each group has identified their cards, poll the students by having them raise their hands as you
read each myth in the order they appear on Visual 1, the answer key, to determine how many think
each myth was correctly paired with its complementary reality.
12. Ask the students how they differentiated the myth card from the reality card. (Answers will vary. Some
may know the answers from prior knowledge. Some groups may guess while other groups may not
know the correct answers.)
13. Display Visual 1. Inform students that this is the answer key for the activity.
14. Distribute the correct statement from Handout 3 to each pair of students who have the corresponding
myth from Handout 1. Ask each student to read the myth and its corresponding statement of reality in
the order found on Visual 1, the answer key. Tell the students to correct their pairings based on what
they hear as other students read the factual statements associated with each myth.
15. Direct the students to return to their seats.
16. Ask the students if they know what a primary source of information is. Define a primary source as a
source that is closest to the person, information, period, or idea being studied.
17. Ask students for examples of primary sources. Tell them that first-hand accounts, legal documents,
court opinions, and diaries of events expose readers to the original source of the information under
review.
18. Ask the students to explain why primary sources are important. Explain that a primary source
document allows the reader to interpret the information that the source provides without the biases or
authoritative comments of a secondary source. Suggest the following scenario:
Suppose that you send a text to a friend, Tom. Suppose that Tom reads your text and decides what
he thinks you mean. He then texts his interpretation of your thoughts to a second friend, John.
John is very upset with you when he reads the text. John does not have access to the primary
source—your original comments and thoughts—he only has access to the secondary source—
Tom’s interpretation of your text.
19. Distribute a copy of Handouts 4 and 5 to each student. Divide the students into groups of four
students.
20. Tell the students that the three excerpts on Handout 4 are from primary source documents. Tell them
that examining these excerpts will help them to determine myth versus reality as related to the Federal
Reserve. Direct students to use the guided discussion questions on Handout 5 to conduct their analysis
of each excerpt.
21. Allow enough time for each group to complete its work. When students have finished, ask student
volunteers from each group to share their observations from the analysis of the excerpts.
22. Ask the students the questions from Handout 5.
Answer Key for Handout 5.
Excerpt 1: Federal Reserve Act
1. The U.S. Congress passed the Federal Reserve Act and President Wilson signed it.
2. The Federal Reserve Act was signed on December 23, 1913.
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3. Answers will vary but may include bankers or leaders of financial institutions.
4. Answers will vary but key words may include: designated, cities, fixed, geographical limits, every
national banking association, required, subscribe, capital stock, Federal Reserve Bank, equal to,
paid-up capital stock, surplus. Key ideas may include: an organization committee will designate
which cities have Federal Reserve banks; all national banking associations are required to
subscribe to the capital stock of the Federal Reserve Bank in their district.
5. Answers will vary but may include: to subscribe to the capital stock…; six per centum of the paidup capital stock and surplus of such bank.
6. Answers will vary but may include: the Act was created to establish a national bank, the Act was
created to organize national banking associations.
7. Answers will vary but may include: an organization committee designated which cities would have
a Federal Reserve District Bank; national banks are required to own stock in their District Reserve
Bank.
8. Answers will vary but may include: national banks own stock in their District Federal Reserve
Bank.

Excerpt 2: McCulloch v. Maryland, 17. U.S. 316 (1819).
1. Answers will vary but may include: a court of law. Students with prior knowledge of the case will
know that it is a landmark U.S. Supreme Court case.
2. The decision was handed down in 1819.
3. The state of Maryland, the petitioner, McCulloch, and future courts are the intended audiences.
4. Answers will vary but may include: deliberate consideration, unanimous, opinion of this Court,
incorporate, Bank of the United States, in pursuance of the constitution, supreme law of the land.
Key idea: the creation of the Bank of the United States was constitutional.
5. Answers will vary but may include: decided opinion, act to incorporate, and made in pursuance of
the constitution.
6. Answers will vary but may include: the document is part of a court decision to resolve a dispute
between two parties.
7. Answers will vary but may include: the decision established the constitutionality of the Bank of the
United States, the decision establishes the supremacy of the Congress to incorporate the Bank of the
United States, the decision was unanimous, Congress was using its constitutional powers to
incorporate the Bank of the United States.
8. Answers will vary but may include: the decision established the constitutionality of Congress to
incorporate a national or central bank as a precedent.
Excerpt 3: National Banking Act, 1935 Title 12, Chapter 3, Subchapter IV, 263.
1. The U.S. Congress passed and President Franklin D. Roosevelt signed the National Banking Act of
1935.
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2. The Act was passed in 1935.
3. Answers will vary but may include the Federal Reserve System and banks.
4. Answers will vary but may include: Federal Open Market Committee, consist, Board of Governors
of the Federal Reserve System, five representatives; open-market operations, in accordance,
purchases and sales of paper, accommodating commerce and business, bearing upon the general
credit situation in the country. Key ideas: the Act created the Federal Open Market Committee, the
Federal Reserve Board of Governors and five representatives of the Federal Reserve Banks will be
members of the Committee, Federal Reserve Banks must conduct open-market operations according
to specific regulations adopted by the Committee, the goal of open-market operations is to
accommodate commerce and business with an eye to U.S. credit conditions.
5. Answers will vary but may include: open-market operation and paper.
6. Answers will vary but may include: the Act was passed to give a specific power, the power to
conduct open-market operations, to the Federal Reserve System; and the Act created the Federal
Open Market Committee.
7. Answers will vary but may include: the Act gave the Federal Reserve a tool to help promote
commerce and business activity while maintaining a stable credit environment in the United States;
the composition of the Federal Open Market Committee was established; the Federal Open Market
Committee was given the authority to conduct open-market operations in order to promote stability
in the economy.
8. Answers will vary but may include: the Federal Open Market Committee has the statutory authority
to conduct open market operations to accommodate the U.S. economy and credit conditions.

Closure
23. Ask the following questions to review the lesson.
a. What is the difference between a myth and reality? (A myth is an unproved or false collective belief
and a reality is the state of being a verifiable thing or fact.)
b. What is a primary source? (A primary source is a source that is closest to the person, information,
period, or idea being studied.)
c. What primary source documents did you use in this lesson? (Excerpts from the Federal Reserve Act
of 1913, the Supreme Court decision in McCulloch v. Maryland, 1819, and the National Banking Act
of 1935.)
d. When was the Federal Reserve System created? (The Federal Reserve Act was signed by President
Woodrow Wilson on December 23, 1913.)
e. What is the advantage of using primary sources? (Using primary sources fosters critical thinking and
allows the reader to interpret the primary source without the biases or authoritative comments of a
secondary source.)
f. Based on your review of primary source documents, who owns the Federal Reserve District Banks?
(All nationally chartered banks and state banks that choose to become members of the Federal
Reserve System own stock in their district’s Federal Reserve Bank [The Federal Reserve Act, 1913].)
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g. Based on your review of primary source documents, is the Federal Reserve System
constitutional? (Yes, it is. The precedent-setting case, McCulloch v. Maryland, 1819 established
the constitutionality of a U.S. central bank.)
h. Based on your review of primary source documents, what is the objective of open market
operations conducted by the New York Federal Reserve Bank at the direction of the Federal Open
Market Committee (the FOMC)? (“Open-market operations shall be governed with a view to
accommodating commerce and business and with regard to their bearing upon the general credit
situation of the country.” National Banking Act, 1935)
i. Can the Federal Reserve prevent bank panics from spreading? (While bank panics can and do still
occur, actions by the Federal Reserve can help to control the spread of such panics.)
j. What gives money its value? (Money gets its value from its ability to purchase goods and
services.)
k. What is a court precedent? (A court precedent is a legal principle that becomes an authority for
judges to use in deciding future cases of a similar issue.)

Assessment
24. Ask students to choose two of the four following blog posts to write comments correcting the
inaccurate information in the posts. Tell students the blog posts are common misrepresentations of the
Federal Reserve System. Ask the students to use primary source references from the Federal Reserve
Act, Supreme Court decisions, and/or additional acts of Congress to support their comments.

Blog Post #1: The Federal Reserve System is an illegal organization with no constitutional authority
that has no involvement with the lives of ordinary Americans. The Federal Reserve only serves the
interests of Wall Street financiers and the most powerful banks in the United States.
Blog Post #2: A gang of the most powerful Wall Street bankers held a clandestine gathering on Jekyll
Island, Georgia, in 1910 to protect their interests. As a result of this secret meeting, the Federal
Reserve System was created.
Blog Post #3: The Federal Reserve System is owned and controlled by citizens of foreign nations.
Blog Post #4: The United States has not experienced bank panics since the Federal Reserve System
was created in 1913. The Federal Reserve System prevents bank panics from occurring.

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Handout 1
Bank panics are a thing of
the past because of the
Federal Reserve System.

U.S. money is backed

The Federal Reserve is
controlled by citizens of
foreign nations.

The Federal Reserve was created
by Wall Street Bankers, in
secret, on Jekyll Island, Georgia.

The Federal Reserve sets
interest rates at whatever
level it pleases.

The Federal Reserve is
unconstitutional.

The Federal Reserve has
little to do with the lives of
ordinary people.

Unanticipated inflation hurts
everyone in the economy.

Most money spent in the
economy is transferred by
check or cash.

The Federal Reserve profits
at taxpayer expense.

by gold.

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Handout 2
Quick responses by the
Federal Reserve prevent
bank panics from spreading.

Purchasing power is what
gives money its value.

Member banks of the Federal
Reserve hold stock in the
Reserve Bank for their district.

The Federal Reserve Act was
signed into law by President
Wilson on December 23, 1913.

The Fed, interacting with the
marketplace, influences
interest rates.

The constitutionality of central
banking was established through
a U.S. Supreme Court precedent.

People can take care of their
day-to-day business because the
Federal Reserve fosters a sound
banking system.

Some people benefit from
unanticipated inflation despite its
generally harmful effects.

Most money spent in the
economy is transferred
electronically.

The Federal Reserve rebates almost
all of the interest earned on the
securities in its portfolio each year to
the U.S. Treasury.

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Handout 3
Myth 1: The Federal Reserve is unconstitutional.
Reality: The constitutionality of central banking was
established through a U.S. Supreme Court precedent. (A
precedent is a legal principle that becomes an authority
for judges to use in deciding future cases of a similar
issue.) The case, McCulloch v. Maryland, 17 U.S. 316
(1819) was a landmark decision by the U.S. Supreme
Court. The case established that the Constitution grants
to Congress implied powers for implementing the
Constitution’s expressed powers, and established that
federal laws and treaties are supreme over state law.
Therefore, when Congress enacted the law to incorporate
the Second Bank of the United States, it was a valid
exercise of its constitutional powers.

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Handout 3 continued
Myth 2: The Federal Reserve was created by Wall Street
bankers, in secret, on Jekyll Island, Georgia.
Reality: Parts of a draft legislation known as the Aldrich
plan after Senator Nelson W. Aldrich, one of the
prominent financiers in attendance at a meeting on Jekyll
Island in late November 1910, did make it into the
statute that became the Federal Reserve Act signed into
law by President Woodrow Wilson on December 23,
1913. In 1908, after the Panic of 1907, Congress created
the National Monetary Commission to study and
propose a solution to address future banking crises.
Senator Nelson Aldrich of Rhode Island made
recommendations based on his investigation and
research about central banks of Europe. However,
throughout December 1913 the Glass-Willis proposal,
which was the product primarily of Representative
Carter Glass of Virginia, was debated and revised until it
became the Federal Reserve Act of 1913. The Federal
Reserve System represents a compromise of ideals. It is
a decentralized central bank that incorporated the
contentious positions voiced by the populists and private
banks of the era.

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Handout 3 continued
Myth 3: The Federal Reserve has little to do with the
lives of ordinary people.
Reality: People can take care of their day-to-day
business because the Federal Reserve fosters a sound
banking system by establishing regulations and acting as
a supervisor for depository institutions. Commercial
bank customers’ demands for funds, electronic
payments, direct deposit, and trust in their financial
institution are all supported through the efforts of the
Federal Reserve System. Furthermore, the flow of
money and credit in the economy is affected by the
monetary policy actions of the Federal Reserve. These
actions all contribute to a stable financial system in
which people operate day to day.

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Handout 3 continued
Myth 4: The Federal Reserve is controlled by citizens of
foreign nations.
Reality: Member banks of the Federal Reserve hold
stock in the Reserve Bank for their district. Individuals
cannot hold stock. Member banks include all nationally
chartered banks and any state-chartered banks that
choose to become members. Based on provisions in the
Federal Reserve Act, each Federal Reserve Bank issues
shares of stock to its member banks. The Federal
Reserve Banks pay dividends to the member banks for
their stock. Member banks cannot sell or trade their
stock. More than 8,000 depository institutions representing approximately 38 percent of the nation’s banks
are members of the system. Although these banks are
member owners, they have no control of monetary
policy or supervisory authority and make no decisions in
these areas.

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Handout 3 continued
Myth 5: Bank panics are a thing of the past because of
the Federal Reserve System.
Reality: Quick responses by the Federal Reserve
prevent bank panics from spreading. Bank panics can
and do still occur. However, actions on the part of the
Federal Reserve System to provide liquidity and lending
facilities to troubled financial institutions ensure that
such events are contained and minimized. The Federal
Reserve works to limit threats to the financial system.

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Handout 3 continued
Myth 6: The Federal Reserve profits at taxpayer
expense.
Reality: The Federal Reserve rebates almost all of the
interest earned on the securities in its portfolio each year
to the U.S. Treasury. As a result of open market
operations—the buying and selling of U.S. government
securities—the Federal Reserve earns interest on the
U.S. government securities in its portfolio. In addition,
the Federal Reserve earns income from fees that depository institutions pay for check clearing, automatic
clearinghouse operations, and funds transfers. It also
earns interest income from loans it makes to depository
institutions at the discount rate, which is the rate of
interest depository institutions pay the Fed for overnight
loans. Each year, the Federal Reserve returns to the U.S.
Treasury what remains from its income after paying its
operating expenses. In 2010, the Federal Reserve
returned $79.2 billion to the U.S. Treasury.

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Handout 3 continued
Myth 7: The Federal Reserve sets interest rates at
whatever level it pleases.
Reality: The Fed, acting within the marketplace,
indirectly influences interest rates. When the Fed buys
and sells U.S. government securities through open
market operations, it influences the money supply and
short-term interest rates. Traditionally, buying securities
from the primary dealers through the open market leads
to lower nominal interest rates. Conversely, Fed sales of
securities lead to rising nominal interest rates. The
Federal Open Market Committee—or the FOMC—
directs the New York Federal Reserve Bank to target the
federal funds rate by buying or selling U.S. Treasuries in
the secondary market to achieve a specific level of bank
reserves. The FOMC bases this targeted rate on its
reading of the economy and the economic outlook to
achieve its dual mandate of price stability and full
employment.

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Handout 3 continued
Myth 8: U.S. money is backed by gold.
Reality: U.S. money gets its value from its purchasing
power. Money is what money does. In other words, the
real value of money is determined by the goods and
services it can buy. As long as people accept money
during such transactions, money maintains its ability to
purchase. Paper currency represented a claim on a
certain amount of gold or silver during much of U.S.
history. However, in 1933, President Franklin Delano
Roosevelt removed the United States from the gold
standard. The Federal Reserve Banks do hold
collateral—U.S. government securities—equal to the
value of Federal Reserve notes—that is, paper
currency—in circulation. Hence, U.S. currency is backed
by the full faith and credit of the U.S. government. It is
fiat money, established through government decree.

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Handout 3 continued
Myth 9: Most money spent in the economy is
transferred by check or cash.
Reality: Most money spent in the economy is
transferred electronically. Since the mid-1990s, check
writing has declined while electronic payments have
increased. Since 2003, electronic payments have
surpassed checks as a form of payment.

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Handout 3 continued
Myth 10: Unanticipated inflation hurts everyone in the
economy.
Reality: Some people benefit from unanticipated
inflation despite its generally harmful effects. For
instance, debtors who are paying a fixed rate of interest
are helped by unanticipated inflation because the rate
they are paying does not provide their creditors a rate of
return necessary to maintain future purchasing power. A
common phrase associated with this phenomenon is
“using cheap dollars to pay back dear dollars.” In other
words, the money debtors are paying to creditors will not
buy today what it could have purchased at the time the
borrower took the loan.

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Handout 4
1.

When the organization committee shall have designated the cities in which Federal reserve banks are to
be organized, and fixed the geographical limits of the Federal reserve districts, every national banking
association within that district shall be required within thirty days after notice from the organization
committee, to subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum
of the paid-up capital stock and surplus of such bank…. Federal Reserve Act, December 23, 1913

2.

After the most deliberate consideration, it is the unanimous and decided opinion of this Court, that the act
to incorporate the Bank of the United States is a law made in pursuance of the constitution, and is a part
of the supreme law of the land. McCulloch v. Maryland, 17 U.S. 316 (1819)

3.

(a) There is hereby created a Federal Open Market Committee (hereinafter referred to as the
“Committee”), which shall consist of the members of the Board of Governors of the Federal Reserve
System and five representatives of the Federal Reserve banks to be selected as hereinafter provided.
(b) No Federal Reserve bank shall engage or decline to engage in open-market operations under sections
348a and 353 to 359 of this title except in accordance with the direction of and regulations adopted by the
Committee.
(c) The time, character, and volume of all purchases and sales of paper described in sections 348a and 353
to 359 of this title as eligible for open-market operations shall be governed with a view to accommodating
commerce and business and with regard to their bearing upon the general credit situation of the country.
National Banking Act, 1935 Title 12, Chapter 3, Subchapter IV, 263

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Handout 5

Guided Discussion: Each group should assign a student to serve as a recorder to produce one copy of the groups’
reflections for each of the excerpts found on Handout 4. Use the following questions to guide the group.

1. Who or what produced this document?
2. When was the document created?
3. Who was the intended audience?
4. What are the key words and ideas?
5. What words and/or phrases are difficult to understand even when using context clues?
6. Why was this document created?
7. What is the significance of this document?
8. What is the lasting value of the document?

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Visual 1

Myths

Realities

The Federal Reserve is unconstitutional.

The constitutionality of central banking was established
through a U.S. Supreme Court precedent.

The Federal Reserve was created by Wall Street
Bankers, in secret, on Jekyll Island, Georgia.

The Federal Reserve Act was signed into law by
President Wilson on December 23, 1913.

The Federal Reserve has little to do with the
lives of ordinary people.

People can take care of their day-to-day business
because the Federal Reserve fosters a sound banking
system.

The Federal Reserve is controlled by citizens of
foreign nations.

Member banks of the Federal Reserve hold stock in the
Reserve Bank for their district.

Bank panics are a thing of the past because of the
Federal Reserve System.

Quick responses by the Federal Reserve prevent bank
panics from spreading.

The Federal Reserve profits at taxpayer expense.

The Federal Reserve rebates almost all of the interest
earned on the securities in its portfolio each year to the
U.S. Treasury.

The Federal Reserve sets interest rates at
whatever level it pleases.

The Fed, interacting with the marketplace, influences
interest rates.

U.S. money is backed by gold.

U.S. money gets its value from its purchasing power.

Most money spent in the economy is transferred
by check or cash.

Most money spent in the economy is transferred
electronically.

Unanticipated inflation hurts everyone in the
economy.

Some people benefit from unanticipated inflation
despite its generally harmful effects.

22


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102