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The Hats
The Federal Rese
Federal Reserve Bank of St. Louis
Federal Reserve Bank of St. Louis


he Federal Reserve

is a central bank. It's not like any other bank you know; it won't
make you a loan or even accept your deposits. Yet the Federal
Reserve can have an important effect on you and the value of
your money.
As the nation's central bank, the Federal Reserve wears a
number of hats; that is, it does several quite different and important
• Provides bank-like services including collecting checks,
wiring money, securities and information, and supplying
• Serves as the government's bank
• Supervises depository institutions
• Makes loans
• Serves the consumer and the community
• Manages the nation's money supply

Many of the bank-like services and information provided to
financial institutions are similar to the services performed by
some of these institutions-banks, thrifts, and credit unions-for
you and your family.
Federal Reserve Bank of St. Louis


The Monetary Control Act of 1980 required the Federal Reserve
to charge fees for some of its services, such as processing
checks, wiring money, safekeeping of securities, and the transporting of cash. Other services provided are a part of our central
banking responsibilities and are not subject to fees. Let's take a
closer look at the Fed services that are subject to fees.

The Fed Collects Checks
Your bank or thrift institution receives thousands of checks
every day. It must give depositors credit for them and naturally
wants to get paid in return. This means sending the checks to the
institutions on which they are drawn for payment.
The Federal Reserve helps financial institutions collect the
checks they receive. It says in effect, "Bundle up your checks
and send them to us. We will sort them and present them for
payment, and we will pay you."







Travels of a Check

Federal Reserve Bank of St. Louis

This saves your bank or thrift the trouble and expense of
sorting the checks and mailing them individually. It also cuts the
time for the checks to clear. Thus you may get credit faster when
you make a deposit.
The Federal Reserve System handles so many checks each
day that taped end to end, they would reach from New York to
The Federal Reserve has helped create and operate an automated clearinghouse (ACH) system to handle electronic payments
instead of paper. Financial institutions, businesses, and the
U.S. Treasury now can cut down on paper work by offering
consumers such services as automatic direct deposit and bill
payment. The number of ACH transactions now totals many
hundreds of millions in a year, and rapid growth continues.
The Fed computes the fees for its check and ACH services by
figuring what they cost to produce and then adding a special
factor to compensate for profits and other costs that private
institutions incur.

The Fed Wires Money, Securities and Information
Our "Fedwire" is a state-of-the-art communications network that
transfers information, funds, and securities throughout the country. Over 4,500 depository institutions nationwide now access
the network's computerized facilities.
Federal Reserve Bank of St. Louis

Wiring Money


Let's suppose a business executive in San Francisco needs a
large sum of money from the home office across the country in
Philadelphia in order to close an important deal.
The home office's bank simply calls the Philadelphia Federal
Reserve Bank, which wires the money to the San Francisco
Reserve Bank, which in turn wires the funds to a local bank
where the executive is waiting. Nearly a hundred trillion dollars
are transferred over the Fedwire network yearly.

The Fed Supplies Cash
When a financial institution needs more coin and currency to
meet its customers' demands, it can order the cash from a
Federal Reserve Bank or branch, which ships the money out by
armored car or registered mail. To do this job the Federal Reserve
must keep a large supply of coin and currency in its vaults. This
cash comes from the Bureau of Engraving and Printing, which
produces the paper money, and a United States Mint, which
produces the coin.
Federal Reserve notes are the only kind of paper money that
is issued today. Faith in the strength, soundness, and stability of
the American economy is the real backing for our money.
Although the processing of cash is free of charge, financial
institutions are charged for its transportation.
Now let's look at the other hats the Federal Reserve wears as it
fulfills its function as central banker.

The federal government spends more and owes more than
anybody else in the world. The Federal Reserve assists the
government by keeping its checking accounts and helping to
handle its IOUs.
When you pay federal taxes, your money doesn't necessarily
go off to Washington. It may wind up as a deposit in the government's checking account at the nearest Federal Reserve Bank.
As the government spends money to build dams, pay soldiers,
or whatever, it writes checks on its accounts with the Federal
Federal Reserve Bank of St. Louis

Reserve, which keeps records and sends regular statements
just as your bank does for you.
When the government borrows money, it gives the lender an
IOU in the form of a certificate or more recently, an entry in a
special account. The Federal Reserve handles much of the
paperwork resulting from these transactions. Except for Savings
Bonds, all U.S. government securities will be in book entry form
after July 1986.
This means your investment is represented by a special account on the books of a Federal Reserve Bank instead of an
engraved piece of paper that could be lost or stolen.

For the Federal Reserve, supervising means first, issuing
regulations about what institutions may or may not do and
second, examining certain ones to make sure they are safe and
sound. We have a staff of examiners, and they visit state member
banks as well as bank holding companies. The remainder of the
country's banks and thrifts are examined by other agencies.
Federal Reserve Bank of St. Louis

Examiners Visit Reguiarly


When a bank is examined, the quality of its deposits and
loans, the amount of its capital and the quality of its management
are carefully reviewed.

Sometimes financial institutions require extra money, usually
when their customers want to borrow or withdraw unexpectedly
large amounts or to meet other temporary and often unexpected
needs. The Fed can make loans to cover such situations. Of
course, the borrower must meet the Fed's requirements, which
include paying a level of interest called the discount rate and
pledging security.

In the 1960s and the 1970s, Congress passed a number of
consumer protection laws and directed the Federal Reserve to
draw up the detailed regulations necessary to put them into
effect. For example, Truth in Lending ensures information on the
cost of credit, Equal Credit Opportunity prohibits discrimination
when applying for credit, and Electronic Fund Transfer provides
protection when moving funds electronically.

The Fed helps to enforce consumer
and community reinvestment rights.

Federal Reserve Bank of St. Louis

These and other consumer regulations apply to all lenders
but they are enforced by different government agencies. The
Federal Reserve itself is responsible for state member banks.
The Federal Reserve wants as many consumers as possible
to know about their credit rights and how to exercise them, so it
has an ongoing educational campaign. Pamphlets, films, and
speaking engagements are featured.
In addition, the Federal Reserve receives and tries to resolve
consumer complaints against depository institutions. Some involve problems with credit regulations, and others stem from
everyday transactions such as making deposits or loan repayments. If you have any questions, write to your district Federal
Reserve Bank.
The Federal Reserve also has a community affairs responsibility and informs the public and lending institutions about programs for community reinvestment, small business lending and
economic development. The Federal Reserve also helps enforce
the Community Reinvestment Act, which provides ways groups
may protest when they think an institution is not meeting a
community's credit needs.

Money, it is said, is much like fire. Under control, both are very
useful, but running wild, both can do great harm. The Federal
Reserve has the job of keeping the nation's supply of money
under control.
The Federal Reserve is not directly concerned with who gets
money or how it is spent. The free enterprise system, with
millions of people making their own decisions, determines these
The Federal Reserve deals in totals only. It tries to make sure
the total amount of money in circulation is about right; not too
much, not too little. Too much money can make prices rise on
the things you buy. This is inflation. Too little money can cause
recession and unemployment.
Federal Reserve Bank of St. Louis


A Delicate Balance

To prevent inflation or recession, the Federal Reserve tries to
keep the flow of spending in line with the near-capacity production
of goods and services. Or, if inflation or recession happens, it
tries to get spending and production back in balance at a level
that keeps most workers and factories busy.
Since the Federal Reserve has no control over production, it
works with spending. It does this by influencing the amount of
money available for consumers, businessmen, and governments
to spend.

The Fed tries to keep spending in line with the near capacity
production of goods and services ...

Federal Reserve Bank of St. Louis

There are three basic ways to get spending money: earn it,
take it out of savings, or borrowJf. The Federal Reserve works
primarily through borrowed money.
Money for loans comes from two sources: first, from people
who have saved and are willing to lend their savings; and second,
from institutions such m~, banks, which have the power, within
limits, to create money,/i n checking-type accounts when they
make loans.
The Federal Reserve doesn't have a great influence over the
level of savings, but it can affect the amount of money that is
When the prices of goods and services begin to rise, the
Federal Reserve might decide to throttle down on credit. This
should slow spending with borrowed money, which could help
bring total spending back in line with production of goods and
services. Other things being equal, prices should then start to
When the country is in a recession and unemployment is
rising, the Federal Reserve is likely to make it possible for financial
institutions to increase their lending. This will help stimulate
spending with borrowed money, which should increase total
spending, which, in turn, should increase production. As production rises, unemployed workers and factories will be called
back on the job.
A balance of spending and production at high levels is what
the Federal Reserve is after, and influencing the amount of
credit is how it goes about it.
You could say that minimizing inflation and maximizing employment in a growing economy are overall objectives of the Federal
Reserve System. Besides the supply of money, many other
factors, both foreign and domestic, affect prices and jobs. The
Federal Reserve is only one member, although an important
one, of the team that is trying to improve the nation's economic
Federal Reserve Bank of St. Louis


Congress created the Federal Reserve back in 1913, but
Congress doesn't run its operations. Neither does the President
of the United States. The Fed is a fairly independent organization
within the government. The purpose of this arrangement is to
keep the job of managing the nation's money supply insulated
from short-run political pressures.
The Federal Reserve has a seven-member Board of Governors, and its headquarters is in Washington, D.C.The President
of the United States appoints the members of the Board of
Governors with the consent of the U.S. Senate.
There are 12 Federal Reserve Banks scattered around the
country, and most of these banks have branches. Each Reserve
Bank has its own president and board of directors.
The relationship between the Board of Governors and the 12
Reserve Banks is not unlike the one between the federal government and the various state governments. Like the federal government, the Board usually concentrates on matters of national
importance. Like the states, the 12 Banks tend to specialize on
matters within their districts.
But it is important to know about local conditions when making
national decisions, so the Reserve Banks have their say. A good
example is open market operations, the main way the Federal
Reserve affects the amount of bank credit available. They are
run by the Federal Open Market Committee, which is made up of
the seven members of the Board of Governors plus the presidents
of five Reserve Banks.
Most presidents take turns serving, and they attend meetings
even when they are not on the Committee.When the Federal Reserve was created, its stock was sold to
the member banks. As stockholders, they elect a majority of the
directors of the 12 Federal Reserve Banks. The other directors
are appointed by the Board of Governors. The directors and the
officers they approve run the Federal Reserve Banks and their
employees, who are not under civil service.
The Federal Reserve earns interest on the government securities it owns. Out of this income it pays all operating expenses
Federal Reserve Bank of St. Louis

and dividends to stockholders. Most of what's left goes to the
U.S. Treasury. In recent years, this has come to many billions of
dollars annually.

This pamphlet was written by Lawrence C. Murdoch, Jr., Vice
President and Secretary of the Federal Reserve Bank of Philadelphia.
Federal Reserve Bank of St. Louis


For additional copies of this pamphlet or for a list of other available
publications, write to:
Federal Reserve Bank of Philadelphia
Public Services Department
P.O. Box 66
Philadelphia, Pennsylvania 19105-0066
Federal Reserve Bank of St. Louis


3 7401 00061 5788



Ten Independence Mali, Philadelphia, PA 19106-1574
Federal Reserve Bank of St. Louis