independent central bank is unique among the world’s central banks. This
adds to the power of the Federal Reserve to influence the U.S. economy and
to bring creditability to the U.S. dollar worldwide.
Structure of the Federal Reserve Board
(America’s Central Bank)^7
The structure of the Federal Reserve Bank is also unique among the world’s
central banks. It consists of the following:
&A presidentially appointed Board of Governors with general responsi-
bilities for oversight
&Twelve Regional Federal Reserve Banks that are private institutions
nominally owned by their stockholders (commercial banks that are
members of the Federal Reserve System)
&The Federal Open Market Committee (FOMC), a 12-member policy-
making committee of the Federal Reserve. The 12 members consist of
7 governors appointed by the President and 5 regional reserve bank
presidentsThe nation’s monetary policy is decided at the monthly meetings of the
FOMC. To understand how the FOMC operates, let us imagine that people
in a community one day find themselves with more paper currency than
they wish to hold—for example, when the main Christmas shopping season
has ended. If the paper currency is physically convertible (for one ounce of
silver, let us suppose), people will return the unwanted paper currency to
the bank in exchange for silver, but the bank could head off this demand
for silver by selling some of its own bonds to the public in exchange for its
own paper currency. For example, if the community has 100 units of un-
wanted paper money, and if people intend to redeem the unwanted 100
units for silver at the bank, the bank could simply sell 100 units worth of
bonds or other assets in exchange for 100 units of its own paper currency.
This will soak up the unwanted paper and head off people’s desire to re-
deem the 100 units for silver.
Thus, by conducting this type of open market operation—selling bonds
(to take dollars out of circulation) when there is excess currency, and buying
bonds (to put dollars in circulation) when there is too little—the bank can
maintain the value of the paper currency at one ounce of silver without ever
redeeming any paper currency for silver. In fact, this is essentially what all
modern central banks do, and the fact that their currencies might be physi-
cally inconvertible is made irrelevant by the maintenance of financial con-
vertibility. Please note that financial convertibility cannot be maintained
unless the bank has sufficient assets to back the currency it has issued.
92 THE ART OF ISLAMIC BANKING AND FINANCE