The Federal Reserve banks are directed by nine-member boards of di-
rectors. Congress also stipulated aunique structure for those boards to
ensure that the selection process does not favor bankers and allow them to
become a majority on any given Federal Reserve Bank board. The Congress,
in doing so, wanted to ensure that the views and concerns of all economic
interest groups would be expressed and heard during the development of
monetary policy.
The nine-member board of directors of a Federal Reserve Bank is
elected as follows:
&Member commercial banks elect three members from the banking com-
munity and three members from agricultural, commercial, industrial,
services, labor, and consumer communities
&The Federal Reserve Board of Governors appoints three directors on its
own (it also appoints the Reserve Banks’ presidents)For a detailed description of the operation of the Federal Reserve and
the process used to adjust and manage interest rates, please read David H.
Friedman,Essential of Banking(American Banking Associations, 1989).^8
The above discussion clearly indicates that interest rates, especially re-
lated to the U.S. dollar, are reflections of the way the Federal Reserve Board
manages its monetary policy in response to many other factors.
Who Owns the Federal Reserve Bank?
All national banks in the United States own shares in the Federal Reserve Bank
in proportion to their capital. In addition, other financial institutions, like
some state chartered banks and other major financial institutions, can own
shares in the Federal Reserve Bank if their boards decide to become members
of the Federal Reserve System. This way, the bankers in the system can have a
voice in the process of developing the monetary policy of the country. Chapter
7 includes more details on this subject.
Credit Creation in the Modern Banking System^9
T-accountsare abstracts of a bank’s balance sheet that show only the
changes in the bank’s assets and liabilities.
For the sake of simplicity, assume, in this T-account example, that:
&All the deposits created by banks stay in the banking system
&Demand deposits are the only form in which newly created funds are
held
&Banks lend out every available dollarMoney and Its Creation 93