Theme 9
The Federal Reserve System
Vocabulary
policy — a plan that determines how an organization will act in certain situations
uniform — always the same, unchanging
to set — to fix, establish
reserve requirements — percentage of total deposits that a bank keeps in cash
mandatory — obligatory, required, has to be done
ratio — proportion; a fixed relationship between two similar things
holdings — property owned; assets
advances — money paid before goods or services are received
rediscount — a negotiable instrument which has been discounted by a bank and then sold a second time to a Federal Reserve Bank and discounted again by that bank
to empower — to authorize, to give power or authority to someone
open-market — public sale of securities
security — stock or bond (see definitions, below)
to purchase — to buy; buying
investments — the money placed to purchase some kind of property with the hope of making a profit; the properties themselves that the money has been invested in
bill of exchange — an order drawn by one person on another, directing him to pay money to a third person or to his account and to charge the person who draws the order
acceptance — a bill of exchange marked "accepted"
market price — the current price
margin requirements — the percentage of the market price of securities that the buyer must pay when he borrows the money to purchase those securities
capital — money or wealth used in business
stock — a share of corporate capital
stock certificate — written evidence of ownership of stock
bond — an interest-bearing certificate of debt
Expansion
Board of Governors — a group of administrators or directors of the United States Federal Reserve System (also known as the Federal Reserve Board)
The Board of Governors sets uniform banking policies.
intervention — interference in the affairs of others; changing the normal direction of' a transaction
There have been many complaints recently about government interference in the purchase and sale of securities.
volume of activity — amount of buying and selling
stock exchange — a place where stocks and bonds are regularly bought and sold
The volume of activity on the stock exchange has been very high this past week.
discount — the interest deducted from the face value of a note at the time a loan is made; the borrower receives the net amount after the discount has been deducted
Vocabulary Practice
Select the answer that correctly completes each sentence. Note: first read passage, and then complete this exercise
The Federal Reserve Board influences the volume of activity on the _____________ .
a. Board of Governors b. rediscounting rate c. Stock Exchange
The Board of Governors can buy or sell United States Government _____________ .
a. reserve requirements b. securities c. liabilities
3. _____________ of the twelve Federal Reserve Banks are uniform.
a. bonds b. policies c. advances
4. When margin requirements are set on the Stock Exchange, the ____________ of stocks and bonds bought with loans is affected.
a. market price b. advances c.open-market operations
5. Federal Reserve Banks are involved in the purchase and sale of ____________ .
a. bills of exchange b. rediscounts c. ratios of holdings
THE FEDERAL RESERVE SYSTEM
The Federal Reserve System of the United States performs many of the functions of the Central Bank of other countries. Te territory of the United States is divided into twelve Federal Reserve Districts, each one of which has a Federal Reserve Bank in a major city. Policies of these twelve banks are uniform however, because they are set by the Board of Governors of the Federal Reserve System.
It is precisely this Federal Reserve Board that carries out operations similar to those that are the responsibility of Central Banks in Europe, Latin America and elsewhere. For instance, member banks are told by the Federal Reserve Board what current reserve requirements are that is the mandatory cash ratio of holdings to liabilities. Federal Reserve Banks may extend credit to member, banks through advances or rediscounts. The rediscounting rate is set by each of the individual member banks. The Board is also empowered to conduct certain open-market operations that can affect the money supply of the United States. For instance, the Board can buy or sell United States Government securities, thus increasing or decreasing the amount of money in circulation. Other open-market interventions of the Federal Reserve Banks include the purchase and sale of investments such as bankers' acceptances and bills of exchange.
The Federal Reserve Board can also influence the volume of activity on the stock Exchanges by setting margin requirements for the purchase of securities. In other words, the Federal Reserve Board can set the percentage of the market price of securities that a buyer must pay when buying stocks or bonds with a loan. Margin requirements thus limit the amount of credit that purchasers of securities may be given to finance their investment activity. By raising or lowering margin requirements, the Federal Reserve Board may limit or expand the volume of stock purchases.
Comprehension Check