Question

What explains the division in twelve main districts, associated with the Federal Reserve Banks, established in 1914? Each of the twelve Federal Reserve Banks is associated with a district. The scope of this paper is to understand the criteria used to divide the country in 12 districts and to address the question if this division, made in 1914, still makes sense in 2020.

In 3000 words.

Answer 1

Federal Reserve System

The Federal Reserve System is the central bank of the United States.

It performs five general functions to promote the U.S. economy's effective operation and, more generally, the public interest. The Federal Reserve

• conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
• promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
• promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
• fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
• promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.

The Decentralized System Structure and Its Philosophy

In establishing the Federal Reserve System, the United States was divided geographically into 12 Districts, each with a separately incorporated Reserve Bank. District boundaries were based on prevailing trade regions that existed in 1913 and related economic considerations, so they do not necessarily coincide with state lines.

The 12 districts are

01-Boston

02-New York

03-Philadelphia

04-Cleveland

05-Richmond

06-Atlanta

07-Chicago

08-St. Louis

09-Minneapolis

10-Kansas City

11-Dallas

12-San Francisco.

Three key entities, serving the public interest

The framers of the Federal Reserve Act developed a central banking system that would broadly represent the public interest.

The interest is the Federal open market committee, Board of governors, Federal reserve bank,

Other Significant Entities Contributing to Federal Reserve Functions

Two other groups play important roles in the Federal Reserve System's core functions:

1. depository institutions--banks, thrifts, and credit unions; and
2. Federal Reserve System advisory committees make recommendations to the Board of Governors and the Reserve Banks regarding the System's responsibilities.

Depository Institutions

Depository institutions offer transactions or checking accounts to the public and may maintain accounts of their own at their local Federal Reserve Banks. Depository institutions are required to meet reserve requirements--that is, to keep a certain amount of cash on hand or in an account at a Reserve Bank based on the total balances in the checking accounts they hold.

Depository institutions with higher balances in their Reserve Bank account than they need to meet reserve requirements may lend to other depository institutions that need those funds to satisfy their own reserve requirements. This rate influences interest rates, asset prices and wealth, exchange rates, and aggregate demand in the economy. The FOMC sets a target for the federal funds rate at its meetings and authorizes actions called open market operations to achieve that target.