MARGINAL PRODUCTIVITY THEORY: A theory used to analyze the profit-maximizing quantity of inputs (that is, the services of factor of productions) purchased by a firm in the production of its output. Marginal productivity theory indicates that the demand for a factor of production input is based on the marginal product of the factor and the price of the output produced by the factor.
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FEDERAL RESERVE PYRAMID:
A representation of the structure of the U.S. Federal Reserve System that is shaped like a pyramid with the Chairman at the top and thousands of commercial banks (and the non-bank public) at the bottom. By the numbers, the Federal Reserve pyramid includes 1 Chairman, 7 members of the Board of Governors, 37 Federal Reserve Banks, around 20,000 commercial banks, and 300 million people making up the non-bank public. The Federal Reserve pyramid (or Fed pyramid) is a simple little diagram that depicts the structure of the Federal Reserve System, which takes in the two-dimensional shape of triangle (hence the term "pyramid" is not totally accurate), with a large base that comes to a peak. The base of the pyramid contains thousands of commercial banks, which rests on a foundation of the millions of people who make up the non-bank public. The middle of the pyramid includes 37 Federal Reserve Banks, including 12 District Banks and 25 Branch Banks. Resting at the top of the pyramid is the Board of Governors, with the Chairman at the very, very top. The top also has two notable offshoots--the Federal Open Market Committee and the Federal Advisory Council.
The graph to the right provides an overview of this Fed pyramid. For a little insight into the structure of the Federal Reserve System, consider a few the numbers. Use the mouse arrow to highlight the assorted components of the Fed pyramid.
|The Fed Pyramid
- 1: At the very, VERY top of this pyramid is the Chairman of the Board of Governors, the one person who runs the show, who has the power, who calls the shots.
- 7: At the very top of this pyramid is the Board of Governors, consisting of 7 folks (including the Chairman), usually economists by training, who make the big decisions.
- 37: The middle of the pyramid is occupied by Federal Reserve Banks. These 37 banks dispersed throughout the country, include 12 District Banks and 25 Branch Banks interact directly with commercial banks and are primarily responsible for carrying out the actions of the Fed.
- 20,000: At the bottom of the pyramid are the economy's commercial banks, including traditional banks, savings and loan associations, credit unions, and mutual savings banks. While the number changes over time from mergers, closings, new start-ups and the like, the total number of establishments is in the range of about 20,000.
- 300 Million: Beneath the pyramid, the foundation upon which the pyramid is built, is the public, the non-bank public to be precise. This includes people, businesses, and even government agencies that make use of commercial banking services.
- 2 Times 12: Note the two ovals to the side of the pyramid. Each oval is comprised of 12 members. The 12 residing in the oval labeled Federal Open Market Committee are critical to the Federal Reserve's money-supply control. The 12 occupying the other oval labeled Federal Advisory Council are not quite as important, but still worth noting.
ChairmanAt the very, VERY top of the Fed pyramid is the Chairman of the Board of Governors. The Chairman of the Board of Governors is the head of the Board of Governors and thus the head of the Federal Reserve System as well. The Chairman is one of the most powerful, if not THE most powerful individuals in the economy. He (the Chairman need not be a male, but historically has been) directs monetary policy and sets the course the Federal Reserve activities. He is the main man, the guy in charge. When the Chairman speaks business leaders, political leaders, and the public take notice.
The Chairman is appointed to a 4-year term, using the Presidential appointment, Senate confirmation process. While the 4-year term of the Chairman is the same length of the 4-year presidential term, most presidents tend to inherit the Chairman appointed by a predecessor. The Chairman is also one of the 7 governors serving a regular 14-year term.
When the Federal Reserve System was created, the Chairman was little more than a figure head, the guy with the gavel who presided over Board meetings. (The actual power rested with the President of the New York Federal Reserve Bank.) However, the Chairman is now one of the most powerful economic positions in the United States and even the world. The wishes and policies of the Chairman need not be approved by the rest of the Board, but they typically are.
Board Of GovernorsAt the top of the Fed pyramid is the Board of Governors. The Board of Governors is the policy making body of the Federal Reserve System. They set the regulations, rules, and policies affecting the money supply and the commercial banking system.
The Board of Governors is comprised of 7 members who are appointed by the President and approved by the Senate. The composition and structure of the Board of Governors is designed, like the rest of the Federal Reserve System, for independence from the President and Congress. The job of the Fed is to carry out policies deemed best for the economy; policies that might not necessarily be to the liking of the President or Congress.
This independence is helped by appointing Governors to staggered terms. Each member of the Board, like any other federal appointees, is appointed by the President and approved by the Senate. Each of the 7 governors is appointed to a 14-year term, with terms staggered every two years. In other words, one term is filled this year, another in two years, and another two years after that. After 14 years, the first term comes up for appointment again.
This system of staggered terms is designed to keep the President from appointing the entire Board. The Board is NOT suppose to work for the President or carry out Presidential policies. With staggered, 14-year terms, a president can normally appoint no more than 3 Governors during an 8-year stay in office, preventing the appointees of the sitting President from having a voting majority.
In addition to staggered 14 year terms, the overall makeup of the Board of Governors involves several general criteria:
- First, no two members can be from the same Federal Reserve District. This ensures that 7 of the 12 Federal Reserve Districts are represented on the Board.
- Second, no member can serve two complete terms. In general, a member is appointed to serve a single 14-year term. However, this criterion allows a member to finish out a the remaining years of a term vacated by a predecessor then serve one complete 14-year term.
- Third, in addition to dispersion across districts, the composition of the Board of Governors is further constructed to represent the geographic divisions of the country.
- Fourth, the composition of the Board of Governors also is constructed to represent the varied interests of the country--financial, agricultural, industrial, and commercial. This is intended to prevent the board from containing ONLY members with experience in the financial industry.
Federal Open Market CommitteeEmerging from the top of the Fed pyramid, an offshoot of the Board of Governors, is the Federal Open Market Committee (FOMC), the key component of the Fed when it comes to monetary policy.
The Federal Open Market Committee is a standing committee of the Federal Reserve System that is specifically charged with conducting open market operations and is more generally responsible for guiding monetary policy.
The FOMC is comprised of the 7 members of the Board of Governors, including the Chairman, and 5 Federal Reserve District Bank presidents. The Chairman of the Board of Governors is also the Chairman of the Federal Open Market Committee.
Because the Fed's monetary policies are conducted through financial markets centered in New York City, the President of the New York Federal Reserve Bank is always on this committee. The remaining 4 slots are shared and rotated among the remaining 11 District Banks. One slot is shared by Boston and Philadelphia. Another is shared by Dallas, Atlanta, and Kansas City. A third by Cleveland, Chicago, and Richmond. And the fourth by San Francisco, Minneapolis, and St. Louis.
The 7 + 1 + 4 composition keeps the bulk of authority and power in the hands of the Board of Governors and the Chairman (the 7), while at the same time maintaining a channel for implementing monetary policy through the New York Federal Reserve Bank (the 1), as well as providing a decentralized nationwide input from the rest of the country through other Federal Reserve District Banks (the 4).
Federal Advisory CouncilA second, less powerful, less important group hovering near the top of the pyramid is the Federal Advisory Council (FAC). As the name suggests, this council has no official policy making role, but is charged only with offering advice to the Federal Reserve Board of Governors.
The Federal Advisory Council consists of the Presidents from 12 commercial banks, one from each of the 12 Federal Reserve Districts. These commercial bank presidents reach the council through selection by their friendly neighborhood Federal Reserve District Bank.
The FAC is totally advisory. It does not set policy. It does not impose regulations. All it does is offer advice to the Board of Governors. The main function of the FAC is to provide feedback from commercial banks, and presumably their customers, about Fed policies.
Federal Reserve BanksDropping down a notch from the lofty position of the Board of Governors and the even loftier Chairman, down to the middle of the pyramid, is the 37 Federal Reserve Banks.
Federal Reserve Banks include 12 District Banks and 25 Branch Banks that are largely responsible for supervising, regulating, and interacting with commercial banks and carrying out the policies established by the Federal Reserve Board of Governors. The 12 District Banks are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The 25 Branch Banks are dispersed throughout the country, with all but the Boston district having at least one Branch Bank. The Branch Banks surface in such cities as Miami, Los Angeles, Denver, New Orleans, and Oklahoma City.
The primary task of Federal Reserve Banks is keep the commercial bank system in operation. The do this through regulatory oversight of banking activities and through the provision of banking services, such as deposits and emergency loans. Federal Reserve Banks also process checks and electronic transactions for commercial banks through a centralized clearing house.
Federal Reserve Banks are the portal for getting currency into circulation. Newly printed currency is sent to the Federal Reserve Banks, which then send the currency to commercial banks. In addition, Federal Reserve Banks are responsible for monitoring their district economies. They collect data, do studies, and hold seminars. Federal Reserve Banks even offer a few limited services to the public. The public can go to a Federal Reserve Bank to buy savings bonds, bid for U.S. Treasury securities, or exchange U.S. currency for foreign currency.
Commercial BanksAt the bottom of the Federal Reserve pyramid are the 20,000 or so commercial banks, including traditional banks, savings and loan associations, credit unions, and mutual savings banks, that are regulated and serviced by the 37 Federal Reserve Banks. While some banks in the country are "officially" members of the Federal Reserve System and some are not, all are subject to Fed regulations and can gain access to Fed services.
Traditional banks are historically categorized as either national or state, depending on the government authorizing the bank's charter. National banks are chartered by the federal Comptroller of the Currency and state banks are chartered by state governments. National banks are automatically members of the Federal Reserve System. State banks can choose whether or not to join the Federal Reserve System. Some do, some do not.
Non-Bank PublicThe base upon which the Fed pyramid rests is the non-bank public. This includes, in effect, the entire population of the country. In contains consumers, businesses, and government agencies that make use of commercial banking services, excluding commercial banks and government banking entities that make up the "banking sector."
In principle, the ultimate goal of the Federal Reserve System is to promote the welfare of this non-bank public by ensuring a sound money supply and banking system, and in so doing to promote lower unemployment, lower inflation, and greater economic growth.
FEDERAL RESERVE PYRAMID, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
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During the American Revolution, the price of corn rose 10,000 percent, the price of wheat 14,000 percent, the price of flour 15,000 percent, and the price of beef 33,000 percent.
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