The story of the Fed; A dollar in your pocket
We all know who Uncle Sam is. He stands for the United States government. We recognize this tall, lanky character by his white beard, top hat, and matching jacket and trousers, which look like the Stars and Stripes.
Not so well-known is the Fed, although we are hearing a great deal about it in the media right now.
The Fed, like Uncle Sam, is a nickname for something we identify with the US government. The Fed is short for the Federal Reserve Board.
Like Uncle Sam, the head of the Federal Reserve Board, or the Fed as it is better known, is also tall. The current chairman, Paul Volcker, stands 6 feet 7 inches tall.
Stop a moment to take a look at a one dollar bill. You will notice on the very top of the bill - on that side with the picture of George Washington, the first President - there appear the words ''Federal Reserve Note.''
What that means is that while the US Treasury may print the note, it does so on orders from the Federal Reserve Board.
All this money that gets circulating in the country from your parents' own bank, the supermarket cash register, the dollar in your pocket, and the gas station attendant's wallet is part of the nation's money supply.
Now take another look at that dollar bill. On the top right-hand corner and in the bottom left-hand corner is a set of numbers squeezed between two letters of the alphabet.
The one I have in front of me says A 61605559A. The reason I have a dollar bill that has A in the front of it is because I live in Boston. And this dollar bill, or Federal Reserve Note, has been issued by the Federal Reserve Board of Boston, which takes the code A. Of course these notes will also circulate throughout the country.
The Federal Reserve Board in Washington, where Mr. Volcker sits, has 12 reserve districts throughout the US. Boston is one of them, but there are 11 others. If you live in New York, or Atlanta, or Dallas, then your dollar bill will probably carry another letter of the alphabet to indicate that it was issued in your particular area.
The Fed has a very difficult job. Its job is to try and control what happens to the amount of money that is circulating in the country and how to use it. Too much money may make prices rise too fast. Too little money may mean the country's economy will not work as well. Money is like the oil that keeps the wheels of the country's economy turning. Shoppers and businessmen need enough money so they can buy and sell goods. That's what we really mean by the economy.
A study of the US economy right now, for instance, will show that inflation has been coming down. The Fed generally has been praised for achieving that. Inflation, to put it in the very simplest way, is when you pay more on average today than you would have paid yesterday for exactly the same thing. The difference between prices today and what they were yesterday is called inflation.
Now the Fed's job is to regulate the flow of money into the economy. This has an effect on what it costs to borrow money. In this way the Fed is like a faucet. What's inside the faucet is the amount of money that is available in the country. But the hand on the faucet belongs to the Fed. And it's up to the Fed to decide whether to turn on the faucet so more money can come out or turn it off so the amount of money can dry up somewhat. The way they do this is through a complicated set of arrangements with thousands of banks that belong to the Federal Reserve system.
So when we want to borrow money - to get a loan - we don't go to the Fed; we go to our bank. But it is the Fed that influences how people borrow and on what terms.
We're hearing so much about the Fed these days because of what is happening on Wall Street, which is another term for the stock and bond market. (A children's column on how Wall Street works appeared in the Monitor Nov. 2, 1981 .)
The stock market has gone wild with excitement these past few weeks. Stocks have gone way up.
Many people think the economy is going to do well in the future. It has been doing badly. Firms have gone bankrupt. People have been out of work. Big factories don't have the confidence to spend more money to expand or put in new equipment.
Now the confidence of the people who buy and sell stocks is picking up. Many of them say it's because the Fed has helped bring down interest rates. An interest rate is the amount of money a bank charges for lending people money. It could be to buy a car or a house. The interest rate is expressed as a percentage. If you borrow $1,000 at 13 percent interest, it means you have to pay back the full $1,000 plus 13 percent of $1,000 over a certain period of time.
The higher the percentage, the more you pay in interest. The smaller the percentage, the less you pay in interest.
When interest rates come down, people feel they can afford to pay for a new car, buy a new house, or get a loan to expand a factory because in the end they will pay out less money than they would if the interest rate is high.
Many of the people who were angry with the Fed are starting to smile again. They have seen interest rates decline, and that means it now costs less to borrow money.