Understanding the Federal Reserve System

As most of you know, over the past few months I've written several postings dealing with economic topics. In response to the requests that I've received asking for a few "quick-look" sources explain a lot of the technical jargon and theoretical concepts that keep popping up in the news media, here are my five favorite online resources.

1. Federal Reserve Bank of Chicago.Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion. Chicago: Federal Reserve Bank, 1961, revised 1992.

If you want to know why banks are vital to the American economy you will have to understand something called fractional reserve banking, because that is the way money is "created" when you use your checking and/or savings account at your local bank. As you might expect, there are certain (often complicated) rules and regulations that must be followed by both your bank and the federal government before this "new' money can enter the economy. This booklet, although long "out of print," remains one of the best explanations of both money creation and banking practices available to the reader with little or no background in economics or banking practices.

2. Board of Governors of the Federal Reserve System. The Federal Reserve System: Purposes and Functions, 5^th edition. Washington: Federal Reserve System, 2005.

Once you understand the basics of money creation as explained in Modern Money Mechanics, you can move on to this description of the Federal Reserve System and its role in the implementation of the nation's economic and monetary policies. Also written to a target audience with little background in economics and banking, the sections on how the Federal Reserve regulates the availability of money and credit are particularly relevant to the current economic uncertainties.

3. Kenneth Spong. Banking Regulation: Its Purpose, Implementation, and Effects, 5^th edition. Kansas City, MO: Federal Reserve Bank of Kansas City, 2000.

Don't let the title scare you, because Banking Regulation is a well-written guide to understanding the rules that "member banks" of the Federal Reserve System are required to follow. It is easy to understand and, like the other publications listed here, is written for the interested layman and it assumes no previous knowledge of the banking industry.

4. Federal Reserve Bank of Richmond.Instruments of the Money Market. Richmond, VA: Federal Reserve Bank of Richmond, 1993.

Even the Federal Reserve has a few "Oldies but Goodies" and Instruments of the Money Market is one of them. If you have read the previous suggestions listed above, you should have no trouble with this guide to the more esoteric concepts of the national and international money markets. Trust me, one cover-to-cover reading of his book will explain concepts that you never dreamed existed.

5. Federal Reserve Bank of Boston. Closed for the Holiday: The Bank Holiday of 1933. Boston: Federal Reserve Bank of Boston, undated.

OK, this one doesn't have a lot to say about our current problems. But I can assure you that, once you read this short booklet, you will understand that the events of 2008-2009 are not even close to what happened in 1929-1930. Think about it like this: Just because the news media is clueless as to what's been going on doesn't mean that you can't form your own opinions.