Federal Reserve System in the context of "Bank run"

Federal Reserve Notes are the currently issued banknotes of the United States dollar. The United States Bureau of Engraving and Printing, within the Department of the Treasury, produces the notes under the authority of the Federal Reserve Act of 1913 and issues them to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System. The Reserve Banks then circulate the notes to their member banks, at which point they become liabilities of the Reserve Banks and obligations of the United States.

Federal Reserve Notes are legal tender, with the words "this note is legal tender for all debts, public and private" printed on each note. The notes are backed by financial assets that the Federal Reserve Banks pledge as collateral, which are mainly Treasury securities and mortgage agency securities that they purchase on the open market by fiat payment.

William Gibbs McAdoo Jr. /ˈmækəˌduː/ (October 31, 1863 – February 1, 1941) was an American lawyer and statesman. McAdoo was a leader of the Progressive movement and played a major role in the administration of his father-in-law, President Woodrow Wilson. A member of the Democratic Party, he also represented California in the United States Senate.

Born in Marietta, Georgia, McAdoo moved to Knoxville, Tennessee, in his youth and graduated from the University of Tennessee. He established a legal practice in Chattanooga, Tennessee, before moving to New York City in 1892. He gained fame as the president of the Hudson and Manhattan Railroad Company and served as the vice chairman of the Democratic National Committee. McAdoo worked on Wilson's successful 1912 presidential campaign and served as the United States Secretary of the Treasury from 1913 to 1918. He married Wilson's daughter, Eleanor, in 1914. McAdoo presided over the establishment of the Federal Reserve System and helped prevent an economic crisis after the outbreak of World War I. After the U.S. entered the war, McAdoo also served as the Director General of Railroads. McAdoo left Wilson's Cabinet in 1919, co-founding the law firm of McAdoo, Cotton & Franklin.

The Federal Reserve Bank of New York is one of the twelve Federal Reserve Banks of the United States. It is responsible for the Second District of the Federal Reserve System, which encompasses the State of New York, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico, and the U.S. Virgin Islands. Located at 33 Liberty Street in Lower Manhattan, it is the largest (by assets), the most active (by volume), and the most influential of the Reserve Banks.

The Federal Reserve Bank of New York is uniquely responsible for implementing monetary policy on behalf of the Federal Open Market Committee and acts as the market agent of the entire Federal Reserve System (as it houses the Open Market Trading Desk and manages System Open Market Account). It is also the sole fiscal agent of the U.S. Department of the Treasury, the bearer of the Treasury's General Account, and the custodian of the world's largest gold storage reserve. Aside from these distinct functions, the New York Fed also performs the same responsibilities and tasks as the other Reserve Banks do, such as supervision and research.

A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve Act of 1913. The banks are jointly responsible for implementing the monetary policy set forth by the Federal Open Market Committee, and are divided as follows:

Some banks also possess branches, with the whole system being headquartered at the Eccles Building in Washington, D.C.

A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking system (where banks normally only keep a small proportion of their assets as cash), numerous customers withdraw cash from deposit accounts with a financial institution at the same time because they believe that the financial institution is, or might become, insolvent. When they transfer funds to another institution, it may be characterized as a capital flight. As a bank run progresses, it may become a self-fulfilling prophecy: as more people withdraw cash, the likelihood of default increases, triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. To combat a bank run, a bank may acquire more cash from other banks or from the central bank, or limit the amount of cash customers may withdraw, either by imposing a hard limit or by scheduling quick deliveries of cash, encouraging high-return term deposits to reduce on-demand withdrawals or suspending withdrawals altogether.

A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time, as people suddenly try to convert their threatened deposits into cash or try to get out of their domestic banking system altogether. A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out. The resulting chain of bankruptcies can cause a long economic recession as domestic businesses and consumers are starved of capital as the domestic banking system shuts down. According to former U.S. Federal Reserve chairman Ben Bernanke, the Great Depression was caused by the failure of the Federal Reserve System to prevent deflation, and much of the economic damage was caused directly by bank runs. The cost of cleaning up a systemic banking crisis can be huge, with fiscal costs averaging 13% of GDP and economic output losses averaging 20% of GDP for important crises from 1970 to 2007.

The Federal Reserve Act was passed by the 63rd United States Congress and signed into law by President Woodrow Wilson on December 23, 1913. The law created the Federal Reserve System, the central banking system of the United States.

Following the 1912 elections, in which Democrats gained control of Congress and the presidency, President Wilson, Congressman Carter Glass, and Senator Robert Latham Owen introduced legislation to create a central bank. The proposal was shaped by debate between those who favored private control of a central bank, such as proponents of the earlier Aldrich Plan, and those who favored government control, including progressives like William Jennings Bryan. Wilson prioritized the bill as part of his New Freedom domestic agenda, and it passed Congress largely as introduced.

The consumer leverage ratio (CLR) is the ratio of total household debt to disposable personal income. In the United States these are reported, respectively, by the Federal Reserve (as the household debt service ratio (DSR)) and the Bureau of Economic Analysis of the US Department of Commerce.

${\displaystyle {\mbox{Consumer leverage ratio}}={{\mbox{Total household debt}} \over {\mbox{Disposable personal income}}}}$