Introduction

This book may seem to be about the Federal Reserve System, and indeed the Fed will be the focus of 75-80% of it. However, before we can focus on the Fed, we must first agree on what prosperity is. Lacking a coherent sense of what prosperity is, we can't even begin to identify what is good or bad about a form of money or of the banking system in which it exists.

Prosperity is nothing more and nothing less than having a growing supply of goods and services that benefits all of us due to having a relatively level money supply. To some, this may seem clear and obvious. To others, it may seem ludicrous. To still others, it may seem irrelevant. There is no doubt that most economists pay no attention to it, and even on those rare occasions where they do pay attention to it, they dismiss or reject it more often than they embrace it.

So let me state for the record the most simple, basic, self-evident fact that has been so consistently ignored throughout my lifetime by all civilizations on this planet. In a truly free market, the supply of goods and services rises over time, and the supply of money remains relatively stable and constant over time. Thus the value of market-trusted money in a truly free market increases on average over time, prices come down on average over time, and in this way prosperity is shared with the poorest of people. In such an economy all a poor laborer has to do to get ahead in life is to scrimp and save. He doesn't even need to earn interest in a bank savings account. Merely the act of putting money away for a rainy day makes him wealthier, and in such a society everyone prospers.

Further, in a free society whenever money loses value it is a certain and clear signal that its value, and therefore the prosperity of the society as a whole, is being siphoned off by some group of individuals. Except when that money is commodity-based (such as gold or silver) and that commodity is being increased through honest production, such siphoning off of prosperity is fraudulent. It can even be legal fraud (as is the case with the Federal Reserve System), but it is still nonetheless fraud.

Of course, if a commodity-based money supply increases too quickly via honest production, then the usefulness of that money supply as money becomes less because the value to society of the money is being watered down. In such instances, so long as the free market has alternative commodities which can be used as a basis for money available to it, natural market forces will automatically shift society toward the newly preferred form of money. So if the overall supply of silver, for instance, is increased by record amounts of mining that doesn't get eaten up by industrial production, society can prefer gold-based money and thereby avoid the problems associated with an inflating silver supply.

Unfortunately, we do not live in a free society; our markets are so far from being free that it's laughable; and our supply of money isn't even close to being constant or stable. It is the failure of our society to insist upon a stable money supply, combined with its insistence on market regulation, which makes the poor seem to be poorer while the rich get richer. In fact, looking at the whole picture this way, it becomes clear that the rich get richer by the draining of wealth from the poor via money supply manipulations. The poor's share of a free society's benefits is being siphoned away, and most of them don't even understand how it's happening. All they know is that they find it harder and harder to make ends meet. The same can be said for the middle class, who are generally even less aware than the poor of what is happening to them, simply because the crisis doesn't seem as dramatic to them. Historically, only the so-called Austrian economists have expressed sentiments compatible with this principle regarding the widening gap between economic classes.

The Austrian school's leading master, Ludwig von Mises wrote, "If the money relation remains unchanged, neither an inflationary (expansionist) nor a deflationary (contractionist) pressure on trade, business, production, consumption, and employment can emerge." (Mises, Human Action: A Treatise on Economics, 3rd edition published by Henry Regnery Company by arrangement with Yale University Press, 1966, p. 430)

Murray Rothbard, another Austrian economist and a student of Mises wrote, "An increased supply of goods produced will raise the demand for money and also therefore lower the overall level of prices." (Rothbard, The Mystery of Banking, Richardson & Snyder, New York, 1983, p. 59)

The Austrians did and do not claim that there had to be a particular quantity of money. To the contrary, they argue that any quantity will do. They are quite content to let the market determine what that level should be. To be fair, they rarely discussed directly the importance of having a relatively constant quantity of money. No economist does, and more's the pity, because particularly in what another Autstrian economist, Hans Sennholz called, "The Age of Inflation," it is easy to forget this most basic of facts: that a money supply must be relatively constant in order to spread prosperity to all, including the poorest of people.

In recent times, politicians have played on the idea of, "the rich getting richer and the poor getting poorer," but to my knowledge only one (Ron Paul, R-TX) has correctly identified why this process happens. Paul wrote, "The moral of the story is that spending is always a tax. The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer." (Paul, "The Inflation Tax", lewrockwell.com, July 16, 2006)

Economists are generally much more concerned with what happens under an unstable money supply, which has led many, including the so-called Chicago school of economics led by the late Milton Friedman, to conclude that the ideal relationship between money on the one hand, and goods and services on the other hand, is where prices are kept stable. And how does the Chicago school propose to keep prices stable? They propose increasing the money supply at a rate that matches the growth of goods and services. Such an "equilibrium" is, in fact, impossible to maintain via regulation, but  that never stopped the Friedmanites from pursuing it. Nor did it stop them from adopting their flawed assumption.

Do you see the flaw in their assumption? It should be as plain as the nose on your face. If the supply of money increases in lock-step with the overall supply of goods and services, then the benefits of living in a free economy can never work their way down to the poorest members of society! Instead, as the money supply steadily rises, the poor will find themselves constantly behind the eight ball, struggling to stay afloat. Why? Because they're already poor! They're starting from point zero, and unless they become superb producers (rare among the poorest of people), they will remain at point zero. When the cost of living rises at the same rate as the standard of living, the only way to move ahead is to produce wealth at a rate that is greater than average among people...hardly a likely skill for a poor person!

Hopefully, you are now beginning to gain a glimmer of understanding as to why the money supply is so important. Those who invest in stocks, bonds, futures, commodities, etc. certainly think it's important. That's why the most successful investors of all kinds pay close attention to the money supply.

"Today, money supply figures pervade the financial press. Every Friday, investors breathlessly watch for the latest money figures, and Wall Street often reacts at the opening on the following Monday. If the money supply has gone up sharply, interest rates may or may not move upward. The press is filled with ominous forecasts of Federal Reserve actions, or of regulations of banks and other financial institutions."

Sounds like it was written earlier this year, doesn't it? Actually, the above paragraph was written 25 years ago and published in Rothbard's The Mystery of Banking. In fact, it was the opening paragraph of the book.

Since that book was written, it's been quite a roller-coaster ride. The 1980's roared until Black Monday on October 19, 1987, the day of the second worst stock market crash in history (second only to the 1929 crash which preceded the Great Depression). It sent the country into a funk into the early 1990s. In the mid-1990's the markets went through another dizzying round of craziness, only to conclude with the telecom crash of 2000. The turn of the millenium saw the craziness of the real estate industry as housing prices went out of sight. Now, it appears that's turning around as well, and with the sub-prime mortgage crisis there is considerable consternation regarding the aftermath. The hopes for the real estate market as a whole are currently dimmed as this book is being written.

Booms and busts have been with us for generations, so what's been going on lately is nothing new. However, it is clear that most people (including most economists) continue to be ignorant of why they happen with such frequency and what causes the devastation they leave in their wake. It is not a coincidence that the Federal Reserve Board of Governors have engaged in roughly 3-4 dozen rounds of economic stimuluses during the past 15-20 years. Once one realizes what the connection is between the Federal Reserve System and the boom/bust cycle, it becomes much more evident why the dizzying ride continues unabated.

This online book is being written by collaborators and contributors from all over America. It is a work in progress, so don't expect to see all of the answers you are looking for just yet. We're hoping to fill out the volume of this book pretty quickly, so check back over time if your particular question isn't answered just yet. Or just use the forums on this website and ask your question there.

This book tries to present a complete overview of money and banking, including considerable historical references that led among other things to the creation of the Federal Reserve System. However, the focal point of this book will be the sections that actually describe and discuss how the Fed works. In particular, it will focus upon how the Fed creates money out of thin air using bank deposits and reserves of all the banks in the United States as the basis for its activities. This activity has tremendous consequences for the entire American economy, and given the importance of the American economy to the world economy as a whole, it also has direct influence there as well.

We will also focus on how these money-creation activities appear to stimulate economic growth, while in actuality the appearance is deceiving and short-lived, thus leading to the boom/bust phenomenon.

Barter and Before

Goods as Money

Under a system of mutual barter, literally anything may be used as money. Our modern system of electronic transfer, checking accounts and paper money in place of the mutual trading of actual goods and services would occupy a short paragraph in the book of human history. Millennia before legal tender laws and central reserve banks, there were many different kinds of generally accepted money. Some were easier to acquire and use than others. When the European settlers first arrived in North America, they discovered a form of money the natives produced by the arrangement of wampum (seashells) into long strings. Native American debts were settled in lengths of wampum. In order to conduct trade with the Indians, the settlers were obliged to trade their excess goods for lengths of these seashells, using this as the medium of exchange when trading with the various tribes. This must have felt quite strange to a people accustomed to paying their debts in denominations of gold and silver coin. In South America, the Spanish settlers found the native Incas trading in birds’ feathers!

In this chapter, we will examine a hypothetical scenario whereby the origins of commodity money (barter) may be logically deduced.

Before Bartering

There is no way of knowing for certain where the barter system evolved first, how or even when, since it existed long before the written word (or possibly the spoken word). We do know that it still exists as the economic basis in some primitive societies today and to a much lesser extent in the developed world (A few minutes spent observing Kindergarteners at lunchtime spontaneously trading items of food can be educational). This being the case, all we can do is try to reverse engineer this system and come to some logical conclusions about its origins based on what we do know. It makes sense to begin with the smallest economic unit - a single person. Let's say that a modern human being was stranded on a deserted island, alone, with no tools or resources to aid him except what exists in the state of nature all around him. What would he have to do to survive? Obviously, his immediate needs are water, food and shelter, and possibly in that order. Finding a handy stream of clean, fresh water, he then looks around the immediate area for a source of food. Let's say that he finds a berry bush nearby and is able to pick his fill from the lower hanging branches in a few hours. Now that he has food and water, he looks for shelter and finds a suitable cave not too far away. Not bad for his first day.

Over the next few days he eats, drinks and explores his immediate surroundings, mapping the area and looking for useful features such as obvious rock and mineral deposits, alternate sources of food and water, possible signs of other inhabitants, maybe even a way off the island. After picking most of the lower hanging berries on his bush, it becomes more time consuming to get his daily food and he realizes that he needs some tool to help him reach the higher branches of the berry bush. He estimates that it will take about a day to make a stick suitable for the task and decides to spend extra time every day picking berries until he has enough to feed himself for the time it takes to fashion his new tool. After a week of saving, he takes a day off from berry picking and makes his picker-stick, using up the berries he has saved. Now he is able to reach the higher branches for more berries and it takes less time to feed himself each day, leaving him free for other activities, such as finding flint to start a fire with.

Less obviously, we assumed that our subject was not impeded in his endeavor by outside influences. He was able to estimate the cost of the stick in berries, in this case a day’s supply, then save and invest that cost to successfully produce his capital equipment. Let's say that a storm or other calamity occurred on the day he was to make his stick and he was forced to use up his supply of berries without producing his stick. Clearly the saving would not have been wasted, as he was able to weather the storm without starvation, but his capital investment would not have been made as planned and he would be back where he started. Had he estimated too few berries, his stick would not have been finished before the berries were gone and further saving would be needed. Had he made the stick, but overestimated its benefits, the saved berries may have been mal invested as the benefit of the stick would not justify the savings it took to make it. To be successful, the benefit obtained from his investment must meet or exceed his expectations, or the effort will have been at least a partial failure. This condition is generally referred to as a mal investment. Of course, had he overestimated the required savings, he would still have "capital" for further investment, a happy situation to find oneself in. That our unfortunate subject has engaged in a sort of 'personal barter' is significant.

What he has done is to trade a portion of his time that he may have spent at other useful activities, or indeed at leisure, for an extra day's supply of berries so that he could make a piece of capital equipment (the picker-stick), thus easing his burden of gathering food and freeing his time for less pressing activities. By saving the berries, he was able to invest in the stick. There are some valuable lessons to be gained from this hypothetical exercise:

His preference for the stick caused him to voluntarily sacrifice something else, in this case, his time and labor. We can say that he traded his time for more berries: In all transactions, the perceived benefit must outweigh the perceived cost.

Only by sacrificing his time and saving his berries was he was able to invest in his ability to produce the stick: There can be no investment without prior saving.

By making this investment, he was able to somewhat mechanize his food production process by producing capital equipment (the stick): There can be no capital equipment (lengthening of the production process) without prior investment.

He was not the subject of outside interference and was able to complete his project: Saving and investment must proceed unaffected by outside influences.

Only by obeying these natural rules can the entrepreneur operate efficiently and avoid mal investments of savings gained by sacrifice.

Bartering Amongst Groups

We have seen how one person left alone must provide for all of his basic needs and find that the rules of the marketplace operate even though that market consists of its most basic unit - a single individual. How would these simple rules operate if there were more than one person participating in this system?

Let us now say that our deserted island dweller (let's call him Fred) is able to explore the entire island over time and happens upon a small tribe of friendly natives living not too far away. He looks around the village and sees many things they make for themselves that would improve his own quality of living beyond his currently meager standard. Naturally he does not want to simply try and take these things by force, there are too many natives and he would prefer to remain friendly. Also, he watches these things being made and realizes that he does not possess the high skill level needed to make his own. What to do?

Whilst wandering the village, he gets a little hungry and reaches into the pouch at his side for some of the berries he brought with him. A native sees him eating berries and gets very excited, running up to Fred and gesticulating wildly, pointing to the berry pouch. After a second, Fred sees that the native wants some berries and gives him a few to sample. The native likes the berries very much and it turns out that the berry bushes do not grow on the natives' side of the island. The native then looks around for something to give Fred for more berries and sees that he is very interested in the meat roasting over the villager's fire. Fred gives the native some  berries for some meat and they shake hands and part ways, both happy with their new acquisitions.

The trade was able to take place because both parties (Fred and the native) preferred the others' goods to their own. Fred wanted the meat because, although the berries are very sweet and juicy, he wanted to supplement his diet with some protein; he could always use his stick to get more berries. The native preferred the berries because they taste very good and he already had plenty of meat. Both parties were able to gain something more desirable (in their individual eyes) from the other by giving up some portion of their own possession. Each person's quality of living was enhanced from his own point of view by interacting with the other. This principle of mutual benefit is the basis for barter.

Now let us suppose that a few days go by and Fred wants to get some more meat from the friendly native, but the native decides that he has enough berries for now and refuses the trade. Although Fred prefers to trade some berries for some meat; in the native's eyes, for the moment, the meat is a more desirable commodity than the berries. How then could Fred use his berries to gain some meat? He would have to find some other thing to trade for his berries that the native would prefer to the meat. This may be something that he already possesses or something else that he can trade for.

As it turns out, a neighbor of Fred's friend has some fish that he finds very desirable. The neighbor does not desire the meat, but finds Fred's berries very appetizing. Making use of this knowledge, Fred trades some berries for some fish, then trades the fish (that he did not particularly desire) with his friend for some meat. In this way, all three parties gain something more desirable, in their eyes, for something they already possess. Unfortunately for Fred, he was forced to transact two trades to gain his desired meat, thus working twice as hard.

Thus we find the Achilles’ heel of the barter system. In order for a trade to be agreed upon, each party must receive something he desires more than the good(s) or service(s) he provides. In the absence of a commonly desirable commodity that can be used ‘in lieu’ of the commodity his native friend desired, Fred was forced to convert his goods (the berries) into a more desirable medium of exchange (the fish). We could say that Fred used the fish as money to buy the meat. Of course, Fred’s friend could have traded the meat for the berries and then the berries for the fish, had he known that his neighbor desired berries, thus using the berries as money in the same way that Fred used the fish.

There are several hypothetical questions we can pose about this story which may expand our knowledge of the barter system, for instance:

What if the villagers already had plenty of berries and did not desire Fred's? How would Fred have been able to improve his living standard by gaining the meat if he did not have something his native friends valued more? Certainly there could be no trade if both parties do not receive something they value more than the object(s) they provide. Fred was lucky in that he found the fish his friend valued more. The concept of perceived value is very important to the barter system. In a free market, all trade is conducted voluntarily.

What if Fred's berries were so precious to the villagers that they were willing to trade large portions of their possessions for a relatively small amount of the berries (or vice-versa)? This would give Fred (or the villagers) a huge trading advantage as his desire for the villagers' goods would not be as strong as the villagers' desire for his (or vice-versa). This may occur where the berries are very rare in quantity compared to the villagers' produce or where the villagers have copious quantities of everything they need and assign little value to the excess. In a free market, the perceived value of any good is relative to the perceived values of all other goods in the same market. These relative values are set by each individual's willingness to voluntarily trade his possessions for those of others. If for some reason, Fred's native friend should lose part of his stock of meat, he would place a greater relative value on the remainder and would be more resistant to trade.

What if, for some reason, all the villagers refused to trade with Fred? Say, for instance, they believed his berries to be poisonous? How, then, would Fred convince the villagers that his goods are safe to eat and as such desirable in the marketplace? What effect would this have on the relative value of his berries even if he were able to prove them safe to eat? To answer these questions, we must refer back to when Fred was a lone person providing for himself. Assuming that Fred had no idea whether the berries were poisonous before he tried them, we can say that he assumed a huge risk by eating an unknown substance in the first place. Having tried them and found them wholesome, it would be a simple demonstration to eat some in front of his prospective trading partners and allow them to observe his lack of adverse reaction. If they were still not willing to trade for the berries as food, he would be forced to find some other use for them that the villagers would find desirable and increase their willingness to trade, perhaps to use as a dye or some other purpose.

Suppose using the berries as a dye is found to be equally or even more desirable than using them as food; Fred's berries would then have multiple uses and their perceived value would rise as more villagers learned of his wonder-berries! Fred would then be in the happy position of having many prospective customers bidding up the value of his berries as each offered more than the last.

We have seen that through bartering, our primitive society is able to significantly improve the living standards of those who participate in the market. The native gains berries that he otherwise would not have enjoyed and Fred gets the meat he so desired. By dividing their labor into specific tasks, or groups of related tasks, both parties are able to improve their own standards and that of their trading partners. Their motives may well be completely selfish; but by helping themselves, they also (as a consequence) help others. By specializing in their chosen fields, each is able to make more efficient use of his labor and thus produce excess goods to trade for other goods that he or she may otherwise not have the opportunity of benefiting from.

In many ways, the basic rules surrounding the barter system can be said to be instinctive. Firstly the question of ownership is solved by the instinctive understanding that anyone who freely chooses to apply his labor through intelligent manipulation of some other bounty of nature automatically assumes ownership of the resultant good, regardless of its perceived value in the marketplace. Ownership of private property is considered an extension of the person’s right of self-possession. Without self-possession, there can be no private property ownership and therefore no voluntary transfer of ownership through barter or any other system.

The question of equity in worth is solved through a process whereby both market participants weigh the perceived benefit of the good(s) received against  the similarly perceived benefit of the good(s) relinquished, freely choosing to make the transaction. Thus a peaceful transfer of ownership is achieved whereby both participants benefit from the efforts (thought, time, labor, capital investment, etc.) of the other.

The main difference between a primitive barter system and a commodity monetary market system is the popular acceptance of the medium of exchange. In a primitive barter system, all goods may be described as money, regardless of relative worth or ease of acceptance in the marketplace, whereas a commodity monetary market system has only one, two or a few commodities widely accepted as money that is (are) used to trade for other more desirable commodities. Owning a quantity of monetary commodities enables the trader to bid for and buy desired goods or commodities without the disadvantage of owning an undesirable medium of exchange. What could be more desirable than money? Ask yourself the same question when grocery shopping or out at the theme park. In essence, everything you buy is, in your estimation, more desirable than the money you used to buy it with, or the voluntary transfer of ownership would never take place.

In essence, any commodity based market system can be described as a barter system. Our modern (essentially worldwide) financial system of fiat paper money issued from a central bank and loaned at interest on the financial market is not a traditional barter system. The medium of exchange (paper currency) is not in itself a commodity and has no intrinsic value. Had our desert island dweller offered his native friends paper dollars (or Euros, Yen, Pounds, etc.) instead of something that they perceived as having intrinsic value, such as the sweet, juicy berries, he would probably not have been enjoying the roasted meat anytime soon.

We have seen that a prerequisite of a free market is the right of personal ownership and its natural extension, the right of private property ownership. We know that in order to trade freely, each participant must perceive a greater value in the goods received than in the goods relinquished. We have learned that there can be no capital investment without the prior acts of sacrifice and saving and that these activities, to be successful, must proceed without outside interference.

Structure – Who owns the Fed?

"Permit me to issue and control the money of the nation and I care not who makes its laws." Mayer Amsched Rothschild "Crony capitalism = fascism....fascism is capitalism in decay" Vladimir Lenin “We make money the old fashioned way. We print it.” Art Rolnick, Chief Economist for the Minneapolis Federal Reserve Bank The Federal Reserve System (FRS), to paraphrase Winston Churchill, is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is the bankers' legalized plunder.

Structure

<update>

Typical Corporate Structure Compared with the Fed

The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, shareholders only stand to lose their investment, and employees will lose their jobs, but neither will be liable for debts that remain owing to the corporation's creditors. A corporation can be a for-profit company or a non-profit company. It can be a stock corporation or a non-stock corporation. A non-profit corporation will generally always be a non-stock company. A corporation may have one or many owners, and may be chartered in such a way that each owner has property in an equal share of the corporation.

The Federal Reserve System is in one sense a non-stock corporation, a public one but not publicly traded, where each owner holds an equal share. In another sense it is a private corporation, since its shares are not traded on the stock exchange.

Banks come in several flavors, commercial banks and savings and loan associations. In terms of ownership they can be non-stock corporations (such as mutual savings banks) or publicly traded stock corporations.

Corporations are generally chartered or registered at the state level, but have very few requirements imposed regarding their structure. National banks, however, are incorporated at the federal level, yet they still are structured in a way that is similar to state-chartered institutions. Shareholders meet at least annually, elect directors to a governing “board” which chooses one among them to be the chair. This board hires the operating and financial managers of the company and provide direction and guidance to the operation of the firm. This description holds true, largely, for financial and non-financial institutions.

Motivations for the Formation of a Typical Corporation and that of the Fed

Commercial banks have been required since 1863, to have a federal charter. The National Bank Act , amended in 1864, 1865 and 1866, mandated these banks to issue a national currency; it also imposed a tax of 10% on the notes of State banks to take effect on July 1, 1866 . The tax effectively forced all non-federal currency from circulation. As time went by this system was found deficient in failing to centralize banking, failing to end the deflation of the 19 th century, leaving intact an inelastic currency and immobile reserves.

These problems were to be relieved by the implementation of the Aldrich Plan . This plan would create twelve National Reserve Associations, whose actions would be controlled by a national board of commercial bankers. These associations would make loans to member banks, create money to make the currency more elastic, and would be fiscal agents of the U.S. government. However, this was a too blatant private system. The opposition led to new committee work, which finally crafted the Federal Reserve Act, enacted in 1913.

More important than the banking panics (of which there were not that many from 1865 through 1913), the tendency toward mild deflation during the 1900s placed tight control on the monetary system. The rich who owned the banks wanted a way to create inflation. You cannot have inflation-driven banking profits under an objective monetary system.

The objective of the Fed is to stabilize the monetary system, prevent asset bubbles, and to provide better supervision of the banks. The powers of the Fed enables it to stretch or shrink the total supply of money, thus decreasing or increasing interest rates. While member banks would benefit from lending out money at high rates, they depend on the spread between the rate at which they borrow and the rate at which they lend. No matter how great the spread is, however, if the rates are too high, borrowing is discouraged and bank profits fall.

Elastic money usually means a continually increasing money supply, which drives down rates, inviting customers to borrow more. Unfortunately this also discourages saving. It is essential in any economy that people have an excess, a savings which can be used to invest in developing the economy, new products and new firms. This can only come from forgoing consumption.

In the kind of economy that the Fed encourages, individuals and ordinary firms will not forgo consumption, save and be the source of investment. Instead, banks will tend to be the funders of new businesses and products.

The Fed was also created for the reason that banks often had too little access to reserves besides what was in their own vaults. Reserves were immobile. While cities usually had a dominant bank to which other banks could turn for liquidity in case of a run, many banks scattered across the country were defenseless. Standard practice had become loaning out nearly all of their capital, rather than just the bank's equity (what they owned free and clear). Often most of the gold they held was deposited by customers, and most of that was normally lent out. A run on the bank could force a bank to close, especially the most risk-taking “rogue banks.” Not only did this give banks a bad name, but also invited new entrants into banking, for the easy profits.

In actuality, the Federal Reserve System helped the member banks to become more risk-taking and also tended to make banking a more closed field, as the existing membership could set the rules for banking through the Fed, making their membership a cartel.

All member banks had the same reserve requirements, and would “loan up” to the same extent, pooling their unused reserves at the Fed. The Fed could move those reserves as needed when any member bank did get into trouble.

</update>

The purpose of the Fed – if the government needs to finance part of its budget by borrowing it could sell its bonds directly to the public, to banks and others. This need of the government in no way includes the need to create additional profit opportunities for the private banks. It does not require that banks should go beyond lending out more than what assets they hold free and clear.

The government's requirements do not entail its caring and feeding another institution that manipulates the money supply independently of the policies set by the President and Congress, and which regulates interest rates and reserve requirements in order that the rest of the banking world can lend out and earn interest on “excess reserves” up to ten times over (that multiplier being the inverse of the reserve ratio).

Someone might object that the government benefits from the fact that the Fed maintains a monetary system that tends to be elastic on the positive side, generally increasing the money supply more often than decreasing it, causing an inflationary trend. This benefits the government, in aiding its eventual repayment of debt by lowering the value of the dollar. True, this is default on the debt by stealth, taxation without representation.

However, the government could very well increase the money supply on its own through the Treasury Department. It cannot do this when borrowing by selling bonds to support its deficit spending. This borrowing temporarily removes money from the market. It would have to print new money. This would be inconvenient because the thievery would be much to open to discovery. The mystery of having it generated through the Fed works much better because the intuition of most people deems it understandable and proper.

The government can take care of its funding needs quite well without the Federal Reserve. This leaves the major and primary purpose of the Fed as being for the benefit of private banks, to set rates and enable the multiplying of amounts that can be loaned out and earn interest beyond their equity.

The government, in terms of its legitimate functions of providing defense and an objective legal system, does not need to depend on a Federal Reserve System. However, the banking cartel could not possibly carry out the money creation and multiple lending of the same funds without its use of government coercion. In order to do this in such a way that the scheme is not identified for what it really is, required a fuzzy definition of the functions of the Fed and a deceptive definition of its structure.

How is the Fed structured? For all the details of this, consult the U.S. Code: Title 12, chapter 3. An alternate source is The Structure and Function document at the Atlanta Fed.

The Board of Governors (BOG)

• Appointed by the President of the U.S., confirmed by the Senate
• The BOG is composed of seven Governors with 14-year terms, staggered to expire in two years.
• The Board of Governors is located in Washington, D.C.
• Governor – note that this is a term not normally used in private business. It is a government title. However, a government entity, such as a state within a nation, normally has just one governor. Is it not a deceptive usage to call directors on a semi-governmental board “governors?”
• A Chairman and a Vice Chairman are also appointed by the President and confirmed by the Senate, for four-year terms. They may be re-appointed.

The Federal Open Market Committee (FOMC)

• Appointed by the President of the U.S. , confirmed by the Senate
• Membership: the Board of Governors and five of the twelve Federal Reserve Bank presidents on a rotating basis for a one-year term – with the president of the New York being a permanent member.
• Traditionally, the chairman of the Board of Governors is elected chairman and the New York Bank's president is elected vice chairman.
• The FOMC is the Federal Reserve's key monetary policy decision-making unit. It meets formally eight times a year in Washington, D.C. It oversees open-market operations, the principal tool of monetary policy, which influences short-term interest rates and determines reserve requirements and monetary growth. Two other tools used at times to implement policy are the reserve ratio and the discount window. The FOMC is made up of the seven Board Members and five of the 12 Reserve Bank presidents. These presidents bring regional information to the meetings and, historically, have had relatively conservative voting records due in part to their insulation from political pressures. The Fed's own telling of this story largely agrees with the House of Representatives Joint Economic Committee. From the Fed's FAQ .

The Twelve District Federal Reserve Banks

• Board of Directors. T he directors are elected by the district member banks, two thirds of them being non-bank employees. Of the nine directors, six—three class A, representing the banking industry, and three class B—are elected by member banks, including all nationally chartered banks and state-chartered banks that meet certain requirements. Three class C directors, including the chairman and deputy chairman, are appointed by the Board of Governors. Class B and C directors represent agriculture, commerce, industry, labor, and services in the Federal Reserve District; they cannot be officers, directors, or employees of a bank, and class C directors cannot be bank stockholders.

Each district bank has one or more subordinate branch banks, each with a similarly structured board. The New York Bank is clearly "the first among equals" since it not only sits in the world's financial center but serves as the Federal Open Market Committee's operating arm, conducting open market operations and foreign exchange intervention. Congress chartered these banks and, consequently, has oversight responsibilities for them.

See The NY Fed board

• Operating Officers – president and vice president nominated by the bank's board and approved by the BOG
• Twelve Federal Reserve Banks make up the operating arm of the Federal Reserve System (FRS). They operate a nationwide payment system, clearing checks and electronic transactions between banks, supervising certain financial institutions, distributing the nation's currency and coin, and serving as a banker for commercial banks and the U.S. Treasury. Each bank has a President nominated by its board of directors and approved by the Board of Governors.

Who Owns the Fed?

Ownership -- The owners of the NY Fed include the largest American banks and the NY Fed may be partially owned by foreign banks, such as the Bank of England and the Rothschild banking dynasty. Fact is that some foreign banks operate subsidiary banks that are national banks in the NY Fed district. The importance of the NY Fed arguably enables it to exercise greater influence or control on the whole FRS.

• BOG “controlled” by the government
• The Federal Reserve Banks

Earmarks of a government body or agency:

What makes an institution part of the government?

1. It is clearly run by an official or officials who is/are elected or appointed by a government official, rather than elected by owners in the public. The BOG is. Ownership is not changeable through trading of shares in the market. Fed shares cannot be sold.
2. Who pays the employees? Another telling sign is the Board of Governors are paid as Federal employees while the branches use their own payroll system.
3. Conflicts of interest are ruled out for all of management by requiring that they place all of their investments in trusts and giving up all private employment. True for the BOG. Employees of the Fed banks, however, only need to avoid trading shares based on insider information within the Fed. “In order to avoid even the appearance of acting on confidential information, an employee authorized to have regular and ongoing access to Class I FOMC information should not knowingly:

a) purchase or sell any security (including any interest in the Thrift Plan for Employees of the Federal Reserve System, but not including shares of a money market mutual fund) during the seven calendar day period prior to and the day(s) of a meeting of the FOMC; or

b) hold any security for less than 30 days, other than shares of a money market mutual fund. http://www.newyorkfed.org/aboutthefed/ob43.pdf page 3.

4. Health benefits and retirement programs are provided by the same government plan by which other government employees and officials are covered. The Fed has its own health and retirement plans.
5. The top level office is located in the District of Columbia . The Fed headquarters is on the National Mall in DC.
6. The Internet presence is under the .gov top level domain. The Fed has a .gov TLD, but the twelve banks use .org.
7. It is exempt from taxes. No part of the Fed is taxable.
8. It cannot be sued unless the government says it can. The Federal Reserve Act says that the Fed can sue and be sued. In the court ruling “Lewis vs. US”, it was determined that the branches can be considered ‘private' for the purposes of tort law (i.e. they can be sued) relative to the day to day operations
9. Its decisions are subject to overruling by the President. No. Congress can, of course, enact new laws to change the Fed's structure and/or function. The only possible presidential intervention possible is removal of a BOG member for serious cause.
10. This week [ 09/21/2007 ], former chairman of the Fed Reserve Alan Greenspan in an interview aired on PBS' News Hour was asked by Jim Lehrer what should be the proper relationship between a chairman of the Fed and The President of the United States. In a shockingly honest tone Greenspan replies,

"Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don't, frankly, matter.”

Earmarks of a private institution

•  Run by a board of directors elected by share-holders

•  Everyone within the organization is paid by the company payroll

•  The board of directors require no government approval

•  Ownership is changeable by the trading of shares in the market

•  The value of the shares are determined by the market

•  The amount of the dividend payments, if any, are determined by the board of directors

•  Health benefits and retirement programs are private

•  The headquarters location is at the discretion of the board

•  The Internet presence is under the .com TLD, or any other than .gov

•  Unless it is registered as a non-profit, it is subject to taxation

•  It can be sued.

•  Its decisions are not subject to overruling by the President

•  Shareholders may be U.S. citizens or foreign holders – note that this holds true for the private banks that are Federal Reserve members and owners.

Who are the owners, the private banks who are members of the Fed, or its shareholders? The following is the list of members of the New York Federal Reserve District, ^ a b c http://www4.fdic.gov/IDASP/index.asp. Cookies must be enabled to use this interactive website. Choose the "Find Institutions" section. Then leave all of the fields with the default value then choose "find". Wait a few moments to be prompted to "save as". It will be about a 3.4MB .csv file that will be downloaded. This file can be viewed with a spreadsheet such as openoffice.org or Microsoft excel.

I entered only the "Founded After" date field with “1913/11/01” to select just the banks who were the members as of the founding of the Fed.

An important sample of this spreadsheet would be the members of the New York Federal Reserve District, which requires sorting the sheet on the “FED” column and selecting all of those with the “FED” value of “2”. Here are the 107 members of the NY Fed in late 1913:

Adirondack Bank

Alliance Bank, National Association

Amboy Bank

Apple Bank for Savings

Astoria Federal Savings and Loan Association

Atlas Savings and Loan Association

Ballston Spa National Bank

Bank of Akron

Bank of Baroda

Bank of Cattaraugus

Bank of China

Bank of China

Bank of Holland

Bank of India

Bank of Millbrook

Bank of Richmondville

Bank of Smithtown

Bessemer Trust Company

Bogota Savings Bank

Brooklyn Federal Savings Bank

Carthage Federal Savings and Loan Association

Cattaraugus County Bank

Cayuga Lake National Bank

Chemung Canal Trust Company

Community Bank, National Association

Cross County Federal Savings Bank

Deutsche Bank Trust Company Americas

Emigrant Bank

Fairfield County Bank

Fairport Savings Bank

First County Bank

First Federal Savings of Middletown

First Hope Bank, A National Banking Association

First Investors Federal Savings Bank

First Niagara Bank

First State Bank

Five Star Bank

Flatbush Federal Savings and Loan Association

Freehold Savings and Loan Association

Fulton Savings Bank

Gibraltar Savings Bank, FSB

Glens Falls National Bank and Trust Company

Gouverneur Savings and Loan Association

GSL Savings Bank

Hudson City Savings Bank

Kearny Federal Savings Bank

Lake Shore Savings Bank

Llewellyn-Edison Savings Bank, FSB

Manasquan Savings Bank

Manufacturers and Traders Trust Company

Maple City Savings Bank, FSB

Medina Savings and Loan Association

Metuchen Savings Bank

Millington Savings Bank

NBT Bank, National Association

New York Community Bank

Newtown Savings Bank

Northfield Bank

NVE Bank

Orange County Trust Company

Oritani Bank

Pamrapo Savings Bank, SLA

PathFinder Bank

Pioneer Savings Bank

Provident Bank

Putnam County Savings Bank

Rhinebeck Savings Bank

Rondout Savings Bank

Roselle Savings Bank

RSI BANK

Savings Bank of Danbury

Sawyer Savings Bank

Seneca Falls Savings Bank

Somerset Savings Bank, SLA

Steuben Trust Company

The Adirondack Trust Company

The Bank of Castile

The Bank of New York Mellon

The Bridgehampton National Bank

The Canandaigua National Bank and Trust Company

The Citizens National Bank of Hammond

The Delaware National Bank of Delhi

The Dime Svgs. Bank of Williamsburgh

The Elmira Savings Bank, FSB

The First National Bank of Dryden

The First National Bank of Groton

The First National Bank of Jeffersonville

The Lyons National Bank

The National Bank of Coxsackie

The National Bank of Delaware County

The National Union Bank of Kinderhook

The North Country Savings Bank

The Oneida Savings Bank

The Provident Bank

The Putnam County National Bank of Carmel

The Rome Savings Bank

The Stissing National Bank of Pine Plains

The Suffolk County National Bank of Riverhead

Tioga State Bank

Ulster Savings Bank

Union County Savings Bank

Union Savings Bank

Walden Savings Bank

Wallkill Valley Federal Savings and Loan Association

Watertown Savings Bank

Wilber National Bank

WSB Municipal Bank

 

Careful perusal of the list will convince anyone that foreign banks have set up subsidiaries in the NY district that have become member banks and thereby, owners of the Federal Reserve. Banks with the country names of Holland, India and China stand out. Among those who were not listed among these existing in 1913, more recently founded foreign bank branches is the Royal Bank of Scotland (RBS National Bank in Bridgeport, CT).

One might object that this does not mean foreign bank owners have any significant influence on American banking policy. What influence bankers have on government policy in general may be more important.

The following two tables of JP Morgan Chase shareholders can be found through the fiance.yahoo.com stock quote web-page, selecting the"Major Holders" link.

One national bank in particular has an ownership that is revealing. JP Morgan Chase is a member of the Philadelphia Fed, and has its chairman/CEO Jamie Dimon on the board of the New York Fed. Individuals are minor shareholders, such as the officers:

Holder	Shares	Reported
DIMON JAMES	2,992,503	25-Jan-08
WINTERS WILLIAM T	1,225,912	25-Jan-08
HARRISON WILLIAM B JR	1,173,569	31-Dec-06
SCHARF CHARLES W	1,061,353	1-Feb-08
BLACK STEVEN D	893,875	25-Jan-08

The significant shareholders are institutions:

TOP INSTITUTIONAL HOLDERS (as of 2008/06/30)

Holder	Shares	% Out	Value
“Barclays Global Investors”	157,667,999	4.59	$5,409,589,045
“AXA”	140,498,887	4.09	$4,820,516,812
“STATE STREET CORP”	131,086,954	3.81	$4,497,593,391
“VANGUARD GROUP, INC.”	107,840,912	3.14	$3,700,021,690
“FMR LLC”	97,127,149	2.83	$3,332,432,482
“ DAVIS SELECTED ADV, LP”	74,560,855	2.17	$2,558,182,935
“MORGAN STANLEY	55,908,016	1.63	$1,918,204,028
“Bank of New York Mellon”	54,224,873	1.58	$1,860,455,392
“Capital Research Global Invst”	51,293,900	1.49	$1,759,893,709
“NORTHERN TRUST CORP”	42,740,560	1.24	$1,466,428,613

The 1976 study by the House of Representatives [pdf] is the tip of the iceberg. The interlocking directorships between the Fed presidents and board members of private banks and other corporations is tight. Later interpretations which include family relationships, including heirs to ownership of private banks and different generations of wealthy persons participating in the Fed beg to make the conclusion that private control is strong.

<update>

Adding research into inter-marriages between banking families to the 1976 study of interlocking directorships, three authors published controversial books: Eustace Mullins, “ The Secrets of the Federal Reserve ,” (Bankers Research Institute, 1984) and Gary S. Kah, “ En Route to Global Occupation .”

Kah's list (p. 13) of original Fed owners (with about 300 stockholders) is:

• Rothschild Banks of London and Berlin
• Lazard Brothers Bank of Paris
• Israel Moses Sieff Banks of Italy
• Warburg Bank of Hamburg , Germany and Amsterdam
• Kuhn Loeb Bank of New York
• Lehman Brothers Bank of New York
• Goldman Sachs Bank of New York
• Chase Manhattan Bank of New York (Controlled By the Rockefeller Family Tree)

Mullins' list (p. 33) is

• The Rockefeller Kuhn, Loeb-controlled National City Bank took the largest number of shares of any bank, 30,000 shares.
• J.P. Morgan's First National Bank took 15,000 shares. When these two banks merged in 1955, they owned in one block almost one fourth of the shares in the Federal Reserve Bank of New York , which controlled the entire system, and thus they could name Paul Volcker or anyone else they chose to be Chairman of the Federal Reserve Board of Governors.
• Chase National Bank took 6,000 shares.
• The Marine Nation Bank of Buffalo , later known as Marine Midland, took 6,000 shares. This bank was owned by the Schoellkopf family, which controlled Niagara Power Company and other large interests.
• National Bank of Commerce of New York City took 21,000 shares.

Mullins created a long chart which builds on the 1976 House study of interlocking directorships, adding relationships by marriage and inheritance, to people of other generations. His list of the original owners of the Fed differs from that of Kah. One of them must be wrong, possibly both. I cannot tell.

There are many foreign banks who operate branch banks in the United States, most of which are national banks, i.e., are members of the Federal Reserve System. The Fed itself maintains a large listing of them. Consider the interests served by the Fed, in the light of the fact that many members are foreign entities, and that the owners of them and directors also serve on the boards of other foreign businesses, as do their American counterparts. Are we really to believe that the Fed exists to serve the end-users of banks, individuals and small businesses in the U.S?

Lastly, a few personal details of the current scene in 2008, of New York Fed member bank owners. Among the banks listed above which are NY Fed members, Deutsche Bank is noteworthy.

A profile from Forbes :

Deutsche Bank, AG, a large bank holding company headquartered in Frankfurt , Germany operates in several U.S. cities, including New York City , in banking and related businesses. It is headed by Josef Ackermann. He is also Deputy Chairman/Director of Siemens, AG. The 59-year old Ackermann, who “joined Deutsche Bank as a member of the Management Board in 1996, where he was responsible for the investment banking division. On May 22, 2002 , Dr. Ackermann was appointed Spokesman of the Management Board and Chairman of our Group Executive Committee. On February 1, 2006 , he was appointed Chairman of the Management Board. After studying Economics and Social Sciences at the University of St. Gallen , he worked at the University's Institute of Economics as research assistant and received a doctorate in Economics. Dr. Ackermann started his professional career in 1977 at Schweizerische Kreditanstalt (SKA) where he held a variety of positions in Corporate Banking, Foreign Exchange/Money Markets and Treasury, Investment Banking and Multinational Services. He worked in London and New York , as well as at several locations in Switzerland . Between 1993 and 1996, he served as President of SKA's Executive Board, following his appointment to that board in 1990. Dr. Ackermann is a member of the Supervisory Board of Siemens AG (Second Deputy Chairman) and a member of the International Advisory Council of Zurich Financial Services Group (since January 2007). Until April 2007, he was a member of the Supervisory Board of Bayer AG.”

Similar stories abound within the banks that are shareholders in the Fed and elect a number of Fed directors.

</update>

The Influence of Government

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. The Fed's financial independence arises because it is hugely profitable, among others, due to its ownership of government bonds. It returns billions of dollars to the government each year.

The biggest benefit to government is the passive role that the government can take in defaulting on its debt. It can spend billions per year beyond tax collections. On the model of what Germany did in 1923- the expansion of money supply is used to make repayment of government borrowing incredibly cheap.

Germany let its money supply expand four-fold, ending with the proverbial stories of wheelbarrows of cash needed to buy a load of bread. See the German Railroad Notes article. The original number of Deutsche Marks needed to repay the national debt was soon trivial. However, government debts to other nations remained a crushing burden since it was denominated in Gold Marks.

The Federal Reserve is subject to oversight by the Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. The hyper-inflation that Germany experienced is of course not at all what the Fed would want. Nevertheless, a phenomenon of ninety years ago fades from memory. At least the fact that the result was not intended is forgotten. Fact is that once hyper-inflation starts, it roars on to catastrophe with no way to stop it.

As long as government debt is not denominated in an objective store of value such as gold, government keeps on borrowing, whether the economy crashes or not. Moreover, bankers are like cats, they always land feet down.

The Influence of Private Corporations

Putting aside citations from books and articles that propagate conspiracy theories, if we look for cogent evidence of private control of the Fed, two well-researched aspects stand out.

•  Underlying the original function of the Act and the strengthened structure in the amendments of 1933 and 1935, but especially a Congressional study in 1976, we can gain a good understanding of the degree to which the Fed was subject to influence by private corporation directors. This relies on the appearance of certain names, usually well-connected upper society members, as directors of various Fed banks and of member banks and other corporations in their districts.

•  This is broadly bolstered by the fact of the large, primary benefit to the private banks who are members of the association, through being able to encourage borrowing by manipulation of interest rates and readily available credit and being able to lend out (among the group of banks) the same amount of reserves up to ten times, earning up to ten times the normal interest on any given amount of increased reserves.

Conclusion

The Federal Reserve System is a mixed ownership institution. The BOG is owned by the government, but the twelve Federal Reserve Banks are privately owned by the member banks in their districts. It took a genius to conceive of an institution clouded in so much confusion. Perhaps more than one. The chief among them was Paul Warburg. The Fed is a rare combination of public and private organizational forms and titles, with a mixture of elements of ownership and control unrivaled in the world. It is a true Chimera.

The final operative factor is “control” rather than any traditional concept of ownership. Traditionally, to own something means that you can use it in any manner you see fit as long as you do not harm anyone else, and freedom to dispose of it. The member banks do not have this kind of control. But neither does the government. The government can close it down, but there are strict limits in law and firm public expectations to prevent free use of the Federal Reserve System for whatever the government may think up.

Although there are several features of the Fed and its activities that indicate it is under some control by the government, much of the evidence supports the fact that it is independent of the government.

When banking giants J.P. Morgan, the First National Bank of New York , the National City Bank of New York, and Kuhn, Loeb & Company met at Jekyll Island in 1910 to plan the creation of the Federal Reserve, it cannot be said that their motivation was to curb their own power and wealth. All objective knowledge being contextual, so also is certainty.

In the context of the available evidence it is certain that the Fed is a combination of a truly hungry private business and a fascist government.