Federal Reserve News

"Crony capitalism = fascism....fascism is capitalism in decay" - Vladimir Lenin

The structure and ownership of the Federal Reserve System (FRS), to paraphrase Winston Churchill, I cannot fully explain the FRS. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is the bankers' legalized plunder.

Structure

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.

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.

Four years later, Woodrow Wilson, who had signed the act into law, regretted it:

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

The organization of the Federal Reserve System (FRS) is strange, some would even say Byzantine. It consists of one top-level agency, the Federal Reserve Board that seems to be part of the government, twelve regional banks, whose shareholders are the member banks and a monetary policy committee.

We turn to the House of Representatives Joint Economic Committee's Report “ The Importance of the Federal Reserve,” where we learn that the FRS is a Federal system made up of (1) a central government agency, the Board of Governors in Washington, D.C., (2) 12 regional banks located in major U.S. cities, and (3) a monetary policy decision-making unit, the Federal Open Market Committee (FOMC), composed of representatives from both the Board and banks. The report continues:

The Board of Governors (BOG).

The BOG is composed of seven Governors appointed by the President of the United States and confirmed by the Senate to staggered 14-year terms. A Chairman is also appointed by the President and confirmed by the Senate, for four-year terms. The Board of Governors is located in Washington , D.C.

Twelve Federal Reserve Banks.

The operating arm of the Federal Reserve System (FRS) consists of Twelve Federal Reserve Banks. 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. [the directors are elected by the district member banks, some of which are non-bankers] 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. The owners of the NY Fed include the largest American banks and the NY Fed is also alleged to be partially owned by foreign banks, such as the Bank of England and the Rothschild banking dynasty. The importance of the NY Fed arguably enables it to exercise greater influence or control on the whole FRS.

Federal Open Market Committee.

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. 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 .

Who owns the Fed?

The regional Federal Reserve Banks are clearly private owned, but they are controlled by the presidentially appointed Board of Governors, giving it the appearance of being part of the government.  The Board, specifically the Federal Open Market Committee (FOMC) sets monetary policy and the Federal Reserve Banks execute it.  In addition, the Fed does not use any taxpayer money to fund its operations.  While the Fed does collect interest on government bonds, the Treasury would have had to make such payment even if they Fed did not hold any bonds.  Moreover, the Fed rebates a significant share of its net income to the Treasury each year, revenues the government would not have at all if the Fed owned no government bonds.  

By definition, the name "Federal Reserve" is deceptive. The institution is not Federal; neither does it hold any reserves. The Federal Reserve is a privately owned corporation set up for profit, the profit of the member private banks.

The Fed itself claims that it is not owned by anyone, an independent agency within the government.

While the President of the U.S. appoints the Federal Reserve Board (FRB) members, the Federal Reserve Banks' boards consist of six directors elected by the member banks and three selected by the FRB. While no government funding was ever made, the close tie of the FRB to the government seems to make its owner the U.S. government. The twelve Reserve banks are much more clearly tied to their owners, the shareholders who are their members.

The Federal Reserve appears to be an example of crony capitalism or state capitalism . The important thing to note is that the power and control is held by the banking system. To be sure, since it is the creation of congress, congress holds the power to alter the charter and steer the FRS. However, until congress does so, in the day-to-day operation of the FRS, it holds sway over the monetary system and the banking industry, and performs critical services to both the banks and government.

For the banks, it expands credit and sets reserve requirements low enough to permit the banks loaning out and earning interest multiple times on the same amount of reserves. For the government it expands the money supply continually, which enables the government to employ the hidden tax of inflation to default on its debt by stealth, repaying its loans with ever cheaper dollars.

The Fed is unaccountable. It is accountable to itself. It was made so “to keep politics out of monetary policy.” I wonder whether that was done to hide private ownership.

Is it private or public? The arguments that it is part of the U.S. government are not convincing, but rather superficial. Was the Fed created with this particular shape to hide ownership by the government? Hardly. The headquarters building would not have been placed on the National Mall and the public face of the Fed on the Internet would not have employed the DOT GOV top-level domain, if it were not part of the government.

The above clues are red herrings. So is the source of authority with which we are supposed to credit the presidential appointment and senate approval of the BOG. What belies this is primarily the predominance of former top-level bankers on the BOG, as well as the boards of the twelve reserve banks.

In order to be considered private you would think an institution would be profit making. The Fed is a non-profit: it turns over excess income to the U.S. Treasury each year. However, its very existence and how it operates enables bankers to maker huge profits. To whom, then, does the Fed owe its loyalty?

The courts have taken notice of the Fed's peculiar status. In the 1982 case, Lewis v. United States (see "The Lewis Decision"), the Ninth Circuit Federal Court of Appeals opined, "Federal reserve banks are not federal instrumentalities for purposes of a Federal Torts Claims Act, but are independent, privately owned and locally controlled corporations." On the other hand, the opinion notes, "The Reserve Banks have properly been held to be federal instrumentalities for some purposes."

Does the United States government own the Fed? No, the Fed owns the United States .