One of the oldest, and most common conspiracy theories around for close to 100 years now is that the Federal Reserve is some privately run cartel with the goal to seize control for some grand new world order plot. Of course, being almost 100 years old, you would think that such a plot would have already been executed, with all of us now under control of a one world Illuminati/Trilateral Commission/Builderberg/Bohemian Grove/Whatever….
Frankly, if the Federal Reserve was to create a new world order, it has done a pretty damned poor job of it.
In all seriousness, the Federal Reserve remains one of the worst understood government agencies in the public eye. If you were to believe the conspiracy theories, it is not a government agency at all, but a cabal of top-secret bankers who secretly control the strings. Sadly, the truth is far less exciting.
First things first, there is no Federal Reserve Bank. The Federal Reserve System are a group of 12 banks, split by geography, located across the country, as you can see here:
The banks are (numbered in coordination with the map above):
- Federal Reserve Bank of Boston
- Federal Reserve Bank of New York
- Federal Reserve Bank of Philadelphia
- Federal Reserve Bank of Cleveland
- Federal Reserve Bank of Richmond
- Federal Reserve Bank of Atlanta
- Federal Reserve Bank of Chicago
- Federal Reserve Bank of St. Louis
- Federal Reserve Bank of Minneapolis
- Federal Reserve Bank of Kansas City
- Federal Reserve Bank of Dallas
- Federal Reserve Bank of San Francisco
Now, before continuing, let us read what the Federal Reserve System says in regards to its ownership:
The Federal Reserve System is not ‘owned’ by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.
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 Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by 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. Therefore, the Federal Reserve can be more accurately described as “independent within the government.
The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
Says it pretty clearly, the Reserve is part of the Federal Government. The Reserve is independent in that its control is not replaced upon the whim of a new administration. Imagine the chaos in our financial system if control of our money system was in the hands of administrators, who find themselves replaced every 2-4 years. Actually, we don’t have to imagine, because that is what happened under the 2nd Bank of the United States. Within a single administration, three different administrators found themselves appointed due to political posturing, and under them rampant inflation and two major financial crashes, plus direct conflict between the bank and the administration. Not really something we would like to return to, would we?
To ensure independence, the Federal Reserve has a board of governors. The seven seats of the board of governors are appointed by the President to serve 14 year terms, staggered so that no president can appoint more than four governors. Also, five of the Reserve Bank Presidents are voted on by the member banks to join the seven governors to become the Federal Open Market Committee. They cannot be removed except through a motion to suspend, either from within the FOMC or from both houses of congress in a similar way to the handling of an impeachment. This results in these members being independent of the Administration’s politics, avoiding the issues of the 2nd Bank of the United States. By the board makeup being seven government, five bank appointed, it also avoids the issues from the 1st Bank of the United States, whose 25 member board only had five government appointees with the resulting rampant inflation and corruption.
Now, the Reserve does offer shares within the banking system for money put into reserve, as mentioned above. These are not ownership shares, but membership shares, such as one would have in a credit union. To be part of the Federal Reserve system, one must hold membership. This comes to the difference between the Federal Reserve System and a traditional government agency. The individual banks which make up the system themselves are locally operated institutions, as ruled in the Supreme Court case “Lewis v. United States“. Each of these has member banks who can access the services of the Federal Reserve directly, as well as having more direct access thanks to having a dedicated reserve staffer for a contact person. They also get voting rights for their individual banks board of directors. This does not give them ownership in the classical sense, the bank is still owned by the Federal Government, just access.
Some claim that it is secret as to whom holds these membership shares is a closely held secret. If that is the case, it is a secret being kept by morons. Each Reserve Bank posts a list of their members publicly, which you can find on each of the reserve banks website. Here is the list for the Federal Reserve Bank of Boston’s members, for example. The amounts deposited do not decide their stake of ownership, like you would find with ownership stock. Instead, the deposited amount will decide the size of your bank’s asset cap. Simply put, the more you have on reserve determines how large a deposit base you may hold for your institution with the ratio being between 0% for incredibly tiny banks to 10% for the nations largest. Being a member offers a single membership share, so, going over the Boston ownership list here, Citizens Bank (through their subsidy of State Street Bank & Trust Company), a subsidy of the Royal Bank of Scotland, a multi-trillion dollar banking conglomerate, has the same strength in membership as the Walpole Co-operative Bank holding only $351 million in assets. Both are equal in membership and say in the Federal Reserve system.
Contrary to popular claim, the Federal Reserve System is regularly audited. These audits do leave out conferences with foreign agents and members of congress, however. While there was an Audit the Fed bill passed earlier this year which would remove those restrictions, it turns out that auditing those meetings is prohibited under other laws, resulting in the bill not actually accomplishing its goals, and instead it would end future authority to engage in audits over the Federal Reserve System, by eliminating the authority for the Comptroller in charge of audits to look at the Credit Facilities by the striking of section (f) under the bill.
Some other claims against the Federal Reserve is that it creates money out of thin air. This is one of the oldest, and least correct statements of what the Federal Reserve does. What the Fed can do is to move assets on to, or off of, a banks balance sheet at the reserve. If a client increases its demand for currency from the reserve, it is reducing the assets held by the reserve by that same amount, and vice-versa. The same way your hometown bank works, you take money out, you have less in your bank account. If you remove assets in the form of currency, your total of how large your bank can be drops. If you pump currency into the reserve, your total of how large your bank can be increases. It’s a give and take. The government sets the amount of minimum reserves that the banks must have in the Fed as well, but the Board of Governors can increase that amount if needed.
In the end, the only agency which can “make money” is the Treasury department, which can credit, or debit, from the general pool as they so demand, while the Fed can only use assets on hand from which to work. The Reserve does physically print the money, but they only print it based on the deposits put into it by the US Treasury department, typically t-bills but also a gigantic supply of gold (larger than what is in Fort Knox).
In the end, the horrible truth of the Federal Reserve is that it is rather dull and boring.