[banking 101] the role of the fed in and out of the u.s.a.

David Farrer sent me an article from Liberty, October 2004, Volume 18, Number 10 - Bill Woolsey, teacher of economics at The Citadel in Charleston, S.C.

It is designed to debunk "conspiracy theories" about the Fed. Here is what the article says and note that any brackets or …s are grammatical - they do not exclude any information:

"Isn't it true that the Federal Reserve is privately owned?" I agreed that it was, "kind of."

According to the Atlanta Federal Reserve bank, "They were to be quasi-private bankers' banks, owned by the member banks, which would buy all the stock of the Reserve Banks and receive dividends for it."

Mishkin explains, "Each of the Federal Reserve banks is a quasi-public (part private, part government) institution owned by the private commercial banks in the district that are members of the Federal Reserve system."

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."

My note: Those purposes are, of course, to fulfil their charters by the the govenment of the United States.

All member banks are U.S. chartered banks — chartered by the federal government as national banks, or by one of the states. However, the stockholders of the various banks can be U.S. citizens or foreigners. So, private investors, including foreigners, own the member banks which in turn seem to own Federal Reserve banks.

Aside from the transactions with their Federal Reserve banks to maintain the 3% ratio to capital, the member banks cannot buy additional shares or sell off their shares. They cannot pledge the shares as collateral for loans. Most investors purchase stock to earn capital gains, in the hope that it will increase in value.

The Federal Reserve Act fixes dividends at 6% per year. That is $6 per year per $100 share. Any additional earnings go to the U.S. Treasury.

Each member bank … gets just one vote [for the Board of Directors] regardless of the number of shares it owns in its Federal Reserve bank.

The Class A directors can be involved in the banking industry and usually are. Class B directors are elected in much the same way, except that none of them can be bank employees or stockholders. Class C directors cannot be involved in the banking industry either [and they] are … appointed by the Board of Governors in Washington D.C.

There are seven members of the Board of Governors and they are appointed by the president of the United States with the advice and consent of the U.S. Senate. The Board of Governors dominates the twelve Federal Reserve banks. Not only does it appoint one-third of their boards of directors, it has an effective veto power over the selection of the twelve Federal Reserve bank presidents.

In 2003, the Fed changed its lending policy. Today, any financially sound bank (member or not) can obtain loans from its district Federal Reserve bank at the primary credit rate. It is set at 1% above the Federal Funds rate. While the Federal Reserve Act implies that lending at the discount rate would be the key element of monetary policy, that approach was long ago superseded by open market operations.

The Federal Reserve Open Market Committee directs open market operations. It is made up of the seven members of the Board of Governors and five Federal Reserve Bank presidents. The president of the New York Federal Reserve always serves and the other four slots rotate among the other eleven Federal Reserve bank presidents.

The committee sets a target for the Federal Funds rate. When the Federal Reserve Open Market Committee sets its target for the Federal Funds rate, it is also determining the primary and secondary credit rates for loans by the Federal Reserve banks. Today, monetary policy is controlled entirely by the Open Market Committee.

Because of the 14-year terms for the members of the Board of Governors, today's monetary policy mostly depends on the appointments made by politicians in the past. Short of rewriting the Federal Reserve Act, appointments by today's politicians will only gradually effect future monetary policy.

My note: Therefore the power of the Fed is vested in the Board and the consituent presidents.

When the Fed was formed, the United States was on a gold standard and the Fed was obligated to pay off Federal Reserve notes on demand with lawful U.S. money — mostly gold coins and gold certificates. While the Fed no longer pays off Federal Reserve notes with anything, it continues to account for them as liabilities.

The Federal Reserve doesn't directly lend currency to banks. When a bank gets an "advance" from the Fed, the Fed just makes an entry into its computer and credits the bank's deposit account.

[T]he Federal Reserve creates money out of thin air through open market operations — purchasing government bonds.

My note: Therefore, you hold a dollar in your wallet and in troubled times, wish to redeem it for its true value. You can't. It is worth only the paper it's printed on. It is non-redeemable. This is fiat money and all western economies run on this. Therefore, any dealings in dollars are book entries in a ledger, unbacked by anything hard.

This was one of the disputes between Adam Smithites and the Mercantilists, the latter who demanded the dollar was backed up by hard bullion.

Do shady international bankers control the Federal Reserve? Perhaps, but not because they "own" the Federal Reserve system.

My note: Ownership is a largely meaningless term - control is a better term and control is very much by the FOMC on monetary policy, i.e. the supply of currency and credit.

More importantly, by taking away the right of banks to issue redeemable, dollar-denominated banknotes, the Fed's compulsory monopoly on currency issue reduces bank earnings by tens of billions of dollars.

My note: And there it is. Not only does the Fed control monetary policy in the nation but it restricts lesser banks's operates through regulation. It is a fixed market. On the other hand, the FOMC is concerned primarily with open markets and therefore global markets as well. The next topic to look at is how far the three key Central Banks in the U.S., Europe and Britain operate in unison in response to global conditions.