Is the U.S. Federal Reserve privately owned?

Editor

Australia’s central bank is the Reserve Bank of Australia. It is a publicly-owned entity and, although enjoying a degree of independence, is ultimately responsible to the federal government and is obliged to cooperate with Treasury.

The central bank of the United States is the Federal Reserve System (the Fed) was set up by an Act of Congress in 1913 and is similarly responsible to the U.S. government. Although parts of the Fed share some characteristics with private-sector entities, the Fed was established to serve the public interest. The Fed has a two-part structure: a central authority called the Board of Governors (in Washington, D.C.), and a decentralized network of 12 Federal Reserve Banks located throughout the country. The Board is an agency of the federal government, but is not funded by Congressional appropriations. All net earnings of the Fed are returned to the federal Treasury.

There have been ongoing disputes concerning the extent of the Fed’s independence and its ownership status. Therefore we thought the following information would be helpful, updated from a primer on money entitled “Money Facts”, which was originally published by The Committee on Banking and Currency of the U.S. House of Representatives on September 21, 1964.

Some people erroneously believe that private banks “own” the Fed. This is because the original Act of Congress required that member banks invest a sum equal to 6% of their capital in the stock of their regional Federal Reserve Bank. But this was not required to disseminate Federal Reserve owner- ship. Forcing member banks to “invest” some of their capital in the Fed was essentially a guarantee against loose practices. So one can say that the Fed is not owned by anyone.

The “stock” owned by these banks is not stock in the normal, corporate- investment sense of the word. It carries only nominal proprietary interest, it cannot be sold or pledged, it represents no claim on Fed assets, and it carries no effective voting rights on any important decisions (i.e. directors appointed by member banks can always be outvoted by people appoint- ed by the President and Congress).

In other words, the “stock” should not be interpreted as ownership stock at all. And the Fed could operate without this “stock”, which serves no worthwhile purpose whatsoever. Eliminating it would change nothing in regard to the basic structure and functions of the Fed. The Fed does not need the money because it has the ability to create money whenever it needs any.