Is the Federal Reserve Bank Public or Private?
August 12, 2012 · Posted in Monetary Economics
Private vs Public Ownership
Some people will say public ownership means something is owned by the government and private ownership means it’s owned by private individuals or corporations, but those are all nothing but fuzzy and imprecise ways of defining the concept at hand. When I lay out a definition I always want to make sure it’s as unambiguous and precise as possible.
That being said, here’s how I would suggest the terms be defined for the sake of a helpful and constructive discussion: Private ownership is the control over matter that has been achieved without the use or threat of theft. Public ownership, on the other hand, is control over matter that has been achieved via the use or threat of theft.
Theft in turn is the initiated occupation of something controlled by another person against that person’s will.
All property origination is of course private. For anything that is supplied by nature and not yet being made use of by anybody can be taken initial ownership of without anybody else exerting control over it at that time, and the occupation occurs without affecting any current owner’s will.
Note that control can be direct physical control but could also mean indirect control, such as instructing other people to do the physical controlling, etc.
For all practical purposes, the main entities engaging in such threats and acts of aggression and theft that characterize public ownership as outlined above, are what people commonly refer to as governments.
The Federal Reserve System
Under our currently prevailing system of societal organization, namely interventionism, where it’s certainly hard to find even just one industry where the state does not heavily interfere in one way or another, it can be argued that no ownership is ever 100% public or private. The real question then becomes is something owned in a rather private or rather public fashion.
For example, if 20% of activity within a business occur under the threat of theft or aggression, while the remaining activities occur without it, one could argue that the organization in question is by and large private.
So let’s examine some facts a little more closely to determine whether the Fed should be considered rather public or rather private:
On the creation of the Federal Reserve System (Fed):
The Federal Reserve Act (ch. 6, 38 Stat. 251, enacted December 23, 1913, 12 U.S.C. ch.3) is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes (now commonly known as the U.S. Dollar) and Federal Reserve Bank Notes as legal tender.
So in other words, an Act of Congress established the Fed first and foremost and laid out the rules that would apply to how it would be implemented and run.
It’s also important to point out that as per this Act …
… all nationally chartered banks were required to become members of the Federal Reserve System. It required them to purchase specified non-transferable stock in their regional Federal reserve bank and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve bank. (Since 1980 all depository institutions have been required to set aside reserves with the Federal Reserve and be entitled to certain Federal Reserve services – Sections 2 and 19.) State chartered banks were given the option of becoming members of the Federal Reserve System and thus to be supervised, in part, by the Federal Reserve (Section 9). Member banks became entitled to have access to discounted loans at the discount window in their respective reserve bank, to a 6% annual dividend in their Federal Reserve stock and to other services (Sections 13 and 7).
In other words, any organization that wants to operate as a National Bank, a concept that results out of government legislation, is required by government law to join the Federal Reserve system and purchase non-fungible ownership shares in their regional Fed branch.
The Fed’s main governing body, the Board of Governors, is a Federal government agency:
The seven-member Board of Governors is the main governing body of the Federal Reserve System. It is charged with overseeing the 12 District Reserve Banks and with helping implement national monetary policy. Governors are appointed by the President of the United States and confirmed by the Senate for staggered, 14-year terms.
The Federal Open Market Committee, arguably the most influential organization within the Fed, is under majority control by the members of the aforementioned Board of Governors:
The Federal Open Market Committee (FOMC) created under 12 U.S.C. § 263 comprises the seven members of the board of governors and five representatives selected from the regional Federal Reserve Banks. The FOMC is charged under law with overseeing open market operations, the principal tool of national monetary policy.
A graphic illustrates the control exercised via these two organizational bodies:
The Fed obviously earns money from interest payments on the assets it holds on its balance sheet. The profit generated is is transferred over to the U.S. Government every year:
The U.S. Government receives all of the system’s annual profits, after a statutory dividend of 6% on member banks’ capital investment is paid, and an account surplus is maintained.
The most recent annual report shows that the Fed made a total profit of $77.3 billion in 2011. Of that a total of $1.5 billion was paid in dividends to member banks while $75.4 was paid to the U.S. Treasury. In other words, the U.S. Government receives around 98% of all Fed profits.
The Fed’s main physical product, the so called Federal Reserve Notes, which all deposits are ultimately convertible into in last resort, is produced by the U.S. Department of the Treasury and sold to member banks of the Federal Reserve System for about 4 cents per note:
Federal Reserve Notes are printed by the Bureau of Engraving and Printing (BEP), a bureau of the Department of the Treasury. When Federal Reserve Banks require additional notes for circulation, they must post collateral in the form direct federal obligations, private bank obligations, or assets purchased through open market operations. If the notes are newly printed, they also pay the BEP for the cost of printing (about 4¢ per note). This differs from the issue of coins, which are purchased for their face value.
Trying to compete with the Treasury Department or the Fed by producing the same product they deal in can get you kidnapped and thrown in a cage for up to 15 years:
Manufacturing counterfeit United States currency or altering genuine currency to increase its value is a violation of Title 18, Section 471 of the United States Code and is punishable by a fine of up to $5,000, or 15 years imprisonment, or both.
Legal tender treatment has ensured an ongoing demand for Federal Reserve Notes, in particular I always like to point to an excellent analysis called “Gold, Money and the U.S. Constitution” from constitutional lawyer Eugene C. Holloway, or my summary of it:
Some scoff at the statement that the legal tender laws are coercive. The answer to those skeptics appears in Andrew Dickson White’s monograph Fiat Money Inflation in France. In 1793, failure to accept the French paper money was made punishable by death and the punishment was actually imposed as demonstrated by the lists of those condemned to the guillotine. In contrast to the Draconian measures taken after the French revolution, the import of the U.S. legal tender laws has been merely to allow private and public debtors to legally discharge their debts by payment of legal tender currency. But this form of interference by the state in private transactions to appropriate the wealth of creditors is coercive nevertheless; and the French experience illustrates the direction that any kind of state coercion can take once the state’s authority to act is established.
Public or Private?
So to sum it up:
- The Fed and all rules associated with it were created by the U.S. Congress
- Membership is mandatory for national banks by government law
- Ownership of Fed stocks is mandatory for national banks by government law
- The Fed’s Board of Governors is appointed by the President and confirmed by the U.S. Senate
- The Federal Open Market Committee (FOMC) is under majority control by the federally appointed Board of Governors
- The products that the Fed deals in are produced and sold by the Department of the Treasury
- The Fed is protected by the U.S. Government from competition in the products it deals in
- The U.S. Government has, via a succession of different court rulings and laws, made the acceptance of Federal Reserve Notes required as a means to discharge all debts public and private
- The U.S. Government receives around 98% of the Fed’s annual profit
I know there may be cases where the question of rather public or rather private may be difficult to decide, for example an oil company that competes with others in a market environment, yet receives government subsidies, or GSEs such as Fannie Mae and Freddie Mac before they were completely nationalized, etc.
But I don’t see how the US central bank could pose such a challenge by any stretch of the imagination – can there be any doubt that for all practical purposes the Federal Reserve System is a 100% public institution of the U.S. Government?