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Memories of the 28th Century

Regarding Federal Reserve System

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I recently learned that there still are people who believe the conspiracy theory that the Federal Reserve System is privately owned. One need only read Title 12, Chapter 3 of the U.S. Code to read about its ownership and what it is supposed to be doing. Some background is necessary for the creation of the Fed to make sense.

The Panic of 1907 was probably the most severe financial panic in U.S. history. There were multiple problems that came together to make the panic, but it became extreme when the Knickerbocker Trust became insolvent. Knickerbocker was the largest clearing bank, and when it became insolvent, many other clearing banks had no choice but to close down also. We donít think about clearing banks anymore, because nearly all check clearing is done through the Federal Reserve System, but before the Fed was created by the Federal Reserve Act of 1913. Clearing payments were handled through clearing banks that accepted and paid checks and the passed them on to either the bank of the originator or another clearing bank that would handle the collection. When the clearing banks failed, people couldnít pay bills or collect payments, unless they were mad in cash. Major commercial and investment banks suffered very much; they couldnít operate.
This continued, until J.P. Morgan set up a meeting of major New York City banks in an attempt to solve the problem. Morgan kept them in the meeting until they agreed to fund some of the clearing banks. This resulted in several clearing banks being merged, but they got enough capital to operate. This led to the economy starting to move. The Panic had caused the stock and bond markets to crash. There is a great anecdote in Reminiscences of a Stock Operator, where Larry Livermore (the fictionalized versions of Jesse Livermor) claimed the he was busily shorting everything he could until Morgan went to the floor of the New Stock Exchange and tell people to buy. Livermore turned around, covered his shorts and started going long. Morgan never actually was on the floor of the NYSE, but the brokers and speculators heard of the success of the meeting, and they all started buying.
After the Panic, Morgan pointed out that while he and the other bankers had eliminated the 25too big for them to bail it out. At this point, Congress started talking about a new central bank. The U.S.A. hadnít had a central bank for decades, so that was a major move. To make it even clearer that he wouldnít help in the next panic, Morgan died in 1912. In 1913, the Federal Reserve Act was passed. That act provided for the bank to be the clearing bank for a large part of the economy and for it to be the lender of last resort for member banks.

Since then, there has been no breakdown in the clearing system, and most people arenít even aware that their checks and many other payments go through the Federal Reserve System. Over the next few decades, most of the clearing banks went into other businesses, because the Fed was better than they, and more banks were joining the system.

The Fed also became the lender of last resort, and it did that without being granted piles of money. All member banks are required to deposit a percent of their capital with the regional Fed. The base deposit is 10%, but the Fed sometimes increases reserve requirements. And the Fed pays 6% interest.
As the lender of last resort, the Fed kept many banks from insolvency, and as a result, more banks joined the Federal Reserve, even though there was the reserve requirement and some restriction of their activity. At this point there are some banks that are not members, and there is at least one major clearing bank in the U.S.A., but national banks are required to be members, so the clearing banks handle some payments between state banks and payments that the Fed will not handle or charges to much for.

But the reason for this blog was the matter of ownership of the Fed, and one can readily see from the USC that the Federal Reserve System is an agency of the Federal government that is charged with protecting the banking system, clearing payments, and regulating the cash flow. The Fed was given more responsibilities, especially holding Treasury bonds and issuing Federal Reserve Notes in place of money, but Federal Reserves Notes were made legal tender in 1953.
The Fed is not the only regulator of banks. National banks are chartered and overseen by the Comptroller of the Currency. There are several other agencies that regulate banks, see link, and state banks are regulated by state agencies.

It is a complicated situation, but the Federal Reserve System is a Federal Agency that regulates the banking system. As the banking system, the Fed has become more important in international commerce also. There are people who claim that the Fed is not regulated or audited. Congress and the Treasury Department are responsible for regulating the Fed, and the Fed is audited regularly, but some people want some detailed information that may not even exist. It has been claimed that the Fed holds some assets that are questionable. I have seen a summary od some of the audits, and the listing Ďother assetsí is there, and it might be interesting to know what that includes, but it isnít a large amount. The Fedís Balance Sheet is linked below.

The Fed is complicated, and the more I look into it, the more I think they should hire me to publicize the Fed and what it does. I would suggest that anyone who is interested read the linked pages and consider what they contain, and please comment, if there is anything important that I excluded. This post is intended to be a general overview with information about the ownership of the Fed, so I excluded a great deal. One thing that I have to add, that probably leads to confusion about the ownership issue is that the reserves that member banks are required to deposit with the regional banks are called ďpreferred stockĒ. Most people concentrate on the name and think that if itís stock, then the owners can vote on the activities of the bank. The so-called preferred stock is like preferred stock in the regional banks are required to pay annual payments, but it gives no rights of ownership. It would be more understandable, if the reserve requirement were called a loan, because that is what it is.
Panic of 1907
The Federal Reserve Act is now title 12, chapter 3 of the U.W. Code

Federal Reserve Balance Sheet
The House of Morgan
Reminiscences of a Stock operator