Who Owns The Federal Reserve?
The Fed is privately owned. Its
shareholders are private banks
by Ellen Brown
"Some people think that the
Federal Reserve Banks are United States Government institutions.
They are private monopolies which prey upon the people of these
United States for the benefit of themselves and their foreign
customers; foreign and domestic speculators and swindlers; and
rich and predatory money lenders."
Louis McFadden, Chairman of the
House Banking and Currency Committee in the 1930s
The Federal Reserve (or Fed) has assumed
sweeping new powers in the last year. In an unprecedented move
in March 2008, the New York Fed advanced the funds for JPMorgan
Chase Bank to buy investment bank Bear Stearns for pennies on
the dollar. The deal was particularly controversial because Jamie
Dimon, CEO of JPMorgan, sits on the board of the New York Fed
and participated in the secret weekend negotiations. In September
2008, the Federal Reserve did something even more unprecedented,
when it bought the world's largest insurance company. The Fed
announced on September 16 that it was giving an $85 billion loan
to American International Group (AIG) for a nearly 80% stake in
the mega-insurer. The Associated Press called it a "government
takeover," but this was no ordinary nationalization. Unlike
the U.S. Treasury, which took over Fannie Mae and Freddie Mac
the week before, the Fed is not a government-owned agency. Also
unprecedented was the way the deal was funded. The Associated
"The Treasury Department, for the
first time in its history, said it would begin selling bonds for
the Federal Reserve in an effort to help the central bank deal
with its unprecedented borrowing needs."
This is extraordinary. Why is the Treasury
issuing U.S. government bonds (or debt) to fund the Fed, which
is itself supposedly "the lender of last resort" created
to fund the banks and the federal government? Yahoo Finance reported
on September 17:
"The Treasury is setting up a temporary
financing program at the Fed's request. The program will auction
Treasury bills to raise cash for the Fed's use. The initiative
aims to help the Fed manage its balance sheet following its efforts
to enhance its liquidity facilities over the previous few quarters."
Normally, the Fed swaps green pieces of
paper called Federal Reserve Notes for pink pieces of paper called
U.S. bonds (the federal government's I.O.U.s), in order to provide
Congress with the dollars it cannot raise through taxes. Now,
it seems, the government is issuing bonds, not for its own use,
but for the use of the Fed! Perhaps the plan is to swap them with
the banks' dodgy derivatives collateral directly, without actually
putting them up for sale to outside buyers. According to Wikipedia
(which translates Fedspeak into somewhat clearer terms than the
Fed's own website):
"The Term Securities Lending Facility
is a 28-day facility that will offer Treasury general collateral
to the Federal Reserve Bank of New York's primary dealers in exchange
for other program-eligible collateral. It is intended to promote
liquidity in the financing markets for Treasury and other collateral
and thus to foster the functioning of financial markets more generally.
. . . The resource allows dealers to switch debt that is less
liquid for U.S. government securities that are easily tradable."
"To switch debt that is less liquid
for U.S. government securities that are easily tradable"
means that the government gets the banks' toxic derivative debt,
and the banks get the government's triple-A securities. Unlike
the risky derivative debt, federal securities are considered "risk-free"
for purposes of determining capital requirements, allowing the
banks to improve their capital position so they can make new loans.
(See E. Brown, "Bailout Bedlam," webofdebt.com/articles,
October 2, 2008.)
In its latest power play, on October 3,
2008, the Fed acquired the ability to pay interest to its member
banks on the reserves the banks maintain at the Fed. Reuters reported
on October 3:
"The U.S. Federal Reserve gained
a key tactical tool from the $700 billion financial rescue package
signed into law on Friday that will help it channel funds into
parched credit markets. Tucked into the 451-page bill is a provision
that lets the Fed pay interest on the reserves banks are required
to hold at the central bank."
If the Fed's money comes ultimately from
the taxpayers, that means we the taxpayers are paying interest
to the banks on the banks' own reserves - reserves maintained
for their own private profit. These increasingly controversial
encroachments on the public purse warrant a closer look at the
central banking scheme itself. Who owns the Federal Reserve, who
actually controls it, where does it get its money, and whose interests
is it serving?
Not Private and Not for Profit?
The Fed's website insists that it is not
a private corporation, is not operated for profit, and is not
funded by Congress. But is that true? The Federal Reserve was
set up in 1913 as a "lender of last resort" to backstop
bank runs, following a particularly bad bank panic in 1907. The
Fed's mandate was then and continues to be to keep the private
banking system intact; and that means keeping intact the system's
most valuable asset, a monopoly on creating the national money
supply. Except for coins, every dollar in circulation is now created
privately as a debt to the Federal Reserve or the banking system
it heads. The Fed's website attempts to gloss over its role as
chief defender and protector of this private banking club, but
let's take a closer look. The website states:
* "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."
* "[The Federal Reserve] 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
* "The Federal Reserve's income is
derived primarily from the interest on U.S. government securities
that it has acquired through open market operations. . . . After
paying its expenses, the Federal Reserve turns the rest of its
earnings over to the U.S. Treasury."
So let's review:
1. The Fed is privately owned.
Its shareholders are private banks. In
fact, 100% of its shareholders are private banks. None of its
stock is owned by the government.
2. The fact that the Fed does not get
"appropriations" from Congress basically means that
it gets its money from Congress without congressional approval,
by engaging in "open market operations."
Here is how it works: When the government
is short of funds, the Treasury issues bonds and delivers them
to bond dealers, which auction them off. When the Fed wants to
"expand the money supply" (create money), it steps in
and buys bonds from these dealers with newly-issued dollars acquired
by the Fed for the cost of writing them into an account on a computer
screen. These maneuvers are called "open market operations"
because the Fed buys the bonds on the "open market"
from the bond dealers. The bonds then become the "reserves"
that the banking establishment uses to back its loans. In another
bit of sleight of hand known as "fractional reserve"
lending, the same reserves are lent many times over, further expanding
the money supply, generating interest for the banks with each
loan. It was this money-creating process that prompted Wright
Patman, Chairman of the House Banking and Currency Committee in
the 1960s, to call the Federal Reserve "a total money-making
machine." He wrote:
"When the Federal Reserve writes
a check for a government bond it does exactly what any bank does,
it creates money, it created money purely and simply by writing
3. The Fed generates profits for its shareholders.
The interest on bonds acquired with its
newly-issued Federal Reserve Notes pays the Fed's operating expenses
plus a guaranteed 6% return to its banker shareholders. A mere
6% a year may not be considered a profit in the world of Wall
Street high finance, but most businesses that manage to cover
all their expenses and give their shareholders a guaranteed 6%
return are considered "for profit" corporations.
In addition to this guaranteed 6%, the
banks will now be getting interest from the taxpayers on their
"reserves." The basic reserve requirement set by the
Federal Reserve is 10%. The website of the Federal Reserve Bank
of New York explains that as money is redeposited and relent throughout
the banking system, this 10% held in "reserve" can be
fanned into ten times that sum in loans; that is, $10,000 in reserves
becomes $100,000 in loans. Federal Reserve Statistical Release
H. puts the total "loans and leases in bank credit"
as of September 24, 2008 at $7,049 billion. Ten percent of that
is $700 billion. That means we the taxpayers will be paying interest
to the banks on at least $700 billion annually - this so that
the banks can retain the reserves to accumulate interest on ten
times that sum in loans.
The banks earn these returns from the
taxpayers for the privilege of having the banks' interests protected
by an all-powerful independent private central bank, even when
those interests may be opposed to the taxpayers' -- for example,
when the banks use their special status as private money creators
to fund speculative derivative schemes that threaten to collapse
the U.S. economy. Among other special benefits, banks and other
financial institutions (but not other corporations) can borrow
at the low Fed funds rate of about 2%. They can then turn around
and put this money into 30-year Treasury bonds at 4.5%, earning
an immediate 2.5% from the taxpayers, just by virtue of their
position as favored banks. A long list of banks (but not other
corporations) is also now protected from the short selling that
can crash the price of other stocks.
Time to Change the Statute?
According to the Fed's website, the control
Congress has over the Federal Reserve is limited to this:
"[T]he Federal Reserve is subject
to oversight by Congress, which periodically reviews its activities
and can alter its responsibilities by statute."
As we know from watching the business
news, "oversight" basically means that Congress gets
to see the results when it's over. The Fed periodically reports
to Congress, but the Fed doesn't ask; it tells. The only real
leverage Congress has over the Fed is that it "can alter
its responsibilities by statute." It is time for Congress
to exercise that leverage and make the Federal Reserve a truly
federal agency, acting by and for the people through their elected
representatives. If the Fed can demand AIG's stock in return for
an $85 billion loan to the mega-insurer, we can demand the Fed's
stock in return for the trillion-or-so dollars we'll be advancing
to bail out the private banking system from its follies.
If the Fed were actually a federal agency,
the government could issue U.S. legal tender directly, avoiding
an unnecessary interest-bearing debt to private middlemen who
create the money out of thin air themselves. Among other benefits
to the taxpayers. a truly "federal" Federal Reserve
could lend the full faith and credit of the United States to state
and local governments interest-free, cutting the cost of infrastructure
in half, restoring the thriving local economies of earlier decades.
Ellen Brown, J.D., developed her research
skills as an attorney practicing civil litigation in Los Angeles.
In Web of Debt, her latest book, she turns those skills to an
analysis of the Federal Reserve and "the money trust."
She shows how this private cartel has usurped the power to create
money from the people themselves.