Is the Federal Reserve a private organization?

[softwareNerd]

Some people among the libertarian community claim that the Federal Reserve is a private organization. Yet, we also know that Greenspan and Bernanke are appointed by the President and the Fed regulates banks. So, is it actually a government organization?

Why do some people claim that the Fed is private? The primary reason is that the individual Federal Reserve Banks (e.g. in New York, Richmond, Dallas) have charters that look like corporations, and they have shares just as corporations do. These shares are held by private institutions: namely, by private banks. This is the grain, upon which the entire "private organization" claim rests.

However, in the case of the Fed, these private shares do not imply private control. Consider, for a moment, how a set of private banks could go about creating a private organization like the Fed. They could set up a corporate entity, buy shares in the entity, and agree to stick to the guidelines issued by this entity. A bank that did not wish to join could simply stay out, and the private entity would have no authority over such outsiders. The government would not give any special privileges to the entity. The government would have no direct way to control how the entity was run, who became its chairman, and so on. Clearly, the Fed does not look at all like such a private entity.

The Fed was created by Congress. The banks that the Fed controls have no option to join or leave. They have no option on how many share they may "buy". Each banks has to "buy" shares that are a certain percentage of their capital. They cannot sell these shares. In fact, these are nothing like shares in typical private entities. If a mafia boss were to tell each person that they have to pay protection money, and that this would go to buying shares in an entity called "Mafia Inc." that does not mean those people have any choice. The share is a fiction. This is the same with the shares in the Fed.

The Federal Reserve chairman is appointed by the President. The Fed is subject to Congressional oversight, and the chairman regularly testifies to Congress. The Fed has been given a degree of executive independence because it controls the money-supply. The Fed has expanded money pretty consistently over the decades, but the thinking has been that if it was more directly under executive control it would expand even more (and, this is probably true). Libertarians will sometimes point to this to show that the Fed is private. The truth is that if the government has little day to day executive control over the Fed, the so called shareholders have none at all. They can lobby the Fed, and they do, just as they lobby all other parts of government.

Some libertarians will point out that the bills we use are not government bills; they're Federal Reserve bills. Once again, this is a naive acceptance of a fiction. Why and how did it come to pass that the Fed has a monopoly on note issue? Central banks around the world issue notes. That is the major reason they were created by their governments. If some government-created entity issues notes and has the legal monopoly to do so, then it is silly to claim that these are somehow not government notes.

Some libertarians point out that the Fed owns government bonds. How can the government owe money to itself? Well, there are two ways to understand this. Firstly, the government can easily set up a government entity and then owe money to it, or let that entity owe money to the government. It happens all the time. The government will sometimes set up an entity and give it some funds as a loan which it expects to be repaid. For instance, the funds might be used for some investment and as those investments yield income, the government is "paid back". Across the world, there are many such government-corporations. In the U.S., there is one huge instance where the government owes money to such an entity: the social-security trust funds. And the other biggie is the Fed. Same thing.

Secondly, another way to look at the issue of debt is that it is true that an organization cannot really owe money to itself. It can do so "on paper" when it creates legal entities like "Social Security Trust Fund" or "Federal Reserve", but when actually netted out it cannot owe itself money. And, the same is true of the Fed. The government owes that money to itself... it does not really owe it to anyone. If a government wants to spend money, and if it can print its own money, then it has two ways of spending more than it receives: either it can print the difference, or it can borrow the difference. In the U.S. -- and almost all modern economies -- these roles have been divided. The legislature and executive borrow the money, but the central bank decides how much of that should be converted to cash. The central banks "prints" money in exchange for the amount of government bonds it wishes to convert to cash.

Why does it matter? One has to wonder why this matters at all? Suppose the Fed was private, would it matter? Well, if it were truly private it would not matter at all, because banks could go their own way, and we would not have to accept Fed notes, and we could simply ignore it. i suspect that the reason it matters is that it allows people to blame the evil bankers rather than placing the blame where it really belongs: on the government (and thereby on the voters).

Certain segments of the libertarian/anarchist movement have always had empathy for the notion that private interests are running the country, as a primary (rather than the truth: which is that voter-sponsored government control is running things, and private corporations react to that). Historically, such anarcho-libertarians have felt more comfortable with anarcho-communists. The evil corporations (sometimes even "jewish bankers") are supposed to be running the world. This segment talks of "crony capitalism", which is a completely misguided label for fascist and socialist aspects of a mixed-economy.

For counter-point, here is one apologist for the "Fed is private" nonsense.

[2046]

If we think of something as government or private in terms of, say, whether or not someone is officially employed by the government, we only look at one dimension. If we think more in terms of the privileges a private entity receives from government, then the more such privileges a nominally private entity receives, the more it shifts from being a private entity to being an arm of the state, and thus forming part of the corporate-state structure itself. It can be perfectly reasonable to think of the Fed as a Congress-created entity comprised of various governmental agencies, bureaucrats, and also big private bankers and corporate elites, because their interests are not fundamentally opposed, but rather mutually supportive. It can therefore also be considered whether or not those large banks are in themselves really "private."

Edited November 28, 2012 by 2046

[solution checker]

Clearly, the Fed does not look at all like such a private entity.

I totally agree. The FED doesn't look like a private entity at all, and it looks much more like a government agency. But looks can be deceptive. The FED's smokescreen has been extremely successful in presenting a false image of a government agency. However, if you're not interested in what it looks like, but what it actually is, you must ask the Supreme Court, Wikipedia or the American Monetary Institute (whose views apparently are considered 'a masterful work' by former Stanford University Professor and Deputy Division Chief, Modeling Division, Research Department, International Monetary Fund (IMF) Michael Kumhof ) who all say that if fact it actually is a private organization.

In short, simple terms, this is (one of the) things that happen:

Department of defense: "Hey Federal Government (FG), can we have a few billion to fight our wars?"

FG: "Sure, here you go, spend it all"

Department of Education: "Hey FG, can we have a few billion to built our schools? "

FG: "Sure, here you go, spend it all"

FG: "Hey FED, do you also need some money to do your thing?"

FED: "No thanks, we're fine, we have a money making machine, so we'll make up some money when we need some."

FG: "Oh yea, that's right. By the way, we're a little short here, could you help us out?"

FED: "No problem, what do you need?"

FG: "A trillion would be wonderful."

FED: "No problem at all, here you go, one trillion US dollar, just be sure you pay it back, with interest of course"

FG: "Ehm, yea, we will....someday we will..."

FED: "That's cool, no hurry!"

Is this something you should be mad about? I say Yes. Because unlike the FED you have to work for all your money, and every time this happens, the money you make looses value, and you'll have to pay tax to someday pay back the loans the FG got from the FED's made-up money.

Edited November 28, 2012 by solution checker

[tadmjones]

The distinction between government ownership or private ownership of the Fed Reserve( while leaving out the validity of the idea that a governement can own anything) does not affect the idea that the functions of the Fed work at variance to the idea of free markets, yes?

[Nicky]

The Federal Reserve System has been created by Congress, and the majority of its leadership (the Federal Reserve Board of Governors and Federal Open Market Committee) is appointed by the President (and confirmed by Congress). Hence, it is a government agency, under government control.

Some of its low level components are private institutions. But no private institution has a leadership role within the system. Every institution that does has been founded and is under the control of the federal government, and therefor a government agency.

Supreme Court

You should learn the difference between "the Fed" and a Federal Reserve Bank. I haven't read any further, but I'm guessing your confusion invalidates the rest of your links as well.

Edited November 29, 2012 by Nicky

[Spiral Architect]

Hmmm...

The Federal Reserve System is the perfect symbol of the mixed economy then.

[solution checker]

You should learn the difference between "the Fed" and a Federal Reserve Bank.

With FED I was referring to the FED.

I haven't read any further

Very wise of you to close your eyes for information that's contradicting your beliefs, that explains so much.

but I'm guessing

remember what you said about guessing

Edited November 29, 2012 by solution checker