Here is what the Fed says about itself:
As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.
However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”
The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to 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. 16
Let’s unpack that.
Independent
The Fed does a little dance around being “independent within the government” rather than “independent of government.” Independent is the key word. By design, Congress and the Executive Branch cannot participate in decisions made by the Federal Reserve System.
In our democratic republic none of our duly elected branches of government have any control over the policy decisions of our central bank and its private member banks. This is true, despite the fact that their money-creation decisions determine our economic well-being. Our Congress can review some of the central bank’s activities, and can “alter its responsibilities by statute,” but today it can have no say in the day-to-day operations and choices of our money creation system.
The Federal Reserve System is intended to be a cabal of private bankers, serving their own interests – primarily to make money for their shareholders. The central bank is there to provide services to its members, to help them when they make little mistakes, allowing them to reduce their individual bank reserves and increase their profits, and to bail them out when they make big mistakes. The central bank has some statutory power to influence the decision- making of its private member banks. However, in practice, the independent bankers are the dogs wagging their Board of Governors’ tail.
Until very recently, it was considered perfectly appropriate for the central bank to do its business in secret. There is a long tradition of this secrecy; no records at all exist for the first Bank of the US (1791– 1881).17 Secrecy is important because our current system depends on everyone maintaining confidence; keeping any potential pitfalls private is a system requirement. Today the Fed produces public reports on what is happening in the economy and financial reports for the Federal Reserve System. However its operational policy meetings were off limits to the public until 2009, when they began publishing their meeting minutes three weeks after the meetings — after the decisions were made and operational. This secrecy allows the bankers to be unencumbered by any societal or political considerations so they can serve their own interests above all. Benefits will theoretically trickle down to the public and somehow the financiers privileged accumulation of wealth will benefit the nation as a whole. This theory is known as laissez-faire capitalism and trickle- down economics. There is only short-term anecdotal evidence to support this assumption. …Think exponential pyramid scheme for long-term outcome.
The Federal Reserve System is subject to several levels of audit and review. Each reserve bank employs a full time staff of auditors that report to the Board. The Board itself has an independent internal audit staff, and an independent auditor audits the financial statements every year. Since 1978, most of the general operations of the Federal Reserve System became subject to review by the General Accounting Office (GAO). However, the Fed’s Discount Window, (which is its process of creating money by loaning it to banks), its Open Market Operations (its process of creating or extinguishing money by buying and selling government securities), and its agreements with foreign banks are all off the table at audit time. That is a substantial chunk of its core business. And, remember, an audit is a process that checks for honesty and integrity in reporting and accounting after the decisions have been made. An audit, even of all its operations, policies and actions, would not impinge on the existing legal rights of the central bank and its members to create as much money as their confidence allows.
Ownership
The regional Federal Reserve Banks are owned by their member banks, which are required by the system to purchase a certain amount of stock as a condition of membership. The amount of stock is based on the size of the bank. The Fed allows up to half the purchase price to be an on-call IOU. While this stock “may not be sold, traded, or pledged as security,” it will earn the member bank 6 percent per year. Though the 12 regional banks “are not operated for profit,” they write off this 6 percent dividend to their members, as part of their operating expenses. It comes out of the seignorage the central bank gets for introducing its share of new money into the economy. While this arrangement may be “quite different from owning stock in a private company,” where there is inherent risk of losing one’s investment, it is an advantageous difference. They get a guaranteed 6 percent return – 12 percent if they are paying no interest on their stock purchase IOU, and their membership brings all the benefits of a central bank.
Please note the Federal Reserve consistently puts ownership in quotation marks. It claims because the member shares cannot be traded on the open market, they are somehow not claims of ownership. That is twisting the truth. In addition to the guaranteed 6 percent return on their membership stock, the big banks get a near guarantee they will be bailed out of any financial difficulty when they screw up. Even extraordinary malfeasance will not be prosecuted because doing so could cause a drop in market confidence – and, that could cause systemic collapse. Banks get a slap on the wrist penalty for breaking the law, and their penalty can be deducted from taxable income as a business expense. No other type of business owner holds this kind of privilege; a privilege not unlike the divine rights of an absolute monarch.
And, not in their words…
If you search on the FederalReserve.gov website for money creation nothing comes up that has anything to do with the creation of new money. If you search for money multiplier which is euphemistic way of saying new money creation in a fractional reserve system, you will get documents about changes in the size of the money supply, and a few comments about why the term no longer applies. The 146-page book issued by the Federal Reserve called The Federal Reserve System: Purposes and Functions (2005) does not even once address how new money is created and entered into the US economy. It is a study in ignoring the gorilla in our midst. It would be like writing a book about human sexuality and omitting information on intercourse.
So, let’s take a little closer look at the main aspects of our current system…