10 Reasons why the Federal Reserve is not a Government Agency

OpEdNews Op Eds 2/27/2015 at 10:23:13

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From flickr.com/photos/52816253@N00/3052016140/: Federal Reserve Bank protest in Charlotte
Federal Reserve Bank protest in Charlotte
(image by Justin Ruckman)

There is considerable ambiguity over whether the Federal Reserve is a government agency, a private institution, or something in between. The Fed itself says:

The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.

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.”

This still leaves quite a bit of ambiguity.

However, here’s more than 10 reasons why the Federal Reserve is not a government agency:
1. The U.S. has to borrow its money and pay interest on it (plus pay broker-dealer middlemen a substantial fee in between). We don’t have to do that with true government money like coins and U.S. Notes (until 1996 when they were phased out). True, the interest is small right now, but it hasn’t always been so, and we are reliant on the Fed keeping a near Zero Interest Rate Policy (ZIRP), when the Constitution’s coinage clause gave us the ability to produce paper money, debt-free(Article 1, Section 8, Clause 5).

2. Only 18% of Treasuries in value are held by the Federal Reserve. The rest are either sold by the Fed itself to other parties, often foreign, or directly by Treasury at auction. There is no need to do either of these things in a truly sovereign money system.

3. Coins and U.S. Notes produce immediate seigniorage for the government account. Federal Reserve Notes don’t and are a cost.

4. The banks get to elect some (7) of the Federal Reserve Bank (FRB) directors. They also have strong backdoor influence over the rest. It is hard to imagine a FRB Chair appointed whom the banks and Wall Street did not want. In fact, current chair Janet Yellen was chosen over more hawkish FRB Governors because of their preference, though the public spin is that people didn’t want controversial Larry Summers instead.

5. Monetary Reformer and founder of the American Monetary Institute, Stephen Zarlenga, in his article on the Federal Reserve, says

The Federal Reserve System puts itself forward as a non-profit organization that turns over its operating profits to the U.S. Treasury, after all expenses, including the 6% dividend to member banks. However this misses the point on several scores. First, the banking profits coming through the privileged money creation process mainly occurs at the member bank level of operation, and those profits are not turned over to the Treasury.” – http://www.monetary.org/is-the-federal-reserve-system-a-governmental-or-a-privately-controlled-organization/2008/02

6% a year is about average for the stock market or a little less, but of course this 6% comes with much less risk. In any case, this is money NOT going to the public. Zarlenga also points out that the money the Fed pays itself is quite high (they are highly paid bankers, after all), though this has not been audited.

6. The Fed bailed out the banks to the tune of $16 Trillion (Bernie Sanders and the GAO)$29 Trillion (L. Randall Wray) …and counting, in a series of revolving loans, many of which went to European banks ($12T says Sanders). (One of the reasons progressives like Krugman oppose further audits is that those calling for audits, like the Paul father and son, are gold bugs looking to establish hard money. Modern progressive economists know this would be a deflationary disaster and rightly oppose gilding the Fed for that reason). Clearly, that is an entity acting independently. What they did NOT do is suggest Sovereign Debt-Free money: OpEdNews Article: Fantasy Fed Speech

7. Zarlenga lists other important facts:

It will be clear from the following points that the Fed is definitely not part of the US Government:

* The Fed is not organized within the Executive, Legislative or Judicial branches of our government.

* Who pays the Fed’s bills and determines its budget? Not any part of our government. The Fed gets its funding from its own specially privileged operations. The Fed Board determines Fed budgets.

* Who monitors and oversees Fed activities? Again the Fed itself. While some important elements of proper auditing have taken place, there has not yet been a comprehensive independent audit, by the Government Accountability Office as proposed in a recent letter from Ralph Nader to new Fed Chairman Ben Bernanke, calling for greater monetary transparency.

* Federal Reserve Employees are not part of the US Civil Service System and are not covered by government employees’ health insurance or pension programs. Who does the hiring and firing? Except for the highly publicized Chairman and 7 member Washington Board, this is in private, unelected hands.

* Federal Reserve Banks are not listed as government organizations by the telephone companies, a small but telling fact.

8. The Fed has been notoriously lax in monitoring the member banks, even well within its legal power to do so. That’s a big reason we got the Consumer Financial Protection Bureau (CFPB) from Elizabeth Warren, even over the vociferous objections of the banks and Wall Street who ultimately got their way in not having her head the new Bureau (perhaps they would have preferred that to having her as a Senate adversary now?).
9. Zarlenga also cites:1) JOHN L. LEWIS, Plaintiff/Appellant, vs. UNITED STATES OF AMERICA, Defendant/Appellee.(No. 80-5905, UNITED STATES COURT OF APPEALS, NINTH CIRCUIT680 F.2d 1239; 1982 U.S. App. LEXIS 20002; March 2, 1982, Submitted; April 19, 1982, Decided)

to show that the Federal Reserve is not a government agency, saying

The district court dismissed, holding that the Federal Reserve Bank is not a federal agency within the meaning of the Federal Reserve Act and that the court therefore lacked subject matter jurisdiction”.

“Federal agency” is defined as: the executive departments, the military departments, independent establishments of the United States, and corporations acting primarily as instrumentalities of the United States, but does not include any contractors with the United States….

There are no sharp criteria for determining whether an entity is a federal agency within the meaning of the Act (28 U.S.C. 2671), but the critical factor is the existence of federal government control over the “detailed physical performance” and “day to day operation” of that entity”. Other factors courts have considered include whether the entity is an independent corporation”, whether the government is involved in the entity’s finances”. and whether the mission of the entity furthers the policy of the United States” Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations.

Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s nine member board of directors.

10. Historically, when faced with price stability vs. its other, and more recent, mandate to control inflation, the Fed chooses to control inflation. This results in a tight monetary policy, in which there is often insufficient currency to meet productive capacity. The Congressional Budget Office (CBO) said, until last year, that there was a trillion dollar/year output gap (the difference in money between would could be produced vs. what is being produced, without inflation).

That’s just 10 reasons the Fed is not a government agency. There are more.

A true government money issuing agency, in contrast, could issue dollars into the real economy via spending bills, without debt, without interest, and without propping up the rentier banking system that has so threatened our economic stability ever since inception in 1913.

We could End the Debt Crisis with debt-free United States Notes.

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Scott Baker is a Managing Editor & The Economics Editor at Opednews, and a blogger for Huffington Post, Daily Kos, and Global Economic Intersection.His anthology of updated Opednews articles was published by Tayen Lane Publishing (March, 2015) and may be found here:
https://tayen-lane.squarespace.com/america-is-not-broke/Scott is President of Common Ground-NYC (http://commongroundnyc.org/), a Geoist/Georgist activist group. He has written (more…)

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