Who owns the Federal Reserve?

Dear Cecil:

I'm a 9 to 5 fixed income kinda guy who cares about his family, nation, and world. I overheard some of my levelheaded millionaire bosses talking about how the Federal Reserve is a private institution owned by individual banks. Isn't our bank our bank? Please tell me this is not happening to my country.

Cecil replies:

Cecil replies:

You’re not going to like this, Rob, but here are the facts. Fact number one: the Federal Reserve System (hereinafter the Fed), although created by Congress, is answerable not to the public but to itself. The system is nominally controlled by member banks, i.e., all national banks plus some state banks, but real power rests with the board of governors in Washington. Fact number two: the Fed’s chairman (currently Alan Greenspan) and board of governors are appointed for long terms by the president but can’t be removed by him and don’t report to him or anybody else. Fact number three: it was done that way for your own good.

Ha, you say. If this were really a democracy, the Fed would be a public agency just like the post office. Hmm, maybe you begin to see what the Fed’s inventors were up to. (Cecil realizes that strictly speaking the postal service itself is no longer a public agency. Don’t distract me.) One may make the argument that we need the Fed because we’re a democracy

Truth is, the Fed was purposely insulated from the petty concerns of the public, including, to be blunt, whether they can afford to eat. "It’s made complex so nobody will understand it," one insider told me. The Fed’s chief aim is the stability of the banking system and the dollar and, by extension, the U.S. economy. Were it otherwise, politicians would be tempted to manipulate federal monetary policy for their own gain. For example, an incumbent president might lower interest rates in an election year to boost the economy temporarily and improve his chances of re-election, even if it meant higher inflation down the road.

But that’s the least of it. Cecil on occasion hears from some genius who thinks he’s come up with the solution to the national debt: print enough money to pay the whole thing off! This idea is, of course, completely nuts. If you double the amount of money in circulation without increasing the amount of underlying wealth, all you’ve done is make your currency worth half as much. Nonetheless governments all over the world (including the U.S. in pre-Fed days) have pulled stunts like this repeatedly, setting off runaway inflation and wrecking their economies. The Fed’s ingenious system of monetary controls means it can’t happen here, at least not as easily.

In short, you should be grateful. But of course you’re not, because the whole thing reeks of elitism. All I can suggest is that if you don’t like it, you visit Russia or Argentina or any number of other Fedless countries whose money was rendered worthless by hyperinflation. Granted these are extreme cases, but they illustrate what’s at stake.

I don’t mean to exaggerate the Fed’s independence. Alan Greenspan is called upon to testify before Congress periodically, and the system he heads would not long survive if it led the nation over a cliff. Nor is the Fed unique. A more or less autonomous central bank is a feature of virtually all capitalist economies. There’s a lot about such banks, just like there’s a lot about capitalism, that offends the sensitive soul. But they do have a compensating advantage, namely that most of the time they work.

Send questions to Cecil via cecil@straightdope.com.

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