In late December 1913, the government of the United States voted the Federal Reserve Act into law.
The promoters had a political problem: widespread resistance to the idea of a central bank. So, the designers of the Federal Reserve System -- mainly Kuhn, Loeb economist Paul Warburg, a recent German immigrant -- created an illusion: a decentralized system of regional Federal Reserve banks. These were private. They were supposedly independent. They were impotent -- except for the Federal Reserve Bank of New York, where the real influence of the entire Federal Reserve System has always been.
If you want to understand this system, begin with Murray Rothbard's book, The Mystery of Banking. I have described it here: http://mises.org/daily/5499. Then follow with Griffin's book, The Creature from Jekyll Island. He summarizes it in a video lecture here: //www.garynorth.com/public/11738.cfm. Both men present the FED as the premier enforcement arm of a bankers' cartel. No economics textbook ever does. The chapter on the FED never follows the chapter on cartels. The connection would be too obvious.
RICHARD FISHER ON RENT-SEEKING
Richard Fisher is the president of the Federal Reserve Bank of Dallas. He has been a vocal critic of Ron Paul.
In a recent speech in Australia, he distinguished between the board of governors of the Federal Reserve system, which is an agency of the United States government, and the 12 regional Federal Reserve banks, which are not agencies of the federal government, but which technically are also not profit-seeking institutions.
If you go to the website of the Federal Reserve System, you see that its URL ends in .gov. If you go to the websites of the regional Federal Reserve banks, you find that their URLs end in .org. They do not end in .com.
The regional banks of the Federal Reserve are not listed on any stock market exchange. They are privately owned. They are owned by commercial banks in their districts. We are never told how many shares are owned by which banks. These matters are not considered relevant to general public. The general public has no say in this matter. They are strictly private organizations. Therefore, the federal government has no say over which banks own the shares, nor does it have any say over the election of officers, including the president of each of the regional banks.
In other words, the system is a classic old boy network. This network is said to control, or at least influence, regional banking matters. We are never told exactly how much authority the regional banks possess. Official literature issued by the regional banks and by the Federal Reserve System is silent on this matter. That is to say, how much autonomy do they have? Far more important, how much autonomy does the Federal Reserve Bank of New York have? This is never discussed in public by any member of the Federal Reserve System or a regional Federal Reserve Bank. It is a verboten topic. It is not discussed in textbooks on money and banking. It is not discussed in textbooks on American history or textbooks on economics. An amazing silence covers the entire subject.
On the website of the Federal Reserve System, we read this.
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."
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.
Dividends are 6% per year. This is established by law. This means that there is no competition. This means there is no free market. This means that the regional Federal Reserve banks are agencies of rent seeking. You can't have it both ways. Fisher wants to present it as if it were both ways, but it is not both ways.
Fisher was promoting in Australia the same illusion that, for a century, the promoters of the Federal Reserve System have promoted. People are supposed to believe this. People do believe it. History books repeat it. Yet it is all nonsense. The regional Federal Reserve banks have little influence, other than being allowed to place five members on the Federal Open Market Committee, on a rotating basis, with this exception: the Federal Reserve Bank of New York. That institution, which has always been the primary regional bank, and which conducts policy of the FOMC, holds a permanent position on the FOMC. Promoters of the illusion do not stress the fact that the Federal Reserve Bank of New York is unique to the system of regional banks. The rest of them are window dressing. All regional Federal Reserve banks are equal, but some are more equal than others.
In a remarkable paragraph, Fisher makes the distinction between the politics of Washington and the silent operations of the regional Federal Reserve banks. He calls Washington political, and he uses that in a pejorative sense. He says that Washington involves a great competition of rent-seekers. "Rent-seekers" is the phrase used by economists to describe individuals and organizations who seek guarantees from the government. A rent-seeker does not want to live by entrepreneurship; he wants to live by means of a government-protected arrangement of some kind. Economists generally are hostile to rent-seekers, with one exception: the Federal Reserve System.
In this unique paragraph, Fisher tars and feathers the Federal Reserve System, because it is part of the political process. He is admitting that it is not independent of the federal government. The general assumption is that it is independent, and it should be independent. But he is saying that the 12 regional branches are really independent. They are not therefore political rent-seekers. Here's what he said.
The president of the United States appoints and the U.S. Senate confirms the chairman and the six other governors of the Fed who reside in Washington. The presidents who operate the business of our central bank through the dozen Federal Reserve Banks spread across the nation are not federal employees. They work under the supervision of the Federal Reserve Board, but serve at the pleasure of and answer to their own boards of directors that consist of nine private citizens from their individual Reserve Bank districts. The 12 Federal Reserve Bank presidents represent the heartland of the country, "Main Street" as we say in the States. Unlike the Federal Reserve governors, we do not suffer in having to live in the politically charged atmosphere of Washington, D.C.; we operate banker's banks rather than maneuvering around the lobbyists and rent seekers that leech off the political center of our nation.
He is saying that the regional Federal Reserve banks are bankers' banks. But are they? The bank is regulated by state government legislation and bureaucratic control. The 12 regional Federal Reserve banks are not governed by state regulations. To what extent are the 12 regional banks separate from the national central bank system? Can they issue currency on their own authority? No. Can they create reserves on their own authority, independent of the FOMC? No. Then in what sense are they banks?
They have no competitors judicially. Each bank has a monopoly in its district. This monopoly was established by federal law in 1913. Each bank therefore makes its profits independent of open competition. Therefore, each bank represents the rent-seeking organization, as defined by Fisher. Local banks own shares in the regional Federal Reserve Bank. What payments are made from the original Federal Reserve Bank to shareholding banks? They receive a 6% return. How does a regional Federal Reserve Bank generate sufficient income to pay dividends to shareholding banks? We are not told. In what way, therefore, do the regional Federal Reserve banks not establish rent-seeking operations for owners of the shares?. By any normal definition of rent-seeking, regional Federal Reserve banks are agents of rent-seekers: commercial banks. Yet they are, as Fisher says, completely outside any control by local politics. They were created in 1913 by the Federal Reserve Act, and they continue to operate, providing no known service that the free market could not provide, or that the centralized Federal Reserve System could not provide.
A CARTEL
Then what is the function of the regional Federal Reserve banks? They are primarily political. They are an illusion created by the original promoters of the Federal Reserve System. They were specifically set up to provide the illusion of regional control, when in fact the Federal Reserve System is a true central bank, with the powers associated with all national central banks. The central bank creates the monetary base on which commercial banks make loans. The regional Federal Reserve banks do not do this. The regional Federal Reserve banks are now, and have always been, a convenient illusion for misleading taxpayers and voters into believing that the Federal Reserve System is not a central bank, with all of the authority, power, and cartel control of all other central banks.
The regional Federal Reserve banks provide five voting members on the FOMC. The seven Governors can out-vote them. But they usually vote as a bloc, with only one dissenter, at most. The FOMC's function is rent-seeking. The Federal Reserve is the enforcer of a cartel. It is a cartel for the biggest commercial banks -- about a dozen out of 7,000.
This is economic reality. Begin here. But keep in mind Fisher's attribution of rent-seeking. There is no agency more committed to rent-seeking than the Federal Reserve System. This is why New York City's multinational banks never go bankrupt. They never have.
Note: Lehman Brothers went bankrupt on September 15, 2008. As an investment bank, it was not a member of the Federal Reserve's national banking system of commercial banks. On September 22, the last two large investment banks, Morgan Stanley and Goldman Sachs, re-structured and became commercial banks. They did not go under.
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