Political Myth: The Federal Reserve is a private bank.
Reality: Not in any way that actually counts.
If you have extra cash, and you need a safe place to put it, you take it to the bank. And if you are temporarily short on cash, and you need a little extra to tide you over, you borrow money from the bank (sometimes in the traditional manner; sometimes by using a credit card). But where does the bank itself deposit it’s extra money? And who does the bank borrow from when it is a little short on cash?
The answer is, the Federal Reserve. Essentially, the Federal Reserve is a bank — indeed it is the bank — for banks. The reason that’s important for those of us who are not bankers is because the Federal Reserve routinely makes policy decisions that have an enormous impact on the U.S. economy. The Federal Reserve controls the interest rate on the loans it gives to banks, as well as the interest rate it pays to banks for the funds it has on deposit. Those interest rates influence the rates that banks charge for the loans they make to us. The Federal Reserve also influences the economy by buying and selling treasury securities. When it buys treasury securities, it puts more money into circulation, which, in turn, makes more money available for lending. Selling securities has the opposite effect. The Federal Reserve has more tools at its disposal than those, but the point is that the major policy decisions that the Federal Reserve makes have a substantial impact on our economy.
So, is the Federal Reserve privately owned?
The part of the Federal Reserve that does the actual banking is divided into 12 branches. Each of the banks that lies within the geographical area that a branch serves is required by law to invest 3 percent of its capital — no more, no less — into “stock” for that branch. For that investment, the bank gets a statutory 6% rate of return — no more, no less.
But the major policy decisions discussed above aren’t made by the “shareholders” of the 12 individual branches of the Federal Reserve; they are made by the Board of Governors. The members of the Board of Governors are appointed by the President and confirmed by the Senate.
So this brings up a philosophical question: If you are required by law to buy a set amount of stock, but you can’t sell it, you can’t buy more of it, and owning it doesn’t give you any power to control major policy decisions in the company whose stock you just “bought,” then do you really own it?
We’ll leave that question to you to ponder on your own.