What is "The Fed" and Who Owns It?

"We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to write upon, and step by step we shall make it what it should be."  With these words, President Woodrow Wilson signed into law the Federal Reserve Act of 1913.  This Act created the Federal Reserve System, the central banking system of the United States that is commonly called "The Fed."

Earlier this week I was engaged in a political and business conversation with a good friend.  At one point, he asked the question "Who owns the Fed?"  Not having a ready and concise answer at the time I committed to doing research to answer his question.

The answer to the question he asked is this:  the US Government owns the Fed, and banks have a unique and limited ownership stake in the regional Federal Reserve Banks.

But the research revealed to me that my friend's question leads to another question covering a broader spectrum; the question is this:  Just what is the Fed?




And the answer to that question is:  The Fed is many things, all of them financial, and it is very complicated.

The Fed describes itself as being "independent" within the US Government, and that it is subject to Congressional oversight.  The Board of Governors of the Federal Reserve System is composed of Presidential appointees who are confirmed by the Senate.  There is apparently no Congressional funding of the Federal Reserve System.

Two characteristics of the Federal Reserve System are important here:

1. Most of the profits generated by the Fed are turned over to the US Treasury; in 2010, this amounted to $79 billion out of a total profit of $82 billion, according to The New York Times article at http://www.nytimes.com/2011/03/23/business/economy/23fed.html?ref=business.
2. The regional Federal Reserve Banks have stockholders, and those stockholders are about 38% of the nation's more than 8000 banks; these banks are required by law to hold this stock, and their only direct return from that stock is a 6% annual dividend, plus the ability to elect each Reserve Bank's board of directors; a brief and clear description of this is available in the FactCheck.org entry at http://factcheck.org/2008/03/federal-reserve-bank-ownership/.

According to The New York Times article cited above, the Fed typically transferred about $25 billion annually to the US Treasury in the decade preceding the recent financial crisis.

The membership of the country's private banks is mostly characterized by the largest banks, because those are national, and not state, banks; the national banks are required by their charters to be members of the Federal Reserve System, and thereby are required to own stock in one of the regional Reserve Banks.

The Federal Reserve System's web site is at http://www.federalreserve.gov/.  The "About the Fed" link calls up a page that includes a link to a lengthy Fed publication called "The Federal Reserve System - Purposes and Functions."  The direct link to this publication is http://www.federalreserve.gov/pf/pf.htm.  The Fed's web site also includes a set of FAQs which provide, among many other things, a discussion of "ownership" within the context of the Federal Reserve System.

The Federal Reserve Bank of Minneapolis published a very readable short history of the Federal Reserve System in 1988; that article is available on the Minneapolis Bank's web site at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3816 in the August 1988 issue of their newsletter called "The Region."  This article describes the chaotic national financial environment of the late 19th Century and early 20th Century.  In answer to this chaos there emerged a political and business desire to create a national system of some sort that would stabilize the country's banks.  Naturally, there was considerable disagreement among the various political, banking, industrial and agricultural communities about the design of this system.  The elections of 1912 brought in a Democratic President (Woodrow Wilson) and a Congress controlled by the Democratic Party.  Wilson emphasized that a solution to the nation's banking issues was one of his top priorities, and as a result of that statement and of what was probably a considerable amount of back-room debating and cajoling and arm-twisting, he was able to sign the Federal Reserve Act into law just before the end of 1913.