Who Owns the Federal Reserve Bank and Why is It Shrouded in Myths and Mysteries? By Ismael Hossein-Zadeh December 18, 2015 COUNTERPUNCH

December 18, 2015 COUNTERPUNCH

Who Owns the Federal Reserve Bank and Why is It Shrouded in Myths and Mysteries?   by Ismael Hossein-Zadeh

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
— Henry Ford

“Give me control of a Nation’s money supply, and I care not who makes its laws.”
— M. A. Rothschild

The Federal Reserve Bank (or simply the Fed), is shrouded in a number of myths
and mysteries. These include its name, its ownership, its purported independence
form external influences, and its presumed commitment to market stability,
economic growth and public interest.
The first MAJOR MYTH, accepted by most people in and outside of the United
States, is that the Fed is owned by the Federal government, as implied by its name:
the Federal Reserve Bank. In reality, however, it is a private institution whose
shareholders are commercial banks; it is the “bankers’ bank.” Like other
corporations, it is guided by and committed to the interests of its shareholders—pro
forma supervision of the Congress notwithstanding.
The choice of the word “Federal” in the name of the bank thus seems to be a
deliberate misnomer—designed to create the impression that it is a public entity.
Indeed, misrepresentation of its ownership is not merely by implication or
impression created by its name. More importantly, it is also officially and explicitly
stated on its Website: “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” [1].
To unmask this blatant misrepresentation, the late Congressman Louis McFadden,
Chairman of the House Banking and Currency Committee in the 1930s, described
the Fed in the following words:
“Some people think that the Federal Reserve Banks are United States Failure of the American
Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves
and their foreign customers; foreign and domestic speculators and
swindlers; and rich and predatory money lenders.”
The fact that the Fed is committed, first and foremost, to the interests of its
shareholders, the commercial banks, explains why its monetary policies are
increasingly catered to the benefits of the banking industry and, more generally, the
financial oligarchy. Extensive deregulations that led to the 2008 financial crisis, the
scandalous bank bailouts in response to the crisis, the continued showering of the
“too-big-to-fail” financial institutions with interest-free money, the failure to
impose effective restraints on these institutions after the crisis, the brutal neoliberal
cuts in social safety net programs in order to pay for the gambling losses of high
finance, and other similarly cruel austerity policies—can all be traced to the
political and economic power of the financial oligarchy, exerted largely through
monetary policies of the Fed.
It also explains why many of the earlier U.S. policymakers resisted entrusting the
profit-driven private banks with the critical task of money supply and credit
creation:
“The [private] Central Bank is an institution of the most deadly
hostility existing against the principles and form of our constitution . . .
. If the American people allow private banks to control the issuance of
their currency . . ., the banks and corporations that will grow up around
them will deprive the people of all their property until their children
will wake up homeless on the continent their fathers conquered”
(Thomas Jefferson, 3rd U.S. President).

In 1836, Andrew Jackson abolished the Bank of the United States, arguing that it
exerted undue and unhealthy influence over the course of the national economy.
From then until 1913, the United States did not allow the formation of a private
central bank. During that period of nearly three quarters of a century, monetary
policies were carried out, more or less, according to the U.S. Constitution: Only the
“Congress shall have power . . . to coin money, regulate the value thereof” (Article
1, Section 8, U.S. Constitution). Not long before the establishment of the Federal
Reserve Bank in 1913, President William Taft (1909-1913) pledged to veto any
legislation that included the formation of a private central bank.

Soon after Woodrow Wilson replaced William Taft as president, however, the
Federal Reserve Bank was founded (December 23, 1913), thereby centralizing the
power of U.S. banks into a privately owned entity that controlled interest rate,
money supply, credit creation, inflation, and (in roundabout ways) employment. It
could also lend money to the government and earn interest, or a fee—money that
the government could create free of charge. This ushered in the beginning of the
gradual rise of national debt, as the government henceforth relied more on
borrowing from banks than self-financing, as it had done prior to granting the
power of money-creation to the private banking system. Three years after signing
the Federal Reserve Act into law, however, Wilson is quoted as having stated:

“I am a most unhappy man. I have unwittingly ruined my country. A
great industrial nation is controlled by its system of credit. Our system
of credit is concentrated. The growth of the nation, therefore, and all
our activities are in the hands of a few men. We have come to be one
of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a
government by free opinion, no longer a government by conviction
and the vote of the majority, but a government by the opinion and
duress of a small group of dominant men” [2].
While many independent thinkers and policy makers of times past thus viewed the
unchecked power of private central banks as a vice not to be permitted to interfere
with a nation’s monetary/economic policies, most economists and policy makers of
today view the independence of central banks from the people and the elected
bodies of government as a virtue!

And herein lies ANOTHER MYTH that is created around the Fed: that it is an
independent, purely technocratic or disinterested policy-making entity that is solely
devoted to national interests, free of all external influences. Indeed, a section or
chapter in every college or high school textbook on macroeconomics, money and
banking or finance is devoted to the “advantages” of the “independence” of private
central banks to determine the “proper” level of money supply, of inflation or of the
volume of credit that an economy may need—always equating independence from
elected authorities and citizens with independence in general. In reality, however,
central bank independence means independence from the people and the elected
bodies of government—not from the powerful financial interests.

“Independence has really come to mean a central bank that has been
captured by Wall Street interests, very large banking interests. It might
be independent of the politicians, but it doesn’t mean it is a neutral
arbiter. During the Great Depression and coming out of it, the Fed
took its cues from Congress. Throughout the entire 1940s, the Federal
Reserve as a practical matter was not independent. It took its marching
orders from the White House and the Treasury—and it was the most
successful decade in American economic history” [3].

Another MAJOR MYTH associated with the Fed is its purported commitment to
national and/or public interest. This presumed mission is allegedly accomplished
through monetary policies that would mitigate financial bubbles, adjust credit or
money supply to commercial and manufacturing needs, and inject buying power
into the economy through large scale investment in infrastructural projects, thereby
fostering market stability and economic expansion.
Such was indeed the case in the immediate aftermath of the Great Depression and
WW II when the Fed had to follow the guidelines of the Congress, the White
House and the Treasury Department. As the regulatory framework of the New Deal
economic policies restricted the role of commercial banks to financial
intermediation between savers and investors, finance capital moved in tandem with
industrial capital, as it essentially greased the wheels of industry, or production.

Under those circumstances, where financial institutions served largely as conduits
that aggregated and funneled national savings to productive investment, financial
bubbles were rare, temporary and small.
Not so in the age of finance capital. Freed from the regulatory constraints of the
immediate post-WW II period (which determined the types, quantities and spheres
of its investments), the financial sector has effectively turned into a giant casino.
Accordingly, the Fed has turned monetary policy (since the days of Alan
Greenspan) into an instrument of further enriching the rich by creating and
safeguarding asset-price bubbles. In other words, the Fed’s monetary policy has
effectively turned into a means of redistribution from the bottom up.

The Financial Terrorism of Corporate Gangsters in
the ‘Western World’

This is no speculation or conspiracy theory: redistributive effects of the Fed
policies in favor of the financial oligarchy are backed by undeniable facts and
figures. For example, a recent study by the Pew Research Center of income/wealth
distribution (published on December 9, 2015) shows that the systematic and
escalating socio-economic polarization has led to a sharp decline in the number of
middle-income Americans.
The study reveals that, for the first time, middle-income households no longer
constitute the majority of American house-holds: “Once in the clear majority,
adults in middle-income households in 2015 were matched in number by those in
lower- and upper-income households combined.” Specifically, while adults in
middle-income households constituted 60.1 percent of total adult population in
1971, they now constitute only 49.9 percent.

According to the Pew report, the share of the national income accruing to middle income
households declined from 62 percent in 1970 to 43 percent in 2014. Over
the same period of time, the share of income going to upper-income households
rose from 29 percent to 49 percent.
A number of critics have argued that, using its proxies at the heads of the Fed and
the Treasury, the financial oligarchy used the financial crisis of 2008 as a shock
therapy to transfer trillions of taxpayer dollars to its deep pockets, thereby further
aggravating the already lopsided distribution of resources. The Pew study
unambiguously confirms this expropriation of national resource by the financial
elites. It shows that the pace of the rising inequality has accelerated in the
aftermath of the 2008 market implosion, as asset re-inflation since then has gone
almost exclusively to oligarchic financial interests.
Proxies of the financial oligarchy at the helm of economic policy making no longer
seem to be averse to the destabilizing bubbles they help create. They seem to
believe (or hope) that the likely disturbances from the bursting of one bubble could
be offset by creating another bubble! Thus, after dot-com bubble, came the housing
bubble; after that, energy-price and emerging markets bubble, after that, the junk
bond market bubble, and so on. By the same token as the Fed re-inflates one bubble
after another, it also systematically redistributes wealth and income from the
bottom up.

This is an extremely ominous trend because, aside from issues of social justice and
economic insecurity for the masses of the people, the policy of creating and
protecting asset bubbles on a regular basis is also unsustainable in the long run. No
matter how long or how much they may expand financial bubbles—like taxes and
rents under feudalism—are ultimately limited by the amount of real values
produced in an economy.

***
Is there a solution to the ravages wrought to the economies/societies of the core
capitalist countries by the accumulation needs of parasitic finance capital—largely
fostered or facilitated by the privately-owned central banks of these countries?
Yes, there is indeed a solution. The solution is ultimately political. It requires
different politics and/or policies: politics of serving the interests of the
overwhelming majority of the people, instead of a cabal of financial oligarchs.
The fact that profit-driven commercial banks and other financial intermediaries are
major sources of financial instability is hardly disputed. It is equally well-known
that, due to their economic and political influence, powerful financial interests
easily subvert government regulations, thereby periodically reproducing financial
instability and economic turbulence.

By contrast, public-sector banks can better
reassure depositors of the security of their savings, as well as help direct those
savings toward socially-beneficial credit allocation and productive investment.
Therefore, ending the recurring crises of financial markets requires placing the
destabilizing financial intermediaries under public ownership and democratic
control. It is only logical that the public, not private, authority should manage
people’s money and their savings, or economic surplus. As the late German
Economist Rudolf Hilferding argued long time ago, the system of centralizing
people’s savings and placing them at the disposal of profit-driven private banks is a
perverse kind of socialism, that is, socialism in favor of the few:
“In this sense a fully developed credit system is the antithesis of
capitalism, and represents organization and control as opposed to
anarchy. It has its source in socialism, but has been adapted to
capitalist society; it is a fraudulent kind of socialism, modified to suit
the needs of capitalism. It socializes other people’s money for use by
the few” [4].

There are compelling reasons not only for higher degrees of reliability but also
higher levels of efficacy of public-sector banking and credit system when
compared with private banking—both on conceptual and empirical grounds.
Nineteenth century neighborhood savings banks, Credit Unions, and Savings and
Loan associations in the United States, Jusen companies in Japan, Trustee Savings
banks in the UK, and the Commonwealth Bank of Australia all served the housing
and other credit needs of their communities well. Perhaps a most interesting and
instructive example is the case of the Bank of North Dakota, which continues to be
owned by the state for nearly a century—widely credited for the state’s budget
surplus and its robust economy in the midst of the harrowing economic woes in
many other states.
The idea of bringing the banking industry, national savings and credit allocation
under public control or supervision is not necessarily socialistic or ideological. In
the same manner that many infrastructural facilities such as public roads, school
systems and health facilities are provided and operated as essential public services,
so can the supply of credit and financial services be provided on a basic public
utility model for both day-to-day business transactions and long-term industrial
projects.
Provision of financial services and/or credit facilities after the model of public
utilities would allow for lower financial costs to both producers and consumers.
Today, between 35 percent and 40 percent of all consumer spending is appropriated
by the financial sector: bankers, insurance companies, non-bank lenders/financiers,
bondholders, and the like [5]. By freeing consumers and producers from what can
properly be called the financial overhead, or rent, similar to land rent under
feudalism, the public option credit and/or banking system can revive many stagnant
economies that are depressed under the crushing burden of never-ending debt servicing
obligations.

References
[1] “Who owns the Federal Reserve?”
[2] This statement of President Wilson is quoted in numerous places. A number of
commentators have argued that some of the damning words used in this much quoted
statement are either not Wilson’s own, or taken out of context. Nobody
denies, however, that regardless of the exact words used, he had serious
reservations about the formation of the Federal Reserve Bank, and the misguided
policy of delegating the nation’s money supply and/or monetary policy to a cabal
of private bankers.
[3]. Ellen Brown, “How the Fed Could Fix the Economy—and Why It Hasn’t”
[4] Hilferding’s book, Finance Capital: A Study of the Latest Phase of Capitalist
Development, has gone through a number of prints/reprints. This quotation is from
Chapter 10 of an online version of the book, which is available at:
http://www.marxists.org/archive/hilferding/1910/finkap/ch10.htm
[5]. Margrit Kennedy, Occupy Money: Creating an Economy Where Everybody
Wins, Gabriola Island, BC (Canada): New Society Publishers, 2012.
Ismael Hossein-zadeh is Professor Emeritus of Economics (Drake University). He
is the author of Beyond Mainstream Explanations of the Financial
Crisis (Routledge 2014), The Political Economy of U.S. Militarism (Palgrave–
Macmillan 2007), and the Soviet Non-capitalist Development: The Case of
Nasser’s Egypt (Praeger Publishers 1989). He is also a contributor to Hopeless:
Barack Obama and the Politics of Illusion.

******

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