#2. The US Federal Reserve for Dummies

From:  http://thegreatrecession.info/blog/the-us-federal-reserve-for-dummies-what-is-the-federal-reserve-system-and-what-is-the-gold-standard/

This is the story of a bank that is not a bank as well as a government regulatory agency that is not government. The following explanation of the Federal Reserve is simpler than more complete versions you can find all over the web.  It’s hard to find a simple explanation of this unusual institution that has been around for a hundred years.

What is the U.S. Federal Reserve System?

The Federal Reserve System is the central bank of the United States of America. It was chartered in 1913 via the “Federal Reserve Act” of congress. While it operates as the nation’s central bank, it is not one bank but a dozen regional Federal Reserve banks. It is also a management/ regulatory system. Because its twelve regional banks are privately owned, it is not really government. It is chartered by the government but not directly controlled by either congress or the executive branch. So, while it regulates the U.S. money supply, it is not quite a U.S. agency because of the fact that no branch of government controls it, though it does have to operate within its charter. That’s it in a whirlwind.

Here is how the government connects with this institution of oxymorons: The U.S. Federal Reserve is composed of a presidentially nominated Board of Governors of the Federal Reserve System, which has seven directors. It manages money through the twelve regional Federal Reserve banks, which conduct all of their business through privately owned “member banks.” They are banks for banks, not banks for people or businesses.

The seven members of the Board of Governors are appointed by the U.S. president and confirmed by the Senate. They are appointed for terms of fourteen years, with one person rotating off every even year, and no one can be removed from his or her position because of policy decisions or views.

What is the Federal Reserve bank?

That’s how the question is often asked, but it should be “What is A Federal Reserve bank?” The twelve banks mentioned may be the most controversial part of the system because of the fact that they directly receive all money created in the U.S. but are privately owned. They are, in other words, non-profit corporations whose sole beneficiary is the U.S. government. Their stock is not publicly or privately traded, yet they are made up of private investors.

If the profits have to go to government you might naturally ask why would anyone want to become a stockholder in any one of them? Simple. The stockholders are the banks in each region that choose to be part of the national banking system for the benefits the system offers. While the twelve Federal Reserve banks must give all of their profits to the U.S. government, the national banks that are members obviously keep all of their individual profits from their own operations. What they gain is influence over the nation’s money supply and the most immediate access to it. These corporate investors derive the unique benefit of being the only ones to whom all U.S. dollars flow directly from the mint (and on computer accounts). Naturally, bankers like to be close to that supply.

So, who owns the Federal Reserve banks?

When a bank decides it wants to become a “national bank” and a member of the Federal Reserve System, it must also by law become a stockholder in one of the twelve regional Federal Reserve banks. That stock cannot be bought and sold, nor traded or pledged as security because the amount the bank holds is a mandate of its membership. The member banks must pay for this stock by investing a certain amount of their funds as a reserve to be held in their regional Federal Reserve Bank. While they cannot make a profit off of how they run their regional reserve bank, they do receive stock dividends of 6% a year on each member bank’s capital investment in a Reserve bank. (Editor’s note: that was $3.4 billion tax free this past year).  Most of that 6% is considered payment for the money they must keep “in reserve,” since they are not directly paid interest on that money.

Because all the profits in theory belong to the U.S. government, the Reserve banks are tax-exempt. This system also holds all the U.S. government’s operating monies and processes payments for the government, including payroll.

The United States Court of Appeals, Ninth Circuit, ruled that the Federal Reserve Banks “are independent privately owned, locally controlled corporations” when it comes to law suits. The court said these banks are only “federal instrumentalities for some purposes.”