NCPA - National Center for Policy Analysis

Who Owns the Fed?

April 26, 2011

Commercial banks hold shares of stock in their local Federal Reserve branch, but these shares do not confer ownership in any meaningful sense.  Member banks receive a fixed 6 percent annual dividend on their Fed stock and enjoy limited voting rights.  But there the resemblance to ordinary shares ends.  The banks are obliged to acquire shares when they become members of the Fed, and they may not sell their shares or pledge them as collateral, says Warren C. Gibson, engineering teacher at Santa Clara University and economics teacher at San Jose State University.

  • The Fed is a nonprofit institution, but that designation means only that profits are not its primary mission.
  • From an accounting point of view, such profits are essentially the same as those earned by firms in competitive markets, but not from an economic point of view.
  • Competitive profits serve the vital function of directing scarce capital resources to the most urgent unmet demands of consumers; the Fed's profits serve no such function.
  • Its income consists primarily of interest earned on its securities portfolio.

The answer to the question "Who owns the Fed?" is that it's the wrong question.  Instead, we should ask: Who calls the Fed's tune?

  • The Fed was created by Congress and can be modified or abolished by Congress.
  • The U.S. president also holds substantial sway over the Fed -- he appoints the seven-member board of governors subject to Senate confirmation.
  • The powerful Open Market Committee, which makes monetary policy decisions, consists of those seven plus the president of the New York Fed and four seats that are rotated among the 11 regional presidents.

But even though it exercises ultimate control, Congress has given the Fed a degree of independence that no other federal agency enjoys.  The Fed's vaunted independence is a good thing, the thinking goes, because we don't want the stewards of our money to be caught up in the swirl of day-to-day politics.  But independence trades off against accountability, says Gibson.

Source: Warren C. Gibson, "Who Owns the Fed?" Freeman Online, May 2011.

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