Structure and Function of the Federal Reserve System
The three main components of the Fed are: (1) the national Board of Governors, (2) the regional Reserve Banks, and (3) the Federal Open Market Committee. Lesser components include: (4) the commercial banks which hold the stock, and (5) the advisory councils.
The function of the national Board of Governors is to determine the system’s monetary policy. The Board consists of seven members who are appointed by the President and confirmed by the Senate. Their terms of office are fourteen years and are staggered so that they do not coincide with the presidential term of office. The purpose of this is to insure that no single President can dominate Fed policy by stacking the Board with his appointments. One Board member is appointed as the Chairman for four years and another as Vice Chairman for four years. The Chairman controls the staff and is the single most powerful influence within the system.
Control is exercised by the Board and a handful of top staff employees. The Federal Reserve Act mandated that the President, when selecting Governors
shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interests, and geographical divisions of the country. This mandate is now almost completely ignored, and the men come primarily from the fields of banking and finance.
The function of the regional Reserve Banks is to hold cash reserves of the system, supply currency to member banks, clear checks, and act as fiscal agent for the government.
The twelve regional Reserve Banks are located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis. They are corporations with stock held by the commercial banks which are members of the system. Member banks elect the directors of the regional Reserve Banks of which they are a part. The larger banks hold more shares but they have only one vote in the selection of the Directors.
Within each regional-bank system there are nine Directors. The member banks elect three Class-A directors who represent the banking industry and three Class-B directors who represent the general public. The remaining three Class-C directors are appointed by the national Board. The Chairman and Vice Chairman of each regional Reserve Bank must be Class-C directors. The selection of President and other officers is subject to veto by the national Board of Governors. In this way, the national Board is able to exercise control over the regional branches of the system.
The function of the Federal Open Market Committee is to implement the monetary policy set by national Board, although it exercises considerable autonomy in setting its own policy. It manipulates the money supply and interest rates primarily by purchasing or selling government securities — although it also accomplishes that through the purchase or sale of foreign currencies and the securities of other governments as well. Money is created and interest rates go down when it purchases. Money is extinguished and interest rates go up when it sells. Policy is formulated on a daily basis. In fact, it is monitored by the minute and the Committee often intervenes in the market to affect immediate changes.
The Open Market Committee is composed of the national Board of Governors plus five of the twelve regional Presidents who serve on a rotating basis. The exception to this is the President of the New York regional Bank who is always on the Committee. Thus, once again, the System is firmly in control of the national Board with the President of the New York regional Bank being more powerful than the others.
Twenty-four bond dealers handle all sales of government securities. Government agencies cannot exchange with each other without going through dealers who earn commissions on each transaction.
Decisions are made at secret meetings. A brief report is released to the public six weeks later, but transcripts of the deliberations are destroyed. That policy was begun in 1970 when the Freedom-of-Information Act was passed. Not even the CIA enjoys such secrecy.
The function of the member banks is to conduct the nation’s banking business and to implement the System’s monetary policy in terms of putting money into or drawing it out of the system at the point of contact with individual or corporate borrowers.
This leads to the troublesome question of ownership. The federal government does not own any stock in the System. In that sense, the Fed is privately owned. That, however, is misleading in that it implies a typical private-ownership relationship in which the stockholders own and control. Nothing could be further from the truth. In this case, the stock carries no proprietary interest, cannot be sold or pledged as collateral, and does not carry ordinary voting rights. Each bank is entitled to but one vote regardless of the amount of stock it holds. In reality, the stock is not evidence of
ownership but simply certificates showing how much operating capital each bank has put into the System. It is not a government agency and it is not a private corporation in the normal sense of the word. It is subject to political control yet, because of its tremendous power over politicians and the elective process, it has managed to remain independent of political oversight. Simply stated, it is a cartel, and its organizational structure is uniquely structured to serve that end.