The Federal Reserve system is an imperfect, but rather innovative, clearinghouse. Its structure as, “independent within government,” makes it hard to decipher precisely who owns it [but here’s my understanding of what it actually is].
What is the Fed – Really?
The Federal Reserve System was modeled after the New York Clearinghouse that existed in New York during the 1800′s and 1900′s. As its name states, the New York Clearinghouse was just a big clearinghouse where many of the big banks would come to settle their interbank payments. Unfortunately, it wasn’t broad enough to handle the scope and complexity of the U.S. banking system so these regional clearinghouses were deficient in dealing with banking crises and liquidity issues.
The Fed System took this private model and ramped it up into a public/private hybrid model to create a national clearinghouse for interbank payments. You don’t hear much talk about this on a daily basis, but that’s really what the Fed is – it’s just a big clearinghouse to help smooth the payments system. All the other stuff it gets attention for (like monetary policy) is just a sideshow to this primary purpose it’s serving – to maintain a healthy functioning payments system.
Who Owns the Fed – Really?
The Fed is a weird entity when it comes to “ownership”. It exists due to an act of Congress but it is also considered an independent entity because it is not part of the Executive or Legislative branches of government. The Fed exists because Congress created it, but it doesn’t enact policy measures with any Congressional or Presidential approval. Politically, this makes it a very independent entity.
What About the Regional Feds?
The Regional Fed banks are arms of the Fed system that serve like regional versions of the NY Clearinghouse. They issue stock to the member banks which pays a fixed… dividend…[What remains after said payout is] remitted back to the US Treasury...
Let’s also not forget the primary purpose of the Fed:
- to serve the payments system. This means it is a supporter of the U.S. banking system. Before it can ever achieve its dual mandate on price stability and full employment the Fed must ensure the payments system is healthy. Therefore, the Fed is often viewed as a servant to the banking system while also trying to be a public purpose servant. It has, in effect, two masters by design…
I prefer to think of the Fed as being an entity designed to help support the U.S. payments system (which thereby makes it a bank facilitating entity) which serves public purpose and private purpose. In other words, it’s better to think of the Fed as a public/private hybrid and not really being “owned” by anyone.
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