So, Who Runs the Fed?

I'd like to comment today on the organization of the Federal Reserve System, and whether it is truly a function of the Federal Government and under democratic purview as is commonly understood—or whether it is a quasi-governmental intermediary that enables the interests of private banks to be enacted into law. As it turns out, it is a mix of the two, split nearly evenly down the middle.

Federal Reserve operations are handled by 12 regional banks, with 25 branches, across the United States. These operate the discount window and monitor the overall economy within their regions. Each regional bank is run like a private bank, independently incorporated, with shares held by member banks. Each has a 9-member board of directors: 6 elected by the shareholders, and 3 appointed by the Board of Governors (explained below). They are like private banks in how they are organized, except profits are relinquished to the Treasury Department, rather than shareholders.

At the federal level of policy-making, decisions that affect the whole of the economy and money supply are made by the Federal Open Market Committee (FOMC), comprised of 12 members. Five of the 12 are chosen out of the presidents of the 12 regional banks, who are elected by the shareholders (private banks). The remaining seven are the Board of Governors, each of which are selected by the President of the United States and confirmed by the Senate in staggered 14-year terms.

So the Fed is an independent government institution that has private aspects. Its everyday operations are run by, essentially, private banks. Broad policy decisions are made by a committee of 12, five of whom come from private industry, and seven who are appointed by the President and approved by the Senate. While seven versus five shifts the FOMC in favor of democratic control, any democratic influence is mitigated by the lengthy terms, and it would be surprising if the banking lobby didn't have a lot of say on the canditates submitted for the position. In the end, it is rare for the FOMC to have a dissenting vote.

Now it is fine with me to have restricted democratic influence over money supply. If it were possible, the democratic majority would vote themselves massive pay raises. For a society heavily in debt, as ours is, its willingness to forgive all debt through hyperinflation would be practically unstoppable. Paper money originated from private banks as gold notes, and within the private sector money creation should probably stay.

The problem with private interests running central banks is this: not all citizens will have the same opportunity to access the discount window for cheap capital. Those who do will have a carry trade advantage over those of us unable to tap into the easy money available from Federal Reserve printing presses.