Could the Fed be privatized?

[Bill H.]

I was talking with a friend about how if the constitution were written today, it would be reasonable to include the Federal Reserve Bank as one of the mandatory pieces of the government, perhaps even placing it as an addition to the big three (exec, legislators, judges). This friend pointed out that including it in the government isn't necessarily mandatory, that it could be run as a private enterprise. In fact, it doesn't need (or so my friend claims) to even be centralized; it could be multiple competing banks. Government could still have influence over various controls (such as interest rates) by legal mandate.

Well, I for one just love the idea of privatizing anything, and if you can throw in a bit of competition, all the more delightful. But I'm kinda doubtful.

Are there proposals out there for privatized central bank systems? How about for private de-centralized ones? Have any ever seriously been considered (or even enacted) by any countries? references will be appreciated.

[Reeder]

The Fed is private. The only quasi governmental appointee is Greenspan.

[Bill H.]

Not even close. You can read more here: http://www.federalreserve.gov/

[Reeder]

The member banks are all privately owned. The federal govt owns no banks.

[Freddy the Pig]

Yes, central banking can be performed by private banks instead of by government-managed Federal Reserve Banks. It was done in this country prior to 1913. If you wish to discuss whether we should do so, as opposed to whether we could (yes) or ever have (yes), I'd recommend starting a GD thread, to which I'd be happy to contribute.

[Northern Piper]

Originally posted by Reeder
The Fed is private. The only quasi governmental appointee is Greenspan.
...
The member banks are all privately owned. The federal govt owns no banks.

Sounds to me like you're confusing the banks in the federal reserve system with the Board of Governors of the Federal Reserve. The banks are private, but the Board of Governors is a federal regulatory agency.

First, all members of the Board are appointed by the President, on the advice and consent of the Senate, just like other significant federal officials. See United States Code, Title 12, s. 241:

Sec. 241. - Creation; membership; compensation and expenses

The Board of Governors of the Federal Reserve System (hereinafter referred to as the ''Board'') shall be composed of seven members, to be appointed by the President, by and with the advice and consent of the Senate, after August 23, 1935, for terms of fourteen years except as hereinafter provided, ....

Second, the members of the Board of Governors are ineligible to hold any position with any of the reserve banks during their fourteen year term of office on the Board. See Section 242: Ineligibility to hold office in member banks; qualifications and terms of office of members; chairman and vice chairman; oath of office.

Third, the Board of Governors has significant regulatory powers over the banks that make up the Federal Reserve. See Section 248 - Enumerated Powers. That includes the responsibility to order Annual independent audits of Federal reserve banks and Board.

[Bill H.]

jklann, good point, but during that time, there really was noone providing the basic services of the current federal reserve, especially governing (as best as possible) the stability of the country's financial system.

What I'm looking for is a serious proposal to do such a thing in an independant (though restricted to serious government supervision and control), and competitive manner. Certainly someone somewhere must have thought about this, and I'd like to learn more about it.

Reeder, though I don't want to bog down this thread with a discussion of what the current Fed is, here is the first question from the FAQ on the site I pointed you to. You may wish to read more there; it's quite fascinating.

What is the Federal Reserve System?

The Federal Reserve System, also known as the Fed, is the central bank of the United States. It was created by the Congress with the passage of the Federal Reserve Act in 1913. The Federal Reserve System is composed of a central, governmental agency--the Board of Governors--in Washington, D.C., and twelve regional Federal Reserve Banks located in major cities throughout the nation.

Also from that FAQ:

Who owns the Federal Reserve?

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

I won't go into all the details about how people are appointed in senior management positions within the Fed (it's a bit complicated), but I will point out that all of the members of the Board of Governors (at the very top), their 1,700 staff members, as well as all of the Chairmen of the Boards, Deputy Chairmen, and some of the additional Directors of each of the 12 Federal Reserve Banks are government appointees.

In case I'm not clear about my question, I am looking for a proposal where the member banks are private, profit-making institutions, which reside outside the government, and who's senior managers are not government officials.

Thanks

[Freddy the Pig]

The Fed performs at least three different functions:

(1) It acts as a "banker's bank", holding reserves from member banks, and making loans to mitigate liquidity problems.

(2) It acts as a regulatory apparatus, examining banks and enforcing rules concerning their financial conduct.

(3) It directly manipulates the money supply, buying and selling securities on the open market via the Federal Open Market Committee.

The first two roles are the classical "central bank" functions. The Fed enforces monetary policy through a combination of all three functions (loaning money via the "discount window", setting reserve requirements, and open market activities).

The first two functions were performed (effectively, in my opinion) by large, private national banks before 1913. The third function didn't really exist in that era, because we were on a specie standard. There is no reason in principle why we couldn't re-privatize the first two functions today, but given that we are no longer on a specie standard, I see no way to privatize the third.

I am not aware, however, of any serious proposal to re-privatize any aspect of central banking.