How does the Federal Reserve work?

Factual Questions
1

I am entirely ignorant and would greatly appreciate some schooling in this area. It seems to me, after a modicum of research, that the Federal Reserve is a company controlled by commercial bank shareholders. So… Can I reasonably extrapolate that when the government borrows money from the Federal Reserve… they have to somehow get the shareholders’ go-ahead???

Is the concept of “Federal Reserve” just words of reassurance? As in, since most remain ignorant of the fact the Reserve is a company, do most people find comfort in the idea that it is limitless? Is it pure ignorance that keeps our currency’s value???

Someone please educate me.

2

The Federal Reserve is an odd beast whose structural history is a result of a series of compromises necessitated by early 20th-century political concerns and rivalries.

That said, although the member banks of the Federal Reserve System own shares of the 12 regional Federal Reserve Banks, these shares are non-transferable and essentially worthless. The only thing the shares allow the member banks to do is appoint some of the members of the Federal Reserve Banks’ boards of directors. The other directors are appointed by the Fed’s Board of Governors, who are appointed by the President.

The market operations of the Fed (manipulating the currency supply) are done by order of the Fed’s board of governors and executed primarily through the Federal Reserve Bank of New York. The primary job of the other regional Federal Reserve Banks is to hold reserve accounts for member banks and to process financial transactions. No Fed shareholders are consulted when it comes to currency market operations.

I’m not entirely sure what you’re asking here, but currency has value because its supply is finite, and people are willing to exchange it. That’s all.

3

Thank you!!!

4

No.

The Federal Reserve is not a company. It is a government agency.

No.

The Federal Reserve is not controlled by commercial bank shareholders. It is controlled by a Board of Governors, seven people who are appointed by the US President after approval by the Senate.

No.

You cannot so extrapolate. This is not remotely close to what happens. Private banks have no direct vote whatever in major Fed operations.

The Federal Reserve is the name of a government agency.

Whether that name “assures” you or not is a matter of personal idiosyncrasy.

The Federal Reserve is a government agency, not a company.

Most people have no idea how the Federal Reserve works.

I hope you appreciate that you are personally included in this group. You do not seem to take comfort in your own ignorance, and I’m not sure why anybody else would either.

No.

The currency’s value is maintained by the balance of supply and demand.

To repeat:

The Federal Reserve is a government agency.

It was created by act of Congress. It could likewise be dissolved by act of Congress at any time. It is a government institution.

Its key decision-making body is the Board of Governors. Members of this board are appointed by the US President upon approval by the Senate.

Nationally chartered private banks are required – this is to say legally mandated – to purchase “shares” in the Federal Reserve. These shares do not represent “ownership” of the Fed in any usual way. They do not function like any normal shares. They cannot be sold. They cannot be traded. They cannot be pledged as collateral. They pay “dividends”, but also by statutory mandate – this is another legal mandate, in compensation to the banks for the capital that the banks lose by the original “purchase” of the shares.

Private banks that become members of the Federal Reserve System receive a vote in the leadership of their local Federal Reserve branch. There are 12 such branches. Each of these 12 branches has a 9 member board. The private bank members of the local Fed branch help to choose 6 of these 9 members on the local Fed branch board. The other three members are chosen by the Board of Governors. Each local board helps choose a local Fed president – there are 12 branches, and so there are 12 local Fed presidents. But each local Fed president can only be chosen with the approval of the Board of Governors (whose members, remember, are appointed by the US President).

One of the most important committees of the Federal Reserve is the Federal Open Market Committee. This committee consists of the 7 members of the Board of Governors, and with the 5 other voting positions rotating between the local Fed presidents (with the exception of the NY Fed President, who always has a voting position). This is to say that one of the most important committees on the Federal Reserve has an outright majority of voting members that are selected directly by the President of the United States, and whose remaining members can only be approved with the permission of the Board of Governors. In this sense, it can be said that private banks have some input and some indirect representation in Fed decisions – they help choose the local boards, who in turn help choose local Fed presidents – but the main decision-making bodies of the Fed are always under the majority control of US Presidential appointees.

5

The value of all currency is driven by confidence. Yes, this includes gold, silver, diamonds, and platinum. If you don’t think people will want what you have in the future as much as they want it now, you’ll try to get rid of it and get what everyone else is going to want more.

The system based on ignorance is the system where people thought gold was magical, as opposed to just another commodity, that inflation was necessarily bad, as opposed to a part of the business cycle and an aspect of any healthy economy, and that money had to be based on a commodity to prevent inflation, which is simply wrong and leads to massive, destructive depressions when you use that idea as opposed to modern economic practice. Modern money isn’t based on such delusions, and it works a lot better.

6

No it is not.

7

From the source itself for anyone who is interested, rather than… an Oklahoma history website?

The Fed was created by act of Congress, it derives its authority from those government acts, its leadership is appointed by the executive, and its main administrative body is quite explicitly a government agency. It has vast monetary and regulatory power, which are both government powers, just in case the Oklahoma education system does not cover that topic.

Yes, the Fed is part of the government.

If anyone wants to be pedantic and press a distinction between the Board of Governors being a “federal agency”, as opposed to the 12 Fed branches which are, technically, individually chartered, then they can do that. But even then, the most that can be said is parts of the Fed are government and parts are private – but with even the private parts being absolutely legally bound both by the original acts of Congress that created and modified the system, and also bound by the government agency that administrates the entire system. The people actually in charge of the thing? They’re all government.

What no one can honestly say is that the Fed is purely non-governmental, or totally not part of the government, not when its entire authority derives from act of Congress and when its chief administrative organ is an explicit government agency.

8

What part of the website I linked to disagrees with your citation?

I think the part that clinches it as not part of the government is it does not shut down when the federal government shuts down.

Does it have government oversight and components? Sure. But that does not make it part of the government.

It is usually cited as being a quasi-governmental agency.

*quasi-
ˈkwāˌzī,ˈkwäzē/
combining form
prefix: quasi-

seemingly; apparently but not really.*
9

I don’t feel the need to repeat what I already wrote.

But I can deal with the other ridiculousness here:

By this argument, the Consumer Financial Protection Bureau is not “part of the government”. It doesn’t shut down, either. The FDIC doesn’t shut down, nor does the Office of the Comptroller of the Currency within the Department of the Treasury. I guess this part of the Treasury is not part of the government, even though… the Treasury is part of the government. Large parts of the US military don’t shut down, either. By your argument, these sections of the military are not “part of the government” either.

Clinches it? Really?

Rather than reaching for the first half-ass excuse that pops into your head, you might want to consider the possibility that “part of the government” is a bit more of a complex matter than you’re making out here with your funding issue. The criterion you offered doesn’t “clinch” anything. Some agencies are funded out of Congressional appropriations, and others aren’t. Some government services are considered “essential” even during a shutdown, and others aren’t. This has nothing whatever to do with whether an agency is part of the government.

The rest of this is just semantics.

If you want to call major government agencies “not part of the government”, you’re free to do so. If you want to use the term “quasi-governmental” as if that’s somehow dispositive (?), even though that term has no basis in the actual Congressional acts that created and modified the Fed, then again, you’re free to do so. In my own experience, the Fed is generally considered an independent agency of the government, not a “quasi-governmental” agency. Again, this is according to the Federal Reserve itself:

I mean… you’re free to disagree with how the Fed describes itself.

If you want to call the Fed “not part of the government”, then knock yerself out. Go nuts.

But I call the Fed a government agency, and in my own experience (which somehow does not seem to match yours), most of the people I come across who talk about the Fed consider it a government agency. The Fed even refers to itself an “independent” government agency. If you want to consider “independent” agencies somehow as somehow… not “part of the government”, or “quasi-governmental”, or whatever, you can. But your idiosyncratic description, your own particular semantic preference, is not somehow so accurate and dispositive that it warrants some sort of special treatment. It doesn’t match the law, doesn’t match my experience, and doesn’t match the Fed’s own description of itself.

Is the Fed part of the government? Yes. I already gave the reasons for that. Those reasons I already listed seem dispositive to me, especially compared to a random half-definition pulled from a dictionary.

10

You seem a little peevish for GQ.

11

It was a pointless waste of space to quote the entire post for that comment.

12

First, try counting to ten.

Second, why don’t those close?

The Fed doesn’t close because its employees are not government employees on the government payroll. Congress does not appropriate money for it as it does for ALL government agencies.

13

They don’t close because they are considered to provide essential services. Just like the Fed.

The Fed likes to say that it is, independent within the government.

The Fed makes a boatload of interest on the debt it holds. A small share pays for salaries. The rest is handed over to the Treasury. Keeping them out of the formal appropriations loop maintains central bank independence. Within the federal government.

The Fed is also one of the regulators of the banking system, so I’m heartened that the banks have little direct control over it.

14

Yup but as noted the Fed stays open because its employees are not on the federal payroll.

As has been noted it is a “quasi federal agency”. It is separate from the government. It has federal oversight and its role is intimately linked to the operation of the country but it is not a government agency by design.

15

It’s not part of the civil service. The private sector doesn’t have much role in it, notwithstanding the above. It is not an NGO or non-governmental organization. It refers to itself as an independent agency of the federal government.

You are free to call it a quasi-governmental agency, but I don’t believe there are many mainstreamers who share your terminology. Just as Congress could pass a law requiring it to close during governmental shutdowns, which it would if it didn’t provide an essential service.

Air traffic controllers operate during governmental shutdowns as well.

ETA. Huh: “The Consumer Financial Protection Bureau and the National Credit Union Administration are also independently funded and would stay open during the crisis.” http://thehill.com/homenews/administration/369646-what-happens-if-the-government-shuts-down I don’t think many refer to them as quasi though…

16
17

Let’s give SDMB some credit. At least here the claim that FRB is “not a government agency” seems to only be an effort to practice pointless pedantry, to declaim digressive details, and to enjoy inundations of inane irrelevance.

Out there in the United States, OTOH, the “fact” that FRB is owned by private banks is used as proof that the Rothschild family really does run the planet, that we are all slaves leashed to the New World Order, and that only Donald Trump can save us and MAGA. (And some of these Alex Jones fans are “smart” enough to read SDMB and right now are thinking “See? Some of those 100+ IQ types agree with us!!”)

So SDMB has proved its relative superiority again. But …

“What did you do during the MAGA crisis, Daddy?”
— I practiced pointless pedantry. Great times!

18

Fun fact: It is possible to disagree with someone without being unpleasant about it.

Most learn that around the age of 12 or so.
mmm

19

The last part of this sentence is factually false.

You shouldn’t post misinformation in GQ. It is bad form. I have already mentioned several government agencies outside of the Fed that do not receive the usual Congressional appropriations.

I’m not sure I would describe it that way. Private banks and thrifts could probably go without being examined/audited for a few days and the world wouldn’t end.

The military doesn’t close specifically because it’s an “essential service”. But the CFPB, the FDIC, the OCC, and a few random other government agencies don’t close simply because their funding is not appropriated annually by Congress. They have independent funding sources. Whack-a-mole states above that ALL (capitalized!) government (underlined!) agencies are appropriated by Congress, but that’s just more ignorance. Specific Congressional appropriations are not the only source of government agency funding.

The FDIC and OCC are financed directly by fees from the institutions they regulate, banks and thrifts and such. The OCC is housed within Treasury but is still financed independently, while I think the FDIC is independent of any usual government department. The CFPB is a more interesting case. Congress decided to house that new regulatory agency within the Federal Reserve to give it an independent source of funding outside of the usual appropriations process in order to avoid future political squabbles about its funding. The CFPB is a government agency, housed within another government agency for funding purposes but still independent of that agency. So the Fed pays for the CFPB, but the Fed Board of Governors don’t have power over it the same way they have power over the Federal Reserve System itself. The CFPB have their own offices, as well, in a separate building in DC.

As for the Fed, it finances itself from its ability to push buttons on a computer to create money. Basically. Well, it uses that money to buy assets, and it uses the return on those purchased assets to finance its operations. But any revenue it receives from its portfolio in excess of its operating expenses is returned to Treasury. A simple act of Congress could change how the Fed funds itself. Congress could demand that the Fed remit any and all revenue directly to Treasury, and fund itself solely from appropriations. But why? There is no obvious logical purpose in appropriating money to the people who actually, you know, create the money, and so Congress doesn’t do that at present. But the option remains available, as strange as it would be. There is nothing preventing Congress from changing the Fed’s funding in this manner, if it wanted to do so. But obviously making that one change would not, magically, change the inherent nature of the Fed.

The Fed also explicitly calls itself a(n independent) government agency.

But anyone who would rather rely on the keen regulatory insight of the Oklahoma Historical Society is free to do so.

20

at the risk of feeding a rather pointless argument, there should be some clarification added about what happens during a government shutdown. That is, who does and who doesn’t come to work and why.
Simply put-those federal workers who are funded through the annual budget process and who aren’t identified as “essential”, don’t work when the Congress doesn’t pass an annual budget. Seems simple and it is. If a federal employee is deemed “essential” then he/she goes to work. If the employee’s funding is not tied to an annual budget and there is money available, then he/she goes to work. Who gets furloughed is very dependent on funding details. Federal Reserve personnel, for instance, go to work because their funding does not come from annual Congressional budgets-that alone is sufficient for them to make the commute every morning regardless of other arguments.