A point of argument that has to be cleared up is, “Who owns the central bank of the United States of America that’s known as the Federal Reserve System?”

That should be a stupid question but unfortunately there’s a choice of answers.  Even more stupid is that one of the answers is not the U.S. government.  An undisputed fact is the Federal Reserve System is NOT owned and operated by the U.S. Government.  Federal Reserve Banks are NOT branches of the U.S. Department of Treasury and the Board of Governors are NOT civil servant government employees with fiduciary responsibility to the Republic of the United States.  The sad fact is the Federal Reserve System is an independently owned and operated system that privatized the functions of the U.S. Treasury in 1913.  The U.S. is one country with two governments.

 “Who owns the central bank of the United States of America?”  The answer is stockholders.  It‘s also an undisputed fact that the Federal Reserve Banks are corporations owned by stockholders.  The choice of answers has to do with who owns the stock in the corporations.  Who owns the stock is important because those are the people who receive the profits from owning the United States central bank.  Here is the first choice of answers that the Board of Governors web site is selling.  The twelve district Federal Reserve Banks (Reserve Banks) are owned like an old-fashioned farmers cooperative by the Member banks they serve.  Member banks are neighborhood commercial banks.  In 1914 the Reserve Bank Organizing Committee divided the United States into twelve reserve districts.  One Reserve Bank was to be organized and established in each district. All the neighborhood banks in a district were supposed to pool their gold together and buy capital stock as a membership fee.  This answer leads to the assumption that Member Banks own all the stock in their district Reserve Bank like a banker’s cooperative.

The second answer choice to the question “Who owns the Federal Reserve?” is from my reading of the original 1913 Federal Reserve Act which established the system.  Just to give you a warning, my answer is unusual but it’s very legal, logical and smart business.  Unusual rules in the Federal Reserve Act indicate the controlling stockholder of the National Bank of New York in 1912 started five trust companies based in Washington D.C. and those became the Federal Reserve Banks with a monopoly to deal with the U.S. Treasury.  These five Reserve Banks were picked to file the Comptroller of Currency Certificate of Organization needed to deal with the U.S. Treasury.  I call these banks the five certificates.  Technically there are only five full Federal Reserve Banks with authority to deal with the U.S. Treasury for Bonds and it appears they are owned by a single group of stockholders.  The five certificate Reserve Banks hold the monopoly to deal with the U.S. Treasury to buy notes and bonds.  The twelve district Reserve Banks are customers.  This established a power structure from the five certificates Reserve Banks to the twelve district Reserve Banks to the Member banks to the public.  The stockholders of the five certificates had two-business objectives for the establishment of the Federal Reserve System.  First was to make all banks in the United States their customers.  The second business objective was to convert the United States monetary system from a money supply to a credit supply.  Bankers don’t make a profit when gold coins are passed from hand-to-hand facilitating exchanges.  The best situation for bankers is a shortage of the money supply because people have to borrow from banks and that’s when Bankers earn interest.  One way to create the effect of a shortage in the money supply is for prices to inflate.  It’s the same effect if everyone go a pay cut.  That is why today the U.S. has a money supply and a credit supply and price inflation.    The Stockholders of the five certificates prefer to supply credit because interest is earned when money is borrowed from them.

The method the five certificates used to establish the Federal Reserve banks was to finance Woodrow Wilson for president and when he won instructed him to appoint friends as Secretary of Treasury, Secretary of Agriculture and Comptroller of Currency.  These three men formed the Reserve Bank Organization Committee.  The Federal Reserve Act was written so these three men had the discretion to allow one person to subscribe to the minimum amount of stock needed to organize a Reserve Bank and then put the payment on call.  This meant one person could own one hundred percent of the stock in five Reserve Banks for “no money down”.  Today, that stock is worth billions per year.  Please notice the number of times the discretion of the Reserve Bank Organization Committee is mentioned in the examples given to justify my statements.

The Federal Reserve Board of Governors web site and I disagree.  They say there’s a misunderstanding in the ownership of the central bank because of system design.  I say the system was designed for misunderstanding to hide the fact that this nation’s central bank is privately owned.  Below are the answers from the Federal Reserve Board of Governors web site.  My answers follow the Board’s answers.  I think my answers are more creditable because my answers are based on the Federal Reserve Act.  The Board of Governors web site, (www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5), uses assumptions because they don’t justify their answers by quoting their Act.  Here is the first of five parts to the Board of Governors answer to the question, “Who owns the Federal Reserve?”  The parts in blue are from the Federal Reserve Board of Governors web site. 

       Who owns the Federal Reserve? (Part 1)

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.

      If appointed Chairman Governor I would recommend we change the Federal Reserve so there’s no independent entity.  I still can’t believe that’s in writing.  An independent entity within the government is an independent entity and not part of the government.  The independent entity governing our central bank with private purposes is in direct conflict with the elected government having only public benefit as its purpose.  In contrast, a janitorial serve with a government contract is allowed to be an independent entity and be a corporation because it doesn’t make rules governing other janitorial services. Also, the law doesn’t require other janitorial services to purchase supplies from them.  If there was a federal janitorial act making this corporation the sole distributor of legal tender toilet paper then it should lose its independent status and become a non-profit bureau or agency of the Republic of United States of America.

Nobody owns a bureau, department or agency of the United States elected government.  That means the Federal Reserve is not a bureau, department or agency because the Federal Reserve Act, section 4.2-3 clearly states, “When the minimum amount of capital stock prescribed by this Act for the organization of any Federal reserve bank shall have been subscribed and allotted …the said Federal reserve bank shall become a body corporate”.  Somebody owns a corporation and that somebody had to subscribe to a minimum amount of capital stock.  Ownership is the reason for the corporate structure.  A corporation is an independent entity owned by people and having a private purpose.  The Board of Governors web site lied straight to our computer monitors when they wrote, “The Federal Reserve System is not "owned" by anyone…” Either that or they don’t understand what a corporation is and they don’t understand what a Constitutional government is.  If that’s the case then maybe they need a new Chairman.  That’s why I’m applying for the job.       

Division of Earnings

If “The Federal Reserve System … is not a private, profit-making institution” then why is there a section called Division of Earnings, section 7 in the Federal Reserve Act?  The Federal Reserve Act passed by the 1913 Congress included a Franchise tax.  The Reserve Banks operate under special privileges granted by the elected government called a franchise.  Today the term franchise is replaced with “privatization” of government services.  Technically speaking the functions of the Treasury, which is our central bank, was the first privatized department of the U.S. Government.  The franchise tax was the elected governments’ share of central bank profits but it was removed in 1919.   It appears one of the “private aspects” is to avoid public responsibility to pay tax.     

1913 Federal Reserve Act, Division of Earnings Sec. 7:  “After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders shall be entitled to receive an annual dividend of six per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met, all the net earnings shall be paid to the United States as a franchise tax, except that one-half of such net earnings shall be paid into a (capital stock) surplus fund until it shall amount to forty per centum of the paid-in capital stock of such bank.”

 

“…all the net earnings shall be paid to the United States as a franchise tax…”  This was a great specification because it limited the amount of profit the Federal Reserve Corporation was privileged to receive.  The profits to the Reserve Bank corporations stop after all “…expenses have been provided for…” and the stockholders receive their “…annual dividend of six per centum…”, and the “…surplus fund…” is filled.  This specification says that the Federal Reserve corporate stockholder had a maximum income limit, which means they were just service providers.  In contrast our United States Congress was the owner of the entire Federal Reserve System because there is no limit to the profit Congress could earn.

“…all the net earnings shall be paid to the United States as a franchise tax...” Although the corporations owned the banks, this line demonstrates the Central Bank system belonged to elected government.  The standard concept that a corporation may make and keep all the profit it can was nullified by the franchise tax.  It was a roundabout way for the Federal Reserve Banks to be a corporation but overall profits from the system went to Congress.  The problem is the franchise tax was deleted and is not in the current version of the Federal Reserve Act (2008).  There is now no limit to the amount of profit the for-profit Federal Reserve Corporation is privileged to earn and keep.

When the 1919 Congress removed the franchise tax from the Federal Reserve Corporations, the elected government of the United States was demoted from the owner of the greatest money system in the world, to a customer with a checking account, in the greatest money system in the world.

If past Chairman Governors really cared about the United States of America they would have recommended to Congress to reinstate the Franchise Tax.  I surmise that anyone opposed to reinstating the Franchise Tax must be getting profit from the private “independent entity within the government”.  I’m guessing the rest of the United States population are all for it.  The Franchise Tax should have been paying off the National Debt for all these years.  It’s not too late to start.

      Here is part two from the Federal Reserve Board of Governors Web site.

Who owns the Federal Reserve? (Part 2)

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

Derived Authority

“…the Federal Reserve derives its authority from the U.S. Congress.”  Actually, the Federal Reserve derived its authority to be an independent central bank from the 1913 U.S. Congress and 2008 Congress is stuck with it today.  The controlling stockholders of the Reserve Banks where established at the discretion of the three appointment men of the 1913 Reserve Bank Organizing Committee and the entire world is stuck with that in 2008.

Independent Central Bank

The Board of Governors answer makes it absolutely clear.  There are two governments in the United States.  One government is a Republic elected by the population that consists of the President, executive and legislative branches.  The other government is the Board of Governors and the central bank.  The Board of Governors and central banks are “independent” because their “decisions don’t have to be ratified by the President or anyone else in the executive or legislative branch of government”.  That means the Board of Governors has the power to raise every interest rate in the country without approval from the elected government.  Interest rate changes are what cause the business cycle.  That also means the Board of Governors and central banks don’t have a boss.  And they aren’t responsible for the consequences of their unratified decisions.  Not having a boss in the United States but having a monopoly to make a profit from every citizen is a powerful benefit.  The slogan “No Taxation without Representation” has to be amended to “No Interest Rate Change without Representation”.  The Federal Reserve Act grants the independent central bank the privilege to raise and lower interest rates without representation from the elected government of the people.  They raise the prime rate and we pay.  They lower the rate and we say thank you.  All of the decisions that caused the Sub-Prime problems were made without “Representation” in the independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government.  (See chapter 7)

So, what benefit does the poor elected government and the citizens of the U.S receive from an independent Board of Governors and central bank with stockholders?  I can’t think of one benefit.  The worst part is they aren’t good at their job.  There is inflation every year.  Gas prices just went up to four dollars and forty cents ($4.40) and they blame everyone but themselves.  If any of us performed that bad we would get fired because we all have a boss.  In these tough economic times there’s no room for excuses and blaming others.  It’s especially true that there should be no excuses from the Board of Governors and central bank stockholders because they have total independent control over the United States economy.  We have paid their higher interest rates and suffered inflation without question or representation. 

It’s real easy to change the Federal Reserve from an independent corporation to a government agency.  Keep everything exactly the same except remove the stockholders.  It‘s OK for neighborhood member banks to own the minimum membership fee stock but the privilege to own other shares of Federal Reserve stock should be dissolved.  Simply transfer stock ownership to the United States General Fund.  Rerouting stock ownership will reroute profits from the central bank and rerouting profits is rerouting money.  Since money is power then rerouting money has the effect of rerouting power away from corporate stockholders and toward the elected government.    Then require that Board of Governors decisions to change interest rates must be ratified by Congress.

Longer Terms

“The terms of the Board of Governors span multiple presidential and congressional terms”.  Their web site says this because the term of office was ten years but is now fourteen years.  Fourteen years spans three and a half terms of office for a President.  That means one President can appoint the Board of Governors and the next three Presidents are stuck with that decision.  Here is the original version.   

1913 Federal Reserve Act Section 10.2 says, “…each member so appointed shall serve for a term of ten years unless sooner removed for cause by the President.  Of the five persons thus appointed, one shall be designated by the President as governor and one as vice governor of the Federal Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be the active executive officer”

 

The other groups of people who have a long-term effect on the independent government are the stockholders of the Reserve Bank corporations.  Section 4 of the Federal Reserve Act gives the stockholders the power of succession, which is the privilege for stockholders to pass their stock to another person.  That other person can be the sons and daughters of the original stockholders.  That means the kids own the stock of the Federal Reserve banks today.  The kids are now the “independent entity within the government, having both public purposes and private aspects.”  If anyone is rich and connected enough to buy a presidential election, get a congressman elected or get their favorite choice for Supreme Court Judge, Board of Governors or Director of the FBI and CIA appointed it would be the kids of the original stockholders.  Owning the Federal Reserve Corporation is like owning the Federal Reserve note and owning the Federal Reserve note is like owning most of the money in the world and that should be enough to buy a presidential candidate and get your friends appointed to long term positions such as Supreme Court Judge or Chairman of Board of Governors of the Federal Reserve.

 If you’re sixty years old and have complained about the government for forty years then it probably wasn’t the elected government of the Republic of the United States of America you have been complaining about.  Our elected government including most appointed officials is replaced every eight years.  It’s doubtful that elected officials could carry on a single theme, purpose or conspiracy because they have short terms in office.  The only logical conclusion is long-term problems or conspiracies must be from the independent government and stockholders because they have terms that “span multiple presidential and congressional terms”.  The family of Federal Reserve Bank stockholders is the Washington D.C. “establishment” and the “establishment” doesn’t change.

Here is the third part of the answer to the question from the Federal Reserve Board of Governors Web site.     

 

       Who owns the Federal Reserve? (Part 3)

However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

Periodic Review     

The “Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government.”  The overall objectives are to strengthen the dollar, balance the budget, reduce the National debt, increase employment and reduce inflation.  The Federal Reserve takes action to stop inflation but hasn’t been successful.  To the Board of Governors action means raising and lowering interest rates by adjusting the “discount rate”.   That hasn’t worked because inflation is up, prices are up, cost of houses is up, number of homeless people is up, working retired people is up, bankruptcy is up and the National Debt is up but the dollar is down, employment is down and mutual funds that hold most of our retirement money are way down.  The Board of Governors is “independent within the government” so nobody has a clue what the criteria is for their decisions.  Actually, historic “discount rates” indicate the best economic success occurred when the “discount rate” was below two percent and wasn’t changed every quarter.  Unfortunately, that situation rarely happens.

“Subject to oversight” means Congress is a spectator.  The periodic review includes the Chairman Governor’s report and discussion with the Speaker of the House of Representative.  The report includes a lot of statistical information about the economy and financial poetry but not enough information to figure out the dynamics of the economy.  This is why Congress hasn’t taken action to change the central bank system.  Congress doesn’t understand the fine points of the “money and credit supply” and therefore doesn’t know what to do about the economy so they listen to the Board of Governors.  The reason Congress doesn’t know is because PhD’s of economics and finance don’t understand our economy.  They don’t have a mathematical equation that calculates changes in our economy.  For example if one more Federal Reserve note (Fed note) is added to our money supply, then what’s the effect on inflation, production and employment?  One reason economic and finance PhD’s can’t do this math is because they can’t figure out the Federal Reserve Act.  The way they think it should work isn’t the way it’s actually working because their math doesn’t equate.  PhD’s haven’t researched each detail of the Federal Reserve Act to figure out how it was designed to operate.  University professors of finance and macroeconomics assume the Act is equitable just because it’s legal.  By this assumption they commit the academic sin of accepting a premise without reproducible and/or mathematical confirmation.  That means the Board of Governor’s decisions aren’t being confirmed mathematically by PhD’s of finance and economics.  It follows that banking the way the Federal Reserve does it is not a science.  I’m not sure it qualifies as accounting either because none of the Board of Governor’s financial statements balance to the National Debt.  This is why Congressional oversight and periodic review is pretty much a waist of time.  Based on the scientific method the Congressmen who says our country is getting ripped-off by the Federal Reserve Stockholders because they are getting free money that is not being accounted for is more credible than the person who says the Congressman is wrong. 

Here is the fourth part of the answer to the question from the Federal Reserve Board of Governor’s Web site.

Who owns the Federal Reserve? (Part 4)

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership."

 

Established by Committee

Technically speaking the twelve regional Federal Reserve Banks were not established by Congress.  According to Section 2 of the Federal Reserve Act, three men appointed by President Wilson as Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, acting as "The Reserve Bank Organization Committee," established the twelve regional Reserve Banks.  Two members of the committee formed a quorum with the power to act.  Section 2 also states, “The determination of said organization committee shall not be subject to review except by the Federal Reserve Board” who were also appointed by President Wilson.  This means that the elected Congress could not question what the appointed men did.  The 2008 Congress is also stuck with what the appointed men established as the Federal Reserve System.

Organized As a Corporation

The Board of Governors web site states “…the nations central banking system, are organized much like private corporations--possibly leading to some confusion about ownership.”  There is no confusion in my mind.  I’d say the fact the Federal Reserve Act states “said Federal Reserve Bank shall become a body corporate” eliminates the confusion about ownership by stockholders.  Further confusion eliminators arise from the powers and privileges granted to the corporation.

Federal Reserve Banks Sec. 4: Federal reserve bank shall become a body corporate and as such, and in the name designated in such organization certificate, shall have power— to adopt and use a corporate seal, have succession, to make contracts, to sue and be sued, complain and defend, in any court of law or equity, to appoint by its board of directors, such officers and employees as are not otherwise provided for in this Act, to define their duties, to prescribe by its board of directors, by-laws in which its general business may be conducted, and the privileges granted to it by law may be exercised and enjoyed.  Add that Shareholder liability is limited to the amount of their subscriptions to stock at the par value, whether subscription have been paid up in whole or in part.

 

With Section 7 of the Federal Reserve Act labeled “Division of Earnings”, I’m not confused at all about ownership.  Reserve Banks are 100% private corporations whose shareholders receive a division of earnings and incur limited liability.  The “privileges granted to it by law may be exercised and enjoyed” but nothing says they have a fiduciary duty or requirement to the people of the elected government that grant them their privileges. 

       Who owns the Federal Reserve? (Part 5)

For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year. 

 

Six Percent

The Board of Governors web site sates, “The Reserve Banks are not operated for profit”.  Now look at the last sentence, “The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year”.  I’ll take this opportunity to show you one of the confusing tricks used in the Federal Reserve Act and it’s the semicolon.  The semicolon is used to squeeze subjects together.  Notice how the statement “dividends are, by law, 6 percent per year” is slid in with a semicolon.  If the Federal Reserve Board of Governors web sight were truly informative they would have clearly stated that ownership of Reserve Bank stock is like a private company and the Reserve Bank is operated for profit in the respect that each share of stock is guaranteed a six percent (6%) dividend each year by law.

Three Classes of Stockholders

There are three classes of stockholders who own stock in Reserve Banks.  The classes are membership, public and five certificates.  Although, the Board of Governors web site misleads us into assuming there is only one class.  The one class is the membership fee class.  This class is made up of Member banks.  Member banks are neighborhood commercial banks.  A neighborhood commercial bank is required to become a member of one of the twelve district Reserve Banks.  Each neighborhood commercial bank is required to buy a minimum amount of stock in their regional district Reserve Bank as a membership fee.  The required amount of membership fee stock that must be purchased from the Reserve Bank is “equal to six per centum of the paid-up capital stock and surplus” of the neighborhood bank.  The membership fee stock “may not be sold, traded, or pledged as security for a loan”.   The term hypothecated means “pledged as security for a loan”.

Stock Issues; Increase and Decrease of Capital Sec. 5: “The capital stock of each Federal reserve bank shall be divided into shares of $100 each. …Shares of the capital stock of Federal reserve banks owned by member banks shall not be transferred or hypothecated.  …A (neighborhood commercial) bank applying for stock in a Federal reserve bank at any time after the organization thereof must subscribe for an amount of the capital stock of the Federal reserve bank equal to six per centum of the paid-up capital stock and surplus of said applicant bank”. 

 

 It’s true membership fee stock is not like normal private corporate stock because there aren’t voting or management privileges granted to Member banks.  The net result is Member banks own stock but don’t own nor control the Reserve Bank they own stock in.  I see no problem here.  This leads to the assumption that there shouldn’t be any extra membership fee or non-member stock in a Reserve Bank.  That conclusion is in contradiction to section 2.9.

Federal Reserve Districts Sec 2.9: “No individual, copartnership, or corporation other than a member bank of its district shall be permitted to subscribe for or to hold at any time more than $25,000 par value of stock in any Federal reserve bank. Such stock shall be known as public stock and may be transferred on the books of the Federal reserve bank by the chairman of the board of directors of such bank.”

Public Class

The second class of stockholder is the “public stockholder”.  Individuals, co-partnerships and corporations own public stock.  There should be no question that they own a share of the central bank of the United States to make a profit.  Public stock is like membership fee stock in the respect they don’t have voting or management privileges.  An interesting specification is the public stockowner is limited to a maximum ownership of $25,000 par value of stock in each Reserve Bank.  In contrast Member banks are required to own a minimum amount of membership fee stock but no maximum limitation was set.  That leaves the door open for one member bank to own a lot more stock than the minimum membership fee amount.  And that leaves the door open to earn a lot more profit as dividends.  The Board of Governors web site was clear that a minimum of six percent dividends is paid per share of stock but no maximum is stated.

Five Certificate Class

I call the third class of stockholders the five certificates class.  The Federal Reserve Act was written so it was legal for the Reserve Bank Organizing Committee to allow one person to subscribe to the minimum amount of stock needed to organize five Reserve Banks.  Further these five banks were granted a monopoly to deal with the U.S. Treasury.  Technically speaking there are only five full Reserve Banks and I call them the five certificates.  The five certificates then organized the twelve district Reserve Banks.  One of the purposes stated at the beginning of the Federal Reserve Act is “to afford means of rediscounting commercial paper”.  Rediscount was designed into the Federal Reserve System as one of the methods for the five certificates to make a profit.  The first step is for a Member bank to originate commercial paper.  That means write a business loan.  The next step is for the twelve Reserve Banks to “discount” the commercial paper from the Member Bank.  This means the Reserve Banks buy the business loan for a profit using the Open Market Operations “Discount Window”.  The final step is the five certificates rediscount the commercial paper from the twelve Reserve Banks.  This means the five certificates buy the business loan from the twelve Reserve Banks for a profit.  I’ll explain the process in Chapters five and six.  The writing of the Federal Reserve Act allows the functions of “discount” and “rediscount” to funnel business loan profits from all across the country to the five certificates located in Washington D.C. as Trust Companies.

Before the Federal Reserve Act there were powerful corporate banks in the United States.  The stockholders of these banks were rich and powerful in 1912 because they were already established as National Bank check-clearing houses of New York, Boston, Philadelphia, Cleveland and Richmond.  These were private for-profit corporations and their clearing-house certificates were deemed to be lawful money.  Lawful money was the tricky way gold bankers exchanged their paper money for gold since 1864.  The following is a review of how the writing of the Federal Reserve Act made it legal for them to maintain their power position without the Act actually saying so directly.

Establishment of the Reserve Cities and Districts Sec. 2.1 & 2.13: “As soon as practicable, the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, acting as "The Reserve Bank Organization Committee," shall designate not less than eight nor more than twelve cities to be known as Federal reserve cities, and shall divide the continental United States, excluding Alaska, into districts, each district to contain only one of such Federal Reserve cities. The determination of said organization committee shall not be subject to review except by the Federal Reserve Board when organized: Provided, That the districts shall be apportioned with due regard to the convenience and customary course of business and shall not necessarily be coterminous with any State or States…The organization of reserve districts and Federal reserve cities shall not be construed as changing the present status of reserve cities and central reserve cities except in so far as this Act changes the amount of reserves that may be carried with approved reserve agents located therein”

The idea was “That the districts shall be apportioned with due regard to the convenience and customary course of (Banking) business” already established and in operation.  The National Banks that were already designated to be reserve banks had the privilege of clearing checks for a fee.  The one who gained the most government privileges since 1864 was the National Bank of New York.  Today the President of the Federal Reserve Bank of New York is specifically written in as a permanent member of the Federal Open Market Committee.

Subscription to Stock by National Banks Sec. 2.3: “…When the organization committee shall have designated the cities in which Federal reserve banks are to be organized, and fixed the geographical limits of the Federal reserve districts, every national banking association within that district shall be required within thirty days after notice from the organization committee, to subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum of the paid-up capital stock and surplus of such bank, one-sixth of the subscription to be payable on call of the organization committee or of the Federal reserve Board, one-sixth within three months and one-sixth within six months thereafter, and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Federal Reserve Board, and payments to be in gold or gold certificates.

This section concerns the organization of the new Federal Reserve Banks.  To organize a Reserve Bank is to create it.  Timing is a key concern.  The timing starts when “When the organization committee shall have designated the cities in which Federal reserve banks are to be organized”.  First the organization committee designates the cities and then national banking associations are required to “subscribe to the capital stock of such Federal reserve bank”.  Subscribe means to sign up for the stock which is to tell the organization committee you want it.  No money changes hands.  To subscribe is to make a reservation to pay for the stock at a later time but take ownership of the stock now.

 A national banking association was required to subscribe to the capital stock of a new Federal Reserve Bank.  The minimum amount of stock the national banking association must subscribe to was “equal to six per centum of the paid-up capital stock and surplus” of that national banking association.  The subscription doesn’t have to be paid all at once.  The subscription was broken into six parts.  The first “one-sixth of the subscription to be payable “on call” of the organization committee”.  The term “on call” means that the payment didn’t need to be paid until it was asked for by the organization committee.  That means the capital stock of a new Federal Reserve Bank was owned for “no money down”.  The first payment due is “one-sixth within three months” and the second payment of “one-sixth within six months thereafter, and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Federal Reserve Board”.  The result is that only two-sixths had to be paid within nine months.

Organization of Reserve Banks Sec. 4.1: “When the organization committee shall have established Federal reserve districts as provided in section two of this Act, a certificate shall be filed with the Comptroller of the Currency showing the geographical limits of such districts and the Federal reserve city designated in each of such districts. The Comptroller of the Currency shall thereupon cause to be forwarded to each national bank located in each district, and to such other banks declared to be eligible by the organization committee which may apply therefore, an application blank in form to be approved by the organization committee, which blank shall contain a resolution to be adopted by the board of directors of each bank executing such application, authorizing a subscription to the capital stock of the Federal reserve bank organizing in that district in accordance with the provisions of this Act”.

 

What is actually stated in this section is important to who ends up owning an entire Federal Reserve Bank.  The point is an application form is sent to national banks already established in a district.  That includes the National Clearing House Banks.  I also want to point out timing again.  First, “When the organization committee established Federal reserve districts” and then “The Comptroller of the Currency forwarded to each national bank located in each district,” “an application blank” “which blank shall contain” “the board of directors of each bank” “authorizing a subscription to the capital stock of the Federal reserve bank organizing in that district”.  The Comptroller of Currency forwards a “form” to “each national bank located in each district, and to such other banks declared to be eligible by the organization committee”.  The organization committee is allowed to declare Trust Companies in Washington D.C. as eligible to subscribe to capital stock of the Federal Reserve Bank.  The net result is national bank stockholders file an application to subscribe to stock in their district Reserve Bank.

Here is the section that states the minimum amount of subscriptions needed to start a Reserve Bank.

Federal Reserve Act, Minimum Capital; Status of Reserve Cities Sec. 2.13: “No Federal reserve bank shall commence business with a subscribed capital less than $4,000,000.

 

Based on section 2.13 stated above, a national bank was required to “subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum of the paid-up capital stock and surplus of such bank”.  With a four million dollar minimum capitalization a national bank with a paid up capital stock and surplus of sixty-seven million would be required to subscribe to the minimum amount capital stock for a Federal Reserve Bank to commence business.  That means the stockholder that owned a National Clearing House bank could own an entire Federal Reserve Bank.  Because of the “call” the National Clearing House banks of New York, Boston, Philadelphia, Cleveland and Richmond, could have started their district Reserve Bank with no money down.  But if you think about it the “call” wasn’t needed.  The stockholders of the National Clearing House banks ended up owning the entire Federal Reserve Bank.  That means everything they paid to buy stock in the Reserve Bank ended up belonging to them.  Payment to buy capital stock in a Reserve Bank that they end up owning is like buying it from them selves because the payment ends up as the property of the Reserve Bank they just bought.  The next trick was to secure a monopoly access to the U.S. Treasury so all the other banks were forced to continue dealing with the stockholders of the National Clearing House banks.  Below is the section that allows those private corporate stockholders to do so. 

 

Monopoly Access

The key to financial power in the Federal Reserve System is the right to deal with the U.S. Treasury for notes and bonds.  The limiting factor is only “Reserve Agents” are licensed to deal with the U.S. Treasury.  And only those with a “Comptroller of Currency Certificate of Organization” are allowed to appoint “Reserve Agents.”   We all know there are twelve Reserve Banks in twelve districts.  Logically, one would think that each of the twelve Reserve Banks would be licensed to deal with the U.S. Treasury by filing a “Comptroller of Currency Certificate of Organization”.  But that’s not what is written.  Only five were designated to execute the certificate.

Here is one of the trickiest specifications in the Federal Reserve Act.  The “organization committee shall designate any five banks of those whose applications have been received, to execute a certificate of organization”.  Now that’s nonchalant.  It’s so casually stated that no one would realize that those five banks end up with a monopoly to deal with the U.S. Treasury.  Then the twelve Federal Reserve Banks become customers of the five certificates.  Then Member banks become customers to the Twelve District Reserve Banks. 

Here is the most powerful sentence in the world because it established a monopoly to deal with the U.S. Treasury.  This sentence contains one hundred ninety-seven (197) words, five (5) “ands”, fourteen (14) commas and one (1) period.  It takes a magician and a grammar teacher to figure it out.

Federal Reserve Banks Sec 4.2:  “When the minimum amount of capital stock prescribed by this Act for the organization of any Federal reserve bank shall have been subscribed and allotted, the organization committee shall designate any five banks of those whose applications have been received, to execute a certificate of organization, and thereupon the banks so designated shall, under their seals, make an organization certificate which shall specifically state the name of such Federal reserve bank, the territorial extent of the district over which the operations of such Federal reserve bank are to be carried on, the city and State in which said is to be located, the amount of capital stock and the number of shares into which the same is divided, the name and place of doing business of each bank executing such certificate, and of all banks which have subscribed to the capital stock of such Federal reserve bank and the number of shares subscribed by each, and the fact that the certificate is made to enable those banks executing same, and all banks which have subscribed or may thereafter subscribe to the capital stock of such Federal reserve bank, to avail themselves of the advantages of this Act.”. 

 

“… the organization committee shall designate any five banks … to execute a certificate of organization”.  Within the meaning of this manuscript the stockholders who own those five banks are referred to, called and named the five certificates.  I consider them to be most powerful people on planet earth.

The term “allotted” means to be put on “call” which means doesn’t need to be paid at this time.  The timing started “When the organization committee shall have designated the cities in which Federal reserve banks are to be organized”.  That was no problem because five of those cities already had a National Bank check clearing and reserve banks.   The end time was, “When the minimum amount of capital stock prescribed by this Act for the organization of any Federal reserve bank shall have been subscribed and allotted”.  The time between the start and end was all that was needed to allow one stockholder to reserve all the stock needed to start a Reserve Bank with “no money down”.

As previously stated in section 4.1, the Comptroller of currency “forwarded to each national bank located in each district, an application blank”.  Here is the most important line, “the organization committee shall designate any five banks of those whose applications have been received, to execute a certificate of organization”.  The 1864 National Currency Act section 44 established the Comptroller of Currency Certificate of Organization as the document the U.S. Treasury needs to recognize and thereby deal with a corporate bank.   This means that only five Reserve Banks executed the certificate of organization and only five Reserve Banks are licensed to deal with the U.S. Treasury.  This gave the five certificates a monopoly to deal with the U.S. Treasury.  The point is the Federal Reserve Act is written in a way that it is legal for the five certificate Reserve Banks to be owned by one stockholder who reserved the minimum amount of subscribed capital to commence business, with no money down.  The only thing that one stockholder needed was to be one of the “other banks declared to be eligible by the organization committee” as stated in section 4.1.

The wholly owned five certificate Reserve Bank is allowed to increase its capital stock when additional banks become members.  Neighborhood commercial banks become Member banks of their district Reserve Bank with the purchase of membership fee stock.  The following section allows the five certificates to increase their capital stock and sell it to the Member Bank.

Federal Reserve Act, Stock Issues; Increase and Decrease of Capital Sec. 5.1: “The capital stock of each Federal reserve bank shall be divided into shares of $100 each. The outstanding capital stock shall be increased from time to time as member banks increase their capital stock and surplus or as additional banks become members”

Middle Man

The following excerpt creates a middleman situation.  The five Certificates are placed in the middle between the Treasury and the Twelve Federal Reserve banks “…and the fact that the certificate is made to enable those (five certificate) banks executing same, and all (other Federal Reserve and member) banks which have subscribed or may thereafter subscribe to the capital stock of such (five certificate) Federal reserve bank, to avail themselves of the advantages of this Act… ”

Most of us think there are three levels in the U.S. banking system.  The three levels being the Treasury, the twelve Federal Reserve Banks and the neighborhood Member banks.  Section 4 of the Federal Reserve Act stuck the five Certificates in as middleman in between the Treasury and the twelve Reserve Banks.  The significant fact is that only those with a Comptroller of Currency Certificate of Organization are licensed to deal directly with the Treasury using reserve agents.  This is where a monopoly was granted to the five certificates.  Although, there was a problem for the five certificates because before the Federal Reserve Act all National banks were reserve agents.  Here is the section that cancelled them out.        

Federal Reserve Districts Sec. 2: “Any national bank failing to signify its acceptance of the terms of this Act within the sixty days aforesaid, shall cease to act as a reserve agent, upon thirty days notice, to be given within the discretion of the said organization committee or of the Federal Reserve Board.” 

 

The “aforesaid” was the National Bank had “to signify in writing, within sixty days after the passage of this act, its acceptance of the terms and provisions hereof.”  The Federal Reserve Act was passed by Congress and signed into law by President Wilson on the same day, December 23, 1913.  That meant a National Bank that didn’t signify in writing acceptance of this Act by February 20, 1914 lost its Reserve Agent privilege and could no longer deal directly with the U.S. Treasury.  Then the Five Certificates had a monopoly.  They have enjoyed a monopoly ever since.

Membership Stock Only

But if I’m wrong and the Board of Governors web site is correct when they say “Reserve Banks are not operated for profit and ownership of a certain amount of stock is, by law, a condition of membership in the System.” then there should be no protest from private parties when I, as Chairman Governor, recommend that the 2008 Congress take possession of any Reserve Bank stock that is in excess of membership fee stock.  There is no down side for the public or financial risk to the Reserve Banks.  The only people that would lose are those who own extra Reserve Bank stock that they shouldn’t have in the first place.  That would include the public and five certificates class.

D.C. Ownership

I also recommend that the 2008 Congress dissolve the privilege of stockholders to own the International Monetary Fund and World Bank.  A simple rule of thumb is to dissolve the privilege of stock ownership in any Reserve bank or branch or trust company based in Washington D.C. or holds a Comptroller of Currency Certificate of Organization.  The objective is to shift the profit of the United States central bank from the rich independent government to the poor elected government.  The way I see it if the stockholders weren’t so greedy by detouring profits then the profits from the franchise tax would have paid down the National Debt and the dollar would be stronger right now.

The next three chapters are about the Federal Reserve Note and Monetary Policy.  Most citizens think the money system is in balance and one thing depends on another.  For instance, if one person defaults on a loan it means that another person looses their savings account.  Don’t worry it’s not like that at all because our system is not based on loaning savings.  The Federal Reserve System is based on creating money out of nothing as needed.  Also, our system doesn’t use gold so gold can’t be lost.  The Federal Reserve System is essentially a scorekeeping system and the Federal Reserve Note represents your score.  The problem with the Federal Reserve stockholders as scorekeepers is citizens hit ten homeruns this but the scorekeeper gets credit for one homerun as interest.

Chapter three explains Financial Instruments as paper and checkbook money.  Then chapter four explains the difference between the money supply and credit supply.  The intent of both chapters is to explain how the cost of money is the same as the profit margin for the Federal Reserve corporate stockholders.  Then Chapter five explains how the Board of Governors makes sure the profit margin stays high with Monetary Policy using the reserve requirement, discount rate and open market operations.

End of Chapter Two

 

         http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#1

           http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5

           Federal Reserve Act, Section 4 Federal Reserve Banks

           Federal Reserve Act, Section 4 Federal Reserve Banks, First

           Federal Reserve Act, Section 4 Federal Reserve Banks, Second

           Federal Reserve Act, Section 4 Federal Reserve Banks, Third

           Federal Reserve Act, Section 4 Federal Reserve Banks, Fourth

           Federal Reserve Act, Section 4 Federal Reserve Banks, Fifth

           Federal Reserve Act, Section 4 Federal Reserve Banks, Sixth

           Federal Reserve Act, Section 2 Federal Reserve Districts

           1913 Federal Reserve Act section 2

http://landru.i-link-2.net/monques/currencyact.htm1#NATIONAL, National Currency Act (later called “National Bank Act”) June 3, 1864 section 31, page 14.

http://www.federalreserve.gov/monetarypolicy/fomc.htm  Federal Open Market Committee, Structure of the FOMC