Money, Banking, and International Financecommercial bank is required to purchase stock of the Federal Reserve Bank in its district,
equaling to 6% of the commercial bank’s net equity (capital). National commercial banks are
banks whose charter comes from the U.S. government. These national banks are also called
member banks, and they earn a fixed 6% dividend on their shares of Federal Reserve stock.
Each Federal Reserve Bank has nine directors. Member commercial banks elect six
directors: Three directors are bankers while the other three are from business. Board of
Governors, which holds the power at the Fed, appoints the last three directors. In turn, the nine
directors elect the president of the Fed district bank. Of course, this is not a free election because
the Board of Governors must approve the bank president.
Commercial banks have no control over their Fed district banks, although they privately
own them. A Fed bank does not operate like a corporation where the stockholders can freely
elect the board of directors, who vote on the major corporate policies. Congress created this odd
structure because it did not want the Fed to be part of government or controlled by the banks,
but somewhere between them. Nevertheless, the Fed is a part of government or quasi-
government. When Congress created the Fed in 1913, it dispersed the Fed’s power over the 12
Fed Banks. Over time, the Board of Governors consolidated the central bank’s power.
Board of Governors is the entity that controls the Federal Reserve System. It determines
monetary policy, reserve requirements, and discount policy. Board consists of seven members,
who serve a 14-year term. Most board members will not finish their term because they resign
and work for the financial firms on Wall Street for five times their Fed salary. A board member
earns roughly $150,000 per year. A U.S. president with Senate approval appoints the members
and appoints the chairperson and vice-chairperson of the board. Chairperson and vice-
chairperson serve a four-year term. The Comptroller of the Currency and Secretary of the
Treasury cannot be members of the board because the Federal Reserve must remain independent
of the U.S. federal government. If the U.S. government is accumulating a massive debt, and the
Treasury cannot increase taxes or borrow, then the Treasury could resort to printing money to
cover deficits by forcing the Fed to buy its securities. Unfortunately, printing money always
leads to inflation.
Board of Governors is independent of the U.S. federal government in three ways. First,
Board of Governors earns its revenue from the 12 district banks. The Fed does not ask Congress
for money. Whoever controls the money is directly or indirectly in command. Second, the terms
of the board members are staggered. Every two years, the U.S. President appoints one member
to the Board of Governors, or 1 4 years divided by seven members. This prevents a newly
elected President from appointing all members at once, who become loyal to the President.
Third, the government cannot completely audit the Fed. Less government knows; the less it can
tamper with things. Please do not think the Fed is entirely independent! If the Federal Reserve
angers Congress too much, Congress could rewrite the laws that created the Fed.
The Federal Open Market Committee (FOMC) is a special committee within the Fed that
makes decisions about open-market operations. Although the Board of Governors determines
monetary policy, the Federal Open Market Committee puts the policy into action. After the
FOMC makes a decision, the committee sends a directive to the manager at the New York City
Federal Reserve Bank to buy and sell U.S. government securities.