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Who Owns the Federal Reserve?
by Edward Flaherty
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Who Owns and Controls the Federal Reserve?
by
Dr. Edward Flaherty
University of Charleston
July 18, 1997
Is the Federal Reserve System secretly owned and covertly
controlled by powerful foreign banking interests? If so, how? These
claims, made chiefly by authors Eustace Mullins (1983) and Gary
Kah (1991) and repeated by many others, are quite serious because
the Fed is the United States central bank and controls U.S.
monetary policy. By changing the supply of money in circulation,
the Fed influences interest rates, affecting the mortgage payments
of millions of families, causing the financial markets to boom or
collapse, and prompting the economy to expand or to stumble into
recession. Such awesome power presumably would be used to
benefit the U.S. economy. Mullins and Kah both argued that the
Federal Reserve Bank of New York is owned by foreigners.
Although the New York Fed is just one of twelve Federal Reserve
banks, controlling it, they claimed, is tantamount to control of the
entire System. Foreigners use their command of the New York Fed
to manipulate U.S. monetary policy for their own and, as Kah
asserted, to further their global political goals, namely the
establishment of the sinister New World Order.
This essay examines the accuracy of these claims. Specifically, it
investigates the charge that the New York Federal Reserve Bank is
owned, directly or indirectly, by foreign elements, whether the New
York Fed in effect runs the whole Federal Reserve System, and
whether its enormous annual profits accrue primarily to foreigners
or to the U.S government. This essay shows that there is little
evidence to support the idea of foreign ownership and much that
contradicts it. In addition, it presents evidence to show that the
New York Fed does not command the entire System, as well as
recent data demonstrating that the System's profits are paid to the
federal government.
Who Owns the Federal Reserve Bank of New York?
Each of the twelve Federal Reserve Banks is organized into a
corporation whose shares are sold to the commercial banks and
thrifts operating within the Bank's district. Shareholders elect six
of the nine the board of directors for their regional Federal Reserve
Bank as well as its president. Mullins reported that the top eight
stockholders of the New York Fed were, in order from largest to
smallest as of 1983, Citibank, Chase Manhatten, Morgan Guaranty
Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers
Trust Company, National Bank of North America, and the Bank of
New York (Mullins, p. 179). Together, these banks owned about
63 percent of the New York Fed's outstanding stock. Mullins then
showed that many of these banks are owned by about a dozen
European banking organizations, mostly British, and most notably
the Rothschild banking dynasty. Through their American agents
they are able to select the board of directors for the New York Fed
and to direct U.S. monetary policy. Mullins explained,
... The most powerful men in the United States were themselves
answerable to another power, a foreign power, and a power which
had been steadfastly seeking to extend its control over the young
republic since its very inception. The power was the financial
power of England, centered in the London Branch of the House of
Rothschild. The fact was that in 1910, the United States was for all
practical purposes being ruled from England, and so it is today
(Mullins, p. 47-48).
He further commented that the day the Federal Reserve Act was
passed, "the Constitution ceased to be the governing covenant of
the American people, and our liberties were handed over to a small
group of international bankers" (Ibid, p. 29).
Unfortunately, Mullins' source for the stockholders of the New
York Fed could not be verified. He claimed his source was the
Federal Reserve Bulletin, although it has never included
shareholder information, nor has any other Federal Reserve
periodical. It is difficult researching this particular claim because a
Federal Reserve Bank is not a publicly traded corporation and is
therefore not required by the Securities and Exchange Commission
to publish a list of its major shareholders. The question of
ownership can still be addressed, however, by examining the legal
rules for acquisition of such stock. The Federal Reserve Act
requires national banks and participating state banks to purchase
shares of their regional Federal Reserve Bank upon joining the
System, thereby becoming "member banks" (12 USCA 282). Since
the eight banks Mullins named all operate within the New York
Federal Reserve district, and are all nationally chartered banks,
they are required to be shareholders of the New York Federal
Reserve Bank. They are also probably the major shareholders as
Mullins claimed.
Are these eight banks on Mullins' list of stockholders owned by
foreigners, what Mullins termed the London Connection? The SEC
requires the name of any individual or organization that owns more
than 5 percent of the outstanding shares of a publicly traded firm be
made public. If foreigners own any shares of Mullins' eight banks,
then their portions are not greater than 5 percent at this time. With
no significant holdings of the major New York area banks, it does
not seem likely that foreign conspirators could direct their actions.
Perhaps foreigners own shares of the New York Federal Reserve
Bank directly. The law stipulates a small portion of Federal
Reserve stock may be available for sale to the public. No person or
organization, however, may own more than $25,000 of such public
stock and none of it carries voting rights (12 USCA 283).
However, under the terms of the Federal Reserve Act, public stock
was only to be sold in the event the sale of stock to member banks
did not raise the minimum of $4 million of initial capital for each
Federal Reserve Bank when they were organized in 1913 (12
USCA 281). Each Bank was able to raise the necessary amount
through member stock sales, and no public stock was ever sold to
the non-bank public. In other words, no Federal Reserve stock has
ever been sold to foreigners; it has only been sold to banks which
are members of the Federal Reserve System (Woodward, 1996).
Regardless of the foreign ownership conjecture, Mullins argued
that since the money-center banks of New York owned the largest
portion of stock in the New York Fed, they could hand-pick its
board of directors and president. This would give them, and hence
the London Connection, control over Fed operations and U.S.
monetary policy. This argument is faulty because each commercial
bank receives one vote regardless of its size, unlike most corporate
voting structures in which the number of votes is tied to the number
of shares a person holds (Ibid). The New York Federal Reserve
district contains over 1,000 member banks, so it is highly unlikely
that even the largest and most powerful banks would be able to
coerce so many smaller ones to vote in a particular manner. To
control the vote of a majority of member banks would mean
acquiring a controlling interest in about 500 member banks of the
New York district. Such an expenditure would require an outlay in
the hundreds of billions of dollars. Surely there is a cheaper path to
global domination.
An historical example may make clear that member banks do not
control the Federal Reserve's policies. Galbraith (1990) recounted
that in the spring of 1929 the New York Stock Exchange was
booming. Prices there had been rising considerably, extending the
bull market that had begun in 1924. The Federal Reserve Board
decided to take steps to arrest the speculative bubble that appeared
to have been forming: it raised the cost banks had to pay to borrow
from the Federal Reserve and it increased speculators' margin
requirements. Charles Mitchell, then the head of National City
Bank (today known as Citibank), which was the largest shareholder
of the New York Federal Reserve Bank according to Mullins, was
so irritated by this decision that in a bank statement he wrote, "We
feel that we have an obligation which is paramount to any Federal
Reserve warning, or anything else, to avert any dangerous crisis in
the money market" (Galbraith, p. 57). National City Bank promised
to increase lending to offset any restritive policies of the Federal
Reserve. Wrote Galbraith, "The effect was more than satisfactory:
the market took off again. In the three summer months, the increase
in prices outran all of the quite impressive increase that had
occurred during the entire previous year" (Ibid). If the Fed and its
policies were really under the control of its major stockholders,
then why did the Federal Reserve Board clearly buck the intent of
its single largest shareholder?
This information also eluded fellow conspiracy theorist Gary Kah,
who disagreed with Mullins on who owns the New York Fed. His
Swiss and Saudi Arabian contacts identified the top eight
shareholders as the Rothschild Banks of London and Berlin;
Lazard Brothers Banks of Paris; Israel Moses Seif Banks of Italy;
Warburg Bank of Hamburg and Amsterdam; Lehman Brothers of
New York; Kuhn, Loeb Bank of New York; Chase Manhatten; and
Goldman, Sachs of New York (Kah, p. 13). It is impossible to
verify Kah's information because it is not known who his "contacts"
were. Nevertheless, Kah's list differs substantially from Mullins'
compilation. Most interestingly, in Kah's list foreigners own the
New York Fed directly without having to own majority interests in
U.S. banks, as is the case with Mullins' list. The discrepancies in
the two lists mean that at least one of them is wrong, and possibly
both. Kah's list is the bogus one because no public stock has ever
been issued, so it is not possible for anyone on Kah's list other than
Chase Manhatten to own shares of the New York Fed.
Moreover, Kah seemed ignorant of important details about the
organization of Federal Reserve stock and management, especially
for someone claiming to have done as much research on the subject
as he did. He refered to the organizations on his stockholders list as
"Class A shareholders," which is curious because Federal Reserve
stock is not classified in this manner (Ibid). It can be either member
stock, which can be purchased only by commercial banks and
thrifts seeking to become members of the Federal Reserve System,
or public stock. However, the directors of a Federal Reserve bank
are separated into Class A, B, and C categories, depending on how
they are appointed (12 USCA 302, 304, 305). Three class A
directors are chosen by the member banks. Three class B directors
are also elected by the member banks to represent the non-bank
sectors of the economy. The final three directors, class C, are
picked by the Board of Governors also to represent the non-bank
public. This may be the source of Kah's confusion, but it is a
relatively simple point that he should have detected had his
research efforts been thorough.
Does the New York Fed Call the Shots?
Mullins and Kah further argued that by controlling the New York
Fed the international banking elite could command the entire
Federal Reserve System, and thus direct U.S. monetary policy for
their own profit. "For all practical purposes," Kah stressed, "the
Federal Reserve Bank of New York is the Federal Reserve" (Ibid,
emphasis his). This is the linchpin of their conspiracy theory
because it provides the mechanism by which the international
bankers execute their plans.
A brief look at how the Fed's powers over monetary policy are
actually distributed shows that the key assumption in the Mullins-
Kah conspiracy theory is erroneous. The Federal Reserve System is
controlled not by the New York Fed, but by the Board of
Governors (the Board) and the Federal Open Market Committee
(FOMC). The Board is a seven member panel appointed by the
President and approved by the Senate. It determines the interest
rate, known as the discount rate, for loans to commercial banks and
thrifts, selects the required reserve ratio which determines how
much of customer deposits a bank must keep on hand (a factor that
significantly affects a bank's ability create new loans), and also
decides how much new currency Federal Reserve Banks may issue
each year (12 USCA 248). The FOMC consists of the members of
the Board, the president of the New York Fed, and four presidents
from other Fed Banks. The FOMC formulates open market policy,
which determines how much in government bonds the Fed Banks
may trade, and is the most effective and commonly used of the
Fed's monetary policy tools (12 USCA 263). The key point is that
a Federal Reserve Bank cannot change its discount rate or required
reserve ratio, issue additional currency, or purchase government
bonds without the explicit approval of either the Board or the
FOMC.
The New York Federal Reserve Bank through its direct and
permanent representation on the FOMC has more say on monetary
policy than other Federal Reserve Banks, but it still only has one
vote of twelve on the FOMC and no say at all in setting the
discount rate or the required reserve ratio. If it wanted monetary
policy to go in one direction, while the Board and the rest of the
FOMC wanted policy to go another, then the New York Fed would
be out-voted. The powers over U.S. monetary policy rest firmly
with the publicly-appointed Board of Governors and the Federal
Open Market Committee, not with the New York Federal Reserve
Bank or a group of international conspirators.
Mullins also made a great to-do about the Federal Advisory
Council (the Council). This is a panel of twelve representatives
appointed by the board of directors of each Fed Bank. The Council
meets at least four times each year with the members of the Board
to give them their advice and to discuss general economic
conditions (12 USCA 261, 262). Many of the members have
been bankers, a point not at all missed by Mullins. He speculated
that it is able to force its will on the Board of Governors.
The claim that the "advice" of the council members is not binding
on the Governors or that it carries no weight is to claim that four
times a year, twelve of the most influential bankers in the United
States take time from their work to travel to Washington to meet
with the Federal Reserve Board merely to drink coffee and
exchange pleasantries (Mullins, p. 45).
A point very much missed by Mullins is that the Council has no
voting power in Board meetings, and thus has no direct input into
monetary policy. In support of his hypothesis that Council
members have been able to impose their will on the Board, Mullins
offered no evidence, not even an anecdote. Moreover, his Council
theory is inconsistent with his general thesis that the Federal
Rerserve System is manipulated by European banking interests
through their control of the New York Fed. If this were true, then
why would they also need the Council?
Who Gets the Fed's Profits?
Gary Kah and Thomas Schauf have also maintained that the huge
profits of the Federal Reserve System are diverted to its foreign
owners through the dividends paid to its stockholders. Kah
reported "Each year billions of dollars are 'earned' by Class A
stockholders of the Federal Reserve" (Kah, p. 20). Schauf further
lamented by asking, "When are the profits of the Fed going to start
flowing into the Treasury so that average Americans are no longer
burdened with excessive, unnecessary taxes?"
The Federal Reserve System certainly makes large profits.
According to the Board's 1995 Annual Report, the System had net
income totalling $23.9 billion, which, if it were a single firm,
would qualify it as one of the most profitable companies in the
world. How were these profits distributed? By an agreement
between the Borad of Governors and the Treasury, nearly all of the
Fed's annual profits are paid to the federal government.
Accordingly, a lion's share of $23.4 billion, which represents 97.9
percent of the Federal Reserve's net income, was transferred to the
Treasury. The Federal Reserve Banks kept $283 million, and the
remaining $231 million was paid to its stockholders as dividends.
Given that less than one percent of the Fed's net earnings are
distributed as dividends, it seems that an investor could easily find
much more profitable ways to store their wealth than buying
Federal Reserve stock. Regarding Schauf's lamentation, the Federal
Reserve System has been paying its profits to the Treasury since
1947.
Conclusion
It does not appear that the New York Federal Reserve Bank is
owned, either directly or indirectly, by foreigners. Neither Mullins
nor Kah provided verifyable sources for their allegations, nor did
their mysterious sources agree on exactly who owns the New York
Federal Reserve Bank. Moreover, their central assumption that
control of the New York Federal Reserve is the same as control of
the whole System is wrong and demonstrates a lack of
understanding of the System's basic organizational structure. The
profits of the Federal Reserve System, again contrary to the
assertion of Kah and Schauf, are funnelled back to the federal
government, not to an "international banking elite." If the U.S.
central bank is in the grip of a banking conspiracy, then Mullins
and Kah have certainly not uncovered it.
References:
82nd Annual Report, 1995. Board of Governors of the Federal
Reserve System. U.S. Government Printing Office.
Galbraith, John K. 1990. A Short History of Financial Euphoria.
New York: Whittle Direct Books.
Kah, Gary. 1991. En Route to Global Occupation. Lafayette, La.:
Huntington House.
Mullins, Eustace. 1983. Secrets of the Federal Reserve. Staunton,
Va.: Bankers Research Institute.
Shauf, Thomas. 1992. The Federal Reserve. Streamwood, IL: FED-
UP, Inc.
Woodward, G. Thomas. 1996. "Money and the Federal Reserve
System: Myth and Reality." Congressional Research Service
United States Code Annotated. 1994. U.S. Government Printing
Office.
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