EVIL ONLY EXISTS TO THE EXTENT GOOD MEN DO NOTHING
PART 4
How the Federal Reserve System Is Structured
The present structure of the Federal Reserve System consists of a board of seven
governors who serve fourteen years, with the term of one of the members expiring
every two years. The new members of the board are appointed by the President of
the United States, who also selects the chairman. The original design was to have
these seven men represent the "public interest" as opposed to the special interest of
the member banks. However, the chairman of the Board of Governors has nearly
always been a prominent member of the banking community. Great pressure is
also exerted from Wall Street to have sympathetic board members appointed by
the President.
The nation is divided into twelve Federal Reserve Districts, with a Federal
Reserve Bank in each district and branch banks in major cities as needed. Local
commercial banks which become part of the Federal Reserve System are called
"member" banks. Each member bank is required to subscribe "stock" in the Federal
Reserve Bank. This amounts to 6 percent of its capital and surplus. Only 3 percent
must be paid into the bank, but the remainder is subject to call if needed. The bank
receives an interest payment of 6 percent per annum on its paid-up stock.
Washington, D.C., will tell the bank how much "reserve" it must maintain with the
Federal Reserve, but this will always be a small fraction of what the bank is
allowed to loan out at interest. On occasion it may be allowed to loan out as much
as thirty times more than what it has in reserves. Of course, by doing so, it may
risk having a "run on the bank" by its depositors if they begin to suspect the
soundness of the bank. In these instances, the Federal Reserve is supposed to come
to the bank's rescue, but very often it has not. Thousands of banks have gone
under in recent years with losses of hundreds of millions by its depositors.
Each of the twelve district banks has a board of directors. Six are usually
bankers, and three are selected from the nonbanking business sector.
Four times a year each of the twelve districts sends a representative to
Washington, D.C., to confer with the Board of Governors. These meetings are
called the Federal Advisory Council, but it is not really too significant.
An important function of the Federal Reserve System is to provide
clearinghouses for collecting checks, notes, drafts, and so forth. This is not done
by transferring currency but by simply adding and subtracting from the accounts
of the various banks. Banks with a balance owing send in the difference.
The Board of Governors is also responsible for a large staff of bank inspectors to
check the practices and lending policies of the member banks. The Board can
suspend a bank from operation or remove the officers of any bank which are
considered to be using unsound practices.
The inspection and check-clearing services of the Federal Reserve is one part of
the system which is reported to be administered with dispatch and efficiency.
The Real Center of Power Is the Federal Open Market Committee
When it comes to controlling the money supply, the interest rates, and the
purchase or sale of securities, the real foot on the throttle and toe on the brake
belong to the Open Market Committee. It makes all of the important decisions and
meets in Washington, D.C., behind closed doors every three weeks.
The Open Market Committee consists of the seven members of the Board of
Governors and five of the board chairmen selected from the twelve district banks.
One of these will always be the chairman of the New York Bank. The others rotate
in turn. Although the chairman from all twelve districts may attend these meetings,
only the five who serve on the committee can vote.
The Congress originally intended this powerful committee to be under the close
supervision of the nonbanking members of the Board of Governors, but it is
recognized today that this is strictly a banking-fraternity committee operating
completely outside the control of the President, the Secretary of the Treasury, the
Comptroller, or the Congress. As of this writing (February 1982) the Open Market
Committee operates just like any of the privately owned central banks of Europe.
Dr. Milton Friedman, a most astute student of the Federal Reserve, and also
William E. Simon, former Secretary of the Treasury, consider this Open Market
Committee a dangerous threat to the economic stability of the United States and
recommend that it be terminated.
There Has to Be a Better Way
There is no doubt that history has caught up with the Federal Reserve System.
The Federal Reserve Act unconstitutionally delegated to a consortium of private
bankers one of the most precious rights a nation possesses-the right to manage its
own system of money and credit.
Under the policies of the Federal Reserve System, national indebtedness has been
encouraged, inflation has skyrocketed, and the value of the American dollar has
sunk so low that savings have been eaten up, fixed incomes have become a
dribble, and a once wealthy nation finds itself owing more than all the rest of the
nations of the earth combined.
Fortunately, there is a way out of all this. It was provided in the section of the act
which is now designated as Section 31. This is the section which allows the federal
government to "amend, alter, or repeal" the Federal Reserve Act at any time. It is
time Americans began talking seriously about Section 31 of the Federal Reserve
Act so that we can save what is left of the American economic heritage. This may
be the only means by which the President can save his program.