The inner workings of the Federal Reserve System

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.

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Throughout their power to change interest rates and buy massive amounts of financial assets, the Federal Reserve System applied more influence over economic growth and the employment rate in recent times than any other government entity....

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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).

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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.

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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.