Is the Federal Reserve public or private?

Answers to your questions about the news.
Sept. 19 2008 6:21 PM

Is the Fed Private or Public?

It's a decentralized central bank, inside the government and independent from it.

Read more about Wall Street's ongoing crisis. 

On Wednesday, the Explainer described why the U.S. Federal Reserve happened to have $85 billion lying around to bail out American International Group. By Thursday afternoon, our inbox was deluged with e-mails asking why we made the Fed sound like a government agency by using the terms "Fed" and "government" interchangeably in reference to the AIG loan deal. Wait a minute: Is the Federal Reserve public or private?

It's neither. From one perspective, the Fed looks like a public institution: Congress created it in 1913 to maintain the stability of the financial system; the president appoints, and the Senate confirms, the members of its Board of Governors; and it's not out to make a profit—after taking care of expenses, the Fed hands off its earnings to the Treasury. Furthermore, the details of its responsibilities are subject to congressional oversight. Still, the Fed is rightly classified as an independent central bank. Neither the executive branch nor the legislature gets a direct say in its decision-making, and it pays for its own operations (primarily by acquiring U.S. government securities on the open market). In short, the Fed is an independent entity within the government.

The Fed is organized like a federation—there's a central governing agency in Washington, D.C., and 12 regional banks scattered across the country. These 12 banks issue shares of stock to thousands of private member banks, including institutions like the Deutsche Bank Trust Co. of America and the Gotham Bank of New York. But regional bank membership isn't like owning stock in Coca-Cola. The member banks are not allowed to sell or trade their shares, which produce dividends at a fixed rate of 6 percent. And they must invest 3 percent of their capital in the Federal Reserve Banks.

How did the Fed get to be the way it is? In the run-up to its creation, conservatives (mostly from big cities in the Northeast) favored a privately run central bank, whereas progressives (William Jennings Bryan  types) called for a public, government-operated reserve. The result of these competing opinions is our hybrid, quasi-public system. It's isolated from partisan politics—board members serve 14-year terms—but it serves the public interest since it's ultimately accountable to the legislature.

Got a question about today's news? Ask the Explainer.

Juliet Lapidos is a former Slate associate editor.

TODAY IN SLATE

Politics

Don’t Worry, Obama Isn’t Sending U.S. Troops to Fight ISIS

But the next president might. 

IOS 8 Comes Out Today. Do Not Put It on Your iPhone 4S.

Why Greenland’s “Dark Snow” Should Worry You

How Much Should You Loathe NFL Commissioner Roger Goodell?

Here are the facts.

Three Talented Actresses in Three Terrible New Shows

Science

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.

Foreigners

More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

The Ungodly Horror of Having a Bug Crawl Into Your Ear and Scratch Away at Your Eardrum

We Could Fix Climate Change for Free. What Exactly Is Holding Us Back?

  News & Politics
Politics
Sept. 17 2014 5:21 PM Don’t Worry, Obama Isn’t Sending U.S. Troops to Fight ISIS But the next president might. 
  Business
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
  Life
Gentleman Scholar
Sept. 17 2014 5:10 PM Should Men Still Open Doors for Women? Or is it ungentlemanly to do so at all?  
  Double X
The XX Factor
Sept. 17 2014 4:36 PM Is Nonfiction the Patriarch of Literary Genres?
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
  Arts
Brow Beat
Sept. 17 2014 5:31 PM Did You Catch Walter White’s Blink-and-You’ll-Miss-It Cameo in Godzilla?
  Technology
Future Tense
Sept. 17 2014 5:26 PM If Fixing Global Warming Is Free, What’s the Holdup?
  Health & Science
Jurisprudence
Sept. 17 2014 4:49 PM Schooling the Supreme Court on Rap Music Is it art or a true threat of violence?
  Sports
Sports Nut
Sept. 17 2014 3:51 PM NFL Jerk Watch: Roger Goodell How much should you loathe the pro football commissioner?