Essay

Who Really Owns the Federal Reserve, and Why the Answer Changes Everything

Most Americans believe the Federal Reserve is a government agency protecting the economy on their behalf. The first audit in its 98-year history revealed something different. Here is what it found.

Every time inflation rises, a bank collapses, or interest rates climb beyond what your mortgage can absorb, the Federal Reserve appears. A chair at a podium. Measured language. The institutional impression of competent management in your interest. The appearance is carefully maintained. It is worth examining what sits underneath it.

The Federal Reserve is not a government agency. It is not funded by Congress. It does not answer to the Treasury. It has never been subject to a complete audit. When a partial audit was finally forced by an act of Congress in 2011, the first in the institution’s 98-year history, it revealed that the Federal Reserve had distributed $16 trillion in secret loans to banks and corporations between 2007 and 2010. Not $16 billion. $16 trillion. More than the entire GDP of the United States at the time. None of it had been disclosed to Congress. None of it had been reported to the public. The same banks receiving the loans were hired on no-bid contracts to manage the lending programs. The members of the Federal Reserve’s own board received over $4 trillion in loans to their personal banks and businesses while sitting on the board that authorized those very loans.

No one went to prison. No one resigned. The audit was not front-page news. And the Federal Reserve continued operating exactly as it had before, because what the audit documented was not a scandal. It was the system working as designed.

The island meeting

In November 1910, six men arrived at Jekyll Island, Georgia, a private hunting club owned by families including the Morgans and the Rockefellers, under instructions to travel separately, use only first names, and tell no one where they were going. They told their servants they were going duck hunting. They stayed nine days.

Among them: Senator Nelson Aldrich, Republican leader of the Senate and father-in-law of John D. Rockefeller Jr.; Frank Vanderlip, president of National City Bank representing the Rockefeller banking interests; Henry Davison, senior partner at J.P. Morgan; Benjamin Strong of Bankers Trust; and Paul Warburg, a partner at Kuhn, Loeb and Company who came from the Warburg banking dynasty in Hamburg with close connections to European banking houses. These men collectively represented an estimated quarter of the world’s wealth. Their meeting was secret because, as Vanderlip later wrote in the Saturday Evening Post, had it become known that rival banking chiefs were collaborating on legislation, Congress would have rejected it immediately.

What they produced at Jekyll Island became the blueprint for the Federal Reserve Act, passed by Congress in 1913. Paul Warburg was its primary architect. His central concern, documented in his own writings, was the name. A central bank would kill the legislation. Americans had rejected two previous central banks specifically because they understood what a central bank meant: private financial interests with public monetary power. Warburg’s solution was to call it something else. The Federal Reserve System. Twelve regional banks instead of one. The word Federal to imply government control. None of it changed what it was. It was a central bank, owned and governed by private financial interests, with the authority to create money, set the cost of borrowing it, and manage the monetary conditions of the entire country.

What the first audit found

In 2010, Senator Bernie Sanders inserted an amendment into the Dodd-Frank financial reform legislation requiring the Government Accountability Office to conduct the first comprehensive audit of Federal Reserve operations. The Fed’s chair, Ben Bernanke, and major banking executives testified before Congress that an audit would destabilize markets and damage the Fed’s independence. Congress passed the amendment anyway. The GAO released its findings on July 21, 2011. In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, rolling back significant provisions of Dodd-Frank. The partial audit of the Fed it had enabled has not been repeated. The transparency that forced the $16 trillion disclosure lasted less than a decade before the institutions it threatened helped dismantle the law that made it possible.

The findings were specific. Between December 2007 and June 2010, the Federal Reserve provided $16 trillion in total financial assistance (loans, credit facilities, and asset purchases) to financial institutions and corporations in the United States and around the world. Recipients included banks in South Korea, Scotland, France, and Germany. The Federal Reserve did not inform Congress. It did not inform the public. The banks that were being bailed out simultaneously filed legal action in federal court to prevent that information from becoming public, forming a consortium called The Clearinghouse Association LLC to block Bloomberg News from publishing data the Fed had been ordered to release. They lost in both district court and the appellate court before the Supreme Court declined to hear their final appeal.

The audit also found that the Federal Reserve outsourced virtually all operations of its emergency lending programs to private contractors. Those contractors were JP Morgan Chase, Morgan Stanley, and Wells Fargo: the same firms receiving trillions of dollars in emergency loans at near-zero interest rates. Two-thirds of the management contracts awarded were no-bid contracts. Morgan Stanley received a no-bid contract worth $108.4 million to help manage the Federal Reserve bailout of AIG, a company in which Morgan Stanley had its own financial interests, while simultaneously receiving emergency loans from the entity awarding the contract.

A subsequent GAO investigation found that at least 18 current and former Federal Reserve regional bank directors had received more than $4 trillion in loans and financial assistance to their own banks and businesses through programs their boards had authorized. Jamie Dimon, CEO of JPMorgan Chase and a member of the Federal Reserve Bank of New York’s board of directors, sat on that board while his bank received emergency Fed loans and while his bank was awarded contracts to manage Fed lending programs. This is not a loophole or an oversight. The Federal Reserve’s governance structure was designed to give the member banks, the same private financial institutions that own the Fed, oversight of their own regulator and lender of last resort.

What this costs you

The Federal Reserve Act was passed in the same year as the 16th Amendment, which introduced the federal income tax. Before 1913, the federal government had no permanent income tax and no central bank. After 1913, it had both. The architecture was complete: the government could borrow at unlimited scale because the tax base guaranteed servicing that debt indefinitely. The national debt has never been paid down since. It was not designed to be. The interest payments on that debt flow to the holders of Treasury securities, which include the member banks of the Federal Reserve System, the same private financial institutions that have governed it since 1913.

When the Fed raises interest rates, it becomes more expensive for you to borrow, for businesses to hire, and for the government to service its debt, while the banks holding that debt receive higher yields. When it lowers rates, cheap credit inflates asset prices, benefiting most those who already own the most assets. When a bank fails and the Fed intervenes, the losses are absorbed by the system and ultimately by the taxpayer. The profits were private. The losses are socialized. This is not a policy failure. It is the mechanism functioning exactly as Paul Warburg designed it on Jekyll Island in 1910, and exactly as the men who financed its creation intended it to function.

One more detail worth knowing. The Federal Reserve’s own website states that Federal Reserve Banks are not agencies of the federal government, and that member bank stock cannot be sold, traded, or pledged as collateral. The Fed documents its own private ownership openly, on its public website, because it does not need to hide it. The institution was designed more than a century ago by the people who benefit from it, and no subsequent Congress, administration, or president has fundamentally changed that design. The men who met on Jekyll Island in 1910 under assumed names built something that outlasted all of them and has compounded their interests across every generation since.

You have been paying for this your entire working life. Every dollar withheld from your paycheck, every interest payment on your mortgage, every tax filing, runs through an architecture designed in secret by private financial interests who made sure they would collect on both sides of every transaction. They did not need to hide it forever. They only needed to build it once, build it well, and make it too large and too embedded to dismantle. They succeeded on all three counts.

The next essay in this series examines the four banking dynasties whose representatives met at Jekyll Island, how they built the financial architecture that governs the modern world, and why the national debt was never intended to be retired.