Solari: History and Organization of the Federal Reserve

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”
-James A. Garfield, 20th President of the United States

Table of Contents

I. Introduction
II. History and Creation of the Federal Reserve
III. Structure of the Federal Reserve System
A. The Fed’s Chain of Command
IV. Federal Open Market Committee
V. Federal Reserve Advisory Bodies
VI. The 12 Private Banks That Form the Federal Reserve
A. The New York Fed
B. The Other Federal Reserve District Banks
C. How Banks Become a Member
D. Rights and Powers of Members
VII. The 12 Private Banks That Form the Federal Reserve
A. Appointments of Board Members
B. Roles and Responsibilities of Board Members
VIII. Conclusion
IX. About Us

I. Introduction

The Federal Reserve is one of the most influential organizations in the U.S. when it comes to economic policy. It is also one of the least well understood elements of the government–especially in that it is not really truly a government organization. Its top level officials are a government agency of the Executive branch. However the Federal Reserve, and especially its 12 Federal Reserve District Banks, occupy a strange twilight zone between government agency and private banking organization.

This status has come up in court cases, where the district banks of the Federal Reserve have argued successfully that that they are not a government agency–instead being classified as “federally created instrumentalities.” (Scott v. Federal Reserve Bank of Kansas City, No. 04-2357 (8th Circ. Ct of App, 2005)(available at A cynical person might say that they are part of the Federal government where advantageous and separate when it is not. However, it is enough to say that the Federal Reserve has an complex, hybrid structure to it.

The Federal Reserve itself has quite a bit of involvement in creating the monetary policy of the U.S. The most commonly discussed ways it influences the economy include acting as a last resort lender to member banks, regulating private banking, and–perhaps above all–setting the discount rate on loans to solve temporary liquidity issues for private banks across the county.

As the bank of the U.S. Federal Government, there is obviously great concern and interest in the financial goings on of the Federal Reserve. This has led to multiple attempts to audit the Federal Reserve–usually with Congress turning to the Government Accountability Office (GAO). The GAO is a Congressional agency which investigates federal spending. As we’ve discussed in previous articles, these duties are accomplished with varying levels of success by topic. ( see The U.S. Statutes Creating Modern Constitutional Financial Management and Reporting Requirements and the Government’s Failure to Follow Them, available at Congress has requested studies as to the lengths to which the GAO can investigate the financial goings on of the Federal Reserve. (see eg. Federal Reserve System Audits: Restrictions of GAO’s Access, available at In 1978, the Federal Banking Agency Audit Act placed the Federal Reserve under the audit authority of the GAO–reversing the 1933 Banking Act provisions that originally removed this authority. (31 USCA §714, available at Since this change, there have been dozens of GAO audits of the Federal Reserve. These audits have led to suggestions from the GAO on everything from check clearing policies to larger regulatory reforms. (see id.) This being said, there are some notable exceptions to the areas the GAO can look into, including:

(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations;(3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items.” (id.)

These are substantial exemptions. In order to understand just how substantial, it’s necessary to more fully understand the structure and role of the Federal Reserve. It’s worth noting that there have been multiple attempts in Congress to implement a more thorough audit nearly every year–including last year. (see eg. H.R. 24, Federal Reserve Transparency Act of 2017, available at These attempts have never succeeded. In past articles, we have discussed the problematic lack of transparency in government spending–especially in certain executive agencies. The Department of Defense and the Department of Housing and Urban Development have over $21T unaccounted for–approximately the same amount as our current national debt. (see eg. The Missing Money, available at There is an obvious need for greater financial transparency and regulatory compliance in the government, and the Federal Reserve handles the government’s accounts, funds, security transactions, and implements monetary policy (mainly through the New York Federal Reserve Bank, discussed below).

In order to understand the role and issues of the Federal Reserve System, this series intends to take a look at the inner workings and functions of the Federal Reserve. To do a true deep dive on this issue can and has taken volumes to properly explore every avenue. Our goal with this series is to instead give a strong overview of the Federal Reserve, its functions, and its issues. Later articles will discuss the Federal Reserve Act in more depth (as well as the twilight-zone legal classification of a “federally created instrumentality”), the lending practices of the Federal Reserve, and some of the problems inherent to the most powerful banking organization in the U.S. and potentially the world.

However, in order to give the best understanding of the Federal Reserve itself, we will start by looking at the history and structure of the Federal Reserve–the what and why of the United States’ most powerful bank….

It’s a magic show!  They pull rabbits out of their hats all the time and call it money.   You like magic shows don’t you?  Just don’t look beneath the table, the horror will spoil the fun.   If you get tired of the same tricks, wait for the puppet show.   That’s when things get REALLY fun.

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