That Weird Public/Private Hybrid Entity We Call The Federal Reserve….

What is the Federal Reserve?  Is it a public entity that works for the government?  Or is it a private entity that works for the banks (entities who serve one master and one master only – their owners)?   You’ll get very different answers depending on who you ask.   In one sense, the Fed exists to help serve public purpose by trying to steer the economy in a way that helps generate full employment and price stability (of course, things don’t always go as planned).

As I’ve explained previously, the primary purpose of this entity is actually to stabilize the payments system through the existence and oversight of the interbank market.  It also serves the government through its symbiotic relationship with the US Treasury.  On the other hand, the Fed’s very existence is designed as a support feature to the banking system.  That is, the Fed works through the banking system and can only enact policy by directly supporting private competitive banks.  So the Fed is a slave to the banks.  But what does this make the Fed?

As we see the Fed shoot down the trillion dollar coin this becomes an increasingly intriguing question.  According to Zeke Miller:

“it was the Federal Reserve that killed the proposal, the official told BuzzFeed, denying a purely political rationale for the announcement, saying the independent central bank would not have credited the Treasury’s accounts for the vast sum for depositing the coin.”

The most interesting thing about the coin idea is that the biggest threat of the coin was to the existence of private banking.  I am actually surprised that a major bank hasn’t come out very publicly stating that the coin was ridiculous.  Why?  Because the coin exposes a potentially enormous change in the way the US monetary system functions.  Instead of having a money system that is designed almost entirely around private banks (who issue most of the money) the coin threatened to expose the reality that government could self finance if it wanted to.  In other words, the government could become the permanent primary issuer of money (as opposed to choosing to use private bank money).

So the Fed’s role is of particular interest here.  And we must again ask ourselves.  What is the Fed?   Is it a public entity or private entity?  It’s a bit of both.  The Fed is a strange sort of hybrid public/private entity.   But the coin decision has to make one wonder where they stand on this issue and whether the Fed has imposed its will on a potentially important debate.  Is this merely a case of the Fed being apolitical and independent?  Or is this a case of the Fed siding with its true master – the private banking oligopoly?  I don’t know, but one thing we know for sure is that the Fed is not merely serving public purpose at all times.  After all, its existence as a support feature for an oligopoly that serves private purpose  (banks are slaves to their owners) renders the Fed compromised on public purpose to some degree.


Got a comment or question about this post? Feel free to use the Ask Cullen section or leave a comment in the forum.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. The banks didn’t have to come out publicly. They came out privately and called up Mr. Bernanke and told him to squash this idea. The coin threatened the future of private banking and they all knew it. The Fed had to kill the coin because the Fed exists to keep the banks alive. It’s that simple.

  2. I do wonder. How many phone calls did the Fed field in recent weeks from the heads of major banks? These guys had to have connected the dots on the coin and the future of their businesses….

  3. But the Federal Reserve Act already establishes absolute deference to the Tsy on matters of law, so it follows that if the White House wants to use the coin there are no barriers. I think the public statement is simply to show solidarity on the issue between Tsy and the FED.

    I don’t see the WH sweating taking the coin off the table because the fully expect those same bankers to be calling Boehner’s office in Feb.

  4. The deference is a strictly legal definition, and does not apply to second hand statements or press releases.

    If Tsy sends the coin, the FED is legally bound to accept it, and Tsy could easily force the point in federal court.

  5. Update: Philip Deihl had overruled me in the MR comments to

    “… the Treasury cannot force the Fed to order a coin. (Even if they had the authority to do so, in the real world, they wouldn’t.) If the Fed doesn’t order the coin the Mint would not, maybe could not, ship the coin to the Fed. If the Mint doesn’t ship the coin to the Fed, the seigniorage can’t be booked and transferred to the TGA.

    The bottom line is that the Fed and Treasury have to be on the same page for the TDC plan to work.”

    In this view, it appears that the FED very well could be the culprit here. I still think it is just as likely that it is simply the chosen stance of the WH, and the coin will never truly be off the table. Obviously, if they need to use it they should either use it immediately or else wait until the last minute, but publicly leaving it on the table while not using it does not improve chances of a Republican cave, which is the first choice.

  6. Is that something that Bernanke could be called before a congressional or Senate committee to testify about?

    “Chairman Bernanke, were you lobbied by private bank officials prior to announcing the Fed’s decision regarding the $1T coin?”

  7. The dollar is still the no. 1 reserve currency and this is a big advantage for the US. Foreign central banks and foreign investors in US denominated assets would not be happy about the 1 trillion coin. Furthermore, in the coming years all the other governments will have to face the same huge deficit problems, so a direct monetisation of the public debt is 100% guaranteed in the future, but the US will not be the first country to do this: UK and Japan will come first and in case of EU imploding, then France, Italy, Spain… There is a BIG difference being the first or one of the last to capitulate. So why menacing the role of the US dollar now ? After all the US will have 2 to 5 years of moderate energy costs ahead that will help a lot while the other countries will struggle. If I was an american I would say that the FED position is right. The future is bleak for everyone, but for now enjoy your pizza !

  8. On one hand the fed has nixed the coin. OTOH, at the same time the policy of the FED has caused bank interest margin to fall to a very low level, one not seen for 50 years, the FT reports.

    Looking at the wider picture it is difficult to see how the FED might be obviously on the side of the banks.

    Is it possible the FED fears the presence of the coin might impede its ability to conduct OMO, at least insofar as the coin is concerned?

  9. NC has a piece up that kinda clairifies some of this up:

    Fed Independence?

    First, here are a some quotes from the US Code and comments.

    “…banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”12 USC 391

    “. . . wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” 12 USC 246

    The US code says that the Secretary has supervision and control, not the Fed Chair, or the bank officers at any of the banks, however exalted, within the Fed system.

  10. Great post! I have often wondered why brilliant economic professors once they get to the Federal Reserve become buffoons. Is it because the Federal Reserve does not serve the greater public good as professors truly in the hearts believe. Is it because the Federal Reserve is tide more to the military industrial complex than it will admit? Do the banks and their interests rule the roost?

  11. To be honest, that means nothing. Have they taken credit/ownership for anything? ;-)

  12. As weird as the whole topic has been about the Fed, the Treasury, and the Trillion dollar coin it actually has a lot of value in understanding the principal participants in the system, their biases, and most importantly the likely outcome of the debate. Who knew numismatics would ultimately prove useful in a conversation about government finance and the economy?

  13. Agreed, this is an excellent post. But I’m surprised the point about the Fed being “compromised” hasn’t generated any comments about conspiracies :)

  14. Hi Cullen:

    Why should anybody be surprised that the Fed would oppose TDC? And I mean oppose it on sound public policy grounds rather than than based on the self-interest of banks. Independent monetary policy exercised by an independent central bank is universally considered by economists to be a fundamental component of a sound institutional structure from a macroeconomic point of view. It’s an institutional development that has been progressing for a century all over the world — and indeed, is universally considered to be a sign of progress and and maturity. Self-financing by the Treasury would be a huge step backward in that respect.

    TDC essentially defenestrates the institution of central banking. Why should we be surprised that the central bank would oppose it?

    A central bank would be opposed to TDC even if the Fed were a 100% public institution. Think of the Bundesbank. Or even think of the recent fiasco in Argentina where the central bank is 100% public.

    Cullen, I think there are problems with the ambiguous public-private nature of the Fed. We are fully in agreement on that. However, I don’t think that this case provides a good case study of private interest being brought to bear on the Fed because ANY self-respecting central bank would and should be vehemently opposed to TDC or any other scheme in which the Treasury self-finances.


    PS And congratulations on the impact you have helped make surrounding this issue.

  15. Honestly, I don’t think there are many people who understand the full ramifications of the coin idea and why its important. This is a story so ripe for Zero Hedge that it could nearly write itself. But you need a fairly sophisticated understanding of the reserve system to fully appreciate it. In other words, you need to be from the MR paradigm to “get it”. Not many people do. I’ve talked to JKH, Carlos and Mike about this privately for weeks. I’m shocked to see that no one else has written about it….

  16. I do look at ZeroHedge sometimes (mostly because a co-worker tells me about it, or Chris Whalen talks about it), but I’m not that familiar. Is it prone to conspiracy theories?

  17. Hi James,

    I think we’re in agreement though phrasing it differently. Central banks, by definition, serve banks. They are the private banking gatekeeper in essence. The coin, as you noted, threatens this entire model. It threatens Fed operations and it threatens the way modern banking operates. So yes, I am not at all surprised to see the Fed shoot down this idea.

    The coin puts a potential alternative on the table. A world where we don’t finance via private banks (a system that includes central banks). In essence, it’s a view into a world where the Fed and Tsy becomes consolidated into Govt and private banks are squeezed out of the picture.

  18. There have been some fantastic posts and comments over at the MR site recently, though I confess much of it goes over my head.

    And yes, ZH was exactly who I was thinking about!

  19. The image of Bernanke and Greenspan (or their equivalent back in the day) on the grassy knoll with sniper rifles is amusing.

  20. ZH… why stop there? I think Cullen should contact Alex Jones! That ought to heat things up a bit… hahaha

    Alex LOVES good banking conspiracies… as recently evidenced by his rant on Piers Morgan… blathering on about how the bankers have largely succeeded in taking away privately owned guns the world over!

  21. Hi Cullen:

    “In essence, it’s a view into a world where the Fed and Tsy becomes consolidated into Govt and private banks are squeezed out of the picture.”

    Yes, Cullen. But a world in which the CB and TSY are consolidated into Govt, is not a world I think anybody should be hoping for. This is a model that has been tried around the world and failed miserably — which is precisely why governments around the world have been gradually evolving towards independent central banking institutions.

    But my original point was more narrow. ANY central bank would oppose TDC, not just the quasi-public/private US Fed.

    A final point: You say that central banks, by definition, serve banks. That is true, to a point. It is true in the same essential sense as the department of energy serves energy companies or FDA serves drug companies. Central banks regulate and facilitate banking activity. But that does not mean that all of these entities do not serve a public purpose. They do.

    The danger of “regulatory capture” is, of course, always present and — as long as humans are humans — will always be there to a degree. “Independence” of any government agency is always a relative term as absolute independence is not realistic.

    But I think history has shown that central banks can be and frequently are reasonably independent and that they can serve and frequently do serve very important public purposes.

  22. That was hilarious, I especially liked how Piers didn’t get a single word in (although his questions were just as stupid).

  23. I you want a really good laugh, there’s a pre-9/11 book out there called “Them” by Ron Johnson. Johnson (a British Jew) goes around the UK, US, and Canada interviewing and engaging w/ all kinds of fringe people (not telling them he’s a Jew): Muslim extremists, KKKers (they let him try on their robes!), etc. By far the funniest part is when he hooks up w/ Alex Jones to sneak into the “Bohemian Grove” gathering in the redwoods of California… a favorite target of conspiracy theorists. … that was my first “contact” with Jones… it wasn’t until years later that I realized he was the same guy as the conspiracy theory nut on the radio! I think Jones posted some video he took from the Bohemian Grove incident on his website.

  24. “This is a model that has been tried around the world and failed miserably”

    Can you elaborate? Where has it been tried (in how many countries, what periods etc), and where did it fail? Were there instances when it was tried and did not fail? Thanks.

  25. I’ve written about it in partial conspiracy mode, but only for LIBOR trader friends who know there is no such thing as a conspiracy in banking, finance, etc.

  26. Written about it? You mean here: ?

    I do like a good conspiracy theory now and then… I’m not sure what you mean by “partial?” … Do you mean ones that maintain a veneer of rational plausibility ;^)

    Michael Hudson has been my go-to guy for that kind of thing recently. I actually enjoy reading his articles, but I know going in to expect a dose of the hyperbolic… and not to necessarily trust absolutely all of his figures (I spend a little time once tracking down his favorite “$13 Trillion bailout” figure… Cullen helped w/ that by providing a counter reference… plus I contacted Michael’s source for that number directly… but never did get a satisfying confirmation).

  27. Peter:

    The policy of direct government financing by the Treasury is a policy that has been tried in various forms since ancient times. The generally inflationary and hyperinflationary consequences over the years led to the evolution of central banking — particularly since the 1970s.

    Examples abound, but to not go to far afield you could look at the US during the era of the Articles of Confederation. The experience there was percieved to be so bad by America’s Founders that the new constitution actually prohibited states from issuing paper money.

    Historically, governments have tried to finance deficts through issuing money and/or through currency debasement. The evolution of independent central banking in modern times occured in large part as a remedy for the problems created by this self-financing by treasuries.

    If you want facts and figures, the negative correlation between central bank independence and inflation has been very firmly established in the macroeconomic literature. You can easily peruse this on the internet. Dozens of academic papers have been written on this and various measures of central bank indpendence have been devised. They all add up to the same result: There is a VERY strong negative correlation between central bank independence and inflation.

    Finally, I am not aware of a SINGLE historical instance of a fiat currency that has been durable without strong and independent central bank institutions.

    This is an area where MMT fails very badly as it quixotically fails to recognize the very important historical achievements of independent central banking. I think MMR has shed the doctrinal/dogmatic advocacy of merged TSY and CB functions.

  28. Historically, though in the US in the post-Civil War 19th century I’m more inclined to believe the argument Cullen makes in this article:

    Where he writes:

    “For instance, in the USA, the Fed system exists because rogue independent banking like we had in the 1800′s proved highly unstable.”

    … since the US did NOT have a central bank at that time, Andrew Jackson having terminated the “Bank of US” charter back in the 1830s (the 2nd time the charter was allowed to expire, I believe).

  29. If governments issueing money directly to finance spending has always led to disaster, why whould te present policy of issuing debt (or Net Financial Assets) to finance spending be any different?
    Government by its nature will issue too much money or too much debt.

  30. Here’s a smorgasbord of conspiracy theories on the Fed:

    The Federal Reserve Cartel: The Eight Families
    By Dean Henderson
    Global Research, June 01, 2011
    1 June 2011

    International Banking Cartel Exposed « Truth11
    25 Minutes Video:

    Corporate Media Exposed: Who Really Controls What You Hear, Watch, and Read?

    What do investment banks actually do?

    10 Things That Every American Should Know About The Federal Reserve
    This entire article is from
    Why the Global Banking System Is a Scam


    Criminal banking cartel dominates US, British governments

    Global banks are the financial services wing of the drug cartels

    History of Money and Private Central Bank Ownership by Freemason/Zionists Mafia
    author: Alexander James – E-mail address
    Source Portland Independent Media Center

    I Am The Enemy Combatant!

    The Federal Reserve Fraud and the “Invisible Government”

    The Global Banking ‘Super-Entity’ Drug Cartel: The “Free Market” of Finance Capital
    Politics / BankstersOct 29, 2012 By: Andrew_G_Marshall

    The International Banking Cartel is the New World Order

    The Money Masters is a 1996 three and a half hour non-fiction, historical documentary film that discusses the concepts of money, debt, taxes, and describes their development from biblical times onward. It also covers the history of fractional-reserve banking, central banking, monetary policy, the bond market, and the Federal Reserve System in the United States:

  31. Tom: Just to be clear, the development of independent central banking is a 20th century phenomenon and really a post 1960 phenomenon. When the Fed was created, the institution of an independent central bank as we know it today had not really been concieved yet. This evolution came much later.

  32. So you’re saying that the Federal Reserve was not independent in 1914 when it was first created? I did not get that impression from Cullen’s article, nor was that my understanding of history, but I’m no expert!

  33. Johnny:

    1. An independent central bank places a brake on government deficit spending that would not otherwise be there. Historically, independent central banks have frequently refused to take actions that would jeopardize price stability.

    2. I assume that it is clear to you why debt issuance in exchange for money is less inflationary that money issuance in exchange for nothing.


  34. I wouldn’t believe anything the White House says here. It is simply too convenient. The TDC does not fit in Obama’s theatrical script for the debt ceiling fight. It is NOT in Obama’s interest to mint a TDC. Obama’s goal is simple – he wants to destroy the Republican Party and win the House back in 2014. The TDC would give the GOP a way out and allow them to vote NO on increasing the debt ceiling without material consequence. Obama needs a a very public win where the markets crash and he forces the House to raise the debt ceiling, and he is seen to be the absolute winner. If the Republicans had real leadership they would have told Obama to go right ahead and mint the coin, but they don’t have leaders right now. Boehner is simply an overwhelmed cat-herder. If they had leaders they would tell the Fed “we don’t agree with minting the TDC, but if it meets the requirements for legal tender you damm better well take it, or be impeached”. They would call Bernanke to testify and question him about it personally, but they don’t have leaders.

  35. Bernanke never officially announced a public decision. It is all the word of an inside Administration source, spoken to the MSM. Take it with a grain of salt. Remember, it is NOT in Obama’s interest to mint the TDC.

  36. We still don’t know the Fed shot it down. Sure they wouldn’t like it, but if a President really wanted to do it they would have to take it. All we have is Administration Sources (unnamed) claiming that the Fed shot it down. How convenient.

  37. At a presser today Bernanke said he wouldn’t even “give the idea oxygen”. He thought it was crazy. I think it was definitely him who shot the idea down.

  38. I am not convinced at all. My take is this. You going to bring me a lot of examples of usually totalitarian regimes ruining their economy and printing money leading to inflation/hyperinflation. Show me a country with well enough implemented checks and balances like the US suffering the same just because the Fed and the Tsy are consolidated. Currently we are simply having a lot of smoke and mirrors hiding the fact that they are consolidated in practice. True, to some extent the smoke and mirrors serve as an additional “check” on the politicians thinking we can indeed “run out of money”, but I don’t believe at this point shedding the illusion could lead to govt spending run amok. We still have a two party system, the sides which happen to be as polarized as ever and intent on preventing each other from achieving anything. Moreover, if we ever tipped into the dictatorship direction, then all the smoke and mirror about Fed’s independence wouldn’t matter much anyway.

  39. LVG, if Obama wanted to keep the idea alive, then he had at his disposal all the tools needed to force Ben B to do whatever he wanted. Lawfully, too. So, it is still a case of Obama and his people being afraid of the idea that killed it. But you know, these ideas they have a tendency to wake up from the dead and reappear, so, this is not the last salvo in the fight :)

  40. THanks, James
    1. I’m not sure I understand that there is a brake and that the Fed would be independent enought to apply it. The brake is the inflation constraint, but it’s not clear the Fed can predict when/if the inflation would occur and, having made that prediction, could act in time to avert the inflation.
    2. No, I am not clear that directly spending newly coined money is less inflationary than issueing bonds (Net Financial Assets) which are 100 percent backed by the Fed and have 99 percent of the characteristics of money, plus a few complicating factors (like interest, creating a future obligation, perhaps even soaking up savings money that would be better deployed elsewhere.