Who's behind the FED?

In summer 2010 I took a tour at the Fed of New York, the most important of the 12 Reserve Banks constitution the Federal Reserve System. The nice thing about many US institutions is that they care a lot about public relations. Tours are free and end with a visit of the gold vault 50 feet below sea level storing 7.000 tons of gold (much of it belonging to foreign countries such as Germany). Visitors are not only provided with USD 1,000 (unfortunately cut to pieces) but also with extensive information material. Even more can be found on the Web-Page, including Annual Reports. Let us take a closer look:

• In 2010 the Fed of New York had an income prior to distribution of USD 40 bn (USD 39,789 mn - just to make sure Europeans and others take away the same picture). This was mostly coming from interest income and is net of operating expenses of USD 1.8 bn.
  
• Most of the interest income comes from US Treasury securities and federal agency and government-sponsored enterprise mortgage-backed securities (read: interest on US debt and on papers bought by the FED in the aftermath of the financial crisis 2008/09.
  
• USD 30.1 of this income prior to distributions is paid to the US Treasury, and a minor portion of 0.5 bn is paid to member banks.
  

At least now we can dismiss some of the horror stories on the internet: Yes, the FED is privately owned, as it consists of private member banks who have to provide capital (the bigger the bank, the more capital they have to provide). Yes, they get a 6 % interest (dividend) on this capital, but it is not the major share of the FEDs income. And yes, while the treasury pays interest to the FED, it gets this money back by dividend payments. But no, it does not seem to be a system set up by bankers to rob the people blatantly.

Still we have that strange circle of money flows: the FED buys government debt (in many cases by 'creating' the money it needs to do so), gets interest on it coming from the Treasury and pays back this interest as dividends to the US Treasury. And still the Treasury seems to be at a disadvantage: not all of its debt is held by the FED so not all the interest comes back; in addition it has to worry about debt to GDP, ratings, ... Why not just print the US dollars needed all by themselves and avoid all that hazzle?

The search in explaining that mystery continues ...

Two questions still open

In my last post I addressed two questions:

1) What does it take to become a bank, being allowed to create money and thus gain interest on this new money?
2) Why do governments not create money into existence by spending it, but rather lend it from central banks and pay interest on in?

Today I am 230 pages further down the road thanks to a great reading suggestion by Ulrich:

Bernstein provides us with a great piece of education and I think for the first time I really understand the Fractional Reserve System. On page 36 he comes close to question 2: "But our Government is legally and morally prohibited from financing its expenditures by printing the money to do it. The Government is in the same boat as the rest of us - it has to has to finance its expenditures by obtaining money from somebody else. This it normally does by levying taxation on us or by borrowing the money from us. But the important point is that the Government cannot spend money indefinitely without replenishing its bank account. [...] Where then can we look for the source of money? Indeed, to the banks themselves!"

Bernstein describes the monetary system of the USA very well. While reading his booklet, written in the 60ies but not outdated at all, you will learn a lot about the FED, its members, money creation, the gold standard, exchange rates. Being written in the 60ies, some eye-openers might surprise you, as the perspective is of course different then ours.
Gold is traded at 35 bucks an ounce, a USD is worth 4 Deutsch Marks or 5 French Francs. This is 45 years in the past - hopefully we will live another 45 years. What will be the exchange factors by then? Thought provoking ....

Still my questions did remain open. Why is a limited number of banks allowed to profit from creating money? Why does the government not keep this rights to itself? Or at least, shouldn't we all have the same rights?
I showed some own initiative. Knowing that the banks create the money, I took a look at the FED of New York, one of the 12 members of the Federal Reserve System of the US. (to be continued ...)