How The Federal Reserve Works (And Who Really Owns It)

The Federal Reserve is one of the cornerstones of the American economy, and with good reason: it performs key functions without which the modern financial sector could not exist. The Fed, however, is surprisingly new, having only emerged during the early 20th century. For comparison, the British and the Dutch have had central banks since the 17th century and they were one of the key factors in sustaining their vast overseas empires.

But it’s exactly this imperialistic history that made the Founding Fathers reluctant to apply the same method to the United States. Of course, central banks were vital for a healthy economy and without one, the US suffered frequent and deep recessions for many decades before things got bad enough to force the hand of Congress.

The creation of the Federal Reserve was not smooth, of course, and it was an exercise in political compromise. The structure Congress crafted with the help of bankers like J. P. Morgan was unique: twelve regional federal reserve banks would regulate private banks on a local level, with a single board of governors appointed by the President to keep everyone in line.

What’s most surprising is the structure of these regional reserve banks: they’re incorporated as private entities and have shares, which every bank they regulate must buy by law. These shares can’t be traded though, and their price is fixed to $100. They do, however, carry a lucrative dividend, which was created to entice the bankers of the day to participate and support the fledgling system.