Federal Reserve Stock Ownership Requirement for Banks

Question

Why are banks required to own stock in the Federal Reserve?

Answer 1

It is difficult to precisely know why some laws were set up the way how they were centuries ago. This being said here some reasons that most likely contributed to Fed's unique structure:

• The federal reserve act at its time was somewhat controversial and people creating Fed had to make compromises. According to Fed's own history page:

From December 1912 to December 1913, the Glass-Willis proposal was hotly debated, molded and reshaped. By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment.

The unique structure Fed has was most likely result of this compromise. For example, some politicians at that time would probably consider direct government management of money supply government overreach. In addition to politicians, wider public as well as banking industry had to also be persuaded to 'get on board' with the system, and according to St. Louis Fed this is the primarily reason for Fed's "blend of public and private interests and centralized and decentralized decision-making".

• Every central bank needs to have some set-up capital, that was even more true when currencies were on gold standard so reserves could not be created ex nihilo. In many countries this capital was provided directly by state. USA was at the time very laisses faire country. In 1913 US government spending as share of GDP in 1900 was around 5% (Julio 2000).

  Forcing private banks to contribute all the Fed's capital in essence means that US government does not need to spend its own money to set up the Fed. Fed's set up capital would undoubtedly create quite significant hole in US budget at the time and as already discussed above Federal reserve act was at the time controversial, if US congress would have to foot the bill for its set up capital the act might have not be passed.

• One role of Fed is to be the lender of last resort. In fact this was one of the primary reasons for Fed's existence as it was set up directly as a response to banking panic of 1907 (see St Louis Fed). Politicians who set up the Fed might have believed that forcing private banks to provide capital to Fed would possibly reduce moral hazard.