BY: Edward Flaherty, Ph.D. Department of Economics College of Charleston, S.C.

Do foreigners own or control the Federal Reserve? Conspiracy theorists Gary Kah (1991) and Eustace Mullins (1983) certainly think so, as do many of their readers. Kah and Mullins each authored books alleging that the U.S. central bank – the Federal Reserve – is under the direction of an international banking community and that this financial elite, primarily British, uses its control to manipulate the U.S. economy and its financial markets for their personal gain. This is a very serious charge. The Federal Reserve sets the government’s monetary and interest rate policies. Any change in them has significant repercussions for just about everyone. An increase in interest rates that benefits savers could also price a new home just out of a family’s reach or make a manufacturing firm’s modernization plan too expensive to undertake. The Fed is supposed to choose a policy that benefits the whole of the U.S. economy, not an overseas banking cabal. The ultimate aim of this international banking elite, the conspiracy theory declares, is to establish a one-world government – the infamous New World Order. The Fed’s alleged role in this is simple according to Kah: At the appointed time, the New World Order schemers will instruct the Fed to sabotage the U.S. economy, causing financial and social chaos that will make it much easier for them to gain real political and military control over the United States. In the meantime they simply reap the Fed’s huge annual profits and manipulate the financial markets for further gain. Kah specifically claims that foreigners directly own the New York Federal Reserve Bank, the largest and most important of the twelve regional Federal Reserve Banks. Through the N.Y. Federal Reserve the international conspirators control the entire Federal Reserve System and gain its profits. In his book En Route to Global Occupation Kah also plays up the Fed’s alleged role in the New World Order plot. Mullins agrees on the importance of the N.Y. Fed, but claims that while domestic commercial banks own it, in reality a secret European banking club actually controls its policies from a distance. How much of these conspiracy theories, if any, is true? In this article I investigate the remarkable claims of Kah and Mullins. Specifically, I examine whether foreigners own the New York Federal Reserve Bank either directly or indirectly, whether the N.Y. Fed controls the whole of the Federal Reserve System, and whether foreigners receive the System’s large annual profits. As it turns out, very little of these conspiracy tales are true.

Who Owns the New York Federal Reserve Bank?

Each of the twelve Federal Reserve Banks is organized as a corporation in much the same way as many other firms. However, Gary Kah in 1991 claimed foreigners intent on global economic and political domination own a controlling interest in the shares of the New York Federal Reserve Bank. “Swiss and Saudi Arabian contacts,” according to Kah (p. 13), identified the top eight shareholders as

Rothschild Banks of London and Berlin
Lazard Brothers Banks of Paris
Israel Moses Seif Banks of Italy
Warburg Bank of Hamburg and Amsterdam
Lehman Brothers of New York
Kuhn, Loeb Bank of New York
Chase Manhatten Bank
Goldman, Sachs of New York.

Kah describes these as the Fed’s “Class A shareholders” (p. 14). This is curious because Federal Reserve stock is not classified in this manner. It can be either “member stock” or “public stock.” However, the directors of a Federal Reserve Bank are separated into Classes A, B, and C depending on how they are appointed (12 USCA §302).

Fellow conspiracy theorist Eustace Mullins presents a different list in his 1983 book Secrets of the Federal Reserve. He reports the top eight stockholders of the New York Fed in 1982 were

Citibank
Chase Manhatten Bank
Morgan Guaranty Trust
Chemical Bank
Manufacturers Hanover Trust
Bankers Trust Company
National Bank of North America
Bank of New York.

He notes that together these banks own about 63 percent of the New York Fed’s outstanding stock. European banking organizations, most notably the Rothschild banking dynasty, he then claims, own many of these banks. Mullins also contends that through their American agents, the European bankers – who he calls the London Connection – select the board of directors for the N.Y. Fed. Since the N.Y. Fed supposedly controls the whole Federal Reserve System, this allows the London Connection to direct U.S. monetary policy. He explains,

... The most powerful men in the United States were themselves answerable to another power, a foreign power, and a power which had been steadfastly seeking to extend its control over the young republic since its very inception. The power was the financial power of England, centered in the London Branch of the House of Rothschild. The fact was that in 1910, the United States was for all practical purposes being ruled from England, and so it is today (Mullins, p. 47-48).
Clearly, there is a discrepancy between the two lists. According to Kah, foreigners own shares of the N.Y. Fed directly. On the other hand, Mullins does not report any such direct foreign ownership. Instead, Europeans allegedly own the U.S. banks which, in turn, own the N.Y. Fed – an indirect ownership. So who is right? Mullins claimed the source of his information was the Federal Reserve Bulletin, however, that publication has never reported the shareholder list of any Federal Reserve Bank. It is not clear where he obtained his list. Kah’s source was supposedly an unnamed group of Swiss and Saudi Arabian contacts and so it is impossible even to verify his list. On the other hand, the two authors published their lists eight years apart. Since Mullins’ was the earlier of the two, it may be possible that sometime between 1983 and 1991 foreigners acquired a substantial amount of stock in the N.Y. Fed. It is also possible that both lists are wrong.

To clarify this mystery, let’s first look at the Federal Reserve Act of 1913 itself. The law requires that all nationally chartered commercial banks and savings & loans buy stock in their regional Federal Reserve Bank, thereby becoming “member banks” (12 USCA §282).1 The amount of stock a bank must buy, called “member stock,” is proportional to the bank’s size. So, we would expect that by law the largest shareholders of the N.Y. Fed to be the largest banks operating in its district. This is consistent with Mullins since all of the banks on his list were, at the time, the largest banks in the N.Y. Fed region.

Further examination of the law and the facts makes Kah’s list suspect. The law does not permit the stock of a Federal Reserve Bank to be traded publicly like the stock of a typical corporation. The original Federal Reserve Act called for each regional Bank to sell stock to raise at least $4 million to begin operations (12 USCA §281). The stock was to be sold to banks, not to the public. Only in the event that sales to member banks did not raise the necessary $4 million would the regional Fed Banks be permitted to sell shares to the public, called “public stock.” However, this did not happen and no stock in any Federal Reserve Bank has ever been sold to the public, to foreigners, or to any non-bank U.S. firm (Woodward, 1996). Note that foreign interests comprise half of the alleged owners on Kah’s list. Moreover, three of the hypothesized American owners are not even banks. The law permits neither foreigners nor non-bank firms from owning shares in any Federal Reserve Bank. Chase Manhatten is the only entity on Kah’s list that could possibly own shares of the N.Y. Fed.

We can simply look at the most recent list of shareholders to test the claim that foreigners own the New York Federal Reserve Bank. According to the N.Y. Fed itself, as of June 30, 1997 the top eight shareholders were

Chase Manhatten Bank
Citibank
Morgan Guaranty Trust Company
Fleet Bank
Bankers Trust
Bank of New York
Marine Midland Bank
Summit Bank.
All of the major shareholders seen here and all of the banks on the complete list are either nationally- or state-chartered banks. All of them are U.S.-owned. Kah’s claim that foreigners directly own the N.Y. Fed is completely wrong. This list is consistent, however, with Mullins in that all the owners are domestic banks functioning within the N.Y. Federal Reserve district. The discrepancies are likely due to mergers, new entries into the banking market, or other significant changes in the size of district banks since the publication of Mullins’ list. One point is clear: foreigners do not own the New York Federal Reserve directly.

Global Domination Through the Back Door?

Although foreigners do not own the New York Federal Reserve Bank directly, perhaps, Mullins argues, they own and control it indirectly via ownership of domestic banks. He claims that since the money-center banks of New York own the largest portion of stock in the New York Fed, they hand-pick its board of directors and president. This would give them, and hence the London Connection, control over Fed operations and U.S. monetary policy.

The Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders each year. The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firm’s stock. These reports show that only one of the N.Y. Fed’s current largest shareholders, Citicorp, has any major foreign stockholders. As of January 1996, Price Alwaleed Bin Talad of Saudi Arabia owned 8.9% of Citicorp stock.2 None of the member banks on the above list have any significant portion of shares held by any foreign individual or institution. Mullins' claim that foreigners own the N.Y. Federal Reserve indirectly is also wrong.

Moreover, the ownership rights of Federal Reserve Bank stock are different than the common stock of typical corporations. Usually, the number of votes a shareholder has is proportional to the number of shares he owns. However, ownership of Federal Reserve Bank stock entitles the shareholder to one vote when voting for its regional Federal Reserve Bank officials regardless of how many total shares the member bank may own. A group of international conspirators would need to purchase a controlling interest in a majority of the banks operating in the N.Y. district to guarantee the election of their desired minions to the N.Y. Fed’s board of directors. Buying that much stock in so many U.S. banks would require an outlay of hundreds of billions of dollars. Surely there must be a cheaper path to global domination.

Mullins’ premise here is that the member banks control the policies of the N.Y. Fed. In the next section I detail why this is wrong, but an historical example also illustrates the fault of this assumption. Galbraith (1990) recounts that in the spring of 1929 the New York Stock Exchange was booming. Prices there had been rising considerably, extending the bull market that began in 1924. The Federal Reserve Board decided to take steps to arrest the speculative bubble that appeared to be forming: It raised the cost banks had to pay to borrow from the Federal Reserve and it increased speculators’ margin requirements. Charles Mitchell, then the head of National City Bank (now Citicorp, one of the largest shareholders of the N.Y. Fed at the time), was so irritated by this decision that in a bank statement he wrote, “We feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert any dangerous crisis in the money market” (Galbraith, p. 57). National City Bank promised to increase lending to offset any restrictive policies of the Federal Reserve. Wrote Galbraith, “The effect was more than satisfactory: the market took off again. In the three summer months, the increase in prices outran all of the quite impressive increase that had occurred during the entire previous year” (Ibid). If the Fed and its policies were really under the control of its major stockholders, then why did the Federal Reserve Board clearly defy the intent of its single largest shareholder?

Does the New York Fed Call the Shots?

Mullins and Kah both argue that by controlling the New York Federal Reserve Bank, the international banking elite command the entire Federal Reserve System and thus direct U.S. monetary policy for their own profit. “For all practical purposes,” Kah writes, “the Federal Reserve Bank of New York is the Federal Reserve” (Kah, p.13; emphasis his). This is the linchpin of their conspiracy theory because it provides the mechanism by which the international bankers can execute their plans. A brief look at how the Fed’s powers are actually distributed shows that this key assumption in the conspiracy theory is wrong.

The Federal Reserve System is controlled not by the New York Federal Reserve Bank, but by the Board of Governors (the Board) and the Federal Open Market Committee (FOMC). The Board is a seven-member panel appointed by the President and approved by the Senate. It determines the interest rate for loans to commercial banks and thrifts, selects the required reserve ratio which determines how much of customer deposits a bank must keep on hand (a factor that significantly affects a bank’s ability create new credit), and also decides how much new currency Federal Reserve Banks may issue each year (12 USCA §248). The FOMC consists of the members of the Board, the president of the New York Fed, and four presidents from other regional Federal Reserve Banks. It formulates open market policy which determines how much in government bonds the Fed Banks may buy or sell – the major tool of monetary policy (12 USCA §263).

The key point is that a Federal Reserve Bank cannot change its discount rate or required reserve ratio, issue additional currency, or purchase government bonds without the explicit approval of either the Board or the FOMC. The New York Federal Reserve Bank, through its direct and permanent representation on the FOMC, has more say on monetary policy than any other Federal Reserve Bank, but it still only has one vote of twelve on the FOMC and no say at all in setting the discount rate or the required reserve ratio. If it wanted monetary policy to go in one direction, while the Board and the rest of the FOMC wanted policy to go another, then the New York Fed would be out-voted. The powers over U.S. monetary policy rest firmly with the publicly-appointed Board of Governors and the Federal Open Market Committee, not with the New York Federal Reserve Bank or a group of international conspirators.

Mullins also made a great to-do about the Federal Advisory Council. This is a panel of twelve representatives appointed by the board of directors of each Fed Bank. The Council meets at least four times each year with the members of the Board to give them their advice and to discuss general economic conditions (12 USCA §261). Many of the members have been bankers, a point not at all missed by Mullins. He speculates that this Council of bankers is able to force its will on the Board of Governors:

The claim that the “advice” of the council members is not binding on the Governors or that it carries no weight is to claim that four times a year, twelve of the most influential bankers in the United States take time from their work to travel to Washington to meet with the Federal Reserve Board merely to drink coffee and exchange pleasantries (Mullins, p. 45).

A point Mullins neglects entirely is that the Council has no voting power in Board meetings, and thus has no direct input into monetary policy. In support of his hypothesis Mullins offers no evidence, not even an anecdote. Moreover, his Council theory is inconsistent with his general thesis that the London Connection runs the Federal Reserve System via their imagined control of the N.Y. Fed. If this were true, then why would they also need the Council?

Who Gets the Fed’s Profits?

Gary Kah and Thomas Schauf (1992) also maintain that the huge profits of the Federal Reserve System are diverted to its foreign owners through the dividends paid to its stockholders. Kah reports “Each year billions of dollars are ‘earned’ by Class A stockholders of the Federal Reserve” (Kah, p. 20). Schauf further laments by asking, “When are the profits of the Fed going to start flowing into the Treasury so that average Americans are no longer burdened with excessive, unnecessary taxes?”

The Federal Reserve System certainly makes large profits. According to the Board’s 1995 Annual Report, the System had net income totaling $23.9 billion, which, if it were a single firm, would qualify it as one of the most profitable companies in the world. How were these profits distributed? By an agreement between the Board and the Treasury, nearly all of the Fed’s annual profits are paid to the federal government. Accordingly, a lion’s share of $23.4 billion, which represented 97.9 percent of the Federal Reserve’s net income, was paid to the Treasury. The Federal Reserve Banks kept $283 million, and the remaining $231 million was paid to the Fed’s stockholders as dividends. Regarding Schauf’s lamentation, the Federal Reserve System has been paying its profits to the Treasury since 1947.

Conclusion

The allegation that an international banking cartel controls the Federal Reserve is wrong. Contrary to Kah’s claim, foreigners do not own any stock in the New York Federal Reserve Bank. Neither do they currently own any significant shares of the domestic banks that actually do own shares in the N.Y. Fed. Moreover, the central assumption that control of the New York Federal Reserve is the same as control of the whole System is badly mistaken. Also, the profits of the Federal Reserve System, again contrary to the conspiracy theorists, are funneled almost entirely back to the federal government, not to an international banking elite. If the U.S. central bank is in the grip of an international conspiracy, then Mullins and Kah have certainly not uncovered it.

Footnotes:
1. State chartered banks have the option of becoming member banks of the Federal Reserve System. Interestingly, only 10% of have done so.

2. Compact Disclosure CD-ROM, v3.0

References:

82nd Annual Report, 1995, Board of Governors of the Federal Reserve System, U.S. Government Printing Office. Galbraith, John K. (1990), A Short History of Financial Euphoria. New York: Whittle Direct Books.

Kah, Gary (1991), En Route to Global Occupation. Lafayette, La.: Huntington House.

Mullins, Eustace (1983), Secrets of the Federal Reserve. Staunton, Va.: Bankers Research Institute.

Schauf, Thomas (1992), The Federal Reserve, Streamwood, IL: FED-UP, Inc. Woodward, G. Thomas (1996), “Money and the Federal Reserve System: Myth and Reality.” Congressional Research Service.

United States Code Annotated, 1994. U.S. Government Printing Office.

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