On December 3, Congress passed a new highway and transit bill allocating $305 billion over the next five years. Part of the funding, allegedly $35.8 billion, will be taken from the Federal Reserve’s capital account. Further details on the maneuvering between the Senate and House versions, and Fed objections, are here, here, and here. Under the final compromise bill, about 8 percent of the Fed’s $35.8 billion contribution will involve a diversion of dividends from commercial banks, but the remainder is just a silly and deceptive gimmick for covering future federal expenditures. Both the banks and the Fed failed in their last-minute efforts to curtail these provisions during the debate over the omnibus spending bill that Congress passed last week.
To appreciate exactly what these provisions will do, we need to examine more closely the nature of the Fed’s capital account. The Fed is only nominally owned by its member banks, which comprise all nationally chartered banks and eligible state-chartered banks that choose to join. Member banks are required to hold an amount equal to 6 percent of their own capital and surplus in the “shares” of their respective district Federal Reserve Banks. Half of this amount is paid in; the other half is subject to call by the Fed’s Board of Governors. As member banks increase or decrease in size, their holdings must be adjusted accordingly. Obviously these “shares” are not like ordinary shares. They cannot be bought or sold on a secondary market, nor are they in any sense residual claims to the Fed’s earnings.