The Federal Reserve Is NOT a Private Operation
I CAME ACROSS A REFERENCE TO THE SOURCE of a persistent "tax honesty
movement" myth concerning the Federal Reserve the other day, just by
good luck. This myth is the one that prompts the wry declaration,
"The Federal Reserve is neither..." meaning the institution is
neither federal, nor possessed of any reserves. Well, the latter may
well be true (and it might not be-- I don't know how much gold the
Fed has squirreled away, and I'm betting you don't, either). But the
former certainly is not.
The source of the confusion here (or at least one source) proves to
be a 1982 ruling by the Ninth Circuit Court of Appeals in the case
Lewis v. United States, 680 F.2d 1239. The case concerns a
man named John Lewis who was struck and injured by a Federal Reserve
truck in 1979.
Lewis sued under the Federal Tort Claims Act (the Act), 28 U.S.C. §
1346(b), but his suit was dismissed in district court on the
government's motion based on the argument that the Federal Reserve
Bank is not a federal agency within the meaning of the Act and that
the court therefore lacked subject matter jurisdiction. The circuit
court agreed and affirmed.
Given just that, it is understandable why this ruling has been taken
as evidence that the Federal Reserve is a private operation. Of
course, taking just that, and coming to that conclusion, requires
forgetting the "Federal Reserve Act"-- 21 dense pages of
legislation... This can be forgiven, of course, because not everyone
is familiar with this legislation (but you can find it on your
CtC Companion CD).
On the other hand, one can only mistake the Lewis v. United
States rulings as establishing that the Federal Reserve is not a
government institution if one doesn't actually bother reading the
whole ruling-- something that is always a bad practice, and much
Those who DO read the whole ruling quickly discover that the courts'
actual positions are not that the Fed is not an agency of the federal
government generally, but only for purposes of the
Federal Tort Claims Act, a piece of
legislation which, like so many others, is of limited application
and incorporates statutory definitions identifying government organs
that fall within its ambit. Those that do not are still government
organs; they simply are not the variety covered by the Federal Tort
As the Ninth Circuit ruling declares:
organization and function of the Federal Reserve Banks, and
applying the relevant factors, we conclude that the Reserve
Banks are not federal instrumentalities for purposes of the FTCA, but are
independent, privately owned and locally controlled corporations.
this is because the Federal Reserve Act doesn't give Congress direct
control over day-today operations of the member banks, a criterion
for FTCA agency status. The court continues:
Each Bank is statutorily empowered to conduct these
activities without day to day direction from the federal government.
Thus, for example, the interest rates on advances to member banks,
individuals, partnerships, and corporations are set by each Reserve Bank
and their decisions regarding the purchase and sale of securities are
likewise independently made.
It is evident from the legislative history of the
Federal Reserve Act that Congress did not intend to give the federal
government direction over the daily operation of the Reserve Banks:
It is proposed that the Government shall retain sufficient power over
the reserve banks to enable it to exercise a direct authority when
necessary to do so, but that it shall in no way attempt to carry on
through its own mechanism the routine operations and banking which
require detailed knowledge of local and individual credit and which
determine the funds of the community in any given instance. In other
words, the reserve-bank plan retains to the Government power over the
exercise of the broader banking functions, while it leaves to
individuals and privately owned institutions the actual direction of
H.R. Report No. 69, 63 Cong. 1st Sess. 18-19 (1913).
The fact that the Federal Reserve Board regulates the
Reserve Banks does not make them federal agencies under the Act. In
United States v. Orleans, 425 U.S. 807, 96 S.Ct. 1971, 48 L.Ed.2d 390
(1976), the Supreme Court held that a community action agency was not a
federal agency or instrumentality for purposes of the Act, even though
the agency was organized under federal regulations and heavily funded by
the federal government. Because the agency's day to day operation was
not supervised by the federal government, but by local officials, the
Court refused to extend federal tort liability for the negligence of the
agency's employees. Similarly, the Federal Reserve Banks, though heavily
regulated, are locally controlled by their member banks. Unlike typical
federal agencies, each bank is empowered to hire and fire employees at
will. Bank employees do not participate in the Civil Service Retirement
System. They are covered by worker's compensation insurance, purchased
by the Bank, rather than the Federal Employees Compensation Act.
Employees traveling on Bank business are not subject to federal travel
regulations and do not receive government employee discounts on lodging
However, on the other hand...
The Reserve Banks have properly been held to be federal
instrumentalities for some purposes. In United States v. Hollingshead,
672 F.2d 751 (9th Cir. 1982), this court held that a Federal Reserve
Bank employee who was responsible for recommending expenditure of
federal funds was a "public official" under the Federal Bribery Statute.
That statute broadly defines public official to include any person
acting "for or on behalf of the Government." S. Rep. No. 2213, 87th
Cong., 2nd Sess. (1962), reprinted in (1962) U.S. Code Cong. & Ad. News
3852, 3856. See 18 U.S.C. § 201(a). The test for determining status as a
public official turns on whether there is "substantial federal
involvement" in the defendant's activities. United States v.
Hollingshead, 672 F.2d at 754. In contrast, under the FTCA, federal
liability is narrowly based on traditional agency principles and does
not necessarily lie when the tortfeasor simply works for an entity, like
the Reserve Banks, which perform important activities for the
The Reserve Banks are deemed to be federal
instrumentalities for purposes of immunity from state taxation. Federal
Reserve Bank of Boston v. Commissioner of Corporations & Taxation, 499
F.2d 60 (1st Cir. 1974), after remand, 520 F.2d 221 (1st Cir. 1975);
Federal Reserve Bank of Minneapolis v. Register of Deeds, 288 Mich. 120,
284 N.W. 667 (1939). The test for determining whether an entity is a
federal instrumentality for purposes of protection from state or local
action or taxation, however, is very broad: whether the entity performs
an important governmental function. Federal Land Bank v. Bismarck Lumber
Co., 314 U.S. 95, 102, 62 S.Ct. 1, 5, 86 L.Ed. 65 (1941); Rust v.
Johnson, 597 F.2d 174, 178 (9th Cir. 1979), cert. denied, 444 U.S. 964,
100 S.Ct. 450, 62 L.Ed.2d 376 (1979). The Reserve Banks, which further
the nation's fiscal policy, clearly perform an important governmental
The court concludes with a restatement of the heart of its
reasoning, that the Fed is indeed a federal entity, just not for
purposes of the FTCA:
Performance of an important governmental function, however, is but a
single factor and not determinative in tort claims actions. Federal
Reserve Bank of St. Louis v. Metrocentre Improvement District, 657 F.2d
183, 185 n.2 (8th Cir. 1981), Cf. Pearl v. United States, 230 F.2d 243
(10th Cir. 1956). State taxation has traditionally been viewed as a
greater obstacle to an entity's ability to perform federal functions
than exposure to judicial process; therefore tax immunity is liberally
applied. Federal Land Bank v. Priddy, 294 U.S. 229, 235, 55 S.Ct. 705,
708, 79 L.Ed. 1408 (1955). Federal tort liability, however, is based on
traditional agency principles and thus depends upon the principal's
ability to control the actions of his agent, and not simply upon whether
the entity performs an important governmental function. See United
States v. Orleans, 425 U.S. 807, 815, 96 S.Ct. 1971, 1976, 48 L.Ed.2d
390 (1976), United States v. Logue, 412 U.S. 521, 527-28, 93 S.Ct. 2215,
2219, 37 L.Ed.2d 121 (1973).
Brinks Inc. v. Board of Governors of the Federal Reserve
System, 466 F.Supp. 116 (D.D.C.1979), held that a Federal Reserve Bank
is a federal instrumentality for purposes of the Service Contract Act,
41 U.S.C. § 351. Citing Federal Reserve Bank of Boston and Federal
Reserve Bank of Minneapolis, the court applied the "important
governmental function" test and concluded that the term "Federal
Government" in the Service Contract Act must be "liberally construed to
effectuate the Act's humanitarian purposes of providing minimum wage and
fringe benefit protection to individuals performing contracts with the
federal government." Id. 288 Mich. at 120, 284 N.W.2d 667.
Such a liberal construction of the term "federal agency"
for purposes of the Act is unwarranted. Unlike in Brinks, plaintiffs are
not without a forum in which to seek a remedy, for they may bring an
appropriate state tort claim directly against the Bank; and if
successful, their prospects of recovery are bright since the
institutions are both highly solvent and amply insured.
For these reasons we hold that the Reserve Banks are not
federal agencies for purposes of the Federal Tort Claims Act and we
affirm the judgment of the district court.
BOTTOM LINE: You've got to read the whole case, if you're going to
rely on the pronouncements of any court (and even then prudence
dictates independent verification of the court's citations and their
aptness). By the way, this mistake about the nature of the Federal
Reserve due to taking a excerpt out of context closely parallels
another that has plagued the "tax honesty" community for many years,
by which it is supposed that the IRS is not an agency of the federal
government. See a discussion of that misunderstanding