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 of 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 less forgivable.

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 Claims Act.

As the Ninth Circuit ruling declares:

Examining the 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.

But this is because the Federal Reserve Act doesn't give Congress direct control over day-to-day 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 routine.

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 and services.

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 government.

 

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 function.

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 here.