Does the U.S. vs. Wells Fargo ruling justify fiscal consolidation?

Dr. Jakob Feinig, author of Moral Economies of Money, recommended the article The Deficit Myth: Banking Between the Lines by Raúl A. Carrillo.

Mr. Carrillo writes “MMT generally encourages analysts to consolidate the Fed as a legal subunit within the rest of the US government.” If the Federal Reserve Banks were in fact part of the US Government, Mr. Carrillo would not need to “encourage” a belief in their consolidation. He’d be able to point to institutional sources that verify his claim.

Deposit Deflation bases its public money theory entirely upon public documents of the US Government and the Federal Reserve Banks. As a sample:

  • The Federal Reserve Banks acknowledge that they are not part of the US Government. (1)
  • Their remittances to the US Treasury were known as “Franchise Taxes” until 1933. (2)
  • Shareholders of the Reserve Banks receive dividends and collectively appoint six of the nine members of each Bank’s board of directors. (1)
  • The Banks’ liabilities are liabilities of their shareholders. (3)
  • US Government debt owned by the Federal Reserve Banks is considered “Debt Held by the Public” rather than “Intragovernmental Holdings.” (4)
  • The Federal Reserve Banks credit the US Government only with printing costs for their orders of Reserve Notes. There is some demand by collectors for uncut sheets; the Reserve Banks sell these back to the US Government for face value, plus printing costs. The US Government sells these at a markup of roughly 15% – 50% depending on the series, earning a collectors’ premium rather than seigniorage thereby. (5, 6, 7)

The Federal Reserve Banks are most certainly the US Government’s agents, just as any bank is perforce an agent for its customers: collecting upon electronic or physical drafts in their favor, issuing checks on their behalf and against their deposit balances. The Reserve Banks are simultaneously the US Government’s debtor, primarily via the Treasury General Account, and creditor, via their holdings of USG Treasuries. They are of course net creditors of the US Treasury.

Mr. Carrillo refers to an article by Nathan Tankus (8), which relies for its support on a ruling by the United States Court of Appeals in 18-1746 U.S. vs. Wells Fargo. (9) That ruling seems well decided within the “capacious” text of the False Claims Act. But the Court took pains to say:

[T]he opinion that follows is narrowly focused on the FCA [False Claims Act] and our analysis may not be relevant to questions involving the status of the FRBs in other contexts.

In the Court’s view:

Fraudulent claims are actionable not only when they are presented to an “officer” or “employee” of the United States, but also when they are presented either to “an agent of the United States” or to a “contractor, grantee, or other recipient” so long as (as to the contractors, grantees, or other recipients) a portion of the money is “provided” (or “reimburse[d]”) by the United States and used to advance its interests. 31 U.S.C. § 3729(b)(2)(A)

That the Federal Reserve Banks are agents of the U.S. Government is not in any informed dispute. But this does not support the MMT claim that the Reserve Banks’ assets and liabilities are a subset of the assets and liabilities of the U.S. Government.

As to the second standard, that “a portion of the money is ‘provided’ (or ‘reimburse[d]’) by the United States and used to advance its interests”, it is satisfied in the Court’s view by the fact that the U.S. Mint “provides” the Federal Reserve Banks with the physical coins and notes that serve in part as the “proceeds” of loans, in this case, from the Term Auction Facility, an emergency lending facility created by the Board of Governors.

This is a “capacious” standard indeed. It would as well have been met by the note linked here: $5 National Bank Note from Holyoke, Massachusetts.jpg – Wikimedia Commons

We can stipulate that the U.S. Mint printed the original note, which bears the signature of U.S. Treasury officials, and the seal of the United States of America, which controls its design elements. The note was, beyond any dispute, issued under the authority of the United States Treasury.

But for the US Government to have spent this note into the economy as sovereign issuer would have been an act of fraud. The note was an IOU of, and a bearer bank account with, Holyoke National Bank. Its lawful circulation depended upon its bank of issue fulfilling a set of prerequisites that enabled it to issue a bearer currency that would be recognized as a legal tender, which its own travelers’ cheques, for example, would not.

So it is with Federal Reserve Notes, which are not money until they have been issued by a Federal Reserve Bank as its own liability. As it is in the case of a USDA certification, which uses the stamp and seal of the U.S. Government to certify, for example, that a particular cut of beef may be sold as prime, without conveying to the U.S. Government any claim upon the meat.

The Federal Reserve Banks are agents of the U.S. Government, but they are also perforce agents of the commercial banks for which they settle accounts. In any agency relationship, there is a possibility that an act of fraud putatively committed against the agent is by some legal standard an act of fraud against one of the principals the agent represents. It is this fact that was properly recognized in U.S. vs. Wells Fargo. It cannot be used by MMT proponents to consolidate the assets and liabilities of the agent with those of one of the principals it represents.


(2) Transfer to Treasury of Excess Earnings of Federal Reserve Banks

(3) 12 U.S. Code § 502 – Liability of shareholders of Federal reserve banks on contracts, etc. | LII / Legal Information Institute





(8) The Federal Government Always Money-Finances Its Spending: A Restatement. Nathan Tankus.

(9) United States v. Wells Fargo, No. 18-1746 (2d Cir. 2019)