More than the Human Appendix: Fed Capital and Central Bank Financial Independence

Abstract

In 2002 in reviewing the role of the Federal Reserve System (FED) the United States General Accounting Office declared that We found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined; the FED capital has become somewhat like the human appendix, an organ whose function is no longer understood (Stella 2009). Is it still true? These short notes address the issue, using a Q&A exposition and taking the occasion the fact that the U.S. Government Accountability Office (GAO), has been asked by members of the Congress to study the implications of a recent dividend rate change for Federal Reserve Bank stock and the implications of modifying or eliminating the existing requirement that all member banks purchase stock issued by their respective Federal Reserve Bank.