Treasury Vs. Federal Reserve

What is the difference between the US Treasury and the Federal Reserve?

The reason I wrote this post is, there is a lot of emotion and confusion circulating both about the role and the raison d’être for the central bank and the Treasury. The underlying premise is a government monopoly on the money supply is detrimental to the economy and ultimately limits people’s freedom as it promotes the expansion and control of the state.

So what is the function of these two organizations? The correct, but non important answer is the Treasurymints the money, including the paper currency in circulation, and collects the revenue  via the IRS. The treasury is actually a department of the US government. Read more about the functions of the US Treasury here.

In contrast, the Federal Reserve bank is autonomous. The Fed is the central bank for all USA banks and a lender of last resort. The Fed expands and contracts the money supply using the more broadly defined as M2 or even M3 definitions of money.Read more here about the purpose of the US central bank.

So what is the difference between the Federal Reserve and the Treasury and why is the Fed seen as the boggy man? Further, although the Treasury maybe not liked, (and the IRS constitutionally questionable) it is less out of the media crossfire today?

It is because the US Treasury is more transparent, and functional. It collects revenue, oversees the debt based on laws and the budget. It does not create the budget and debt but this is done by the President and congress. The Treasury is part of the problem but more taking marching orders from the President’s budget.

In contrast,  the central bank secretly and autonomously sets policy that dramatically affects your life. This is not democracy. It is no a conspiracy theory to say the centrally planned central bank royally screws things up.

Why the Federal Reserve is a failure? – Greenspan and Bernanke tried to help the US economy, but fail. Why? It is because there is a flaw in the economic theory that supports the central bank. The  central banking system is based on theory as archaic as the Geocentric orbit theory. It is based on an old fashion ideas, a fallacy that the government can fine tune the business cycle and central planning of money is superior to free money.

The economic theory that the US central bank is based on is as out of date as the Ptolemaic model. Ben Bernanke is a defender of harmful paradigm

What we have learned is, economics is not something that can be managed top down. Communism, Keynesianism, monetary management of the business cycle. It would all be better to let the markets work. Nothing is a clearer lesson in economics, than the failed economic experiments of the 20th century.

Why is the idea of the Fed creating money so bad? The central bank can in a round about way create money out of thin air. This can and does cause inflation. It exacerbates the business cycle and causes pain and suffering in the economy. It supports a government policy of increased debt, money creation and expansion. This is why today the Federal Reserve is taking a lot of heat.

What is important to know about the Federal Reserve:

The central bank was chartered:

to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes

  • Logically seems to makes sense, but history shows it does not work. Further, there are other logical arguments by the Austrian school of Economics that would argue for free money and market forces determine the supply of money, rather than central planning of money.
  • The Federal Reserve bank has  the power. It controls the interest rates. If you control interest rates than you control the world. In one day you could push interest rates to 50% or 0%. This means it has a lot of power. Of course it would not do that, but it does not matter. An incorrect choice of interest rate policy, which is almost always the case, affects the world on and large-scale internationally and on a small-scale.
  • It could be argued the Federal Reserve caused WWII. I am not joking. An over expansion of credit in the 1920s created the great depression which lead to the rise of opportunist dictators. How was the Federal Reserve not responsible?
  • The Fed was created in 1913 to provide liquidity to prevent financial panics, such as in 1907, which could turn into a real sector crisis. However, since the economy is complex and can not be micromanage by turning dials and nob. This is why the Fed consistently gets it wrong. For example, the great depression, the Internet Stock bubble, the housing bubble to mention a few. From 1836-1913 the USA had no central bank and prospered, including the American “Gilded Age” and free bank era.
  • The people who work at the Federal Reserve are well-intentioned economists. It is the idea that an economy can be steer from a top down approach that is crazy. The road to hell is often paved with good intentions.

What is the treasury?

The treasury is in charge of revenue and finances. That is really it. Think of the treasure like the bean counters and the Federal Reserve the wheeler and dealer bankers.

Does the Federal reserve create money?

Yes. The Chairman of the Fed might not operate the printing press, but he expands the money supply more broadly define with open market operations. The key point here is the money supply is more than just paper money.

What is money?

Anything people use as a medium of exchange. It can defined as gold, or anything people want to trade with. The economic definitions of M1, M2 and M3 which are modern definitions that take into account highly liquid deposits.

What about the idea the Federal reserve makes a profit, therefore is it good?

The idea that the Fed is a profit center is again wrong. They have made an accounting but not economic profit. They do not create anything. It is accounting and security trading –  buying and selling. In my mind this is not value added profit. The Fed’s profit means it takes money and ‘crowds out’ money from the private sector and gives it to the public sector. The Federal Reserve bank is evil any way you look at it.

I know that is strong language, but they literally have screwed things up and made millions suffer their inept policies. It has not stopped business cycle so it is time we abolish the Federal Reserve Bank and replace it with sound money. Sound money being optimally free money or at least replace fiat money with a gold standard.

 

 

 

 

5 Replies to “Treasury Vs. Federal Reserve”

  1. The Fed pays 98% of its income to the government.
    Could we then conclude that when the FED purchases US treasury the Government is borrowing a next to 0 cost.

    One could also conclude that its not really borrowing but its more like printing. (Electronic money credits)

    The US is basically never revenue constrain as long as the Dollar is accepted as a serious medium.

    Am I going wrong on this?

    1. Mark Biernat says:

      Your logic is correct. The Fed – no matter how aloft they seem, is nothing more than an indirect revenue generator that promotes the expansion of government.

      A Federal monopoly of money (either the Treasury or the Federal Reserve) gives Washington a blank check to electronically expand the money supply, which is basically printing money.

      What does it matter if the government prints money to pay its bills or if bank accounts have more money in them from monetary policy, and the value of the debt becomes less. It basically is the same, it is an empowered government at the expense of the citizens. Printing money is a form of taxation.

      I saw two videos, one of Ben Bernanke saying the Fed essentially is printing money with quantitave easing, and one where he said it not printing money. It was a great video and I wanted to put it on the site, but I can not find it now.

      However, all semantics aside, yes the Fed creates money out of thin air. It does it in a round about way but it the same as printing money as banks have more money in their account. It is money credits in their accounts.

      Sound money is more optimally a monetary system that allows for competing currencies or perhaps a gold standard without the Federal reserve. The rate of gold expands about 2% a year and the world gold supplies are pretty well estimated. Using gold is an old monetarist argument to keep government in control and the money supply expanding at a steady rate so expectations are steady and businesses can plan and go about their business.

      However, free money in which the supply of money is controlled by the demand for money would unshackled money from central control and planning, and hence lessen the business cycle. Prices could adjust more naturally and there would be less non price rationing and disequilibrium such as unemployment.

      Many people have the same idea about the Fed as they do about the income tax. That is, just because we have it today, means it has always been this way and society would collapse without it. Of course US history proves wrong on both accounts. The USA had little direct taxation much of its history and less control over the money supply. Consider this, when American was at its ‘gilded age’ of wealth and the country grew rich exponentially faster than the rest of the world – this was when the rest of the world had direct taxation and central banks while the USA did not. It would be a stretch to say that was the only reason, but at least in part it was because of this.

      This is not some high in the sky economic theory but something that has been used in the past and economics from the Austrian school of thought and classical liberalism support.

      Money not controlled centrally would go a long way to lessen business cycles. The idea that the Fed is the lender of last resort has been corrupted to mean that they should steer the economy with the central planning of money.

  2. Thanks Mark.

    This a subject that is very basic and important to all but is unfortunately still not understood by most American. The US is perceived as the most Capitalist system in the world but it provides very little information on all the major monetary and financial and fiscal structural changes that have progressively contributed to the debasement of its currency and the astronomic entitlement debt of its Government since 1913.

    1. Mark Biernat says:

      The problem with any entitlement or way of operating, including debt creation and currency devaluation, once you give it to someone or people accept that this is they way things are done, it is very hard to take it away.

      1. Alan Roberson says:

        Wonderful comments and I couldn’t agree more, “You will never be able to fire Santa Claus”

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