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.
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.