What is the difference between the U.S. Treasury and the Federal Reserve?
The U.S. Treasury mints the coins, while the Federal Reserve Bank controls the currency and influences the purchasing power in the economy through the use of the interest rate policy tools.
Beyond that definition, I wrote this post is to clarify the confusion circulating about the role and the raison d’être for the U.S. Central Bank and the Treasury.
What is the difference between the Federal Reserve and the Treasury, and why is the Fed seen as both a provider of stability and a nemesis of a healthy economy?
My 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. That is, the Federal Reserve Act passed December 23rd, 1913, and later modified in the Banking Act of 1933 included a dual mandate.
The goal of the Federal Reserve is to “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This state goal of managing the free market opened the door to questionable new role money in the economy.
No longer was it to be a medium of exchange but a policy tool to paradoxically engineer capitalism.
Role of the U.S. Treasury – What is the function of these two organizations? The correct, but non-important answer is the Treasury mints the money, including the paper currency in circulation, and collects the revenue via the IRS. The Treasury is a department of the U.S. government. Read more about the functions of the U.S. Treasury here.
The Federal Reserve bank – In contrast, the Fed is a semi-autonomous organization. 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 U.S. central bank.
Why is the Treasury less subject to criticism compared to the Fed?
It is because the U.S. 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 the President and Congress do this. 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. Central Banking is not free-market economics. I am not expressing a conspiracy theory to say the centrally planned central bank royally screws things up.
Why is the Federal Reserve a failure? – Greenspan and Bernanke tried to help the U.S. economy, but fail. Why? It is because there is a flaw in the economic theory that supports the central bank. The basis of the central banking system is a theory as archaic as the Geocentric orbit theory. The underlying premise is the fallacy that the government can fine-tune the business cycle, and central planning of money is superior to free money.
The Interest rate is the price of loanable funds or money lent and saved. A centrally planned rate will not be as optimal as a market-determined rate. The centrally managed Fed Funds Rate distorts the capital structure as a form of non-price rationing.
What we have learned is that economics is not something that can be managed top-down. Communism, Keynesianism, monetary management of the business cycle are ideas connected to central planning. It would all be better to let the markets work. Nothing is a more explicit 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 roundabout 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 under critical scrutiny.
What is essential 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 more effective supervision of banking in the United States, and for other purposes
- Logically seems to make 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 power. It controls the interest rates. If you control interest rates, then you control the world. In one day, you could push interest rates to 50% or 0%. This means it has much 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 that the Federal Reserve caused WWII. I am not joking. An over-expansion of credit in the 1920s created the great depression, which leads 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 micromanaged 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 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 critical point here is that the money supply is more than just paper money.
What is money?
The definition of money is as anything people use as a medium of exchange. It is as gold, or anything people want to trade with as a medium of exchange. The economic definition of money today is M1, M2 and M3, which 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 are not guided by economic profit. They do not create anything.
Instead, the Central bank buys and sells securities to facilitate economic stability and not with the goal of an accounting profit. In my mind, this is not a value-added organization. If there is an accounting profit from its actions, it 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 have screwed things up and made millions suffer their inept policies. It has not stopped the 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.