Federal Reserve System Cliff Notes

by Guest Author Roger Erickson

Let me try to explain the origins of an increasingly bizarre and buggy system in need of complete overhaul. In 1913 congress outsourced to the quasi-private Fed – our Central Bank, or “CB” – the responsibility for monitoring and managing an equitable supply of currency nationwide.  Up to this point money in the U.S. had been a mix of private bank notes and government-issued notes.  Under the new CB system and all others like it, public governance accounts for public finances by creating currency and injecting it into a double-entry accounting system, but only as a one-sided entry. This then requires inventing ways to drain the inevitable “bank reserves” created as a consequence of double-entry bookkeeping – the Holy Grail of banking methodology.

Such bank-reserve drains typically take the arbitrary form of pretending to “sell” Treasury Security bonds to the CB, to mitigate the consequence of injecting single entries into a double-entry system.

As an arbitrary method of paying the salaries of the private CB staff doing the actual bookkeeping, an extra surcharge is added to the Treasury Securities, making the bonds, in effect, interest-bearing.   The size of that surcharge has sometimes been fixed by Congress, and sometimes allowed to float at auctions where our Fed re-sells the bonds to it’s private bank members instead of simply holding them in house.

These comical arrangements led to instances where the surcharge earned by the Fed grossly outraced public decency of salaries, triggering the bizarre “solution” where net fiat currency “profit” earned by the Fed yearly is “returned” to the U.S. Treasury, the issuer of fiat currency – untouched and unused by the public!   Surely all agree that a fiat currency issuer has no need to receive it’s own fiat as pretend revenue – or fiat profit!  To legends of Emperors without clothes, we may add, courtesy of our Fed, the legend of Fiat Issuers without Fiat Profits (or with, if you prefer; it hardly matters).

To streamline this comical scenario, couldn’t the Central Bank accountants – who were once required but are themselves now replaced by spreadsheets – simply be salaried employees in a department of the Treasury Agency?  And, couldn’t the pretend “bonds” required to satisfy double-entry accounting methods simply bear zero-interest?  Bingo!

Why wasn’t that simple scenario pursued from the start?  Habit, lack of imagination, and, certainly most importantly, the self-interest of an active banking lobby accustomed to salaries much higher than those of public servants.

By current bizarre practice standards, the only way to acquire the currency surcharge to pay off the invented public bonds, with interest, is to sell extra public bonds to the Central Bank.  This entirely explains the so-called national debt, and why that dimensionless number grows constantly.  It is a semantic oddity arising entirely from archaic design – in short, a system bug.

Debt is actually a completely incorrect name for it.  What that number actually represents is the accumulating difference between the amount of fiat currency that’s been put into circulation and the amount that’s been taken back out via taxes.  It’s not ‘owed’ to anyone, it’s just the accumulating record of fiat currency supply growth required by a $US-using population (foreign & domestic) growing in both size and per capita transaction rate.

Astute readers could come up with endless, far leaner, more elegant, ways of handling public accounting for public fiat currency supplies, but that’s a topic I will leave to others to explore.

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