# the Federal Reserve and the US debt. **URL:** \ **Category:** Factual Questions\ **Created:** [January 27, 2011, 7:49pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225 "2011-01-27T19:49:43Z")\ **Posts on this page:** 8\ **Page:** 1
**Author:** ![blood63](https://avatars.discourse-cdn.com/v4/letter/b/97f17d/32.png) [@blood63](https://boards.straightdope.com/u/blood63)\ **Post date:** [January 27, 2011, 7:49pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/1 "2011-01-27T19:49:43Z")
I have just learned that the federal reserve is privately owned (by other banks) and I have a few questions. 1. Does the federal reserve control the US currency? Can it call the mint and order 1 billion dollars more if it had a borrower for that money (say another bank?) 2. If the federal reserve makes money lending money, what incentive does it have to stop lending money and reduce debt? After reading this, I think I am missing a bit of knowledge regarding economics. After all, the government is the one who controls the national debt. Right? Does the federal reserve get its instructions from Washington? So confusing. No wonder people don’t know who to vote for. ---
**Author:** ![Duckster](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/duckster/32/1244_2.png) [@Duckster](https://boards.straightdope.com/u/Duckster)\ **Post date:** [January 27, 2011, 8:28pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/2 "2011-01-27T20:28:09Z")
A good place to start is on the Fed’s own\*\* government web site\*\* FAQs page —\> [http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm](http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm) Note this part: > [@](#): > > The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [January 27, 2011, 8:36pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/3 "2011-01-27T20:36:06Z")
Cecil’s take on the [Federal Reserve](http://www.straightdope.com/columns/read/1214/who-owns-the-federal-reserve). > [@](#): > > You’re not going to like this, Rob, but here are the facts. Fact number one: the Federal Reserve System (hereinafter the Fed), although created by Congress, is answerable not to the public but to itself. The system is nominally controlled by member banks, i.e., all national banks plus some state banks, but real power rests with the board of governors in Washington. Fact number two: the Fed’s chairman (currently Alan Greenspan) and board of governors are appointed for long terms by the president but can’t be removed by him and don’t report to him or anybody else. Fact number three: it was done that way for your own good. > > Ha, you say. If this were really a democracy, the Fed would be a public agency just like the post office. Hmm, maybe you begin to see what the Fed’s inventors were up to. (Cecil realizes that strictly speaking the postal service itself is no longer a public agency. Don’t distract me.) One may make the argument that we need the Fed because we’re a democracy > > Truth is, the Fed was purposely insulated from the petty concerns of the public, including, to be blunt, whether they can afford to eat. “It’s made complex so nobody will understand it,” one insider told me. The Fed’s chief aim is the stability of the banking system and the dollar and, by extension, the U.S. economy. Were it otherwise, politicians would be tempted to manipulate federal monetary policy for their own gain. For example, an incumbent president might lower interest rates in an election year to boost the economy temporarily and improve his chances of re-election, even if it meant higher inflation down the road. > [@](#): > > But that’s the least of it. Cecil on occasion hears from some genius who thinks he’s come up with the solution to the national debt: print enough money to pay the whole thing off! This idea is, of course, completely nuts. If you double the amount of money in circulation without increasing the amount of underlying wealth, all you’ve done is make your currency worth half as much. Nonetheless governments all over the world (including the U.S. in pre-Fed days) have pulled stunts like this repeatedly, setting off runaway inflation and wrecking their economies. The Fed’s ingenious system of monetary controls means it can’t happen here, at least not as easily. -XT ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [January 27, 2011, 8:36pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/4 "2011-01-27T20:36:43Z")
The Federal Reserve is nominally owned by the big banks, but it is controlled by the government, in that the Board of Governors is appointed by the President and confirmed by the Senate. The Federal Reserve does not control currency as such, they control the “money supply” by adjusting the interest rates at which they lend to their member banks. Higher interest rates mean banks must pay more to borrow money, which means they must charge more to lend money, which means fewer people borrow, which decreases the money supply. Lower interest rates encourage borrowing, increasing the money supply. The precise mechanism by which they lower and increase interest rates is pretty complicated and involves auctioning Treasury securities and I don’t exactly understand it myself. As for hard currency (the stuff printed by the Mint and the Bureau of Engraving and Printing) – this represents a tiny, minuscule fraction of the actual money moving around. Banks which need currency order it from their regional Federal Reserve Bank, and send an electronic wire transfer to pay for it. The Fed works with the Department of the Treasury to ensure that enough is printed and minted to meet the demand of local banks. The government does control the national debt, in that Congress decides how much to spend and therefore how much to tax and borrow. The national debt isn’t directly related to what the Fed does; the Treasury is in charge of collecting taxes, issuing bonds, and paying debts on behalf of the federal government. ---
**Author:** ![XT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/xt/32/456_2.png) [@XT](https://boards.straightdope.com/u/XT)\ **Post date:** [January 27, 2011, 8:39pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/5 "2011-01-27T20:39:44Z")
[Here](http://www.straightdope.com/columns/read/719/how-much-money-is-there) is another article from The Master on the subject of how money is created: > [@](#): > > Coins and paper currency are economic petty cash. At the end of 1990 the total amount of currency in circulation was $246 billion. The total amount of money, by the strictest definition (what economists call M1), was $825 billion. M1 money is whatever you can spend right now–currency plus checking deposits. A more inclusive estimate of the money supply (M2–includes savings accounts) was $3.3 trillion. > > While currency is still the most popular method of payment, it accounts for only 1 percent of the value of all transactions. (The big money travels via “wire transfer” between banks–0.1% of the transactions, but 80% of the dollars.) People sometimes say inflation occurs when the government “prints too much money.” Nonsense. The amount of money actually printed is inconsequential. > [@](#): > > Nobody is in charge of deciding how much currency to issue. The Treasury Department prints it, but the amount actually distributed to the public is purely a function of consumer demand. If people want more greenbacks, they draw down their checking accounts and get them. The government prints as much as people want. > [@](#): > > The government doesn’t create money, private banks do. Banks create money by making loans. Suppose I put $100 in my checking account. The bank bets I won’t draw it out for a while and lends $85 of my $100 to legendary cartoonist Slug Signorino. Slug blows the $85 on Captain Morgan and lottery tickets at McGinty’s. Now McGinty’s has $85 in folding green and I’ve got $100 in checking that theoretically I can draw out at any time. Behold, the local money supply has bloomed from $100 to $185. > > It doesn’t stop there. If McGinty’s puts the $85 in its checking account, its bank will lend out most of it, increasing the money supply even more. That’s how the banks find the cash to lend to Uncle Sam. They lend it out, the government spends it, the recipients put the money in the bank, and the banks lend out that. The total amount of money that banks can create is regulated by the Federal Reserve. Too much money (not too much currency) = inflation. > [@](#): > > The Federal Reserve System is not part of the government and is answerable to no one. (I know you didn’t ask, but lots of other people have.) By “government” I mean the executive branch. The President does appoint the Fed’s governing board but the members serve for long terms and can do as they please, free of political interference (in theory). The Fed is a quasi-public agency created by Congress and as a practical matter does not lightly defy the President. -XT ---
**Author:** ![Elendil\_s\_Heir](https://avatars.discourse-cdn.com/v4/letter/e/7cd45c/32.png) [@Elendil\_s\_Heir](https://boards.straightdope.com/u/Elendil_s_Heir)\ **Post date:** [January 27, 2011, 8:41pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/6 "2011-01-27T20:41:11Z")
Arthur Burns, appointed Fed Chairman by President Nixon, said of his role in keeping the economy on an even keel, “The Fed’s job is to take away the punch bowl just as the party’s really getting started.” ---
**Author:** ![MandaJo](https://avatars.discourse-cdn.com/v4/letter/m/ac91a4/32.png) [@MandaJo](https://boards.straightdope.com/u/MandaJo)\ **Post date:** [January 27, 2011, 8:55pm UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/7 "2011-01-27T20:55:24Z")
> [@blood63](#): > > 1. If the federal reserve makes money lending money, what incentive does it have to stop lending money and reduce debt? In addition to the political appointees mentioned above, the Fed is controlled by _bankers_. Bankers hate inflation worse than anything. Unexpected inflation makes the money they loaned out five years ago worth less when it is repaid. Bankers hate inflation even more than your grandmother does–at least her social security gets a COLA. Bankers hate inflation way worse than governments, and fight it much harder. Congress would be much more likely to loan money out willy-nilly to make people happy today. Bankers have to protect the value of the money that is already out there. ---
**Author:** ![dtilque](https://avatars.discourse-cdn.com/v4/letter/d/d6d6ee/32.png) [@dtilque](https://boards.straightdope.com/u/dtilque)\ **Post date:** [January 28, 2011, 10:08am UTC](https://boards.straightdope.com/t/the-federal-reserve-and-the-us-debt/569225/8 "2011-01-28T10:08:22Z")
> [@blood63](#): > > 1. If the federal reserve makes money lending money, what incentive does it have to stop lending money and reduce debt? The Fed does sometimes make money, although it’s technically a nonprofit institution. Some money it makes is paid to it’s member banks as dividends and the rest is turned over to the US Treasury. Out of $81 billion it made last year, $78.4 billion will go to the Treasury. Both those numbers are record highs, by the way.