What would happen if the US decided to punt the FED?

I don’t want to get into a debate about whether or not the US will ever be able to pay off its debt in the current system.

What I want to discuss is, what would actually happen?

A couple of scenarios I can think of (feel free to add more).

  1. the Congress decides to issue money, taking the FED out of the loop. They pay the FED one lump sum in US money, and close down the entire Federal Reserve System.

  2. As an add-on to the above, Congress tells the FED to piss off. No lump sum payment. The FED has no standing army. How could they collect?

Either way, the US is out of debt, and can move forward without a privately owned central bank. Since the FED is a privately held bank, any losses would be absorbed by private parties, not the US.

As long as the US is physically in existence, it has value. The treasury would take over the function of the FED.

I know the central bankers (and those that feed off it) would not like this, but from a practical view, as long as the world viewed the new US currency as “legal tender”, why couldn’t it work?

The debt is not held by the FED, it is held by the Social security trust, private individuals and other countries. Sovereign default would lead to economic turmoil and a economic reality that would make the great depression look like a vacation.

Your retirement money owns almost all of the debt, what would happen to you if that went away.

It is only viewed as a safe investment due to the belief that it will be paid back, once that trust is destroyed it would not be rebuilt within our lifetimes and being in debt would become much more expensive.

The fact that the FED exists doesn’t even come into play.

Because it depends on faith. The idea that one can use a $100 bill to purchase goods and services, is all based on faith.

how can you say the fact that the FED exists doesn’t even come into play, when the US pays the interest on the money the FED “loans” it? That is the national debt.

The FED has never had an audit, so what assets it has to cover what it has loaned is unknown. But from my eyes, it looks like a giant ponzi scheme, and can crash at any time. The only way it stays afloat is the belief that the money they are creating out of thin air actually exists.

When they pull the plug, it will be ugly. Unless of course, there is a plan B.

So, just to be clear, as long as people accept $100 bills as currency, there’s no problems?

That’s not how the Fed works. Treasuries are sold to primary dealers. The Fed cannot buy treasuries directly from the government. They can only buy treasures in the open market. (See open market committee rules.)

The Fed “buys” treasuries from the open market most commonly by taking treasuries from banks and giving then reserve credits.

The USA is constitutionally prohibited from defaulting.

If the Fed went under, so would almost every bank I the country. The Fed is where banks deposit theiir money.

The existence off the Fed has resulted much fewer"runs on three bank"and bank panics and financial crises than we had historically before the Fed.

The treasury could take over the function of the Fed vet the treasury is subject to political pressure (to raise treasures or lower rates, ignore bubbles or even promote them) the Fed is more insulated from politics.

What form of money doesn’t depend on faith?

The OP has evinced no particular interest in reality, but for anyone who doesn’t know how the Federal Reserve System works…

The Federal Reserve System is a government agency. It was created by act of Congress. It can be destroyed at any time by act of Congress.

The Fed considers itself “independent”, which is to say that the major officers that serve on the main decision-body committee – the seven members of the Board of Governors – serve terms that are unrelated to the political cycle. If a new president is elected, we always have new secretaries for Treasury and Defense and so on, but the main leadership of the main Fed board remains unchanged. The intent here was to build a sort of buffer between the power of creating new money and all other major executive powers. The hope is that the varying tides of political fortune won’t interfere with the “independent” Fed implementing the most proper policy with respect to the US money supply.

But the Federal Reserve System was created by act of Congress, and can be destroyed at any time by act of Congress. It is not a “private bank”.

But sometimes people (like the OP) say that the Fed is private. And I’ve heard that banks have shares in the Fed, and receive dividends based on those shares.

The Federal Reserve System is a government agency.

There are twelve regional Fed banks spread across the country. These regional banks do not have any independent power to decide the most important issues in US monetary policy. They exist on the whim of Congress, and can be eliminated by Congress along with the rest of the Federal Reserve.

It is these twelve regional banks that have quasi-private status, in the sense that the regional banks have “shares” and pay “dividends” and all that. These regional banks are not, however, genuinely private institutions. Genuine private banks can pay dividends according to the discretion of their management. The regional Fed banks are legally bound to pay dividends (because the Fed is a government agency, which exists according to federal law). The owners of these shares are private banks in the US. These private banks do not have a choice of whether or not to buy these shares, but are forced by law to own shares (because the Fed is a government agency, which exists according to federal law).

Suppose you wanted to start your own private bank, SDMB-Poster Savings and Trust. In order to start this bank, you’d need to follow all applicable federal and state laws. One of those laws that you would have to follow is to purchase stock in the relevant regional bank.

You don’t have a choice of whether to do this. You are required to do this, by law.

These shares do not operate like the shares of any other legitimately private company. These shares cannot be sold to other people. They cannot be traded. They cannot be pledged as collateral. They are, effectively, a barrier to entry for anyone like you who wants to start a new bank. If you want to start a bank, you have to have sufficient funds to jump through all the hoops. This is one of the hoops you have to jump through. After you jump through the hoop, you are given shares that you cannot do anything with but sit on.

As a sort of compensation for jumping through that hoop, the shares pay dividends. The amount and timing of these dividends are determined by law.

The Federal Reserve System is not a private bank.

There are people out there in the world who have heard that shares for the “FED” somehow exist, and that these shares pay dividends. These people, who know literally nothing beyond those two facts, jump rashly to the conclusion that the entire Federal Reserve System is a private bank. One can only assume that these people have never heard of the original Federal Reserve Act that created the entire institution.

What about the US government debt that the Fed holds?

Let’s say that you create your bank, SDMB-Poster Savings and Trust. This bank pays all of its profits to you personally. And let’s say, also, that you as an individual have issued debt to various people around the world, for the sake of easy numbers, let’s say that you’ve issued 14 trillion dollars worth of debt around the world.

You owe interest to all of the people who hold this debt. This interest is, for the most part, a genuine liability.

However, it just so happens that in the normal course of its operations, your very own bank has purchased 2.8 trillion dollars worth of your total debt. Like a responsible debtor, you make all of your interest payments to the holders of your bonds around the world. So you make a payment to your own bank for the interest on 2.8 trillion dollars worth of bonds. But your bank, under your control, takes that interest and (after any relevant expenses) immediately returns the interest payment to you.

Question: Is the debt held by your own bank a genuine burden to you?

Answer: No. No, it is not.

Since you created the bank, you could destroy the bank at any time. If you decided to destroy the bank, the assets held by the bank – including those bonds you personally issued – would be returned to you after any relevant costs were paid. And when you received your own bonds back? They would be meaningless. A bond issued by you, held by you, no longer has any legitimate meaning. At that point, it’s just paper. You could tear it up whenever you wanted.

Congress could, at any time, dissolve the Fed and return the Fed assets to Treasury to be dissolved. While this would, technically, lower the amount of “debt held by the public”, it would not change the genuine debt-burden that must be financed by all taxpayers of the United States. It would be a financially meaningless operation. Congress could dissolve the Fed, and dissolve the Treasury debt held by the Fed, and the result would be effectively nothing for the US taxpayer.

Why would anyone advocate collapsing the Fed into Treasury then?

A person would have to be operating under tragically deep ignorance to believe that dissolving the Fed back into Treasury would result in reduction in the real debt burden. But it’s understandable that if someone is so bloody ignorant as to believe the Fed is a private bank, that the United States repudiating the debt of that private bank would be beneficial.

However, if the Fed were genuinely a private bank, it would be blatantly unconstitutional to declare that the debt held by the Fed would not be relevant. This time we’re dealing with constitutional ignorance.

If the Fed were truly a private bank, it would be contrary to the highest law of the land for Congress to repudiate that debt.

But the Fed is not private. The Fed is a government agency, which is why Congress could dissolve it at any time.

So now can we answer the OP’s question. What would actually HAPPEN if the Fed were to be dissolved?

Let’s answer this question in as responsible a manner as we can. Fedwire can transfer literally trillions of dollars every single day, so let’s assume that we’re dissolving the Fed into Treasury in a sufficiently responsible manner that we’re not destroying the entire US/world payments system at the same time.

What would need to happen is for Treasury to take over these clearinghouse systems. Treasury would need to keep track of which banks are holding US bank reserves. Treasury would need to have some policy-making apparatus to decide when to create new money, and when to destroy money – or alternatively, when to raise interest rates and when to drop them. Treasury would need to have some sort of administration for the bank regulation functions currently done by the Fed.

Treasury would, in other words, have to do all the operations of a central bank.

There is no point whatever in doing that. We already have the necessary administrative operations of a central bank done by a government agency. This government agency is called the Federal Reserve System. Collapsing that agency into Treasury does not make that agency’s very important duties go away. There is no nation on earth that does without a central bank. I suppose that, given enough time and preparation, Treasury could slowly release these various duties to the private sector. That would be… complicated. It would take a long time, and would require an even longer post to explain how that (completely hypothetical and politically impossible) operation would happen. Not really worth it.

You can’t be serious. Congress in charge of the money supply ?

As Hellestal pointed out in his excellent post, Congress is already in charge of the money supply. But they in their wisdom (:eek:) have chosen to delegate that authority to a government agency.

We’ve set up and dissolved central banks in this country before. The current Fed is not the first system that Congress has chartered. (And indeed its structure and practices have changed a bit since the original Federal Reserve Act over a century ago.)

A quick glance at economic history in the United States makes it clear that having a nominally independent central bank is better than not.

We get a lot of gold-bugs, Illuminati nuts, Hyperlibertarians, Audit-the-Fed, and Just-Print-More-Zeroes-How-Much-Does-Ink-Cost? types here at SDMB, each more ignorant and outrageous than the one before.

I declare the contest over. This OP wins the first-place prize.

More in the way of ‘general questions’ maybe, but what’s with writing ‘Fed’ (short for 'Federal, an abbreviation not an acronym) in all caps?

That is a falsehood. By law, the Federal Reserve and its regional banks are audited every year by an independent party.

The Federal Reserve’s finances are quite well known. You can find its balance sheet online.

What’s happened here is you do not actually know what the Fed, the national debt, or money is.

The Greenbackers are coming out of the woodwork.

What monetary system doesn’t depend nearly entirely on faith? At their hearts, monetary systems are basically a form of standardized, structured barter. In ancient times, you might pay your neighbor 3 goats, 2 chickens and an omer of barley, and he and his sons would come and build you a barn. In the money world, you’d pay him some value in shekels of silver, gold or copper. These specific metals are chosen due to their rarity and beauty, not because of any inherent value. In other words, the monetary system either evolves or is set up in such a way that X many shekels of silver is equivalent to 1 gold shekel, and so many copper shekels is equal to one shekel of silver, because of the relative rarity of the metals.

That’s why having a gold mine is considered so lucky- you’re literally generating money out of the ground. Hopefully not too much, or your exchange rate between the gold, silver and copper would change, making your gold worth less. This is also why iron was not often used- it’s extremely useful, but also so common as to not be worthwhile in a monetary scheme.

But it’s all ultimately based on faith- faith that when someone pays you in shekels of silver, that you can turn around and pay someone else those shekels in exchange for goods and services.

Modern day money just skips the scarce metals, and sets the various currencies up against each other in terms of valuation, and rather than literally digging the money out of the ground, it’s created by the Fed and other national monetary regulation agencies. Again, if there’s too much, your money is worth less.

You’re just replacing your faith that you’ll be able to trade 65 shekels of of copper with someone else for a Big Mak with the notion that you’ll be able to trade $4.68 with someone in exchange for a Big Mac. (values are rough estimates).

So what sort of monetary scheme do you advocate?

I shouldn’t presume to speak for Mr. Farnaby, but IIRC the Alabama School is very laissez faire about money.

Wells Fargo Bank could issue its own banknotes, as could Wendy’s Hamburgers, as could you or I or anyone at all EXCEPT a government entity. It would be up to each banknote issuer whether their money is backed by gold, Bitcoins, Beanie Babies, or nothing at all. When you’re buying a Wendy’s hamburger, it’s up to you to do due diligence on exchange rates and, if you don’t have exact change, remember to negotiate in advance what sort of banknotes you’ll accept as change.

If fraud occurs — say I try to pass off counterfeit Beanie Babies when you redeem my banknotes — hire a lawyer. The government, too incompetent to issue money and no longer able to steal taxes at gunpoint to support its operations, magically turns into Wisdom Personified when needed to litigate a civil dispute.

None, as far as I can tell. That is my point.

I doubt you would say that if you lived through the Great Depression.

This has nothing to do with my question. If my premise is wrong, fine. Show me where. But I am not here with an agenda. You are.

Just trying to understand what would happen and why we need it.

I am not advocating a gold standard. What I am trying to understand is what would happen if the Federal Reserve was dissolved…

If it is so beneficial, why did the first two banks get shut down? Was Jefferson, Jackson, and anyone else who wanted to keep a central bank out of this country a conspiracy theorist, or did they understand how debt can crush a country?

People are using bitcoins, and they have nothing “behind” them. However, they have a perceived value based on what people are willing to exchange for them.

As for a resource-backed standard, oil makes more sense to me than gold. Gold is fine to own, pretty to look at, but I can’t do anything with it (except exchange it for money).

Everything has a perceived value. But if I was starving, I’d want a few chickens over a few gold coins (unless I was near some place to exchange those gold coins).

Ok. Help me out. Where have I gone astray?

Money - something used as an exchange between two parties to secure goods and/or services.

National debt - the money spent by the US government over and above what it actually collects in taxes. Plus interest.

Fed - the institution that buys Treasuries, then issues that “money” out to the 12 reserve banks.