The Federal Reserve Still Going Wrong at 100

By:  Jack Kenny
The Federal Reserve Still Going Wrong at 100

At 100 years old, the Federal Reserve is still fulfilling its intended mission to control the nation’s money supply — empowering big banks at the expense of average Americans.

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

The statement above was made by Ben Bernanke, then one of the seven governors of the Federal Reserve Board, in a speech to the National Economists Club on November 21, 2002. Bernanke, who will retire in 2014 after seven years as chairman of the Fed, has been following a policy of “quantitative easing,” keeping interest rates low and expanding the money supply with monthly purchases of $85 billion in bonds, including $45 billion in mortgage-backed securities. That raises again the question that has perplexed both the public and members of Congress for decades: Where does the Federal Reserve get the money to make these purchases? Consider the following exchange between Chairman Bernanke and Rep. Keith Rothfus (R-Pa.) at a July 17, 2013 hearing of the House Committee on Financial Services

Rep. Rothfus: Simple question that I have is when I have someone in my district that is going out to buy a Treasury bill, an individual is looking to make an investment, they go to their bank, they go to their broker, they have $1,000 or $5,000, and they get a bill. Where does the Fed get its money to buy its Treasury bills?

Chairman Bernanke: When we buy securities from a private citizen, we create a deposit in their bank, and it shows up as reserves. So if you look up our balance sheet, our balance sheet balances. We have Treasury securities on the asset side. On the liability side we have either cash or reserves at banks, and on the margin that’s what has been building up as excess reserves at banks.

Rep. Rothfus: You create the reserves?

Chairman Bernanke: Yes

Rep. Rothfus: Is that printing money?

Chairman Bernanke: Not literally.

“Not literally” because our paper dollars are literally printed at the Treasury Department, not the Federal Reserve. What the Fed has is, as Bernanke noted in that 2002 speech, not the printing press, but “its electronic equivalent.” The Fed creates the “money” it uses to buy Treasury notes and other securities and transfers the IOUs as “assets” to its 12 regional banks with a few strokes of computer keys.

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