Money FAQS

As an author of a money book, it's no surprise I get asked from time to time about our money.
Here are a few such examples:

1. How is money 'created' and how does it flow between the Treasury Department, the Federal Reserve, and the banks, etc?
   
   Basically, every Monday the Treasury Dept auctions IOU's (i.e. bills) which mature in 13 or 26 weeks. They sell other longer notes at specified intervals throughout the year. Investors buy these pieces of paper (now all digital) on which the government promises to repay a certain amount of money with interest. Most are bought by private investors. To this point everything is legitimate. But if there are not enough investors to raise all the money the government needs, the Federal Reserve Corporation (Fed) gets involved and buys the remainder. This is the part that's the real problem. The Fed writes a check (again all digitally) to the US Government. But there is nothing that represents any labor or capital that is transferred to the US Government when this check clears the bank. Because the Fed is the check clearing agency, no one knows that there was nothing in their checking account when they wrote the check. The Fed increases their assets (they now hold a Treasury Note) and the US Government now has a few more billion dollars (Federal Reserve Notes) in their bank account. This site has a fairly good description of the details- of course it doesn't talk about the ones the Fed buys! http://www.ny.frb.org/aboutthefed/fedpoint/fed41.html
   
   Recently the Fed has had to buy significantly more of this debt which has caused their assets to skyrocket. (See Rescue to the Rescue to the Rescue ). However the percentage of their debt comprised of US Treasury securities has plumetted from the 90's to around 50%. This means they have bought non US Treasury securities at an even greater rate.
   
   Money is also created when individual banks make loans. This part is fairly well explained in Modern Money Mechanics.
2. When you say the Treasury Dept auctions bills, where do they get the funds backing the bills? Or are the bills nothing more than paper?The bills are uncollateralized. Another setting may make the audacity of this whole scheme more striking (and clear). If you go the bank for a loan, you give the banker a signed and notarized note and the banker gives you money. In effect, the bank buys your note. They are the creditor, you are the debtor. In this case the Treasury Dept. is the debtor giving people notes and the T-bill investors are the creditors loaning the US their money. Every time a T-bill is sold by the US Treasury, the US debt is going up. T-bills and notes are in reality no different than the note you give the bank when you take a loan.
   
   The big difference, of course, is that banks typically require collateral before giving you money (i.e. buying your note). They won't accept a note from you that is only backed by your faith and credit. Not so with the US Government. Not only do people accept (i.e. invest in) uncollateralized notes from the US Government (Treasury Dept), they stand in lines for the opportunity to do so. Instead of talking about loaning their money to Uncle Sam, people say they are investing in, or buying, T-bills as if they were acquiring the productive output of someone's labor. We buy cars, we buy houses, food or gold that someone mined. In each case we are giving money in exchange for the fruit of someone's labor. When we extend the fruit of our labor to someone and do not receive the fruit of their labor in exchange, this has historically been called a loan, not a purchase. In the case of T-bills, people exchange the fruit of their labor for the IOU's of the US Government and under the linguistic revisionism of the Federal Reserve, they now have a debt-assets - See Two Faces of Debt . I discuss the importance of semantics and strict construction of words in a little more detail in Dollar Noncents.
3. When you say the Fed buys the left-over’s, who is the Fed? Isn’t this like a little boy making phony lemonade to sell on the street curb and then selling the left-over to his dad?
   The Fed is the Federal Reserve Corporation. They are a private non-governmental agency (This is all according to their own documentation.) which has been granted monopoly powers to buy notes of the US Government with nothing - well they use their own notes, but unlike the US Treasury notes, they will never have to pay on their notes. On the other hand, the T-bills and notes issued by the US Treasury Dept are real, they are very real. They are a real as the note you gave the bank when you bought your house - if you have a loan. They represent obligations of the US Government. The notes we use as currency are not notes of the US Government, they are notes of the Federal Reserve Corporation. The process of converting US Treasury notes into Federal Reserve Notes is called monetizing debt - turning debt into money.
4. Then the Fed writes a check to the U.S. Gov- Isn’t the Treasury Dept who started the process a department of the U.S. Gov?
   Yes, it is. The Fed is the check clearing agency - that why Federal Express is called Federal Express. In the old days of paper checks, they moved the checks from the Fed bank where it was cashed to the Fed bank where it was drawn.
   According to the Fed,
   

   When a bank receives a check for deposit, it provisionally credits the account of the check depositor and later collects the funds from the bank upon which the check is drawn. Rather than sort all the checks and send each one back to the bank it was drawn upon for settlement, depository institutions transfer many of their checks to Federal Reserve Banks for collection. In turn, Reserve Banks pay the depositing banks for the total amount of the checks, and then collect the funds from the banks on which the checks are drawn. The Federal Reserve processes about one-third of all checks in the United States. (from http://www.ny.frb.org/aboutthefed/fedpoint/fed08.html)
   
   

   If you were the check clearing entity, you could write a check on your bank account and when it came across your desk in the process of being cleared, you would simply credit the depositing account and no one would ever know that there never was any money in your account or that you never even had an account to begin with. The depositor would be happy because the money showed up in their account. You could buy anything in this way with no labor at all. This is how the Federal Reserve "buys" T-bills and notes or other commercial paper securities.

A little complicated? Absolutely, it's supposed to be. By creating an elaborate process of smoke and mirrors involving exchanging each other IOU's, everyone is kept blissfully ignorant, trust is maintained in the faith and credit of the US Government, and no one knows (or cares) that the wizzard is just a fat, balding con man. WHERE"S TOTO??
Frankly, this is so hard to understand because it's too simple, fraudulent, and stupid be believed. But aren't the boldest cons often the most likely to succeed!