The Federal Reserve System Repays the Treasury Most of the Interest It Collects From the Treasury

Recently by Gary North: When Frankie Met Johnny: The 1934 Meeting of Roosevelt and Keynes

Most critics of the Federal Reserve believe that the central bank earns enormous profits as a result of its legal authority to create money. I have tried to correct this misconception for almost 40 years. I keep trying.

The Federal Reserve System does create money to buy U.S. Treasury debt. The Treasury does pay interest to the Federal Reserve on this debt. But the FED does not keep most of this money. It repays the Treasury, after deducting operating expenses: a few billion dollars per year. In 2008, this was a little over $4 billion, or 13% of revenues.

Here is the latest document from the FED: The Federal Reserve Banks: Combined Financial Statements as of and for the Years Ended December 31, 2008 and 2007 and Report of Independent Auditors. The columns appear on page 2. The 2008 figures are in the left-hand column. The 2007 figures are in the right-hand column. According to this audited report, the FED paid the Treasury over $31 billion in 2008.

Yes, the FED is audited. It is audited each year by a large accounting firm. This job rotates each year to another firm. The FED determines what the firms are shown and what they are not shown, e.g., the actual gold held by the FED on behalf of the U.S. government. (The firms are not shown the gold. No agency is ever shown the gold, including Congress.)

The author of the typical anti-FED article does not know this. He assumes that the FED pockets all the money. It doesn’t.

Some of the articles insist that the Rothschilds own the FED. They don’t. Member banks do.

Almost none of the authors analyze the FED as (1) the enforcing arm of a huge cartel and (2) lender of last resort to the largest banks. Yet this is the heart of the Federal Reserve System’s function. It protects the largest banks. It always has.

It restricts entry into the field. This is another feature of every cartel: government-restricted entry. This protects above-market returns for members of the cartel.

This means that the Federal Reserve System is a government agency. Anyhow, the Board of Governors is. Look at its site. Its suffix is .gov. The regional banks are all .org.

Turn to any first-year college textbook in economics. Read the chapter on the economics of cartels. Then read the chapter on the Federal Reserve System. There is a total disconnect. The chapter on cartels describes the cartel as benefiting the members by reducing competition. The more free market—oriented textbooks will describe the cartel as reducing efficiency by reducing consumer choice. It may even dispute the claim of every cartel, that it furthers the public good.

The chapter on the FED describes it as an agency favoring the public good. It does not mention the analysis on the chapter on cartels. Yet the analysis of the chapter on cartels fits the FED quite well.

There is widespread ignorance regarding the FED. If you want to understand how the FED works, and what the economic implications are, read these free books on the FED, written by Murray Rothbard, a free market economist who really did understand the FED. Begin here: The Case Against the FED. Then read his textbook on money and banking, The Mystery of Banking. Then read his history of the origins of the FED. See Part 2 of his History of Money and Banking in the U.S.

Finally, read the booklet published by the Federal Reserve Bank of Chicago, Modern Money Mechanics. The booklet shows how the fractional reserve process works. It’s straight from the horse’s mouth! (It has been out of print for many years. Hooray for the Web!)

October 26, 2009

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North