-Caveat Lector-
<A HREF="http://www.cofc.edu/~flaherty/interest.html">Myth #7: The Federal
Reserve charges interest on the currency we use.</A> Myth #7: The Federal
Reserve charges interest on the currency we use.
In my experience this particular myth has alarmed more people than any other.
The Federal Reserve is a bank, no? Banks do not lend money for free, right?
Our currency comes into circulation only when the government borrows
currency from the Fed -- at interest -- and then spends it into the economy,
right?. This means we, as citizens, pay interest on the very currency that
we use. Conspiracy theorists believe this is part of the alleged "New World
Order" plot to bankrupt the United States.
What is the truth here? Does the government really pay interest on our paper
money, Federal Reserve Notes? Thomas Schauf of FED-UP, Inc. circulates an
information letter in which he writes:
"Why pay interest on our currency? A typical incorrect answer is - the FED
profits are returned to the U.S. Treasury. The truth is, the FED is a
private bank in business for profit. We pay roughly $300 billion in interest
on our artificial debt and by special agreement, the U.S. Treasury receives
$20 billion in return. Taxpayers lose $280 billion to the FED banking system
per year ... Your local library has these dollar figures. The numbers don't
lie."5
Schauf also argues that the Federal Reserve system is part of the
international banking conspiracy, and that President Kennedy might have been
assassinated because he allegedly attempted to curb the power of the Federal
Reserve (See Myth #9). The currency interest issue is also raised by other
conspiracy theorists. Television evangelist Pat Robertson in his book The
New World Order and Jacques Jaikaran in Debt Virus make identical claims, as
does the organization Americans for Better Transportation (formerly known as
the Coalition to Reform Money).
How accurate are these claims? Some of Schauf's statement is correct. The
Treasury Department prints Federal Reserve Notes and then sells it to the
Federal Reserve system for an average cost of about 4 cents per bill (see
FedPoint #1). However, the Fed must present as collateral for the currency
an amount of Treasury securities that is equivalent in value to the currency
purchased. The Federal Reserve collects interest on all the Treasury
securities it owns, including the ones held as collateral. This is as far
into the realm of fact as Schauf's statement can take his reader.
What Schauf does not tell his reader is that nearly all the Federal Reserve's
net earnings are repaid to the Treasury. This is done per an agreement
between the Board of Governors and the Treasury. Schauf says this 'typical'
answer is incorrect. Shown below is the abbreviated income statements for
the Federal Reserve system for 1994-97.
Summary of Recent Federal Reserve Earnings
(figures in billions)
Income, Expenses, & Profits: 1994 1995 1996 1997
Interest on Treasuries $19.2 23.8 23.9 25.7
Other income 2.3 1.6 1.2 1.2
----------------------------
Total income 21.5 25.4 25.1 26.9
Net expenses 1.8 1.9 1.9 2.0
----------------------------
Profit 19.7 23.6 23.2 24.9
Payments & transfers to Treasury 20.5 23.4 20.1 20.6
Source: Annual Report, 1997, Board of Governors of the Federal Reserve System.
For the four years combined the Federal Reserve collected $92.6 billion in
interest on its portfolio of Treasury securities and other government bonds.
The Fed also rebated $84.6 billion to the Treasury, which amounted to about
92.5% of its profits. From 1980-97 the Fed has collected about $329 billion
in interest from the Treasury. It has also rebated about $327 billion during
that period. It seems pretty clear that Federal Reserve profits really are
returned to the Treasury. What this means is that Federal Reserve Notes do
not cost the Treasury any net interest.
Schauf and the Coalition believe that the Treasury ought to issue its own
currency in the form of United States Notes, a form of currency issued on a
few occasions in the past (there are still some in circulation, although the
total amount is limited by law). A 1953 series A note is shown below.
Current paper money has the inscription "Federal Reserve Note" across the
top, whereas the bill above has "United States Note."
Schauf and the Coalition argue this would be an "interest-free" form of
currency. However, there is no functional difference between U.S. Notes and
the Federal Reserve notes we now use. Neither impose a net interest burden
on the Treasury. The key difference between the two currencies is who
controls the issuance. The publicly-appointed Board of Governors now
controls the emissions of Federal ReserveNotes and can make monetary policy
decisions largely independent of political pressure. The issuance of U.S.
Notes, on the other hand, would be controlled by the Treasury Department, an
arm of the executive branch and a purely political entity. Monetary policy,
in this economist's view, ought to be based on the needs of the economy, not
on the needs of current incumbent political party.
Like many others, this Federal Reserve myth is also incorrect. Schauf and
the Coalition err in the argument by ignoring entirely the funds rebated from
the Fed to the Treasury each year. This key detail essentially means that
the bonds held by the Federal Reserve are interest-free loans to the federal
government -- the equivalent of printing money. Federal Reserve Notes do not
cost the Treasury any net interest. Indeed, Mr. Schauf, the numbers do not
lie.
References:
1. Americans for Better Transportation
2. Board of Governors of the Federal Reserve System, Annual Report, 1997.
3. Jaikaran, Jacques (1995), Debt Virus: A Compelling Solution to the
World's Debt Problems, Lakewood, Co.: Glenbridge Publishing.
4. Robertson, Pat (1994), The New World Order, Dallas: Word Publishing.
5. Schauf, Thomas (1992), The Federal Reserve. Streamwood, IL: FED-UP, Inc.
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