Do Fed Surpluses Go to the Treasury?

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  • Wed, Sep 19, 2012 - 10:49am

    #1

    kiwi_canuck

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    Do Fed Surpluses Go to the Treasury?

I read the comic on the Federal Reserve http://www.newyorkfed.org/education/addpub/Comic_FRS.pdf.  Towards the end is the following panel.   Does the Fed actually return excess money to the US Treasury?  If so does that mean the Fed cartel is not as evil as supposed?  I had assumed that member banks kept all the seignorage.

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  • Sat, Sep 22, 2012 - 11:54am

    #2
    Kurtis

    Kurtis

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    So they say

Is this a reasonably way to fund an institution: give it way more than it needs, and then expect it to give you back the rest? That seems like a recipe for corruption, at best. Why would they do it that way? Hmmm.

I read this factoid in an econoics textbook: “Although nominally a corporation owned by the commercial banks that are members of the Federal Reserve System, the Federal Reserve is in practice a public agency. It is directly responsible to Congress; it listens carefully to the advice of the President; and whenever any conflict arises between its making a profit and promoting the public interest, it acts unswervingly in the public interest. The Fed prints the nation’s currency, in return for which it holds interest-bearing government securities. Through this activity, it earns billions of dollars of profits each year. But, to reflect its public mission, all of its profits go to the U.S. government.” (Samuelson, Paul A., and William D Nordhaus, Economics (16th edition) (Boston: Irwin McGraw-Hill, 1998), p. 495) 

 

This is misleading on several fronts. What does it mean to be a “public agency”? This passage implies that the fact that it is (1) “directly responsible to Congress,” that it (2) “listens carefully to the advice of the President,” and that it (3) invariably puts the public interest before its own private profit. In what sense is (1) true? The Chairmen of the Federal Reserve Board is not infrequently called to testify to, or report to, Congress. Of course, anyone can be asked to report to Congress, it is just that the Fed is so important and powerful that it in fact is called to report. So what is special here is that the Fed is important and powerful, but those qualities do not make it in any important and relevant sense “public.” The second criterion, that it “listens carefully to the advice of the President,” is so vacuous that it hardly requires further comment. Suffice it to point out that it is under no legal obligation to follow the Presidents advice, neither its specifics nor its generalities. As for the third criterion, are we really supposed to believe that, without any meaningful check on its power to do the contrary, the owners and controllers of this institution, perhaps unique in world history in this respect, consistently puts the public interest over their own private profit? Bankers, we must conclude, are noble indeed! (Note that it has been admitted here, though not stressed, that the Fed can indeed make a profit.) 

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