How come the Federal reserve can print money to lend but the Federal government can't do the same?

• Does it make any sense for a banking institution to print money and then lend it to our government at interest? What did the bank do to deserve this unjust enrichment? The bank neither worked for nor earned this money that they lend. Why is the government subservient to such a primitive system? American's pay almost 40% of there money in income taxes yet the Fed pays no taxes and they don't even work for the money that they lend. All they do is print money out and give it to the government and charge interest. As a matter of fact the Federal reserves doesn't even print the money themselves the department treasury does at the command of the Federal reserve. Why should the government pay any interest? shouldn't the government by governing it's own monetary system?

• Answer:

  First let me say that Yahoo Answers does not provide enough space to respond with a complete answer. Therefore, for those who are interested let me suggest reading some excellent books and one of the easiest to understand is “The Truth In Money Book” by Theodore R. Thoren and Richard F. Warner [1980] (library of congress catalog number 83-51421; ISBN 0-9606938-1-5). There are many others and none of this has ever been secret. As a foundation it may be helpful to understand that prior to the Central Bank (the Federal Reserve) there were many economic booms and busts. While we can all debate the realities of the cyclical nature of economic systems (of any type) it can be accepted as a truism that the investment community prefers economic futures as more reliable than not. I suggest that those legislative efforts which resulted (cir. 1913) in the creation of the Federal Reserve System were meant to ‘stabilize’ the economic system and were not some conspiracy to initiate a ‘global government.’ That this was not a good approach to meet that goal is clearly obvious in retrospect but at the time most believed that it would work. That it meant that the Congress would be abrogating their Constitutionally delegated power (responsibility) to control the money supply by turning it over to a private (uncontrolled) banking sector, was something that was clearly not well thought out. However, they did it and as so much from government actions, there are the unintended consequences. Now this system doesn’t work exactly as most people understand it. First, it is (as others have stated) a private sector business, in this case a bank. Secondly, it is not as straight foreword as simply printing the money for the federal government and it works something like the following: Congress votes to increase the federal debt, let us say by one billion United States Dollars (USD). By that vote it instructs the United States Treasury to write interest-bearing bonds for that amount of money. The United States Treasury goes to the Federal Reserve to borrow money and offers bonds against taxpayers’ ability to pay. The Federal Reserve buys the bonds by simply creating a bookkeeping entry for one billion to the credit of the government’s checking account. The Treasury can now write checks against the created credit. These checks are dispersed throughout the country, endorsed by recipients and deposited into banks. The banks send the Treasury checks to the Federal Reserve to be cleared. The Federal Reserve debits the Treasury’s account and credits the banks with the amount. These credits increase the banks’ reserves. These reserves serve as the base used by the commercial banks to create checkbook money and to lend it out at interest. At this point the only thing of real value is the ability of the American people to pay the initial debt through taxes and whatever the federal government purchased with this created money. The banks have merely acted as a form of hired fiduciary agent and are being paid by interest earned. Keep in mind that this interest is not the only way the banks make money because they exist in what is termed a ‘factional’ banking system. Keep in mind the ‘reserves’ that have been created out of these created funds. They are worth a lot more to the individual bank that the amount of the initial reserve deposited amount. Think of $1,000 dollars being deposited in a single bank. This increases their reserves by $1,000 dollars. Due to the factional reserve system they can only loan out a portion of that money, say 85% or $850. Which they do by depositing it into the account of the individual who borrowed it which, increases their reserves (the way banks do audits) by $850. That is, they have a new asset (the loan papers) of $850 and a deposit of $850. of this new deposit (addition to the reserves) they can loan ‘another 85% or $722. This cycle continues until that loanable 85% reaches zero. However that has converted into new reserves of $5,667. Lets see now. An initial reserve of $1,000 created by paper created out of whole-clothe of federal bonds (good only due to the ability to pay of the American tax payer) and increased through this factional reserve into a total reserve of $5,667. So, in terms of the Money supply a one billion dollar note (bonds) of the federal government is actually converted into $5,667,000,000 in the U.S. money supply system. And, most significantly all of comes into existence based on debt. Look into this system and study it, there is a lot more to the story and it is fascinating.