# Is the Federal Reserve issuing money in a fair way?

Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be distributed fairly between all the citizens, and that means giving them all an amount equal in proportion to their income (say a 5% of their annual income for achieving a 5% inflation). So they should give the money to the government, and then the government either distributes the money or it builds public infrastructure that everyone benefits from. Most likely, this is the way the Eastern European countries experienced inflation in the 1990's.

Conversely, when the Fed decides to remove a certain amount of money from the economy, the Government should tax everyone in a fair way (the rich should pay more than the poor) and then give the money to the Fed to burn it. Or to burn it directly, without even giving it to the Fed.

Instead, the Federal Reserve has some sophisticated and arcane ways to move the money, beyond the comprehension of the general public. The Fed and the banks are involved into actually owning those newly issued money, and that looks really strange.

When the Fed wants to expand the money supply, it buys a security -- let's call it Asset A -- from a bank. Then it electronically transfers money to that bank.

Therefore, if the Federal Reserve decides, it can issue new money and buy and own half of the assets in the USA for free whenever they want. The newly issued money get to the banks, and depending on the decision of the banks to use the money or not, they can create inflation - or not. They can give those money in astronomical bonuses to their top executives and those people can send the money to Switzerland for example - therefore no inflation.

Is there something important that I'm missing?

• The fed doesn't create the money: The banks do. en.wikipedia.org/wiki/Fiat_money#Money_creation_and_regulation Aug 15 '17 at 14:27
• @MartinSchröder That's not strictly true.
– J...
Aug 15 '17 at 15:22
• Where does the "basic logic" in your first sentence come from? Aug 15 '17 at 17:04
• I think this is an excellent case where we get to see what happens when "basic logic" is challenged. Whose basic logic? One interesting consequence of your logic is that creating and destroying money robs from the rich and gives to the poor (you give it out equally by citizenship, but take it equally by wealth). If the fed creates a billion dollars, then destroys a billion dollars, by your system, those two don't actually cancel out! Aug 15 '17 at 17:24
• @JoeJobs Editing the question to alter critically its content is not the way to do it, since it tends to make the already posted answers obsolete/incomprehensible/irrelevant. Aug 15 '17 at 19:14

The Fed introduces money in the economy through the banks via the mechanism of fractional-reserve banking, as you mentioned in your article. This means the Fed is then allowing the banks to provide credit to anyone who they find adequate. The reason to do so is that banks will favor investment opportunities which lead to long term growth, such as build a house or a factory, rather than immediate consumption of goods, which would lead faster to inflation. The alternative would be to transfer the money to the government, which would distribute it through investments (like build roads) or subsidies.

Your question is on fairness: whilst there would be several ways to look at what "fairness" means (give the same to everyone OR give more to the ones who deserve/need more), the key point is that the Fed's job is to make the US dollar stable, and not to work on individual bank gains. You can read on the Fed's mission:

(...) to foster the stability, integrity, and efficiency of the nation's monetary, financial, and payment systems so as to promote optimal macroeconomic performance

Their approach to distributing the money is to keep the inflation low, which according to them and the US Congress, is on the best interest of the whole country and not just the banks.

• Thanks. Basic logic says that you keep inflation low by simply not issuing new money. If the population or the productivity grows that will create deflation (the products become cheaper), and then you only issue enough money to reduce the deflation to zero. If the population or the economic efficiency (productivity) are decreasing, that will create inflation and then you burn money to reduce it to zero. The banks have a dreadful record of giving credits - the money go to huge bonuses, Swiss banks or into tax havens. Giving the money directly to the people, proportionally, looks much more fair. Aug 15 '17 at 19:33
• @JoeJobs - You are missing the fact that the Federal Reserve is not part of the federal government. The Federal Reserve is a collection of private corporations. So why would a private corporation simply give money directly to the people?
– Dunk
Aug 15 '17 at 20:33
• @Dunk - because the Fed is licensed to create money out of nothing. If the Fed doesn't want to give those free money for free, then they should not have such a licence. It's outrageous to think that any entity has a licence to print money and then to own it. Not even the government should be allowed to do that. Free money should be distributed freely and fairly, because nobody actually worked to create the value of those money (after paying the production costs, ofc). Distribute the money to everyone or give tax cuts to everyone or build infrastructure that everyone benefits from. Aug 17 '17 at 16:46
• @JoeJobs-The Fed doesn't create money out of nothing. They "print money" when the federal government says " we want a loan, can you sell federally insured T-Bills in the amount of $XXX". We guarantee to pay you "The federal reserve banks" that amount of money plus interest. If you want to call "a promise" by the federal government "creating money out of nothing" then I won't disagree. However, the mere fact that people are willing to buy that "nothing" money shows that our opinion of that fact doesn't matter. – Dunk Aug 28 '17 at 22:36 Normative questions require a standard of fairness in order to then be analyzed and answered with some degree of "objectiveness" so that the answer is not just a declaration of philosophical-ideological positions. The OP starts by writing "Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be distributed equally between all the citizens." Why "basic logic" says that? Whose "basic logic"? I note that throughout human history and especially in the western civilization in the last 400 years, "fairness" is almost exclusively interpreted as "proportionality", not flat equality (i.e. as "per capita tax" is considered not in accord with current societal values, so are "per capita transfers"). Anyway, under the given fairness standard, certainly "new money is not fairly distributed". Regarding how the creation of new money works, and how it affects the domestic or global economy (or not), which is an additional question, I believe there are many threads here that provide a lot of information on the matter. Selecting the tag "inflation" or "money supply" will bring up most of them. • I apologize, I wish I could turn back the time to write the question right from the very beginning. What I meant was to distribute the money fairly, and that implies proportionally as you clearly pointed out, choosing the word "equally" was wrong. Aug 15 '17 at 19:09 • Money-creation isn't a distribution scheme at all, @JoeJobs. It funnels money to people who (think they) can effectively capitalize it into something productive. Then they pay it back. With interest. You might as well say that any bank anywhere making any loan to anyone has to distribute it fairly - after all, the central reserve banks aren't the only ones who create money via fractional reserve technique. Aug 15 '17 at 21:55 • @Beanluc - So it's not fair. Creating money that you own (without actually working for it) very much looks like theft. If you create money from nothing, then give it to everyone, for free. Lending money to banks who are plagued by theft, corruption and "no accountability for failure" looks like insulting the people's intelligence. I know a person who makes a good living after he made a loan and vanished with the money. More money than I can save in a lifetime. And then the honest taxpayers like me (who can never buy a house) will have to pay for that - in form of generous bailouts. Aug 17 '17 at 15:06 • You might as well just say that any borrowing at all is not fair. Aug 17 '17 at 18:52 • @Beanluc - of course it's not fair with such banks that take the money from the poor and give it to the rich, to the thieves and who encourage speculation because that's robbery. Clear the corruption in the banks and then borrowing is OK. But that's not my main point. The main point is that nobody should own the money made out of nothing. The money made out of nothing belong to every citizen and it should get to the citizen by: fair distribution or tax cuts or building infrastructure projects. No group of citizens should own free printed money because that's (legalized) theft. Aug 19 '17 at 4:43 No, because monetary policy is known to increase inequality. In effect, evidence indicates that monetary policy has contributed toward higher inequality. Therefore, the Fed is not being very supportive of fairness, from this point of view. Reasons are several. Some examples: • Booming Stock Markets: low interest rates generate booming stock markets. Because shares are mainly owned by the rich, this benefits them proportionally more than the poor: • Better access to finance by the rich: because of higher collateral, more wealthy individuals have better access to financial markets, including loans to business and housing. Therefore, they benefit much more than the rest of individuals from cheap credit via low interest rates. As this article states: the wealthier you are, the more you are likely to borrow (until one gets very, very wealthy), because banks will lend you more and because you are likely to buy an expensive house and want to milk the tax advantages of a large mortgage. With today’s low interest rates, a wealthy family with a \$300,000 mortgage could be saving \$7,500 per year in mortgage interest or over \$600 per month. Some wealthy families have much bigger mortgages than that, so the Fed-driven savings to the wealthy could be even larger. Since the wealthy save more from low interest rates than the poor, the Fed’s interest rate policy is making wealth inequality worse.

Some people however say that the activity of the Fed, even if it has increased inequality by the above channels, it remains overall beneficial by fostering higher employment and avoiding a more deep financial and economic recession. Thus, higher inequality is simply a "short-term" cost of the necessary activity of the Fed.

• Though one could say that lower interest rates also create lower tax savings on those interests. Aug 15 '17 at 17:12
• If you want an inflation of 5%, then give to everyone an amount equal to their 5% annual income. The prices will go up by 5% so the buying power of everyone will stay the same. If the inflation will not by exactly 5% (I'm not sure if the annual income is the best reference), then the inflation will be another number - say 3%. But in any case, everyone will have the same buying power as before, because the inflation increases the prices for everyone. Therefore there is no need to increase the inequality. That means the system is not fair and the Fed is only increasing the public confusion. Aug 15 '17 at 19:52
• @JoeJobs Wealthy individuals can protect themselves from inflation much better than poorer individuals. Also, inflation affects the poor disproportionately more than the rich. Aug 16 '17 at 6:43
• @luchonacho - fine, so if the inflation affects the poor say 50% more than the rich, then give to the poor 50% more money than to the rich (in proportion I mean). Think about a compensating system instead of maintaining a fraudulent system that uses a bombastic language and fuzzy terms that actually nobody understands. Aug 17 '17 at 16:54
• Re:"even if it has increased...overall beneficial". Those same people are also likely to believe that a "ruling elite" is necessary in order to keep society under control. After all, the masses aren't smart enough to do the right thing. The Federal Reserve System is nothing more than keeping the uber-rich and powerful...well...uber-rich and powerful. The only benefit of the Fed is that it keeps the uber-rich and powerful from manipulating the economy to trigger long-term recessions when the government doesn't do what they say because the government is already doing what they say.
– Dunk
Aug 28 '17 at 22:43

Is there something important that I'm missing?

I think the basics are missing and not just from you but the public in general which is why it' s sounds so complicated. Lets start with the four types of money issued in the United States:

1. Coins - physical money created and issued by the U.S. Treasury and sold at face value to the Federal Reserve, which books coins as an asset on its balance sheet. Unlike the other three forms of money I will outline in this answer, coins are issued without any corresponding debt attached to them. Coins are legal tender, meaning that they can be used to pay, "all debts, public charges, taxes, and dues." 31 U.S.C. § 5103.
2. Cash - aka, Federal Reserve Notes, is physical money issued by the Federal Reserve (though created by the Treasury's Bureau of Engraving and Printing at the Fed's instruction) and sold by the Fed at face value to commercial banks, which pay for cash using their reserve accounts at the Fed, which get debited in the amount of cash obtained. Cash is one of two liabilities on the Federal Reserve's balance sheet, and an obligation of the U.S. government. Cash is legal tender, meaning it can be used to pay, "all debts, public charges, taxes, and dues." 31 U.S.C. § 5103.
3. Reserves - this is electronic money created and issued by the Federal Reserve in exchange for U.S. government bonds and bills, that is, IOUs from the U.S. government. Reserves are the second liability on the Federal Reserve's balance sheet, but reserves are assets to commercial banks and other entities that bank with the Fed, including the U.S. government and foreign central banks. Reserves, that is, Fed liabilities or IOUs, are money only for these entities, and exist only as the result of government debt. The amount of reserves in the system is controlled by the Federal Reserve, which increases reserves by buying government bonds or agency mortgage-backed securities and decreases reserves by selling government bonds or agency mortgage-backed securities. Reserves are not legal tender.
4. Bank money - this electronic money created and issued by commercial banks in exchange for debt, public or private, taken by borrowers from the bank, whose electronic accounts at the bank are credited in the amount of their new loan. Bank money is a liability to commercial banks but is an asset to non-bank entities who bank at commercial banks, including people, non-financial businesses, non-bank financial businesses, and governments...bank money, that is, a commercial bank liability or IOU is money for these entities. The amount of bank money in the system is controlled by commercial banks, which increase bank money bu buying debt, crediting bank accounts in exchange for loan paper, and decrease bank money by not issuing new debt as old debt gets paid off. Bank money is not legal tender.

I think what is confusing and it was even for me, is all the discussion that we hear in the media, but none of the clarification. That discussion is on reserves. Reserves function as money for commercial banks, which have accounts at the Fed, but do not function as money for ordinary people and non-bank businesses, who do not have accounts at the Fed. For ordinary people and non-bank businesses, money isn't reserves, it's bank money. Cash is an altogether different animal for the purposes of this discussion, which pertains to digital money only. But the Fed cannot and does not create bank money. Commercial banks create bank money.

For commercial banks, reserves are asset-money, and bank money, that is, ordinary checking and savings accounts, is liability money. Makes sense so far?

So when the Fed buys assets from a commercial bank or the U.S. government, it creates new reserves and credits in the bank's or the government's Fed account in the amount of those new reserves, and the seller transfer the asset to the Fed in exchange. The key takeaway here is that this simple two-party transaction structure results in an increase in reserves, but no net increase in bank money. The reason there is no change in bank money under the Fed's normal asset purchase route is that there is no non-bank entity, and thus no bank money, involved in the transaction, which is simply a two-party transaction between the Fed and a Fed account holder, a commercial bank or the government, conducted entirely in reserves.

With all that said, the traditional two-party asset purchase structure was recently abandoned by the Fed in February of 2020, however, replaced by a three-party asset purchase structure of getting public money into private hands. Since then what we have been seeing is the lockstep increase in both reserves and bank money.