Something else that should be clarified.
The Federal Reserve System is not privately owned.
Federal Reserve banks are privately owned (but not in the sense that most people would conceive private)
Member banks are privately owned.

"If they dont ask the Fed to raise money then how are they going to pay for Public Spending?"

The question wasn't about simply asking them (I think you know that)...my point was, why bother dealing with the Fed in the first place? Let's not play a syntax or semantics game here.

"By "issuing money" do you mean printing dollars? If so then the problem with doing this is that you will cause inflation and you will devalue the currency"

Ok, so what's the difference between simply issuing money and selling bonds at interest to issue money? In the end, someone is issuing money...I'm pretty sure inflation caused by more money is independent of who is issuing that money.

Further...You said that the difference between the Governments budget (what they plan to spend) and how much they can raise via taxes is the PSBR...The PSBR is then handed over to the Fed. Right?

The PSBR then, is the amount needed in extra money to cover spending that cannot be raised with taxes. So, correct me if I'm wrong here...the Treasury prints up Treasury Bonds and the Fed prints up an equal amount of actual money and ultimately, they exchange the two. RIght? There are probably a lot of details I'm missing here, but the point is that Bonds are swapped for Money.

But as you said: "the Treasury has to pay interest on these Bonds and then repay the principal amount at the end of their term"

The Fed is making money here. Why is the Fed making money off of the American people? AND how does the Fed justify creating money? IF Bonds represent what the government can't produce itself via taxes, from where does money come from? What is it backed by? Surely not taxes (the American people) because the lack of them is what caused this exchange in the first place. Who insures this money is good?

And you never answered my other question...What justifies the charging of interest on those Bonds?

spyman, I appreciate the challenge. :) But as you can see, I'm a bit over my head here. I'd like for someone to answer these questions for me first, before I can engage you in defense of some of my suppositions.

I am determined to get to the bottom of this.

If I'm not mistaken... the treasury pays interest on those bonds to whoever ends up holding them. Which is generally private individuals, companies, or... whoever buys them. They are essentially borrowing money to pay the difference between spending and income from Taxes. I'd much prefer the government do this than simply print money to cover the difference. That was tried in the Wiemar Republic, and well... that didn't work out too well. By having to borrow the money, rather than simply printing it, inflation is kept in check (and can be regulated some by setting interest rates), and it seems to me things are kept a bit more accountable, becuase there is a responsibility to pay those bonds back rather than simply to just saying "don't worry! We'll just print more money!"

I certainly won't claim to understand all of the complexities of all of this, but I much prefer borrowing the money to simply printing more of it and ending up in a hyper-inflation scenerio.

geez guys...the economy is the secret police of our desires....all the rest is maze running...interesting as to how inventive we are...the mice are rapt

I don't think they even print most of the money anymore. A lot of it exists only electronically.

I don't think they even print most of the money anymore. A lot of it exists only electronically.

How'd that happen?

When a government sells bonds it is essentially borrowing money from those it buys from. Noone would buy a bond if it didn't pay out interest as that would be a large opportunity cost. It isn't alot though, because the risk (especially for US treasury bonds) is almost non-existent.

Ok, thanks guys!

Now...if the amount of Treasury Bonds equal the same amount of money, where does the money to pay the interest on those Bonds come from?

If the US issues $100 in Treasury Bonds to borrow $100 in printed (or digital) money, where does the extra say $10 come from to cover the interest? It can't come from taxes, because all taxes have been earmarked for spending...which is the reason for the US to borrow it in the first place.

Its not coming from anywhere. The Fed will just say that this bond costs 100$ but I'll pay you 110$ if you hold onto it for a couple of years. In a couple of years people will buy more bonds to give the government money to pay for previous bonds. Things like economic growth, technological advancement and inflation helps keep this a good deal for the government so they can spend more. The consumer then gets the benefit of a low risk way to save.

One could argue that since the next generation is going to have better technology and growththen us they will be better off then us, so borrowing is just redistributing some of there extra income to us (the ones that will develop this technology and help foster this growth)

Thanks Centurian!

How is this not considered perpetual debt?

Is the argument that at some point economic growth, technological advancement and inflation finally catch up and all debts get paid? How does that work?

Cuz if you take a look around, it hasn't happened. In fact, the disparity between debt and value has gotten exponentially worse.

And, I'm still waiting to hear what justifies the interest on government borrowing...

Justifies the interest? Could you clarify? When a government borrows money it comes from somewhere else, ie someone is lending it. People don't lend money for no reason, they need interest. Is that what you were asking?

In that case, yes it is perpetual debt. But not in the slowly spiralling downwards doomsday way you are thinking of it as. When a government borrows money it should be an investment in tommorow. They might borrow a trillion dollars but if that creates 10 trillion for the american economy later on then thats a net gain, everyone wins. Of course, the debt needs to be kept under control so the government can borrow at a competitive interest rate.

Well, by all accounts that I can find, the Constitution grants Congress the right to.borrow money against the value of gold or silver in reserve...and it can do so interest free.

The Fed, however (since the dollar is no longer backed by gold or silver) charges interest on something that Congress should be able to do without interest. What value does the Fed provide our government in charging this interest?

What justifies the interest charged on US government loans?

Ok, I just read this...PLEASE someone tell me where it goes wrong and show me how this ISN'T happening right here and now!

http://www.constitutionforum.us/economics_of_disaster2.htm

To understand what is happening, we need to consider how money works in an idealized society. Assume for a moment a nation with a money supply fixed at $100 dollars. Under these circumstances, it should be obvious that the value of all the goods in that nation is $100 dollars; the operating principle being that the value of everything combined necessarily equals the amount of money available to buy things. Therefore, the people within our ideal society trade goods and services using the available money as a medium of exchange. The system is stable, society is stable, and these fortunate people could go on forever trading the same money over and over again for all that life has to offer.

Now suppose within our idealized economy we have a lazy and greedy smart person who gets the idea that instead of working like everyone else, he would make his money work for him by loaning it out at interest to his fellow citizens. If he does this, what will happen? Upon satisfaction of the first loan this individual makes, Mr. Smarty Pants ends up with the amount he loaned plus the interest on this loan both of which he promptly re-loans. Upon satisfaction of this second loan, our enterprising individual ends up with his original principle, the interest from his first loan, and a greater amount of interest from his second loan. This process keeps repeating itself with Mr. Smarty Pants earning more and more interest with each new loan because he has more money to lend for each subsequent loan. It should now be clear “What happens?” In an idealized society, if one person loans money at interest, like a cancerous growth which consumes everything around it, he will end up with all the money and every one else will be flat broke.

Interest = Usury = perpetual debt = economic slavery

OR by the transitive property...Interest = slavery.

Can anyone chime in here and show me how this is wrong?

So... you're against loans entirely?

In your example above, the people who were loaned the money, obviously managed to make back the money they borrowed and were able to pay back this "evil greedy person" and his interest. So that loan clearly created some money, and value within the society right?

Or are you saying that even in this case, there is still only the $100 to go around, so eventually this person manages to corner the market on money?

In that case I think you just made a strong argument against the gold standard. With a fixed amount something out there against which all other value is measured, then yes, someone could theoretically gain all of the money/gold/whatever and hold everyone else in debt. But luckily our system doesn't work that way, and we have new money coming into and out of the system all the time, "regulated" by the interest rates set by the Federal Reserve.

I'd also point out that in your "ideal" society, with only $100 to go around, assuming the society was producing things and growing, then it would quickly become difficult to actually put a useful value on any one of those dollars. They would all become so valuable that no one would be able to use them for anything but the biggest projects or goods.

I suppose Mr. Smarty Pants doesn't need to eat, drink, or shelter and clothe himself, let alone entertain and educate himself?

Darwyn, I've been reading more of the article you linked to (and exerted from). It is certainly interesting, and does address at least some of what I've said in reaction to the bit you posted (I hadn't realized that that was just an exert from the link, but though it was a summary written by you). I'll keep reading, but it seems to me what it really comes down to is an argument about growth, and what kind of growth the world can sustain. I'm not sure I buy that it is driven entirely by the fractional reserve banking system, there are after all more people being born every day, and many of those people would (reasonably) like to increase their standard of living, but I might agree that we do need to take a serious look at what kind of growth we as a planet can sustain and support.

Ironically, unless it goes somewhere really unexpected in the last bit I have yet to read, I think the article you posted that link to, taken to it's logical conclusion, is really an argument for Sicarius' hunter-gatherer/anarchic society, which is debatable in it's merits for the people living in it, but is probably the easiest way to a more sustainable use of the earths resources

(I'm not yet willing to beleive there is no way to live a different type of lifestyle and have it be truly sustainable, but there can be little doubt that a hunter-gatherer society, with far fewer people on the earth would be the quickest way to make sure the earths resources are never used up!)

Chris - I think that assumes that Mr. Smarty Pants loans out the entirety of his wealth. He could just as easily loan half his wealth (while waiting for his loans to mature to use the other half to eat, drink etc...) and achieve the same end result. In the end, Mr. Smarty Pants will end up with all the money.

DrOct - Growth does seem to be the issue here. This tidbit from the ideal society example should explain how growth is accounted for:

"it should be obvious that the value of all the goods in that nation is $100 dollars; the operating principle being that the value of everything combined necessarily equals the amount of money available to buy things."

In other words, as the value of everything increases (due to more people creating more goods, etc...) so too does the amount of money. The $100 could turn into $1000 with added growth, but the values would remain the same because it is linked to "everything combined".

Now, consider that the example ONLY takes into account a fixed dollar...one that is backed by the value of "everything combined" (be it gold, silver, work product...whatever).

What happens to Mr. Smarty Pants if the dollar is backed by nothing other than the credit of his own loans? To put it another way in compensating for growth, what happens when the $100 becomes $1000 even though the backing of "everything combined" is really only worth $500?

What happens, I think, is that not only does Mr. Smarty Pants become rich by doing nothing, but it also gives him control of inflation! Is not Mr. Smarty Pants, with the ability to create money out of thin air (backed only by the credit of his own loans) in effect the Federal Reserve?

I'd like to point out this tidbit from the same link:

"Usury was a crime because honest men believed that money, being a medium of exchange, should be earned by contributing to society and not by loaning money to other people. Our forebears clearly understood that by loaning money a money lender gets others to do work to his benefit and this allows the lender to reap these benefits while doing nothing to earn them. For this reason, usury was a crime condemned by all the world’s religions and in some societies it was actually punishable by death."

Is allowing someone to make money off the backs of others while not contributing to society wrong? It surely used to be. What changed? How did our perceptions change?

I have a response to this half-written, but have to log off my computer here at work while they do some IT work. I'll save what I had written and try to finish and post it later.

Great...thanks!

If anything, this discussion has forced me to look at our monetary policy much more closely. I only want to make sense of what's going on here.

Darwyn, when the guy who is lending the money spends the money to eat etc, people are receiving it. He would have trouble holding on to the money then.

The bit on usury sounds a touch anti-semitic by the way. Watch your sources.

"when the guy who is lending the money spends the money to eat etc, people are receiving it. He would have trouble holding on to the money then."

I don't think that matters. As even Chrisp mentioned "let alone entertain and educate". Perhaps he entertains or educates himself by loaning money and watching it grow? What I'm saying is,that as long as Mr. Smarty Pants has money to allocate toward loaning money, he should *eventually* own it all...his money is always growing exponentially.

"The bit on usury sounds a touch anti-semitic by the way. Watch your sources."

Really? The term "usury" is anti-semitic? I have never heard of such a thing...and upon cursory research, I don't see how it is religious specific since most of the major religions and creeds historically acknowledge it.

D

The interest is payable out of future tax revenues which in turn is generated from GDP. Thats why I said that in effect the output of future generations is paying for today's spending...

So as more taxes get allocated toward interest, the PSBR gets larger and larger, which requires more borrowing and more interest.

Again, how is this NOT perpetual debt?

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To be honest, I'm very disappointed in this thread. Very few of my questions have been straightly answered and I'm genuinely seeking answers...and for as much opposition I received, no one as proven me wrong....that perpetual debt is both a reality and a deliberate instrument of slavery.

My questions still remain:

- What value does the Fed provide that Congress cannot do itself without interest?

- What justifies the interest charged on government loans?

If someone new is going to join the fray and attempt to answer, I'd urge them to read the thread at least half-way up so I'm not responding by answering or asking the same questions.

Either you are thick or you are taking the piss :) - Most of your questions are pretty dumb and your follow ups are even dumber

When you get an answer you say you understand the answer and then ask another question that demonstrates that you don't

One last try - and please note, I am not defending this system of financial management but rather telling you how it works....

Question 1: What value does the Fed provide that Congress cannot do itself without interest?

I have said this at least three times - Congress is a bunch of elected suits that know nothing about finance. They therefore delegate day to day management of the economy to someone that does rather like you hire a plumber to fix your pipes. What exactly do you think would happen if they did it themselves? What alternative strategy are you suggesting?

I'm sure there are other ways to delegate this activity but this is the one that they currently use. The applicability of interest is irrelevant to this question

Question 2: What justifies the interest charged on government loans?

There is no justification. It is like saying what justifies putting petrol in a car? Nothing particularly but it won't work if you don't

I keep asking you, but you have never answered, what your alternative financing strategy would be. Congress needs to raise funds to balance its budget. It has three basic choices every year - a) higher taxes b) borrow more money c) print more money (it could sell assets also but you only get to do this once unless you buy some from time to time :) )

You appear to be asking why they do b) rather than c) and I keep answering that c) is possible but has significant consequences

I have not opposed your portrait of perpetual debt; although I would describe it as a continuous cycle rather than perpetual because there are several things that could stop the cycle....hyperinflation for one

You say you are genuinely interested in this topic but do not listen to the answers you get

So Darwyn, do you truly beleive that loans and interest are inherently evil? Or is it just interest you're against? Because without interest, there would likely be no loans (well there would probably still be small loans among friends/family, but basically no business loans, or likely housing loans or anything else like that). Why? Because without some kind of compensation for not having the use of your money (which is certainly an opportunity cost) why loan it out for x period of time?

How do you feel about the idea of interest bearing bank accounts? Because those wouldn't be possible without banks giving out interest bearing loans. Additionally, your bank account is effectively a loan to the bank, how do you feel about loaning money to banks? (Or do you not use banks?).

How do you feel about investment? Because by buying stock in a company, or investing in a friends business start-up, and expecting to share in the profits, doesn't that allow you the investor to "reap these benefits while doing nothing to earn them?" I honestly don't think there is anything (inherently) morally wrong with lending money at interest. It compensates you for not having the use of your money for the period of the loan, and allows you to help someone with a project, or business, or whatever, that they are clearly passionate about and that they want to make happen.

Look at it another way: Your friend wants to start a business, say, making pins (to use Adam Smiths example). He knows about the business and he thinks he's worked out a better way to make the pins than anyone else, and is sure he can make a very successful business with it. But he doesn't have the money to get started. You want to help your friend out, becuase you beleive he's right, and he's got a new and much better way to make pins. But you don't have any of the talent to help with making pins, and don't know anything about the pin making business. But what you do have is some money. So your best contribution is to loan your friend some money to start up his business. But you don't have a huge amount of money, and giving up that money for the year or so that it will take for your friend to get everything up and running, and to be able to pay you back is going to be a bit of a hardship, you've got other things you could do with that money, like investing it in your own business, or buying somewhat nicer things for your family, so you ask your friend to pay you back with a small bit of interest, so that when you get your money back you have a bit more than you loaned out, as compensation for the slight hardship you experienced by not having the money to use (or to gain interest on in a bank account). Or, you ask that the money you paid, give you a partial ownership in the business, so that whatever profits the company makes you share in. Is this really that unreasonable? You both gain some benefit from the arrangement. Your friend gets to start up his business, that will hopefully be successful, you get to help contribute to that success by providing capital, and you make some extra money as a result. Honestly I don't think this is evil or bad at all, I think it's entirely reasonable for someone to expect some sort of compensation or reward for helping someone else's success.

All of that being said, I won't try to argue that there is no way to abuse this system, that there aren't predatory loans, or that debt can't be used to effectively keep people in slavery (share-croppers in the post civil war south comes to mind, as do mining and other companies that kept their employees in debt to keep them there, and to be able to pay them very little). There certainly do need to be laws and regulations to make sure that people actually know and understand the terms of what they are signing up for, bankruptcy laws to let people get out of debt they can't possibly pay for, and laws about what kinds of interest rates can be charged. But I don't think that debt and interest are inherently evil, or inherently lead to "slavery." Lots of things can be used for evil purposes, but it doesn't make them inherently evil.

I've still got that other response half written (didn't get my computer back up last Friday until quitting time, and then... well it was the weekend and I had better things to do, than debate monetary policy. like go to my friends wedding. ;) ) I'll try to finish it today. I'm not sure without a lot more knowledge of the banking system, or economics in general I'm going to be able to satisfy your rage against interest being charged by the federal reserve, but I've got an idea I came up with Friday that might help explain why interest from government loans make sense.

Part of the reason no one has "answered straightly" may simply be because this is a complicated system, so there may not be a "simple" answer to your questions. (Also none of us are economists or bankers, so we're all kind of just trying to figure it out along with you, but just as you intuitively seem to feel that our current monetary system is bad, and therefore do research to try to find out why it is, many of us intuitively feel like it probably does work and is (mostly) good in the end, so we're working on doing research to show why it's (mostly) good.)

Anyway, hopefully I'll get some time today at work to finish up, and polish, that other response, (and ideally do some research to actually support my theory, or I'll find it's not true at all, and have to give up on that line of reasoning. I'll let you know either way.).

I'm still working on that other response, but honestly it might be a while. The more research I do, the more unsure I am of exactly how everything works, and I want to be sure that I understand the whole situation before I go out on a limb.

The gist though of what I was trying to say is that loaning money (regardless of who does it, the Fed or a private bank) creates money that is clearly desired by the market. The interest rates provide a check on that growth though, to prevent wild inflation. Basically it seems to me that creating money through loans makes it more likely that only as much money as the economy desires/requires is created, (becuase someone has to borrow money for it to be create) and that enough money is created. In this way, it lets the free market have most of the influence on how much money is out there.

Interest rates, theoretically at least, are a way to check that growth, and be sure that that growth doesn't get out of hand (and are of course naturally a part of the system, even without the Fed). Having a central body that attempts to regulate these interest rates (and I say attempts because they can't directly force these changes in interest rates), in theory at least, helps make sure there is someone guiding the ship, and that things don't go too far one way or the other. It also insulates the policy somewhat from political pressures. I don't know about you, but I'm not sure I want whatever party is in power to just print or not print money to help their short term political goals. (They already cause enough trouble by spending more money than they take in every year).

This is just the gist of my thinking, but I'm still trying to learn more so I can be sure that A) I'm actually right, and B) That I can actually give a bit better examples of how and why this works in the real world.