Structure, Evolution, and Who Pays (1913–Present)
The modern U.S. system wasn't built in a day. It evolved from European precedents and American crises.
The Prototype: Established the model of a central bank issuing paper money backed by government debt to finance war.
The Network: Rothschilds & others pioneered international sovereign debt. Proved that information & distribution networks control state credit.
The Catalyst: Morgan privately backstopped the U.S. panic. Lesson: The entity that backstops the system controls it.
The Plan: A secret meeting of financiers & politicians drafted the blueprint for a U.S. central bank, leading to the Federal Reserve Act.
A "Public-Private Hybrid" structure designed to balance centralized national control with regional private banking interests.
Federal Reserve Act creates the system. Purpose: Provide elastic currency & serve as lender of last resort to prevent bank runs.
EO 6102 seizes gold. Banking Act of 1935 centralizes power in the D.C. Board of Governors, drastically reducing regional bank independence. Modern FOMC created.
Gave the federal government responsibility for "maximum employment, production, and purchasing power," setting the stage for the Fed's future dual mandate.
Nixon ends gold convertibility. The dollar becomes backed only by confidence, allowing structurally unlimited debt issuance.
Reform Act (1977) codifies the "Dual Mandate" (Stable Prices + Max Employment). Humphrey-Hawkins (1978) requires the Fed Chair to testify to Congress twice yearly.
Paul Volcker crushes inflation with historic interest rate hikes. Proves the Fed's power to discipline the entire economy, even at the cost of recession.
Expanded oversight and prohibited bailout loans to individual companies (must be broad-based). Created new regulatory roles for the Fed.
Reserve Requirements eliminated (0%) in March 2020. QE normalized. The Fed now acts as the permanent stabilizer of the financial system.
Congress has the "Power of the Purse." To spend a single dollar, two separate laws must usually pass: one to authorize the program, and one to appropriate the money.
(February) A detailed proposal. It is a request, not law.
(Spring) Congress sets the "topline" spending limits. An internal blueprint.
Proposed legislation to establish a program or agency.
Permission: Signed by President. Says "Agency X is allowed to exist and spend up to $Y." But it provides NO money.
Proposed legislation to actually fund the authorized programs.
Funding: Signed by President. Gives Treasury legal authority to write the check.
Did Congress pass all 12 Appropriations Acts?
Government is funded. Agencies operate normally for the fiscal year.
Congress must choose:
When the government spends more than it taxes (Deficit), it must borrow. It does not just "print money" directly; it sells debt securities.
The U.S. Treasury Department issues securities (Bills, Notes, Bonds). It holds an auction to sell this debt to the public to raise cash.
A specific group of large banks (Primary Dealers) are required to bid at these auctions. They buy the debt initially.
The Federal Reserve buys/sells these securities in the secondary market. By buying bonds, the Fed injects cash (liquidity) into the banking system, indirectly financing the debt.
In FY 2024, federal revenue was ~$4.9 Trillion. Here is who pays:
Individual Income Taxes (~50%) and Payroll Taxes (~36%) account for ~85% of all federal revenue.
The Top 1% pay ~40% of all Income Taxes (funding general govt).
However, the Bottom 80% contribute a massive share of Payroll Taxes (FICA).
Payroll Taxes Fund:
"The working majority effectively pre-funds its own safety net."