Federal Funding, Central Banking & Power
Structure, Evolution, and Who Pays (1913–Present)
I. The Historical Architecture
The modern U.S. system wasn't built in a day. It evolved from European precedents and American crises.
1694: Bank of England
The Prototype: Established the model of a central bank issuing paper money backed by government debt to finance war.
1800s: Bond Markets
The Network: Rothschilds & others pioneered international sovereign debt. Proved that information & distribution networks control state credit.
1907: J.P. Morgan
The Catalyst: Morgan privately backstopped the U.S. panic. Lesson: The entity that backstops the system controls it.
1910: Jekyll Island
The Plan: A secret meeting of financiers & politicians drafted the blueprint for a U.S. central bank, leading to the Federal Reserve Act.
II. The Federal Reserve System (1913–Present)
A "Public-Private Hybrid" structure designed to balance centralized national control with regional private banking interests.
Public Component
Board of Governors (Washington D.C.)
- Independent Federal Agency.
- 7 Members appointed by President, confirmed by Senate.
- 14-year staggered terms (insulated from politics).
- Cannot be impeached by Congress (removed only "for cause").
Private Component
12 Regional Reserve Banks
- Private Corporations (not federal agencies).
- Owned by Member Banks (commercial banks hold stock).
- Employees are not federal workers.
- Directors largely chosen by private banks.
The 12 Regional Banks
III. Timeline of Monetary Control
1913: The Foundation
Federal Reserve Act creates the system. Purpose: Provide elastic currency & serve as lender of last resort to prevent bank runs.
1933-35: Centralization
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.
1946: Employment Act
Gave the federal government responsibility for "maximum employment, production, and purchasing power," setting the stage for the Fed's future dual mandate.
1971: Pure Fiat
Nixon ends gold convertibility. The dollar becomes backed only by confidence, allowing structurally unlimited debt issuance.
1977-78: Mandate & Accountability
Reform Act (1977) codifies the "Dual Mandate" (Stable Prices + Max Employment). Humphrey-Hawkins (1978) requires the Fed Chair to testify to Congress twice yearly.
1979-87: The Volcker Era
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.
2010: Dodd-Frank Act
Expanded oversight and prohibited bailout loans to individual companies (must be broad-based). Created new regulatory roles for the Fed.
2020-Present: Permanent Crisis
Reserve Requirements eliminated (0%) in March 2020. QE normalized. The Fed now acts as the permanent stabilizer of the financial system.
IV. How the Budget Becomes Law (Or Doesn't)
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.
1. President's Request
(February) A detailed proposal. It is a request, not law.
2. Budget Resolution
(Spring) Congress sets the "topline" spending limits. An internal blueprint.
Track A: Authorization
Authorization Bill
Proposed legislation to establish a program or agency.
Authorization Act (Law)
Permission: Signed by President. Says "Agency X is allowed to exist and spend up to $Y." But it provides NO money.
Track B: Appropriation
Appropriations Bill
Proposed legislation to actually fund the authorized programs.
Appropriations Act (Law)
Funding: Signed by President. Gives Treasury legal authority to write the check.
DEADLINE: October 1st (Fiscal Year Begins)
Did Congress pass all 12 Appropriations Acts?
YES
Government is funded. Agencies operate normally for the fiscal year.
NO
Congress must choose:
V. How the Government Borrows Money
When the government spends more than it taxes (Deficit), it must borrow. It does not just "print money" directly; it sells debt securities.
1. The Treasury Auction
The U.S. Treasury Department issues securities (Bills, Notes, Bonds). It holds an auction to sell this debt to the public to raise cash.
2. Primary Dealers
A specific group of large banks (Primary Dealers) are required to bid at these auctions. They buy the debt initially.
3. The Fed's Role (Open Market)
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.
VI. Who Funds the Government?
In FY 2024, federal revenue was ~$4.9 Trillion. Here is who pays:
Federal Revenue Sources (2024)
Individual Income Taxes (~50%) and Payroll Taxes (~36%) account for ~85% of all federal revenue.
The "Welfare Funding Paradox"
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:
- Social Security
- Medicare (Part A)
"The working majority effectively pre-funds its own safety net."
VII. Where Does the Money Go?
Key Spending Facts (FY 2024):
- Mandatory Spending (~60%): Social Security, Medicare, Medicaid. This is on "autopilot."
- Interest on Debt (~13-15%): Cost nearly $900 Billion in 2024. It is crowding out other spending.
- Discretionary (~25-30%): Includes Defense (~13-15%) and everything else (Education, DOJ, Infrastructure).
- State Transfers: ~$1.1 Trillion flows to states (Medicaid, etc.), giving Feds leverage.