U.S. History/Final Questions on the National Bank and the Federal Reserve
So during Washington's day, the federal government had two options for when it needed extra money - it could take out a loan from the Bank of the US or it could sell bonds. Today though, it just sells bonds. Is that right? Or are there additional ways in which the federal government has been able to get extra money? Has it ever taken out a loan from regular banks?
My last questions regard the role that the Bank of the US and the Federal Reserve have played as the official depositories of federal US tax dollars. Unless I'm mistaken, the federal government did not have the power to levy taxes under the Articles of Confederation. However, there were at least two or three years between the adoption of the Constitution and the establishment of the Bank of the US. Would you happen to know where federal tax dollars were stored during this interim? Or where they were stored in between the closure of the Bank of the US and the establishment of the Federal Reserve?
I'm also wondering whether the Federal Reserve has any revenues other than the federal tax dollars that it holds and the interest payments that it receives on loans.
And that should be all! Thank you again, so much for guiding me through this!
Always government' main method for borrowing money has been bonds. In the early days, issuing bonds could take time that government did not always have, so bank loans were another option. Today, bonds are sold daily and there is no need for bank loans. I know there have been times when the government has borrowed from bankers. J.P. Morgan lent the federal government large sums in the 1890's. But since the creation of the federal reserve, I don't think private bank loans have been necessary. I cannot say for certain whether any agencies have borrowed money in modern times, or whether doing so is even authorized under the law, but it certainly is not a common practice if it happens at all.
There was no federal government prior to ratification of the Constitution. The Continental congress, sometimes called the Confederation Congress was the closest that we had. You are correct that it could not levy taxes. It could only request money from States, who rarely gave any. As a result, it was always broke. It did have the power to print money, but since it was not backed by anything, it devalued very quickly.
In the early years of the War, government finances were pretty much handled by one man. Robert Morris was a member of Congress and later the Superintendent of Finance. On the rare occasions he got any money, it pretty much went right out the door to pay back debts or pay for needed purchases. He often had to finance government needs out of his own pocket (he was also a wealthy merchant).
In 1781, Morris was able to get a State Bank chartered in Pennsylvania called the Bank of North America. This pretty much served as the central bank of the country until the First Bank of the US took over that role. After the demise of the First Bank, and again after the Second Bank, the Federal Government deposited funds with various State banks.
The Federal Reserve has several ways of making money. It holds in reserve funds from its member banks (which consist of most private US banks). It purchases U.S. government securities through open market operations and collect the interest. It also makes money from the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate).