Why Does the Government Borrow Money It Has the Power to Create?

The answer to the national debt is in the Constitution. Article I, Section 8: "Congress shall have the Power to coin Money and regulate the Value thereof." Not the Federal Reserve. Not private banks. Congress. The United States has a national debt because the government borrows money rather than creating it — and pays interest on that debt, to private financial institutions, in perpetuity, from tax revenue. None of this is required by the document that governs the country. It is a choice made in 1913 and never revisited.

They will tell you it is more complicated than that. Here is what the chairman of the Federal Reserve said when someone asked him directly to explain it:

The Fed chair admits it's effectively printing money, then calls it a myth on the same program a year later. His predecessor describes deliberate obfuscation as the job. These are not critics making accusations. These are the men who ran the institution. And note what the 60 Minutes transcript records about oversight: during the 2008 crisis, Bernanke "had freedom to act immediately — he doesn't need prior permission from Congress or the President." Trillions of dollars committed. No vote. No authorization. Because Congress handed that authority to a private institution in 1913 and never took it back.

The contradiction did not go unnoticed. In December 2010, Jon Stewart aired both Bernanke clips back to back on The Daily Show — 2009 Bernanke saying "well, effectively" printing money, followed immediately by 2010 Bernanke calling it "one myth that's out there." NPR covered the segment under the headline "Jon Stewart Busts Fed Chair Ben Bernanke On 'Printing Money.'" Stewart's conclusion: the Fed chair had invented the term, then corrected everyone for using it. It is, as far as this publication is aware, the only time a comedy program has produced a more coherent account of Federal Reserve monetary mechanics than the Federal Reserve chairman himself. ■ Corroborated

In November 1910, Senator Nelson Aldrich organized a meeting so sensitive that the attendees were instructed to use first names only, tell no one their destination, and travel by private rail car to avoid recognition. They convened at the Jekyll Island Club off the coast of Georgia. Among them: Frank Vanderlip of National City Bank; Henry Davison, senior partner at J.P. Morgan; Benjamin Strong of Bankers Trust; Paul Warburg of Kuhn, Loeb & Co. Between the men in that room sat an estimated quarter of the world's wealth.

What they wrote at Jekyll Island became the Federal Reserve Act. Vanderlip later described the secrecy in a 1935 Saturday Evening Post account: his group had to travel "as secretive, indeed as furtive, as any conspirator," because "discovery, we knew, simply must not happen, or else all our time and effort would be wasted. If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress." This is not a contested document. It is Vanderlip's own account.

The Mechanics of Debt Money

When a commercial bank makes you a mortgage loan, the money it lends you did not exist before the moment the loan was approved. The bank creates it as a deposit entry — a credit on your account, a liability on theirs. This is fractional reserve banking: banks hold a fraction of deposits in reserve and lend the rest into existence. The money supply of the modern economy is overwhelmingly composed of this bank-created credit money, not of currency issued by the government.

The implications of this structure are not obscure. They are described in the Federal Reserve's own publications. When money enters the economy primarily as debt, the aggregate money supply can only be maintained if borrowing continues — if the debt is constantly rolled over, expanded, serviced. The interest payments on that debt are the profit of money creation.

That profit — the seigniorage of credit money — flows to private financial institutions. DMPFED.ORG exists to ask whether it should.

Seigniorage on physical currency — the difference between what a dollar bill costs to produce and its face value — does flow to the Treasury. This is the one place where the monetary system functions as its defenders describe it. But physical currency represents a small and shrinking fraction of the money supply. The overwhelming majority of money is credit money, and the seigniorage-equivalent on credit money is paid to private banks in the form of interest over the life of every loan.

How They Say It Works, and How It Actually Works

The description above is the plain version. It's worth going one level deeper, because the model taught in most economics courses and the model the central banks themselves now describe in their own publications are not the same thing — and the gap matters for where this argument goes next.

The textbook version: banks hold a fraction of deposits in reserve — historically up to 10 percent on the largest transaction accounts — and lend out the rest. Because that lent money gets deposited elsewhere and lent out again, a single dollar of reserves ends up supporting several dollars of new loans: the money multiplier. In this telling, the Fed controls the money supply by controlling the reserve supply.

The Bank of England's 2014 Quarterly Bulletin corrected this directly, in an article aimed at its own readers: money is created the moment a bank issues a loan, not multiplied out of a pre-existing pool of reserves. The Bundesbank's 2017 monthly report describes the identical mechanism for the Eurosystem. On the operational side, the gap is now total: in January 2019 the FOMC announced it would run policy under an "ample reserves" framework, and in March 2020 the Federal Reserve Board reduced reserve requirement ratios to zero percent for every depository institution in the country. The reserve requirement the multiplier model depends on does not currently exist in the U.S. banking system.

In place of reserve requirements, the Fed now steers the interest rate directly through a corridor: interest on reserve balances (IORB) as the effective floor for what banks will accept, the overnight reverse repo facility (ON RRP) as a secondary floor for non-bank money-market participants, and the discount rate as a ceiling. A full diagram of how that corridor has moved over the last two years is available here →

Money creation happens in two genuinely separate places under this framework. When the Fed buys a security, it credits a bank's reserve account — a wholesale-level entry between the Fed and the banking system. When a commercial bank issues a loan, it creates a deposit at that same instant — and that second mechanism, not the first, is how most of the money actually circulating in the economy comes into existence. The Fed can move the price of reserves. It does not ration the quantity of loans.

Where the Money Goes

Return to the seigniorage question this publication exists to ask. The Fed earns interest on the securities it holds and pays interest on the reserves and reverse repos that fund its balance sheet; the difference is its net income. By statute, that income first pays a fixed dividend to the member banks that hold stock in their regional Reserve Bank — 6 percent annually for banks under $10 billion in assets, and the lesser of 6 percent or the 10-year Treasury yield above that threshold. What remains, after a small statutory surplus, is remitted to the U.S. Treasury. Between 2009 and 2022, those remittances ran $47 billion to $117 billion a year — real revenue, not an abstraction.

Since September 2022, that arithmetic has run in reverse. The interest the Fed pays out on reserves now exceeds what it earns on the older, lower-yielding securities bought during quantitative easing. An ordinary company in that position reports a loss. The Fed, under accounting rules it sets for itself, instead records the shortfall as a "deferred asset" — a bookkeeping device no other U.S. financial institution is permitted to use. That deferred asset stood at $243 billion at the end of the third quarter of 2025. The Congressional Budget Office estimated in May 2025 that Treasury remittances would not resume before fiscal year 2030.

The public was told the Fed sends its profits to the Treasury. That's mostly been true. It just isn't true right now, by design of an accounting rule that only the Fed gets to use.

This is the mechanism, in numbers, behind the sentence that opened this section: the profit of money creation is not a metaphor. It is a real balance sheet, with a real statutory formula for who gets paid first — and the public interest is not first in that line.

Wilson's Warning — and the Contested Record

Woodrow Wilson signed the Federal Reserve Act on the evening of December 23, 1913. His documented writings from the same period leave no ambiguity about his understanding of the problem it was meant to address. In The New Freedom (1913), he wrote: "The great monopoly in this country is the money monopoly. So long as that exists, our old variety and freedom and individual energy of development are out of the question. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated."

A more pointed formulation has circulated widely: that Wilson later said he had "unwittingly ruined my country" by signing the Federal Reserve Act. This quote is attributed to Wilson in multiple secondary sources and reportedly appears in a document held by the Woodrow Wilson Presidential Library. The Library has contested the specific provenance of that phrasing. The documentary trail is under active research and will be updated with primary source verification as it becomes available.

1913: A Year Worth Noting

The Federal Reserve Act was signed December 23, 1913. The Sixteenth Amendment, authorizing the federal income tax, had been ratified February 3 of the same year. Prior to 1913, the federal government was funded primarily through tariffs — taxes on imports, collected at the border, not on labor. The tariff system that had financed the American government since the Republic's founding was progressively replaced, over the decades that followed, by income taxation.

The structural relationship between these facts is an analytical inference, not a documented causal claim: a monetary system that creates money as interest-bearing debt requires a revenue stream capable of servicing that debt. Whether the simultaneous enactment of debt-money and income tax was designed coordination or coincidence is not established by available primary sources and is tiered accordingly below.

The DMPFED Position

This publication is not a call to abolish the Federal Reserve, end fractional reserve banking, or return to the gold standard. The DMPFED position is more specific and more modest: that monetary policy — the decisions governing how much credit money is created, on what terms, and to what ends — should be made by a democratically accountable federal agency, not a privately constituted institution. And that a meaningful share of the profit of money creation should return to the public Treasury.

Fractional reserve banking may continue. Banks may continue to create credit and earn interest. The reform concerns who sets the policy within which they operate, and where the seigniorage flows. It is, in this sense, less radical than ending the Fed and more radical than the current consensus: it demands actual democratic accountability for the most consequential economic decisions made in the American economy.

The precedent is Abraham Lincoln's Legal Tender Act of 1862, which authorized the Treasury to issue United States Notes — Greenbacks — directly, without debt, to finance the Union. They worked. After Lincoln's death, the system was systematically dismantled. The history of that dismantling, and the interests served by it, belongs in the public record. It is why this publication begins here.