FED never produced anything, they were initially minimally funded.... they actually printed virtually all of it....
How Asset Purchases Work (Mechanics):
When the Fed decides to buy an asset (like a Treasury bond or MBS), it does the following:
Identifies the Seller: The Fed buys assets from banks, primary dealers, institutional investors, etc., usually through auctions in the open market.
Credits Reserves: The Fed pays for the asset by crediting the reserve account of the seller's bank.
Example: Imagine the Fed buys a $1 million Treasury bond from Investment Fund A, which banks at MegaBank.
The Fed adds the bond to its assets on its balance sheet.
Simultaneously, the Fed creates $1 million in new digital reserves and credits MegaBank's reserve account at the Fed (adding to the liabilities side of its balance sheet).
MegaBank then credits Investment Fund A's account by $1 million.
Key Points:
No Pre-existing Money Needed: The Fed doesn't draw down a bank account funded by taxes or borrow money to make these purchases. It creates the payment digitally at the moment of purchase.
Balance Sheet Expansion: Each asset purchase simultaneously increases both the Assets (the bond or MBS) and Liabilities (the newly created reserves) on the Fed's balance sheet. The Fed's balance sheet grows when it buys assets.
Initial Capital (1913): While the Fed creates its operational money, it did start with initial capital provided by member banks.
Commercial banks that joined the Federal Reserve System were required to purchase shares (stock) in their regional Federal Reserve Bank. These shares paid a fixed dividend (6% by law), but did not confer control like regular stock. This initial capital provided a small buffer, but it was tiny compared to the Fed's balance sheet today and was not the source of funds for asset purchases.
Gold Certificates (Historically): In the early decades under the gold standard, the Fed did hold gold certificates (backed by gold held at the Treasury). This provided a form of backing for the currency it issued, but the mechanism for paying for asset purchases was still primarily the creation of reserves or the issuance of notes, albeit constrained by gold reserve requirements. The gold wasn't "spent" to buy assets; it acted as collateral limiting how much the Fed could create.
Earnings & Seigniorage: The Fed earns interest on the assets (bonds, MBS) it holds. After covering its operating expenses and paying the statutory dividend to member banks, the Fed remits the vast majority of its earnings back to the U.S. Treasury. This is a form of government revenue called seigniorage. However, these earnings are a result of holding the assets, not the source of funds to buy them.
In Summary:
The Federal Reserve didn't get "money" from somewhere else to start buying assets. Its foundational power, granted by Congress, is the authority to create U.S. base money – both physical currency (Federal Reserve Notes) and, crucially for asset purchases, digital bank reserves. When the Fed buys an asset, it pays for it by creating new reserves out of thin air and crediting the seller's bank. This is the essence of its ability to conduct monetary policy and expand the money supply. Initial capital from member banks and historical gold holdings provided structure and constraints, but not the operational funds for purchases.
How Asset Purchases Work (Mechanics):
When the Fed decides to buy an asset (like a Treasury bond or MBS), it does the following:
Identifies the Seller: The Fed buys assets from banks, primary dealers, institutional investors, etc., usually through auctions in the open market.
Credits Reserves: The Fed pays for the asset by crediting the reserve account of the seller's bank.
Example: Imagine the Fed buys a $1 million Treasury bond from Investment Fund A, which banks at MegaBank.
The Fed adds the bond to its assets on its balance sheet.
Simultaneously, the Fed creates $1 million in new digital reserves and credits MegaBank's reserve account at the Fed (adding to the liabilities side of its balance sheet).
MegaBank then credits Investment Fund A's account by $1 million.
Key Points:
No Pre-existing Money Needed: The Fed doesn't draw down a bank account funded by taxes or borrow money to make these purchases. It creates the payment digitally at the moment of purchase.
Balance Sheet Expansion: Each asset purchase simultaneously increases both the Assets (the bond or MBS) and Liabilities (the newly created reserves) on the Fed's balance sheet. The Fed's balance sheet grows when it buys assets.
Initial Capital (1913): While the Fed creates its operational money, it did start with initial capital provided by member banks.
Commercial banks that joined the Federal Reserve System were required to purchase shares (stock) in their regional Federal Reserve Bank. These shares paid a fixed dividend (6% by law), but did not confer control like regular stock. This initial capital provided a small buffer, but it was tiny compared to the Fed's balance sheet today and was not the source of funds for asset purchases.
Gold Certificates (Historically): In the early decades under the gold standard, the Fed did hold gold certificates (backed by gold held at the Treasury). This provided a form of backing for the currency it issued, but the mechanism for paying for asset purchases was still primarily the creation of reserves or the issuance of notes, albeit constrained by gold reserve requirements. The gold wasn't "spent" to buy assets; it acted as collateral limiting how much the Fed could create.
Earnings & Seigniorage: The Fed earns interest on the assets (bonds, MBS) it holds. After covering its operating expenses and paying the statutory dividend to member banks, the Fed remits the vast majority of its earnings back to the U.S. Treasury. This is a form of government revenue called seigniorage. However, these earnings are a result of holding the assets, not the source of funds to buy them.
In Summary:
The Federal Reserve didn't get "money" from somewhere else to start buying assets. Its foundational power, granted by Congress, is the authority to create U.S. base money – both physical currency (Federal Reserve Notes) and, crucially for asset purchases, digital bank reserves. When the Fed buys an asset, it pays for it by creating new reserves out of thin air and crediting the seller's bank. This is the essence of its ability to conduct monetary policy and expand the money supply. Initial capital from member banks and historical gold holdings provided structure and constraints, but not the operational funds for purchases.