Federal Reserve Banks as Agents of the US Government

Vernon maintains: The national debt is the liabilities of Treasury, but if we consolidate their balance sheet with The Fed, then Notes, Coins, and Reserves are also part of the national “debt”.

Indeed, consolidating those balance sheets works all sorts of wonders in the imagination of economists. But remember the riddle attributed to Lincoln. “How many legs would a dog have, if we counted his tail a leg? Four. It wouldn’t make his tail a leg to call it one.” Reserve Bank liabilities are the debt of their shareholders, and some of those liabilities are in fact US Government assets. On what legitimate basis would we consolidate their balance sheets and consider Reserve Bank debt to be part of the “national ‘debt’”?

There is one common justification worth exploring, which Bill Mitchell offers here. The Federal Reserve Banks, even if not part of the US Government, are agents of the US Government.

And so they are. As every bank is the agent of its customers. Reserve Banks print and mail USG tax refunds as USG’s fiscal agents, drawing down USG accounts as they do. They sell and service Treasury Bills as agents against USG’s accounts, even as they buy and sell T-bills as assets on their own accounts to manage the yield curve.

Similarly, banks settle our drafts and collect from those who have paid us as our agents. We use the online portals of our banks and brokerage firms to manage our assets and liabilities. But they’re our assets and liabilities, appearing on our balance sheets. Even as our agent, the bank is often our counterparty. We can’t consolidate our balance sheet with that of a bank merely because it is our agent.

A bank as agent of its customers is described in the Uniform Commercial Code:


… and in this article on the web site of the Federal Reserve Bank of Atlanta.

An agent is not the principal’s subject. Indeed, every agent is itself a principal, within its own realm and upon its own balance sheet. Principal and agent have a contractual relationship. Amazon deals with publishers and distributors on the agency model, and we know they’d best read the contract carefully to understand who absorbs the risks of the sale and where the balance of power resides.

For a vivid example of the agency in commerce, consider the options at your supermarket’s service desk. At the larger markets in my area, one can pay utility bills, procure postage stamps and bus tickets, effect Western Union money transfers, purchase lottery tickets, register no-contract cell phones for activation, and obtain and activate an E-ZPass and dozens of brands of gift card.

These liabilities, assigned via an agent, reside on the books of their issuers. The customer does have some recourse with the agent for nonperformance; but were we to consolidate the books of principal and agent, we’d see the bus ticket as the liability of the supermarket, or Western Union on the hook for the supermarket’s paper towel bill.

As it happens, quite a few commercial banks are agents of the US Government, as well as of their other customers:

  • The IRS manual shows that our tax payments are processed by private banks, determined by where we send the check. U.S. Bank and J.P. Morgan Chase are USG’s Lockbox Processing Banks as of 2021.
  • Citibank (pdf) and U.S. Bank issue the purchase cards that enable USG officials to obtain supplies and procure services to a threshold of $2000-$3000 without requiring the vendor to await a settlement draft from the Treasury General Account.
  • And of course those Depositaries through which US Government agencies process their daily receipts are Financial Agents of the Federal Government, and are so described in Title 31 of the Electronic Code of Federal Regulations.

So I hope we can agree that the Reserve Banks’ responsibilities as agents of the US Government provide no justification for consolidating their books with those of the US Government. I challenge this site’s readers to identify any other justification.