The US is very unique among developed nations in that it has both a Treasury Department and a central bank. The Federal Reserve was established just over 100 years ago, while the Treasury was created in 1789 by Alexander Hamilton.
What is the difference between these two financial institutions, and why does the US have two major monetary organizations within its government?
What the Treasury Does
The Treasury Department handles the US government’s tax collection and budget. It is part of the Executive Branch of government. One of the main roles of the Treasury is to offer advice to the president of the United States regarding financial planning and government spending.
Two major organizations within the Treasury are well-known for their role in handling the country’s finances. The first is the Internal Revenue Service, which is responsible for collecting taxes and administering tax returns. The second is the US Mint, the organization responsible for actually printing money and minting coins.
The Treasury and the Federal Reserve work closely with one another. The US Treasury has an account with the Federal Reserve, and the Federal Reserve receives massive amounts of currency from the Treasury that it then circulates through banks in the US.
The Federal Reserve
The Federal Reserve functions as the central banking institution in the United States. Unlike the Treasury, it actually doesn’t answer to any specific entity in the US government and functions largely independently. The Federal Reserve is responsible for setting interest rates and overall economic policy for the US, making it the main driver of financial planning for the country’s economy.
The Federal Reserve isn’t “owned” by anyone like a traditional bank. The central bank doesn’t operate in order to turn a profit, but instead serves the interests of the US government. When the Fed does end up with excess money from its banking activities, it simply transfers that overage back to the Treasury Department, funding government budgets.
Where They Overlap
The two institutions also have overlapping responsibilities in some respects. For instance, both the Treasury and the Fed function as literal treasuries. The US Treasury is responsible for maintaining the country’s supply of gold, which is stored in a vault in New York. The Federal Reserve, meanwhile, is quite literally a central bank; major US financial institutions all keep accounts with the Fed, and the bank ends up storing considerable sums of money in this role.
The bottom line is that both institutions work together to pursue financial policies that will be the most beneficial for the United States’ economy. While they are distinct entities, they often work together to achieve a common goal.