What does "writes a check to Congress in exchange for them" mean in this context?

Question

On page 192 of the 5th edition, George Edward Griffin begins to describe
the "Mandrake Mechanism", chapter ten, in "The Creature from Jekyll Island".

First, the Fed takes all the government bonds which the public does
not buy and writes a check to Congress in exchange for them. (It
acquires other debt obligations as well, but government bonds comprise
most of its inventory.)

I don't understand it.  The government issues bonds.  Some people buy it.  Some bonds are not bought.  How does Congress get involved in this?  Is it the case that Congress buys all those people did not buy?  With what money does Congress buy?  Is Griffin saying that the Fed itself ``writes a check to Congress'' so that Congress can afford it?
Update. The question is requesting not a profound understanding of the process, but only the process itself.  If Griffin doesn't describe it properly, I would consider an excellent answer the mere description of this first step of the process that Griffin tried to describe.

user18 · Accepted Answer

The US Government has $$X$ in spending and raises $$Y$ in revenue.
Usually, $X>Y$. So, the US Government (or more specifically the US Treasury) has to cover this $$(X-Y)$ difference (or funding requirement/shortfall).
It does so by issuing bonds (or notes or bills) worth $$(X-Y)$. Pretty much anyone is free to buy these bonds, including the public and the Fed.
So "writes a check to Congress in exchange for them" probably simply describes the act of the Fed buying some of these bonds.

The buying and selling of US Government bonds by the Fed is called open market operations. See e.g. Investopedia or this Fed webpage for how this works.

Three clarifications:

The US Congress doesn't have any direct official/technical/legal role in any of this, except insofar as it determines spending ($X$) and revenue ($Y$). So, it's not really correct to say that the Fed "writes a check" to Congress. We should instead say that Fed "writes a check" to Treasury. (Of course, we could quibble and say that Congress and the Treasury are all part of the US Government, so "writing a check" to the Treasury is "really the same thing" as to Congress.)
This writer writes, "the Fed takes all the government bonds which the public does not buy." This statement may suggest incorrectly that the government is free to sell as many bonds at whatever interest rate it likes. But this is incorrect. Instead, what happens is that the Fed targets certain interest rates. The government must then adjust its interest rates—so as to meet its $$(X-Y)$ funding requirement and, at the same time, the Fed's targets.
"Writes a check" is not strictly speaking correct, since nowadays this is all done electronically with keystrokes rather than any physical writing of checks.

By the way, I've never heard of this writer, but Wikipedia calls him a conspiracy theorist and states that The Creature from Jekyll Island (1994) "promotes false theories about the motives behind the creation of the Federal Reserve System." So I wouldn't necessarily believe anything written by this writer.

What does "writes a check to Congress in exchange for them" mean in this context?

One Answer

Add your own answers!

Ask a Question