The U.S. federal government is increasingly reliant on debt for short-term economic growth. This situation stems from the government’s decision to give away the power to regulate the money supply to the Federal Reserve—a private entity made up of 12 banks. While certain elements of free-market capitalism contribute to the U.S.’s debt-dependent nature, this initial decision to separate monetary control has trapped the country in an ongoing cycle of growing debt.

As of now, the U.S. is nearly 30 trillion dollars in debt. While some economists argue this is either inconsequential or manageable, 30 trillion is no small amount. The growing debt places the U.S. in a weakened position for the future. Paying off debt is like playing catch-up: the government must divert money to servicing debt rather than investing in future economic growth. Some economists, such as Mervyn King, argue that large federal debt may stifle growth by driving up interest rates, which in turn discourages private investment. Furthermore, there is a possible inverse relationship between paying off debt and economic growth. Mervyn King suggested that the 2008 financial crisis, in part, was due to China’s population increasing savings and paying off debt. Saving, investing, and paying off debt are crucial for individual financial stability and overall well-being. However, because the debt system incentivizes those in control—such as politicians—to favor debt, it undermines individual stability. This, in my view, highlights the core issue: basing the economy on debt is fundamentally problematic.

By separating the regulation of the money supply from the federal government and handing it over to a private entity like the Federal Reserve, the government has become dependent on loans from that entity whenever it needs money. Since the government requires substantial capital to accomplish its goals and tax revenue is limited, an increasing portion of federal debt—currently around 8 trillion dollars—is owed to the Federal Reserve. While this debt might not seem problematic in the short term, paying it off leads to rising interest rates, which slows down economic growth and private investment.

The Federal Reserve Act of 1913 was designed to stabilize the economy, and economists argue that the Fed helps prevent harmful short-term policies—like reducing unemployment to gain political favor—that could otherwise arise if the government controlled the money supply. However, the trade-off is that the Fed’s actions to keep inflation and unemployment in check often come at the cost of exacerbating national debt. This ongoing cycle leads to a situation where paying off debt erodes future economic growth. A better approach would be to merge the Fed with the federal government to allow for more ethical and long-term economic decision-making. While low levels of inflation can spur economic growth by incentivizing spending, immense debt and economic stagnation are far worse. Therefore, merging the Fed into the U.S. government’s monetary policy is a better solution for sustainable economic health.

Sources:

Ferreira, Mário B., Filipa de Almeida, Jerônimo C. Soro, Márcia Maurer Herter, Diego Costa Pinto, and Carla Sofia Silva. “On the Relation between over-Indebtedness and Well-Being: An Analysis of the Mechanisms Influencing Health, Sleep, Life Satisfaction, and Emotional Well-Being.” Frontiers in Psychology 12 (2021). https://doi.org/10.3389/fpsyg.2021.591875.

King, Mervyn A. The End of Alchemy: Money, Banking, and the Future of the Global Economy. New York: W.W. Norton & Company, 2017.

Congress, United States. “Federal Reserve Act : Public Law 63-43, 63d Congress, H.R. 7837: An Act to Provide for the Establishment of Federal Reserve Banks, to Furnish an Elastic Currency, to Afford Means of Rediscounting Commercial Paper, to Establish a More Effective Supervision of Banking in the United States, and for Other Purposes.” FRASER, December 23, 1913. https://fraser.stlouisfed.org/title/966.

De Rugy, Veronique. “Debt and Growth: A Decade of Studies.” Mercatus Center, May 13, 2021. https://www.mercatus.org/publications/government-spending/debt-and-growth-decade-studies#:~:text=High%20public%20debt%20can%20negatively,volatility%20and%20lower%20growth%20rates.