Posted originally on Dec 1, 2025 by Martin Armstrong |  

People love to blame the Federal Reserve for everything under the sun because it is easier than admitting the real problem: government. The tragic part of this entire monetary experiment is that the Fed, as originally designed in 1913, was brilliant. Each regional branch operated independently, responding to local capital flows instead of political agendas in Washington.

Money moved with the seasons. When crops were planted, capital flowed one way; when the harvest came in, it flowed another. The system was designed to absorb these fluctuations smoothly. It was never supposed to be a political arm of the federal government. In fact, the Fed was owned by the member banks and functioned as a true lender of last resort — buying corporate paper, not government debt. That allowed elastic money that expanded and contracted with economic activity. Corporate paper matures. Government debt does not.

Then came World War I, and with it, the beginning of the end.

Washington needed to borrow staggering amounts of money, so the government told the Fed: stop buying corporate paper and buy our debt instead. From that moment forward, the independence of the branches was eroded. The original structure was discarded in favor of centralized political control. Roosevelt finished the job during the New Deal by usurping the authority of all the regional banks and concentrating everything in Washington under a single chairman. What should have remained a decentralized system responding to capital flows became a one-size-fits-all political tool.

This is why I say the central bank does not need reform, but the government does.

The Fed does not create inflation; the fiscal side of the ledger does. Once Washington discovered that it was less inflationary to borrow than to print outright, the entire system became debt-driven. And because government debt never expires, the money supply never contracts. If the Fed does absolutely nothing, the money supply still expands because the government continually rolls the debt and pays interest on interest. That is why we are in a perpetual cycle of rising obligations.

The Fed has been politically gutted. Every time Washington meddles with the structure, nothing is ever restored afterward. There is no long-term planning, no institutional memory. When I go down to Washington and speak with people, I feel as though I’m explaining basic arithmetic to a grade-school classroom. The political class does not understand markets, capital flows, or historical monetary structure.

The Fed was designed to stabilize regional capital flows. Today, it is blamed for inflation it does not create, forced to manage debt it does not issue, and expected to solve political failures it did not cause. The lender-of-last-resort function only made sense when the Fed bought corporate paper that rolled off the books. Government debt has destroyed that mechanism. Once money becomes tied to sovereign debt, it never contracts, rather it becomes perpetual.

This is why our monetary system is collapsing into the Sovereign Debt Crisis. Not because of the Fed, but because government destroyed the very architecture that once allowed the economy to breathe.