The Federal Reserve held interest rates steady Wednesday at 3.5% to 3.75%, and the financial press dutifully reported another “wait and see” moment in monetary policy. What almost no coverage mentioned is how the Fed maintains that rate, which is through a system that pays roughly $200 billion annually to banks under legal authority Congress never clearly granted.

For 18 years, the Fed has operated what economists call a “floor system” that, as argued by Alexander W. Salter, may violate the plain language of the statute that authorized it. When Congress allowed the Fed to pay interest on reserves in 2008, the law set a clear ceiling: rates could not exceed “the general level of short-term interest rates.” The Fed found this constraint inconvenient and reinterpreted its way around it, making itself the judge of its own compliance.

This creative interpretation transformed American monetary policy. The result is a system that operates on a $6.6 trillion balance sheet, has never received explicit Congressional authorization, and funnels money to the largest financial institutions – all while Congress watches silently.

How The Floor System Works

Understanding what the Fed did requires understanding what it replaced. Before 2008, the Fed controlled short-term interest rates through scarcity. It held a relatively small balance sheet and managed the supply of reserves through daily open market operations. Banks that needed reserves borrowed them in the federal funds market. The interest rate in that market, called the “target federal funds rate,” became the Fed’s primary policy tool.

This “corridor system” kept reserves scarce and valuable. Banks had incentive to lend excess reserves rather than let them sit idle earning nothing. The Fed’s balance sheet stayed lean because it only needed enough reserves to influence the margin.

The 2008 financial crisis shattered this framework. Emergency lending programs flooded the banking system with reserves. The Fed’s balance sheet exploded from under $1 trillion to over $2 trillion in months. Under the old system, this flood of reserves would have driven the federal funds rate to zero and potentially triggered inflation as banks lent out their excess holdings.

The Fed’s solution was to pay banks to do nothing. By offering interest on reserves at a rate above what banks could earn elsewhere, the Fed created a “floor” under short-term rates. Banks would hold reserves rather than lend them if holding paid better. The flood of reserves stayed parked at the Fed rather than flowing into the economy.

The problem, as Salter documents, is that Congress never authorized this. The statute said interest on reserves could not exceed “the general level of short-term interest rates” – meaning market rates, not rates the Fed administers. By redefining “short-term interest rates” to include the primary credit rate (a rate the Fed itself sets), officials created a circular justification. The Fed can pay whatever rate it wants on reserves, provided that rate is below another rate the Fed also sets.

18 Years of “Temporary”

Milton Friedman observed that nothing is as permanent as a temporary government program. The floor system proves his point. What began as crisis management in 2008 remains the operating framework in 2026. The Fed’s balance sheet, which peaked above $9 trillion during the pandemic response, still exceeds $6.6 trillion. Annual interest payments to banks approach $200 billion – more than the federal Department of Transportation budget.

The beneficiaries are concentrated. Megabanks and foreign institutions receive the lion’s share of these payments. The system effectively taxes the broader economy through inflation risk and fiscal cost while directing benefits to the largest financial institutions. This is one way the Cantillon effect is enshrined in policy in the U.S. monetary system.

Congress has done nothing. As Salter notes, the Senate has “debated” whether to strip the Fed’s authority to pay interest on reserves, but debate without action is theater. Neither party has introduced legislation to explicitly authorize the floor system or to prohibit it. The Fed operates in a legal gray zone that everyone acknowledges but no one addresses.

Fed Governor Stephen Miran recently highlighted a related problem: bank regulations have increased demand for reserves, forcing the Fed to maintain a larger balance sheet. His proposed solution is regulatory reform to reduce this demand. But as Salter argues, this addresses a downstream effect while leaving the core problem untouched. Even with lighter regulations, the floor system would remain, and its legal basis would remain questionable.

Why Bitcoin’s Rules Cannot Bend

This is precisely why bitcoin’s immutable protocol rules matter. The Federal Reserve reinterpreted its statutory constraints when those constraints became inconvenient. No such reinterpretation is possible with bitcoin.

When the Fed decided to redefine “short-term interest rates,” it needed only internal agreement among officials. No external check existed. Congress could have objected, but chose not to, and the courts have not been asked to rule. The Fed’s reinterpretation became operational reality through institutional will.

Bitcoin’s consensus rules feature an entirely different enforcement mechanism. Any attempt to change the supply limit or issuance schedule of new bitcoins would require convincing hundreds of thousands of independent node operators to run modified software. These operators have no institutional loyalty to any central authority. They run nodes precisely because they value the existing rules. A proposed change that dilutes their holdings would face immediate, distributed resistance.

The 2017 Block Size Wars demonstrated this dynamic. When major mining pools and corporations attempted to increase Bitcoin’s block size through the SegWit2x proposal, node operators refused to upgrade. The proposal failed despite having support from over 80% of mining hash power and nearly every major Bitcoin company. “Economic nodes” (the participants who actually use bitcoin for transactions and savings) held fast, and wielded their veto power over protocol changes.

No equivalent mechanism constrains the Federal Reserve. Its governors are appointed, not elected, and its deliberations are private. Its reinterpretations of statutory authority face no immediate check. The Fed’s eighteen-year floor system stands as evidence that institutional will can override statutory intent when no one is watching closely enough to stop it.

Rules Versus Discretion

The deeper issue is governance philosophy. An examination of the Fed’s origins teaches that the Federal Reserve operates on “discretion.” Its officials assess economic conditions, weigh competing priorities, and make judgments about appropriate policy. When those judgments require reinterpreting statutory constraints, they are reinterpreted. The justification is always necessity – the emergency demanded action, and action required flexibility.

In contrast, Bitcoin operates on rules, and the protocol does not assess conditions or weigh priorities. It executes the same logic regardless of price, politics, or crisis. The 2020 pandemic did not accelerate bitcoin issuance, and the 2022 bear market did not slow it. No emergency grants anyone authority to deviate from the schedule.

This distinction matters for anyone holding assets denominated in either system. Dollars held today are subject to whatever the Fed decides tomorrow, including decisions that reinterpret the Fed’s own constraints. Bitcoin held today will be diluted according to a schedule that cannot be altered without distributed consensus among economically motivated participants who benefit from the existing rules.

The Fed’s floor system is not really a scandal in the traditional sense. No one alleges personal corruption, and the officials who designed it believed they were acting in the public interest during a crisis. But the system’s persistence reveals something important about institutional incentives: once an agency expands its authority, that expansion tends to become permanent.

Bitcoin was designed with this tendency in mind. Its creators designed an elegant, mathematically secure system so that no individual or institution could claim authority to modify the protocol. The rules exist independent of their creators, bitcoin holders, miners, governments, and anyone else. The rules will persist as long as network participants, in aggregate, choose to enforce them.

It’s been 18 years since the Fed reinterpreted its statutory constraints, and Congress still has not acted. The floor system continues, the payments to banks continue, as does the Fed’s bloated balance sheet. For those who want monetary rules that actually bind, the lesson is clear: code can enforce what law cannot.