Every time I explain to my students about Treasury securities—T-Bills, Treasury Notes, and Treasury Bonds— it leads to a pretty fired up discussion about the Federal Reserve and who really has the keys to the vault of our banking system.

If you want to understand how our country runs its own figurative checking account, and in turn who really pulls the purse strings, it is really important to understand the Federal Reserve System. Yet many adults don’t even understand the Fed, the reason being is that who is in control really isn’t black and white, and the whole system is a conflict of interest.

But if you teach the Federal Reserve system by approaching it from a purely macroeconomic perspective, kids don’t get it as deeply. I’ve tried many times. If your approach is to teach them how to buy Treasury securities, then they’ll have stake in the idea, which leads to macro understanding.

I subscribe to this teaching philosophy for everything economic. Make every lesson flow in and out of their pockets.

So, first, here’s the 2-part,quick lesson about what Treasury securities are. Do make sure to teach them this one after the municipal bond lesson.

1. Define Treasury securities: Any Treasury security is an I.O.U. the U.S. Department of the Treasury gives to the Federal Reserve Bank in exchange for money. (Some argue they scribble out these I.O.U.s too often, and spend a little freely with the loans.)

These investments, which for our discussion include three of the main types—T-Bills, Treasury Notes, and Treasury Bonds—are considered risk-free because the government could never possibly run out of money, so there would never be a default on their loan to you, the buyer. The logic is that even if the government went broke, it could raise taxes to pay off its bonds when the maturity dates arrive. Hmm. So does that mean you, as a taxpayer, would end up paying off the government’s debt to you?

There is an ominous example in history of a major nation defaulting on its bonds. Russia, in 1998, defaulted on its consumer debt (which is what bonds are). IT was called the Ruble Crisis and it was only 11 years ago. In this economy, it would not be unreasonable to worry about it. Yet, treasuries are considered failsafe, and as such the demand for them rises every time the stock market drops.

2. The difference between a Treasury Bill (nicknamed the T-Bill), Treasury Note, and Treasury Bond: The length of time the loan is made to the government. T-bills mature in one year or less, sometimes in as little as 30 days. Reminds me of an American Express card for the government. They’re borrowing money, but they’ve only 30 days to repay it, plus interest. Interest is only given at the maturity date. No coupons, which is why they’re also sometimes called no-coupon-bonds. Treasury Notes mature in 2 to 10 years, and Treasury Bonds in 20 to 30 years.

They are all purchased the same way you purchase municipal bonds, through a financial advisor at your local credit union/bank, or through a stock brokerage house.

Okay, once they have that under their belt, give them the following zinger about the Federal Reserve. Try it, you’ll be amazed how up in arms your teen will get. Explain how the Federal Reserve System is designed, and then ask them to think about whether it’s a conflict of interest. It may be the best essay question you ever get to ask them. And please send in stories about the discussions you’ve had with your kids about the Fed. I honestly would start any economics class with this lesson.

The Federal Reserve: What is this central banking system that lets the U.S. government borrow money from taxpayers any time it wants, without discretion? And who really runs it?

The Federal Reserve is comprised of 12 regional banks. These regional banks are technically owned by their member banks, yet the Fed is often considered an independent government institution with some private parts. The reasons are:

1. It does not operate to make a profit (which is a good thing, seeing how it lends to the government without any limits).

2. The Fed Chairman is appointed by the President of the United States, and serves as the executive officer of the Board of Governors, which is part of the Fed and also a so-called independent government agency. (Who in the room can name who he is right now, without Googling?)

3. It has three major functions, which are absolutely government administrative functions: The Fed sets monetary policy; the Fed supervises and regulates banks so that consumer rights are protected; and the Fed provides financial services and payment systems for the entire banking system, the government, and foreign official institutions.

So wait: how can it be part of the government and also lend the government money constantly by selling its debt to us? Isn’t that a conflict of interest?

And away you go…There is no clearer understanding of how corporate America and the U.S. government are bound. I believe, perhaps more than anything, that kids should be encouraged to find the conflict of interest unsettling, and to write their congressmen for explanation about why the Fed chairman is chosen by the same person who needs the I.O.U.s.

To keep updated on new posts, you can also subscribe to our RSS feed, on Facebook and on your Twitter page. Just add us.