Monday, April 11, 2011

Why "Own the Fed," Not "End the Fed"?, Part I

The movement to "End the Fed" has gained a lot of momentum in the past couple of years, moving from the demand of a minority of "conspiracy theorists" into the mainstream. While probably motivated by the egregious misuse of the central bank's powers, particularly in bailing out failed companies and the purchase of "toxic assets" to maintain prices on Wall Street and prevent losses to speculators, the demand reflects a fundamental misunderstanding of, one, the role of the State, and, two, that of the central bank.

Today let's deal with the widespread belief that only the State has the right to create money. This is easy: The State has no exclusive right to "create money." It may not even have the right to create money, frankly, but that's a different argument.  If we look at the Constitution, it's reasonable to claim that the State's authority extends to setting the standard of value for and regulating the issuance of currency. In connection with that, we could argue that the power to create money is a right of private property. Thus, if you don't own something as private property, you can't create money. Since anything owned by the State is, ipso facto, not private property, the State cannot create money.

If that's the case, the right (and thus power) of money creation would be reserved to private citizens. What we need to look at, however, is whether the State has the exclusive right to create money.  Did "the sovereign" have the sole right to "create money" during the Middle Ages? No. Anybody that had the "mint right" could strike coins. The Archbishops of York, for example, struck their own coins into the 16th century, as did others previously. As long as they met the official standard, the Archbishops could issue as many — or as few — coins as they liked.  Even counterfeiters could get away with it . . . if they put the full value of metal in their coins.  The laws were against short weight coins and "clipping."  There was no good way of determining whether a coin was official or not if it contained the full value of metal, so why bother?

This changed when the divine right of kings became the fashionable theory of government in the 16th century. Due in large measure to the antics of Henry VIII Tudor and his "discovery" that manipulating the currency could generate huge profits for whoever debased the coinage, the belief grew that the king could somehow "create money" by his private ownership of everything in sight.

Offsetting this, however, was the growing realization that "money" was anything that could be used to settle a debt. Financial institutions were springing up to deal with "non coin money," that is, to handle contracts that circulated in the channels of commerce without the need to carry around vast quantities of coin, or to accumulate stores of coin before doing business. These contracts were called "bills of exchange," and the financial institutions that dealt in them were called "commercial banks."

To regulate the trade in this "commercial paper," the Bank of England was established in 1694. Almost immediately, however, "the sovereign" managed to take over effective ownership of the Bank by forcing a loan of the Bank's reserves, replacing the gold and silver with "government stock." This put the presumably exclusive money power firmly back in the hands of the central government barely six years after the "Glorious Revolution" that was intended to curtail the power of the executive — of which the most dangerous was the power to finance government operations by borrowing rather than through taxation.

Thus, when the U.S. Constitution was adopted, a number of powers formerly reserved to the executive branch ("the sovereign") were deliberately vested in the legislature — among the most important of which were the rights to borrow money and regulate the value of the currency, especially after Henry VIII had shown how creative manipulation of the currency could finance his extravagances and remove every vestige of power from parliament, and Charles I had demonstrated that being able to borrow could keep a government afloat even when the legislature refused to grant taxes. Money creation seems to have been prohibited — which worried George Mason, who feared that, forbidden to emit bills of credit, the central government might not be able to meet emergency calls for cash.

Whether or not the federal government has the power to create money, it certainly has the right to delegate the power it does have wherever it wishes, whether to a private individual, corporation, or keep it.  The belief that the Federal Reserve, being an allegedly private corporation, is acting unconstitutionally is without foundation.  It may be problematical that the federal government has the power to create money — but, assuming it does, it can delegate it anywhere it wants . . . even back to the people from whom it presumably got it in the first place.  Thus, the Federal Reserve doesn't need to be abolished, but reformed.



If you want to participate in helping to turn this situation around, i.e., taking back the money power and returning it to the people, and at the same time reorienting the Federal Reserve to its original purpose, consider participating at the rally outside the Federal Reserve building in Washington, DC, this Friday, April 15.

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