Wednesday, August 17, 2011

The Job of the Fed

One of the hardest tasks we face, evidently, is a kind of economic and financial aphasia with which students of binary economics seem to be afflicted. In English, nobody seems to know what we’re talking about when we use words that we think have plain meanings. We even define our words, and still the meaning seems to zip right over the heads of whoever it is we’re speaking to.

Take, for instance, when we discourse on banking. We’ve droned on at great length about the difference between deposit banking and issue banking, the role of the central bank, the difference between pure credit and past savings-based credit, so on, so forth, etc., as it were, blah, blah.

So what are we to think when we pick up the newspaper and read something so at odds not only with everything we say, but reality itself? It’s as if the media, academia, the politicians, and even ordinary citizens are engaged in what Winston Smith in 1984 called “improvising history.”

We think it’s time to fire off yet another letter that the editors aren’t equipped to understand, and will sweep under the rug. It does, however, have the advantage in that it writes our blog for the day . . . .

Letters
The Washington Post

Dear Sir(s):

In today's Post Neil Irwin asserts, "It is the job of the Fed, or any central bank, to print money." Unqualified, that statement hands the government a blank check. The original Federal Reserve Act of 1913 states the job of the Fed is "to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish more effective supervision of banking in the United States, and for other purposes." In this way the Fed would provide liquidity for private sector development when existing savings were insufficient.

Under "other purposes" the Fed was empowered to deal in outstanding government securities backing the National Bank Notes and Treasury Notes of 1890. The intent was to replace the government debt-backed currency with private sector asset-backed Federal Reserve Notes. Nevertheless, the primary purpose of open market operations was to supplement the Fed's rediscounting power by dealing in paper issued by private sector businesses and non-member banks, not monetize government debt.

The proper use of the banking system is described in Dr. Harold Moulton's, The Formation of Capital (1935), written to present an alternative to the Keynesian New Deal.

Yours,

Hastur the Unspeakable

(Not really. We just wanted to see if anybody is reading this.)

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