Immediately after the presidential campaign of 1912, Woodrow
Wilson began hedging on his promise to do something about the financial
system. This, of course, was
unacceptable to William Jennings Bryan, who had been made Secretary of State in
return for his critical support in getting Wilson elected.
Bryan began pushing hard, and the legislation for the new
Federal Reserve System went through.
Contrary to popular legend, there was nothing secret about the Federal
Reserve Act. It was one of the longest
and hardest fought legislative battles in the history of the United States.
From our perspective, the Federal Reserve System solved
three out of four important problems, at least on paper, and only temporarily:
• The inelastic National Bank Note and Treasury Notes of 1890
currencies were to be replaced with elastic Federal Reserve Note Currencies.
• The government debt backing of the National Bank Notes and
Treasury Notes of 1890 was to be replaced with private sector asset backing.
• The Federal Reserve Note currencies (there were twelve of
them, one for each region) were to pass at par and be convertible into all the
other currencies in circulation, e.g.,
gold and silver coin and certificates, and with each other.
The one problem the establishment of the Federal Reserve did
not solve was democratic access to money creation by ordinary citizens.
This became a moot point, because to finance entry into the
First World War the Congress decided to take advantage of a loophole in the
Federal Reserve Act. Since one of the
main purposes of the Federal Reserve was to replace the currency backed by
government debt with currency backed by private sector hard assets, it had to
be able to purchase government debt on the open market to replace the National
Bank Notes with Federal Reserve Bank Notes.
Instead of using this power to retire debt, however, the
Federal Reserve was persuaded by Congress to use it to increase debt by buying
Liberty and Victory bonds. Technically,
of course, these were not actually bonds used to borrow existing savings, but
bills of credit emitted as money.
After the war the Federal Reserve began retiring the debt,
but the 1929 Stock Market Crash and the Great Depression ushered in the
Keynesian New Deal — financed with massive increases in government debt. World War II was also financed on debt . . .
ironically in direct contravention of Keynes’s own recommendation!
Consequently, the Federal Reserve virtually ceased discount
operations except for politically motivated bailouts, and confined its open
market operations to dealing in government securities.
Part of the Capital Homesteading proposal is to return the
Federal Reserve to its original mission of providing liquidity to the private
sector and stop using it to monetize government deficits. Consistent with binary economics, of course,
all new money would be created in ways that make people into capital owners,
thereby providing them with a means of acquiring and maintaining a Capital
Homestead to match the 1862 land-based Homestead Act.
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