On May 22, 2013, the Wall
Street Journal published an op-ed piece by Phil Gramm and Steve McMillin, “The
Debt Problem Hasn’t Vanished.” We
thought it was pretty good — except that the authors assumed as a given that
the currency had to be backed by government debt.
Naturally, we couldn’t let that pass unchallenged, so we
sent the following letter. It must have
been pretty good, for Mr. McMillin sent us back a brief note commenting
favorably on our insightful analysis.
Maybe there’s still hope to turn things around and return to a currency
backed with private sector hard assets instead of government debt:
Dear Sir(s):
Phil Gramm and Steve McMillin’s piece, “The Debt Problem
Hasn’t Vanished” (WSJ, 05/22/13, A15)
echoes the warnings of Henry C. Adams in the 19th century and Harold
G. Moulton in the 20th. Gramm
and McMillin’s analysis, however, assumes that paying down government debt
necessarily means a shrinking money supply.
“Money” and “currency” are not equivalent terms. Mass consumption power and small business and
agricultural development in the 19th century was tied to the
deflating bank note currency. At the
same time, industrial and commercial interests could create money at will in
the form of demand deposits and commercial paper by discounting and
rediscounting bills of exchange at state and National banks.
The increase in personal real income and decrease in the
wholesale price level was, as Gramm and McMillin point out, due to increases in
productivity unmatched in history. This
was fueled by the synergy of the Homestead Act and rapidly advancing technology.
The discontinuity between production and consumption power
resulted in financial panics and subsequent depressions in 1873 and 1893. Centralized control of the financial system,
failure to separate commercial from investment banking, stock market
speculation, and an inadequate clearinghouse and reserve system caused “the
Bankers’ Panic” of 1907, and renewed demands for reform.
The Federal Reserve was established in 1913 primarily to 1)
Replace the inelastic government debt-backed National Bank Notes of 1863-1913
and Treasury Notes of 1890 with elastic private sector asset-backed Federal
Reserve Notes. 2) Regulate clearinghouse
operations. 3) Provide for emergency
reserves at need. 4) Decentralize
financial power away from New York City by establishing a network of twelve
regional central banks.
Political decisions to finance U.S. entry into World Wars I
and II and the New Deal using debt instead of taxes diverted the Federal
Reserve from its mission to be the lender of last resort for the private sector,
and transformed the backing of the Federal Reserve Notes from private sector
hard assets to government debt. The
Federal Reserve was now construed as the lender of first resort for the federal
government.
Adding the contradictory mandates to control inflation and
establish full employment to the Federal Reserve’s mission — impossible in any
event within the Keynesian framework — confused monetary and fiscal policy to
the point of incomprehensibility. In an
effort to achieve these and other goals, changes during the New Deal put the Federal
Reserve under direct political control, while maintaining its nominal
independence.
To solve the debt problem permanently, it is essential to
terminate monetization of government debt and increase the tax base by
fostering productivity. We can duplicate
the quantum leaps in productivity and real income we saw in 19th
century America by making ownership of future private sector industrial and
commercial capital open to everyone, without redistributing existing wealth.
A “Capital” or “Industrial” Homestead Act, such as President
Reagan called for when governor of California, can be financed not by
self-defeating and counterproductive redistribution of existing wealth, but by allowing
anyone with a qualified and financially feasible capital project, whether
agricultural, commercial, or industrial, to discount bills at local commercial
banks for rediscount at the regional Federal Reserves. Replacing traditional forms of collateral
with capital credit insurance and reinsurance, and bank reserves backed with
government debt with reserves backed with private sector hard assets, would
take away any justification for having an outstanding national debt of any
size.
Yours, blah, blah.
#30#
