If we keep raising the issue of the Federal Reserve, it’s
because other people keep insisting on two things that we know are
incorrect. One, the federal government
is the sole legal money creator in the United States. Two, central banks were invented to finance
government.
The basic problem is that the Federal Reserve System, the
central bank of the United States, is being egregiously misused. First, of course, it was never intended to
finance government. The power of the
federal government to create money (“emit bills of credit”) was specifically
removed from the enumerated powers of Congress under Article I, Section 8, and
prohibited to the individual states under Article I, Section 10.
The framers had a very
bad experience with the Continental Currency, and did not want a repeat. Giving politicians the power to emit bills of
credit (“create money”) virtually at will is a recipe for disaster, as we have
seen with the rapid growth of the U.S. national debt since the New Deal.
The Federal Reserve was primarily intended “to furnish an elastic currency, to afford means
of rediscounting commercial paper, to establish a more effective supervision of
banking in the United States, and for other purposes.” That is a direct quote from the preamble to
the original 1913 Act . . . that has been carefully edited out.
The idea was to shift
from an inelastic (i.e., fixed in
amount) reserve currency backed with government debt (the United States Notes
or “Greenbacks” of 1862-1971, the National Bank Notes of 1863-1913, and the
Treasury Notes of 1890), to an elastic (i.e.,
varies directly with the present value of existing and future marketable goods
and services in the economy) reserve currency backed with the present value of
private sector hard assets.
The only reason that
the Federal Reserve was permitted to deal in government securities of any kind,
primary or secondary, was to retire the debt-backed reserve currency and
replace it with an asset-backed reserve currency. The program to retire the National Bank Notes
terminated in 1938, so there is no longer any legal justification for the
Federal Reserve to buy or sell government securities, either by discounting or
rediscounting, or engaging in open market operations.
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