Wednesday, October 2, 2013

Some Brief Thoughts on Federal Reserve Monetary Policy

Once upon a time (last week, it may have been), we got a request from a reporter for our take on current Federal Reserve monetary policy.  Good?  Bad?  Indifferent?  Is anything wrong?  Is it causing any problems?  What is your opinion as financial and monetary commentators?

That’s easy.  Federal Reserve monetary policy (combined with federal government fiscal policy) is an unmitigated disaster.  This is due to four factors, three direct, and one indirect.


1) No one in power understands money.  Money is anything that can be accepted in settlement of a debt, i.e., “everything transferred in commerce.”  Money is therefore a contract just as, in a sense, all contracts are money, consisting of offer, acceptance, and consideration, “consideration” being the inducement to enter into a contract, i.e., the thing of value being exchanged.  By defining money exclusively as currency (“current money”) issued or authorized by the State (M1 and M2), monetary policy ignores what has (until the recent tsunami of cash from “stimulus”) constituted the bulk of the U.S. money supply — private sector bills of exchange.

2) Those in power believe that only the federal government has the right and power to create or authorize money.  Not only does the federal government not have a monopoly on money, it has no power to create money at all.  The constitutional term that would have given the Congress this power, “emit bills of credit,” was specifically taken out of the first draft of the Constitution in order to prevent a recurrence of the Continental Currency debacle.

3) The Federal Reserve was never intended to finance government.  It was established to meet the liquidity needs of private sector industry, commerce, and agriculture.  The Federal Reserve would a) supplement the inelastic gold reserve currency with an elastic, private sector asset-backed paper currency, b) replace the inelastic debt-backed paper non-reserve  currencies in circulation in 1913 (the National Bank Notes, the Treasury Notes of 1890, and eventually, the United States Notes, the “Greenbacks”) with the elastic asset-backed paper reserve currency (Federal Reserve Notes), c) oversee and regulate clearinghouse operations, and d) carry out “other purposes” (i.e., economic research).

Due to the exigencies of financing the U.S. entry into WWI and the reluctance of the politicians to finance the war by raising taxes, the Federal Reserve used the power it had been granted to deal in secondary government issuances on the open market to retire the debt that backed the inelastic debt-backed paper currencies instead to increase the debt.  With the advent of Keynesian economics and its unquestioned dogmas that a) “money is peculiarly a creation of the State” (Treatise on Money, Vol. I), b) government-issued currency is the only real money, and c) that currency represents the present value only of existing marketable goods and services in which the State has ultimate property through its power to tax, the amount of government debt became viewed as irrelevant, a “non-repayable debt the nation owes itself.”  There is today no effective check on the power of government as a result of its being able to finance operations without direct taxation, only the indirect tax of inflation.


1) Because Keynesian economics requires that capital ownership be concentrated in private hands yet controlled (effectively owned) by the State, ordinary people have been stripped of capital ownership.  Had the Federal Reserve used its money creation powers to finance broad-based capital ownership in the private sector instead of concentrated ownership and control in the public sector, as Louis Kelso and Mortimer Adler proposed, people would have been able to derive the bulk of their income from ownership of capital, instead of from jobs that they don’t have, or from government welfare that permits the State to intrude in virtually every aspect of life.

In sum, because the Federal Reserve continues to pour massive quantities of debt-backed money into the economy, and banks are able to put the money into the stock market instead of new, broadly owned capital formation, the secondary market is grossly over-valued at the same time that the production of marketable goods and services that is supposed to stand behind stock prices is in decline relative to share values.


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