Yesterday we looked
at what central banks were designed and intended to do. Today we look at what central banks have been
diverted or hijacked into doing, i.e., shifted from providing an elastic,
asset-backed reserve currency to finance the private sector by supplying
liquidity for qualified agricultural, commercial, and industrial purposes, to
providing virtually unlimited financing for government using an elastic,
debt-backed currency to expand the power of the State.
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| R.M.S. Titanic: Too Big To Fail |
Thus, despite the
fact that the rediscounting mechanism was intended under the Federal Reserve
Act of 1913 to be the primary means for controlling the American money supply
for the benefit of the private sector, it has long been abandoned as an
integral part of the United States financial system. The discount window has
been used instead to help bail out a few companies or countries considered too
big or too important to fail.
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| Not worth a Continental |
Overall, however,
the money creation powers of the Federal Reserve have been used to monetize
government debt. These are the bills of
credit by means of which the federal government creates money, but which the
power to emit was specifically removed from Article I, Section 8 of the
Constitution. This was to prevent the devastating problems associated with a
debt-backed currency under the control of the politicians that the country had
experienced with the debacle of the Continental Currency. Since the system was
designed to implement an asset-backed currency not under political control, a
number of problems have resulted from the shift.
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| Tyrannosaurus Debt |
Citizens usually
blame decisions by Congress or the President for our economic problems,
particularly those decisions that result in nonproductive or counter-productive
spending and tax policies. People usually don’t take decisions by the Federal
Reserve into account, many of which (as Louis Kelso and others have pointed out
for decades), have been equally counter-productive.
Federal Reserve
policies, albeit in response to the political control over the institution
established in the 1930s contrary to the original intent of the Federal Reserve
Act, have added to the problem of government deficits, fueling the growth of
the booked (i.e., acknowledged)
national debt to over $18
trillion. This has made the
United States the highest government debtor in the world. This has artificially
and unnecessarily slowed the growth rate of the private sector, and allowed for
massive expansion of government.
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| Louis O. Kelso |
As a result, what
Kelso and other expanded ownership pioneers predicted is becoming increasingly
evident:
• Continuing
economic disenfranchisement of the American people.
• Low rates of
peacetime economic growth.
• Rates of private
sector investment far below U.S. potential.
• Excessive use of
non-productive credit in the public and private sectors.
• Downsizing of U.S.
companies in competition with foreign companies with lower labor costs.
• Mounting trade
deficits in the global marketplace.
• A growing gap in
consumption incomes between the wealthiest Americans and ordinary workers and
the poor.
• Under-use of human
talent and advanced technologies developed by the military and in our space and
energy programs that could be employed to improve America’s competitiveness in
the global marketplace.
So — what should the Federal Reserve be doing? Tune in tomorrow.