Monday, April 6, 2015

The Legal Basis for Reform of the Federal Reserve


The legal basis for the reform of the Federal Reserve is found in the purpose for which the institution was originally established.  This is stated in the preamble to the Federal Reserve Act of 1913, a sentence that, for some reason, is never mentioned, even though it was never officially deleted.  They just don’t mention it, like your crazy Uncle Louie in the attic or Cousin Winnie in the cellar.  It’s kind of embarrassing, because there’s nothing in the preamble that mentions funding government.  Instead —

And if you can’t read that, here it is again:

[PUBLIC — NO. 43 — 63D CONGRESS]
[H. R. 7837]

An Act To provide for the establishment of Federal reserve banks, 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.

The specific means of doing this is found in the relevant portion of § 13 (now § 13.2), deletions underlined and highlighted:

Upon the indorsement of any of its member banks, which shall be deemed a waiver of demand, notice and protest by such bank as to its own indorsement exclusively, any Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the government of the United States. Notes, drafts, and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than 90 days: Provided, That  notes, drafts, and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months may be discounted in an amount to be limited to a percentage of the capital of the Federal reserve bank, to be ascertained and fixed by the Federal Reserve Board.

Today this section reads as follows (and the link to it is here), additions underlined and highlighted:

2. Discount of commercial, agricultural, and industrial paper

Upon the indorsement of any of its member banks, which shall be deemed a waiver of demand, notice and protest by such bank as to its own indorsement exclusively, any Federal reserve bank may discount notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Board of Governors of the Federal Reserve System to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of this Act. Nothing in this Act contained shall be construed to prohibit such notes, drafts, and bills of exchange, secured by staple agricultural products, or other goods, wares, or merchandise from being eligible for such discount, and the notes, drafts, and bills of exchange of factors issued as such making advances exclusively to producers of staple agricultural products in their raw state shall be eligible for such discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the government of the United States. Notes, drafts, and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than 90 days, exclusive of grace.

[12 USC 343. As amended by act of Sept. 7, 1916 (39 Stat. 752), which completely revised this section; and by act of March 4, 1923 (42 Stat. 1478). As used in this paragraph the phrase "bonds and notes of Government of the United States" includes Treasury bills or certificates of indebtedness. (See act of June 17, 1929, amending section 5 of Second Liberty Bond Act of Sept. 24, 1917). As to eligibility for discount under this paragraph of notes representing loans to finance building construction, see this act, section 24).]

What do these deletions and additions mean?  For the most part, nothing.  The actual language of the Act was just tweaked a little, i.e., the “Federal Reserve Board” changed to the “Board of Governors of the Federal Reserve System,” and the bits about agriculture moved and rephrased.  So what really changed?

The interpretation: that bit in small print (remember what they always tell you about “the small print”?) in brackets that starts out “12 USC 343.  As amended by act of Sept. 7, 1916,” etc.  Here’s where things went wrong: “As used in this paragraph the phrase ‘bonds and notes of Government of the United States’ includes Treasury bills or certificates of indebtedness.”

English translation: as amended, the Federal Reserve system has the power to deal in bills of credit emitted by the U.S. government . . . for which the Congress has no authority under the enumerated powers of Article 1, § 8 of the U.S. Constitution. . . .

The bottom line?  The Federal Reserve has the power right now to create money to finance Capital Homesteading.  Technically, it wouldn’t even have to amend the Act at all, not even to extend the term of the paper accepted: it could “interpret” the wording to include an automatic renewal of all bills and notes with terms beyond the stipulated 90 days, plus grace, or interpret “grace” to accommodate the longer term.

Getting rid of the government financing would probably require amending the act to remove the provision including bills of credit from qualified securities, but that’s a relatively simple tweak, too.

#30#

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