Last Thursday we responded to a few comments — they weren’t really questions, just assertions of alleged “facts” about money and Congress’s alleged power to create money (which it doesn’t have, much less a sole power) — about “money.” Today, to start the week off right, we’re looking at whether the Federal Reserve can create money . . . since that is the other assertion made by our critic:
3) The Fed is not legally capable of doing that [creating debt-free interest-free money].
|Many people's ideas of money depend on which fantasy they believe.|
On the contrary. The Federal Reserve is a creature of law, and is “legally capable” of carrying out whatever functions it was granted in its charter. The argument here seems to be that because only Congress can create money, the Federal Reserve cannot. This argument is invalid, as Congress does not, in fact, have the power to create money, as we saw above.
Even if Congress did have the power to create money, there is nothing in the Constitution prohibiting Congress from delegating any or all of its functions to private individuals or corporations. “Congress” has no capacity to act on its own behalf. Congress is an abstraction, a human construct. It can act only through its members or its appointed agents. Claiming that only “Congress” can act but cannot delegate any function is to claim that Congress cannot, in fact, act at all.
|All coin may be money, but not all money is coin.|
Finally, nowhere in either the first or final draft of the U.S. Constitution does it say that Congress shall have the sole power to coin money, as if “coining money” and “creating money” are equivalent terms. The states were prohibited from coining money, but private individuals and corporations were not. Private coinage was not uncommon in the United States prior to the National Banking Act of 1863, which instituted a statutory, not a constitutional prohibition against private coinage. Some issues, notably the gold coinages of the Bechtlers (who issued the first gold dollar) and those of Moffat and Company (primarily in the fifty dollar denomination), were granted de facto legal tender status due to the dearth of government issues. Moffat and Company, in fact, was given the contract to become the United States Assay Office in California, and eventually became the San Francisco Mint.
4) [N]or is the Fed legally capable of carving out the kinds of exceptions you advocate.
On the contrary. The Federal Reserve has whatever competence is granted in its charter. It currently has the power to rediscount qualified private sector “paper” (bills of exchange) issued for agricultural, commercial, and industrial purposes, and to buy and sell similar bills of exchange and other agricultural, commercial, and industrial asset-backed securities (“mortgages”) on the open market for the purpose of ensuring adequate liquidity for agriculture, commerce, and industry without inflation or deflation.
The clear intent of the framers of the Federal Reserve Act of 1913 was to replace the then-current inelastic, debt-backed reserve currency consisting of National Bank Notes, the Treasury Notes of 1890, and the United States Notes (the “Greenbacks”), with an elastic, asset-backed reserve currency to be known as “Federal Reserve Notes.” In what was intended as a temporary measure to retire the inelastic, debt-backed reserve currencies, the Federal Reserve was empowered to deal in secondary issues of government debt.
|Treasury Notes of 1890 were used to purchase silver to coin silver dollars, which were then put into the U.S. Treasury and replaced with silver certificates|
Had the commercial banks that were forced to hold the government bonds to back their note issues “dumped” them all at once without having a ready buyer in the person of the Federal Reserve, they would have suffered an enormous loss due to suddenly flooding the channels of commerce with billions of dollars in government debt, driving down the price. Instead, in a program that ended in the 1930s, the Federal Reserve gradually purchased existing government debt from the commercial banks using debt-backed “Federal Reserve Bank Notes,” then replaced the Federal Reserve Bank Notes with indistinguishable asset-backed “Federal Reserve Notes” as the commercial banks presented qualified loans to the Federal Reserve for rediscounting.
5) In the world of corporate "personhood" only Congress is the corporate "parent" who can issue the peoples’ money. The Fed is a corporate “child” or legal inferior who can only issue promissory notes (and the errant corporate Fed “child” is not even doing that; instead, it is selfishly issuing its own “notes of indebtedness”).
On the contrary. As we saw above, Congress has no power under the Constitution to create money, while the Federal Reserve has whatever powers it has been given in its charter.
6) As I've said before, this is like the parent giving a teenager the keys to the family car, and when the parent asks for the keys to be returned, the child says “[expletive deleted] you.”
|It's not the kid in the car we worry about, it's Congress with a blank check.|
On the contrary. Given that, if run in accordance with the provisions of the Federal Reserve Act of 1913, the Federal Reserve can only create money by rediscounting paper presented by member banks, or by purchasing existing qualified securities on the open market, there is a natural brake or limit on the amount of money the Federal Reserve can create: the actual value of existing and future marketable goods and services in the economy. If paper presented for rediscount, or purchased on the open market is not tied by private property to something of definable value, it is a “fictitious bill,” and does not qualify for rediscounting or purchase.
The politicians in Congress, however, have already demonstrated that the only check on their questionable practice of creating money is how much they can spend and get away with.
Of course, having said all this, what do we propose to do about it? We’ll look at that tomorrow.