It really is amazing what you kind find rooting through old documents, correspondence, what have you. When you have access to an archive that records a social movement of which most people have at best an inadequate understanding, it is easy to become frustrated at just how obtuse people have been.
Take, for instance, people of days gone by at the Federal Reserve — 14,033 days to be exact, or June 20, 1980. That’s the date on a little missive we received from some flunky at the Federal Reserve responding to proposals to have the Federal Reserve fund a program of expanded capital ownership. First, however, a few points to clarify:
|Members of the Ownership Campaign, 1979|
· This is from 1980, nearly forty years ago. The Federal Reserve Flunky is probably long-retired with a generous pension funded either by your tax dollars or (more likely) increased government debt monetized to meet obligations such as the Flunky’s pension.
· We know he is a flunky because lackeys get to wear uniforms.
· The outreach to the Federal Reserve was made four years or so before CESJ was formed in April 1984, but the ideas have been around for quite a bit longer, many of them going back to Aristotle and even earlier.
· The letter was, um, a trifle . . . snippy, shall we say? In all probability the flunky who signed it was not the same flunky who wrote it, who was probably the flunky of a flunky. No effort was made to be polite.
That being said, today we will look at one of the three “deficiencies” advanced to explain why money creation for productive projects “is fundamentally at odds with sound monetary policy.” That’s an actual quote.
|Henry Thornton reeling in shock at today's central banks.|
Part of the proposal was and remains to institute a 100% reserve requirement. We have, admittedly, been discussing whether we should modify that, especially in light of the fact that with modern communications anything discounted by a commercial bank can be rediscounted at the regional Federal Reserve virtually instantaneously. That does not, however, change the fact that as described to the Federal Reserve flunky the proposal was mandatory rediscounting to maintain 100% reserves behind all demand deposits at commercial banks. Period.
In other words, one of the banking reforms we presented to the Federal Reserve would have given the Federal Reserve near total and absolute control over the reserves of commercial banks. This is because “reserves” are defined as vault cash (i.e., cash actually on hand at the bank) and the commercial bank’s demand deposits at the Federal Reserve, the latter of which constitutes most of a commercial bank’s reserves.
|Us, with jaw dropped at the Fed's response.|
That would mean the bulk of a commercial bank’s reserves would be boosted from between zero (yes, zero) to ten percent (this is per the Federal Reserve reserve ratio published on its own website) to 100% — an increase from 0% to 100% . . . or an increase in the power of the Federal Reserve over reserve requirements of a previously unheard-of magnitude, all of which would be under the actual physical control of the Federal Reserve!
As noted, we are discussing the advisability of allowing the Federal Reserve to increase its power over reserve requirements so dramatically, but that is not the point here. That is the reason the Federal Reserve flunky gave for claiming that the 100% percent reserve requirement is unsound is that it would decrease Federal Reserve control!
Please excuse us while we indulge in multiple exclamation points and question marks to indicate our complete and total baffled amazement and astonishment at such obtuseness even from a Federal Reserve flunky:
In what universe is acquiring almost total control the same as losing control . . . unless you’re incompetent, that is? As the Federal Reserve flunky explained,
[I]t [the 100% reserve requirement] would make Federal Reserve control over the total supply of bank reserves substantially more difficult and thus would risk compromising the effectiveness of monetary policy.
Okay, there’s that, but what about the money itself? The proposal is that no money is to be created except when “qualified paper” is presented for rediscounting. And who decides what the qualifications are for qualified paper? Well . . . the Federal Reserve, or (actually) the Congress, but the Federal Reserve would have to accept the definition of “qualified paper” or it would not accept it. Congress can mandate that the Federal Reserve must accept all qualified paper, but it cannot demand that the Federal Reserve accept unqualified paper, now, can it?
|No, the OTHER risky business. . . .|
Of course not.
That being the case, no money can be created except on the terms already agreed to by the Federal Reserve. Further, suppose it has good and sufficient reason to change the definition of “qualified,” e.g., “After such and such a date, the term ‘qualified’ will no longer include paper with less than a ZZZ rating” or some such thing.
Again, this is not a reduction in the power of the Federal Reserve over monetary policy, but a tremendous increase in power. Congress could not demand that the Federal Reserve violate its own rules for creating money. No, Congress would have to change the rules, and the Federal Reserve would have to agree to the change — they are, after all, supposed to be independent.
Now, it is true that there would be one area in which the Federal Reserve would lose power: setting interest rates. Given that rediscounting does not involve payment of any interest (although, admittedly, some people who really should know better think of the discount rate as an “interest” rate; there are even people who confuse it with ROI and the cost of capital!), the power to set interest rates would be moot, anyway, and if Federal Reserve allowed anything other than the market to set the discount rate they would be sliding into disaster, anyway.
No, the response from the Federal Reserve so many years ago as to why the Federal Reserve could not possibly operate in accordance with the original Federal Reserve Act of 1913 is, while “interesting,” completely wrong-headed. It also explains why the financial system is in such a mess, and the national debt is in the trillions of dollars instead of a surplus in the hundreds of cents.