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:
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| 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.
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| 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?
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| 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.
#30#
