On paper, the Federal Reserve System, the central bank of the United States, is owned by its member banks. Member banks are required to purchase a special form of preferred stock paying a minimal dividend but carrying a meaningless vote. This is not, however, true ownership. As Louis O. Kelso once pointed out, control means ownership in all codes of law, and as we will see below, the federal government, while it does have “legal title” to the Federal Reserve System, controls it by having the president of the United States appoint the Chairman of the Board of Governors, and by receiving all revenue in excess of what is expended in operations.
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| United States Note (Red Seals) |
Originally, of course, the Federal Reserve was instituted to solve several problems, among which the principal problem was an inelastic, debt-backed reserve currency. This means that the amount of reserve currency — three of them! (United States Notes, National Bank Notes, and the Treasury Notes of 1890) — in the economy was fixed by law, and all of it was backed not by actual assets, but by government debt.
True, many people then and now assumed the reserve currency was backed by gold, but that is simply a myth. It was measured in terms of gold, cir. $20 an ounce, and from 1877 to 1933 (which by then included the debt-backed Federal Reserve Bank Notes) could be converted into gold on demand, but they were backed by U.S. federal government debt, the same as today.
The main idea of the Federal Reserve was to shift from the three inelastic, government debt-backed reserve currencies, to a single elastic, private sector asset-backed reserve currency. “Elastic” refers to the ability of the reserve currency to respond directly to the needs of the economy and expand or contract naturally without government interference.
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| John Maynard Keynes |
What happened? How did we end up with an elastic, government debt-backed reserve currency? Briefly, what happened was World War I and John Maynard Keynes. During World War I the program to retire the debt-backed reserve currencies and replace them with private sector asset-backed Federal Reserve Notes (which were to replace the government debt-backed Federal Reserve Bank Notes in a complicated process we don’t need to describe today) got derailed by the need to finance entry into the war. Politicians found it easier to issue debt than raise taxes.
After the war, the program was restored, but then came the Great Depression of the 1930s — and that brought in the Fabian Socialist-influenced Brain Trust and John Maynard Keynes, which demanded government control of money and credit . . . which could not be accomplished if the private sector determined how much money and credit there should be by natural means. As Keynes declared as his first principle of money and credit,
It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp’s Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)
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| Louis O. Kelso |
In other words, the modern state claims the right to change reality, that is, truth itself. This is consistent with the belief that God is a divinized society, and religion consists of the group’s worship of itself, but it has very little to do with what money really is. For that, we can go to Louis Kelso, who explained,
Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)
Now, Kelso’s definition is not complete, but it is at least consistent with reality, and thus true! And, frankly, Keynes’s prescription of total government control over the quantity of money hasn’t exactly worked out all that well. The New Deal, which was an application of his theories, was economically (and politically) a disaster. It didn’t end the Great Depression but made it worse. The Great Depression was ended by World War II . . . at the cost of even greater government control over the economy, laying the groundwork for much worse problems to come, as we see around us today — one of which is the fixed belief that government can fix what’s broken in the economy by fiddling with the quantity of money and credit.
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| Jerome Powell |
We’ve proved several times over the years in this blog and elsewhere that belief is pure Fabian Fantasy, but it continues to persist because it puts immense power in the hands of politicians . . . who may be the last people on Earth you really want to trust with that kind of power (or any other, for that matter). That is why the Chairman of the Federal Reserve, Jerome Powell, is trying to convince people that President-elect Trump cannot “fire” him, no matter how hard he tries.
Now, it is evident from the way Powell has been running the Federal Reserve that neither he nor any of the heads of the central bank for nearly a century have any idea how the institution is supposed to function or its primary purposes, to say nothing of the politicians responsible for getting the country into the mess it is in. You would think, however, Powell and his confreres would at least know who their ultimate boss is.
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| Harold G. Moulton |
You see, under the Banking Act of 1935, one of the New Deal reforms, the Chairman of the Federal Reserve is a political appointee who serves at the pleasure of the president. As Harold Moulton noted in the aftermath of the 1935 Act, “[T]he Board of Governors [of the Federal Reserve] has been placed more definitely under political control. This is accomplished through that provision of the law which makes the governor of the Board [i.e., the Chairman] removable at the will of the president.” (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 417.)
Whether that power will be exercised is another matter, as is the prudence of such an arrangement, but the fact remains the president of the United States does indeed have the power to “fire” the Chairman of the Federal Reserve.
Is there a better solution? Yes. The banking reforms of the Economic Democracy Act would put power over the Federal Reserve directly in the hands of the citizens, not politicians, and let the actual needs of the private sector, not the fantasies of politicians, determine how much money the economy needs.
#30#
