Here are copies of two letters we sent last week to the Wall Street Journal and the Washington Post regarding potential sources of new capital for commercial banks that the "stress tests" appear to mandate. As required by letters to editors that hope to have a chance of getting published, we restricted ourselves to the single issue of using the Federal Reserve properly as a source of liquidity for financial feasible industrial, commercial, and agricultural private sector projects. We did not cover the equally important issue of the necessity for widespread direct ownership of the means of production — including financial resources that can be created "out of nothing" and thus have no existing owner(s) — to secure a sound economy.
Widespread direct ownership of the means of production, however, only becomes politically and financially feasible when the central bank is used to create money to finance the acquisition of capital by people who currently own little or nothing in the way of income-generating assets. Pointing out how the Federal Reserve is designed and originally intended to operate is thus only half the battle. The other is to bring programs like Capital Homesteading to the attention of "prime movers" and others who can implement it and deliver its benefits to the people of the United States and the world.
Letters, The Wall Street Journal
No doubt the authorities making the decisions in response to the so-called "stress tests" regarding the amount of capitalization required by commercial banks believe they are acting in the best interests of the economy and the financial markets. If they truly understood money, credit, banking, and finance, however, they would realize that additional capitalization by foreign or domestic investors, or the taxpayers, is completely unnecessary. The solution already exists and can be implemented without the use of tax monies or government loans.
The Federal Reserve System was established in part to provide the country with a "flexible currency" that would expand when the economy required more money in circulation, and contract in response to the dangers of inflation. Under § 13 of the Federal Reserve Act of 1913, a commercial bank that wishes to make loans that are not covered by its current reserves can discount (sell) qualified industrial, commercial, and agricultural loans to the local Federal Reserve Bank.
The central bank of the United States has the power to create money to purchase these loans, either in the form of Federal Reserve Notes (promissory notes) or demand deposits. The Federal Reserve thereby provides the commercial bank with 100% reserves backing the money created through the discounting process, or (if you will) "instant capitalization." No taxpayer money, foreign investors, or federal bailouts are needed. It is only necessary to stop using the Federal Reserve to monetize government deficits, and start using the central bank for the purpose for which it was intended.
Letters, The Washington Post
With respect to the additional capitalization requirements for commercial banks proposed as a result of the bank "stress tests," how long will it take the public to understand that increased government involvement in the private sector is not part of the solution, but part of the problem? Ironically, a solution already exists in plain sight.
The Federal Reserve System was established to provide liquidity for the private sector through the commercial banking system without the need for pre-existing reserves (capitalization). Using the Federal Reserve to finance government spending came later, when politicians decided it was easier to fund the United States' entry into World War I by borrowing money from the central bank instead of through taxation.
Under § 13 of the Federal Reserve Act of 1913, a commercial bank can sell (discount) qualified industrial, commercial, and agricultural loans to its local Federal Reserve Bank. The Federal Reserve has the power to create money to purchase these loans, thereby providing the country with an asset-backed currency supported by 100% cash reserves. There is no need for consumers to cut spending in order to save, for foreign investors, or for bank bailouts.