The Federal Reserve Really Serves Its Members or the US?
|December 31, 2013||Posted by Staff under Views|
Amend the Fed: We Need a Central Bank that Serves Main Street
December 23rd marked the 100th anniversary of the Federal Reserve.
At an IMF conference on November 8, 2013, former Treasury Secretary Larry Summers suggested that since near-zero interest rates were not adequately promoting people to borrow and spend, it might now be necessary to set interest at below zero. This idea was lauded and expanded upon by other ivory-tower inside-the-box thinkers, including Paul Krugman.
Negative interest would mean that banks would charge the depositor for holding his deposits rather than paying interest on them. Runs on the banks would no doubt follow.
To ordinary mortals living in the less rarefied atmosphere of the real world, the proposal to impose negative interest rates looks either inane or like the next giant step toward the totalitarian New World Order.
Paul Craig Roberts, former Assistant Secretary of the Treasury, calls the idea “harebrained.” He is equally skeptical of quantitative easing, the Fed’s other tool for stimulating the economy. Roberts points to Andrew Huszar’s explosive November 11th Wall Street Journal article titled “Confessions of a Quantitative Easer,” in which Huszar says that QE was always intended to serve Wall Street, not Main Street. Huszar’s assignment at the Fed was to manage the purchase of $1.25 trillion in mortgages with dollars created on a computer screen. He says he resigned when he realized that the real purpose of the policy was to drive up the prices of the banks’ holdings of debt instruments, to provide the banks with trillions of dollars at zero cost with which to lend and speculate, and to provide the banks with fat commissions from brokering most of the Fed’s QE transactions.
100 Years Is Enough: Time to Make the Fed a Public Utility
The Federal Reserve Act was passed in 1913 in response to a wave of bank crises, which had hit, on average, every six years over a period of 80 years. The resulting economic depressions triggered a populist movement for monetary reform in the 1890s. Mary Ellen Lease, an early populist leader, said in a fiery speech that could have been written today:
“Wall Street owns the country. The great common people of this country are slaves, and monopoly is the master … Money rules … Our laws are the output of a system which clothes rascals in robes and honesty in rags. The parties lie to us and the political speakers mislead us…
We want money, land, and transportation. We want the abolition of the National Banks, and we want the power to make loans direct from the government. We want the foreclosure system wiped out.”
That was what they wanted, but the Federal Reserve Act was what they got. What the populists sought was a national currency issued debt-free and interest-free by the government, on the model of Lincoln’s Greenbacks. What the American people got was a money supply created by private banks as credit (or debt) lent to the government and the people at interest. Although the national money supply would be printed by the U.S. Bureau of Engraving and Printing, it would be issued by the “bankers’ bank,” the Federal Reserve. The Fed is composed of twelve branches, all of which are 100 percent owned by the banks in their districts. Until 1935, these branches could each independently issue paper dollars for the cost of printing them, and could lend them at interest.
The new system was supposed to prevent bank runs, but in 1929 the United States experienced the worst bank run in its history. At that time, banks were required to keep sufficient gold to cover only 40 percent of their deposits. When panicked bank customers rushed to cash in their dollars, gold reserves shrank.
For its first half century, the Federal Reserve continued to pocket the interest on the money it issued and lent to the government. But in the 1960s, Wright Patman, Chairman of the House Banking and Currency Committee, pushed to have the Fed nationalized. To avoid that result, the Fed quietly agreed to rebate its profits to the U.S. Treasury.
But the central bank own some of the federal debt. Commercial banks hold the majority of it and do not rebate the interest they collected to the government. They also “buy: government bonds with newly created demand deposit entries on their books — nothing more.
At the end of 2013, the total for the previous 26 years came to about $9 trillion on a federal debt of $17.25 trillion. The federal debt has been accumulating ever since 1835, when Andrew Jackson paid it off and vetoed the Second U.S. Bank’s renewal.
How about the power to issue money be returned to the government. Make the Federal Reserve a public utility. The firehose of cheap credit lavished on Wall Street needs to be re-directed to Main Street.
Ed. Notes: Money sure does bring out the urge to reform in many of us.
Bankers have found a lucrative gravy train by controlling the money supply. Yet that control has been given to governments before, sometimes with happy results, sometimes not; witness the places with rampant inflation and near worthless national currency.
What might work better would be to allow currencies to compete, as we do credit cards. The role of government would be to set standards — as it does with weights and measures — and prosecute fraud. The government could still issue its own notes to anyone who’d take them, and so could banks, but also could currency clubs like local currencies. The competition would tend to keep all currencies honest. After a while, probably one or two would prevail, as do Visa and Master Card, but the possibility of an upstart currency would keep the successful ones honest.
One key component most monetary reformers overlook is that debt is not something ethereal but rather people borrow money in order to buy something, and usually that something is land, often with a house on it. If people did not have to buy land, they’d not have to borrow so much, by a long shot. Small mortgages would greatly reduce the profit and power of banks.
What would make it possible for people to not buy land? Well, they could “rent” the land from their community, or pay Land Dues or a land tax to their local government. When society gets the rent for land, then owners can’t charge a price for land, a gift of nature they did not create, whose value the presence of the populace generates. It’s fair, and prevents land from becoming an object of speculation, so the rent or dues or tax always stays affordable.
(Rebating some of the rental public revenue to residents would of course also help keep land affordable.)
While individuals now borrow to buy land, governments often borrow because they can’t tax enough. The reason they can’t raise enough funds with their taxes is because politicians levy dumb taxes that shrink the tax base rather than levy smart taxes that expand the tax base. The typical taxes on income, sales, and buildings reduce the worth of jobs, of purchasing power, and of improvements (respectively). The more things they tax and the higher they raise the rates, the more sand they throw into the gears of the economy. Not too smart.
But one tax, rarely used, does just the opposite: the tax on land. Having to pay it or Land Dues, owners don’t speculate but develop their sites and keep their locations at highest and best use (or sell to others who will). All that construction and development and efficient land use pushes up the value of locations in the region — a fatter tax base for the smartest of all taxes. With all that collected as public revenue, governments would no longer have to borrow much if anything at all — again cutting the money issue down to near dismissive size.
So, why is land invisible and money so fascinating?