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In Pennsylvania in the first half of the 18th century, the provincial government not only printed its own money but owned its own bank. Colonial scrip was printed and lent to farmers at 5% interest, and this money recycled back to the government as it was repaid. The money went out and came back in a circular flow, preventing inflation. This was quite different from what happened in those Banana Republics that used the power to print money simply to pay off foreign debts owed in dollars. The invariable result was to invite speculators to jack up the price of the dollars relative to the local currency, causing the currency’s rapid devaluation. The Bank of Pennsylvania, by contrast, issued its fiat currency as loans for domestic use, loans on which not only the principal but the interest came back to the government. Since the provincial government had the power to issue the local scrip, it could issue some extra to meet its expenses; and this money filtered through the economy to provide the additional sums needed to cover the interest on the loans. During the time this provincial system was in place, the Pennsylvania colonists paid no taxes, there was no government debt, and price inflation did not result.
What the Fed is doing today could be considered comparable: it is generating the equivalent of debt-free government-issued colonial scrip with its “quantitative easing” tool, and it is advancing credit for private use, with the interest on the loans returning to the government.
The Case for Nationalizing the Fed
One major difference between the Federal Reserve and the bank of colonial Pennsylvania is that the Fed remains a private bank owned by other banks. There is the fear that the powerful tool of “quantitative easing” could turn into a dangerous weapon in the wrong hands. A private central bank can be driven by a small financial elite in secret boardroom meetings beyond congressional control. The power to create money is a double-edged sword even for a government, but at least a government must answer to the people in the public forum of a democracy.
That is true in theory, but we the people don’t have much more control over Treasury Secretary Tim Geithner, a government official, than we have over Ben Bernanke. The Treasury’s Troubled Asset Relief Program (or TARP) has been heavily criticized for moving “toxic” assets off the books of the culpable Wall Street derivative banks and onto the backs of the taxpayers. The problem is that government officials and Federal Reserve officials alike believe that the only way the nation can have a functioning credit system is to maintain business as usual on Wall Street. This is not true. A public banking system headed by a truly federal central bank could provide all the credit we need.
To prevent corruption and abuse, this system of money and credit would need to be made subject to the sort of public monitoring and control provided by the checks and balances built into the Constitution. Stephen Zarlenga, president of the American Monetary Institute, suggests that the money system should be organized as a fourth branch of government alongside the executive, judicial and congressional branches. The Fed is acting like a fourth branch now, but without the public oversight of a true government agency. Congressman Ron Paul has brought a bill (HR1027) to audit the Federal Reserve, and Congressman Dennis Kucinich told Congress earlier this month that he would soon be bringing a bill to nationalize the Fed. He said: “Banking is not a proper function of the government, but oversight is. The Treasury Department should not be outsourcing to the Fed its oversight responsibilities. The Fed, which failed miserably to oversee the banks, should be put under Treasury instead. It’s time for the government to operate in the public interest, not in the interest of private banks. It’s time to stop bailing out banks and begin building up America.”
Note, however, that if the Fed is nationalized and it continues to issue credit for the benefit of consumers, small businesses, and the government itself, it will actually be in the banking business; and that, arguably, is how it should be. Our money system today is nothing more than a series of legal agreements between parties. “Credit” is merely an agreement to repay over time. While private parties and private banks should be free to lend their own money or their investors’ money, we also need the sort of “credit” that is created on a computer screen; and that sort of credit, as money reformer Richard Cook observes, is properly administered as a public utility. The dollar is backed by nothing but “the full faith and credit of the United States” and should be dispensed and monitored by the United States. As William Jennings Bryan declared in his winning presidential nomination speech at the Democratic Convention in 1896:
“[W]e believe that the right to coin money and issue money is a function of government. . . . Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson . . . and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business. . . . [W]hen we have restored the money of the Constitution, all other necessary reforms will be possible, and . . . until that is done there is no reform that can be accomplished.”
The loans the Fed creates by “quantitative easing” are no more inflationary than the credit created daily on a computer screen by private banks. At least, loans used to be created daily by private banks, until their ability to lend was frozen for accounting reasons. The Fed’s credit facility has the advantages over private banks’ that (a) it is not subject to the lending freeze, and (b) its profits are rebated to the government, which ultimately serves the taxpayers’ interest. Nationalizing the Federal Reserve is the ideal solution; but while we are waiting for that development, the government can do the next best thing and tap into the very cheap, readily available credit provided by its own central bank.
Notes:
1. "FAQs: Federal Reserve System," federalreserve.gov.
2. J. Voorhis, The Strange Case of Richard Milhous Nixon (1973).
3. See Benjamin Gisin, Michael Krajovic, "Rescuing the Physical Economy," Conscious Economics (January 2009); Ellen Brown, "Monetize this!", webofdebt.com/articles (February 22, 2009).
4. David Kidd, "How Money is Created in Australia," www.http://dkd.net/davekidd/politics/money.html (2001).
5. See Ellen Brown, "The Wall Street Ponzi Scheme Called Fractional Reserve Banking," webofdebt.com/articles (December 29, 2008).
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