Time to Abolish the FED? E. Groseclose

Elgin Groseclose Time to Abolishthe FED? To PROPOSE that the time has come for abolition of the Federal Reserve System will appear novel, if not he retical, considering how most con servative inflation fighters regard it as the lever by which the careening wagon of inflation will be braked to a halt without jarring its occupants. Note, for instance, the reverence to ward it in the Republican Party platform (that tactfully omits men tion of the Reserve's responsibility for the bloated currency circula tion). Note that the President vows to «respect the independence" of the System. Note finally the enormous new powers conferred upon the Re serve by a compliant Congress in Copyright 1981 by Elgin Groseclose. Dr. Groseclose, a financial analyst, is author of America's Money Ma chine and Money and Man. He serves as Executive Director of the Institute for Monetary Research, Inc., Washington, D. C.

the Depositary Institutions Deregu lation and Monetary Control Act of 1980. Yet it is this very legislation that will demonstrate the incapacity of the System to meet the continually widening responsibilities laid upon it and force re-examination of its raison d'etre. For in a supposedly free market and private enterprise society it has become an economic Politbureau with authoritarian power for state planning and control of the economy approaching that of totalitarian governments. As with a Politbureau, its power has been con Icentrated in a Presidium (the Open Market Committee) of twelve per sons (11 men, 1 woman) with terms of 14 years that isolate them from reality and make them independent of any influence from the elected government. A.fi1 452 THE FREEMAN August BafflingRise in InterestRates If evidence were needed of the in ability of this select company to make the profound decisions and judg ments required to manage an econ omy so vast and complex as the U.S., one need only note the consterna tion in the market at the current surge in interest rates, ((money sup ply" and unabated price rises, all contrary to the design of the policy makers. To many FED watchers, the actions of the Presidi urn are like those of an amateur hi-jacker of a 747-pulling this lever and pushing that, now playing with federal funds rates, now with reserve ratios, now with meaningless concepts like M, Mu M2 ad infinitum, meantime leav ing the market lost in the wild blue, not knowing whether the economy is. headed for a crash, or. aboard a Voyager soaring toward an outer nebula.

Good men (and woman) though they may be, skilled no doubt in the intricacies of banking, it is doubtful if they are acquainted with the ele mentarycomposition of money which they are supposed to govern. (We will mention this later.) For that matter, the Federal Reserve System was never designed to deal with money but only with debt-bankers' debt. When the National Monetary Commission was set up in 1910 to devise a means of preventing credit crunches- ((panics" such as that which struck Wall Street in 1907 and frightened the country, it produced some 24 volumes of reports on banking practices around the world and one thin volume on money itself that is less than a primer on the subject. A Pawnshopfor IndigentBanks Actually what emerged in the Federal Reserve Act of 1913, and what has remained ever since, un der a catalog of euphemisms trotted out every time a crisis arises, is a glorified pawnshop for indigent banks. That is, under the guise of a ~~flexible currency" for seasonal or sporadic needs, it allowed member banks to sell to the FED qualifying debt instruments in exchange for cash.

There were certain safeguards, however, in the System as originally enacted. Thus, accommodation to banks was limited to advances col lateralized by short-term commer cial paper of not more than three months' maturity (six months for certain agricultural paper). Reserve banks could also buy short-term government bonds in the market. Cash meant gold coin, or depositary receipts therefor, but Federal Re serve notes, redeemable in gold, were unfortunately authorized as legal tender up to 2V2 times the amount of gold held in reserve for their re demption. These narrow limits were soon broken. To finance World War I, the 1981 TIME TO ABOLISH THE FED? 453 Out-DoingJohn Law Thus, the Reserve enjoys a power greater than that of John Law, the 18th century financial wizard who captivated France by his undertak ing to ((coin the soil of France." The powers of the Reserve were ex-' in its vaults can increase bank re panded to acquire vast quantities of serves at will simply by buying gov government debt, issuing its circu-ernment bonds in the market and lating notes therefor. In 1922 the paying for them by deposit credit or Presidium began-tentatively at notes. Moreover, in exchange for first-to use its powers in the direc-greater supervision, the Act gave tion of state planning of the econ-the check-paying institutions cer omy, first to influence the price level, tain goodies in exchange. They can later the amount of debt the country now hold their cups-or buckets could stand (the volume of bank at the gushing fountain of Reserve loans) and eventually the level of credit. That is, under almost any employment. conditions that the Reserve authorThe Federal Reserve Act was her-ities determine under Regulation A aIded as an instrument that would banks can exchange their secured or end panics; despite the fact that unsecured debt obligations for the within 20 years of its establishment Reserve's legal tender currency. (Of the country was plunged into the course, since the Reserve notes are worst financial debacle in its his-irredeemable, this is only an ex tory, Congress and the public have change of one frozen asset for an continued to confide to the System other.) more and more authority, climaxed Not only can banks obtain cash in with the Monetary Control Act of this manner but the Act permits the 1980. Reserve to bail out corporations in trouble, even individuals in finan cial straits.

The capstone of the Act is the pro vision that allows the Reserve to bail out Banks' holdings of frozen foreign securities-such as those of Poland and Turkey-so long as they are ((guaranteed" by the govern ment of the borrower. New InflationaryPowersto FED This Act, in essence, brings every check-paying institution in the country under the authority of the Reserve, and requires them to main tain in Reserve banks such reserves as the Reserve authorities deter mine. Heralded as a measure to con trol inflation, its effects are theop posite. By concentrating reserves in Reserve banks, the System was fur nished with-enormous new lending powers. Yet it is all like playing with mirrors, for the Reserve, freed from any necessity to maintain gold 454 THE FREEMAN August Reserve may now liquify the wealth-pardon, the debts-of the entire world. Here, then, is the flood that no fis cal -restraint can dam, no balanced budget prevent. While the Reserve authorities no doubt will hope to use these enormous powers sparingly, that is an idle hope. If the Reserve attempts to tighten its purse strings a howl from the market will rise so overpoweringly as not to be resisted.

No power sitting in Washington with such a wand to convert debt into cash at the stroke of a pen will be able to resist a demand that it be used. If examples are needed, we need only look at New York City, the Franklin National Bank, the Chrysler Corporation. Others will follow. If then the Federal Reserve were abolished, and its pawnshop func tions transferred to, say, the Federal Deposit Insurance Corporation, what system of money regulation should follow? An answer to this question is that referred to earlier-an un derstanding of the essence of money. Contrary to fractional reserve and monetarist theory, that regards money as purchasing power from created debt, rather than a store of value, money consists of a substance and a principle: the substance may be anything from the great stones of Yap to such fragile items as tobacco, used in Colonial Virginia-but his torically, gold or silver. The principIe is that of integrity. This may be illustrated in the first commercial transaction of which we have ac count-the purchase of a field for a burial ground by the Patriarch Abraham from the Hittite Ephron for 400 shekels of silver, recorded in Genesis, which states that Abraham weighed the silver unto Ephron. (The shekel was a weight, never a coin.) The account does not explain who certified the accuracy of the scales or the fineness of the silver-it was unnecessary. Abraham was a man of integrity.

True Natureof Money Later in history precious metal was struck in pieces of uniform size and fineness known as coins. This permitted trade to proceed by tale rather than weight. As certification of the weight and purity of the coin age the first mints were established in the temple and under the aegis of the presiding deity and the coins bore the image or symbol of the de ity. This was true in Athens, where drachma bore the image of the sa cred owl. In Rome, where the mint was that of Juno Moneta (the War ner), the coinage was known as mo neta. When coinage passed from the temple to ruler, after Alexander the Great began to put his effigy on the coins, integrity gradually seeped away and coinage began to suffer debasement by clipping and alloy1981 TIME TO ABOLISH THE FED? 455 so that coinage eventually lost its prestige as money . Nevertheless, throughout history to the present time money has always meant coin age, and is so meant in the U.S.

Constitution. Stable money will not return to the economy until money again means coinage and not spurious Federal Reserve notes. The Loss of Integrity, Gold ContractsRepudiated The second ingredient of money, that of integrity or public credibil ity, was lost in 1934 when the paper circulation was made irredeemable, when the government repudiated its gold contracts, when it violated the Constitutional prohibition against impairment of contract by annulling all private contracts for payment in coin, and finally when, again con trary to Constitutional provision, all privately held gold was sequestered without due process of law. Restoration of public confidence requires first the restoration of free coinage, which means that anyone can bring metal to the mint and have it coined. Free coinage is an English inno vation in 1666 during the reign of Charles II. By opening the mints to the public, the government's monop oly of money that had been the his toric practice since Roman times, was surrendered to the free market.

So successful were the results in providing an abundance of circulat ing media that England in the suc ceeding centuries became the pre mier commercial power of Europe, and when the U.S. was founded, free coinage became the rule here until 1934. Here is the great regulator of the CCmoneysupply"-the market. Wor ries about an adequate supply of money under such conditions are groundless, as experience with pe troleum supplies has demonstrated once governmental controls are re moved. A second measure necessary to re store public confidence in the mone tary system is a Constitutional amendment securing the electorate in their private possession of mone tary metal, by excluding such metal from seizure under government power of eminent domain. This would remove the fear of a second seizure as occurred in 1934. A final necessity for restoration of confidence in the money is that of making explicit what is explicit in regard to the states but only by in ference in regard to the federal gov ernment-namely a Constitutional amendment declaring that the fed eral government may declare as le gal tender only gold and silver coin.

i Ridgway K. Foley, Jr. ~~ Why Right Does Not Triumph ~~ PONDER a question which perplexes most of those persons professing al legiance to the political, economic, social and moral principles charac terizing the right side of the politi cal spectrum: Why does the position fail to gain adherents and reach as cendancy? Why do the pillars of pro priety and good sense appear to crumble round about us? Ini tially, allow me to sound a ca veat: labeling persons or philoso phies involves inherent risks. In deed, an analysis of the political spectrum, with its terminology of ttold right," ttnew right," ttold left," ttnew left," and ttcenter ," deserves a separate discourse. For the purposes of this essay, I interchangeably utilize the terms ttright," ttconservative;" ttvoluntarMr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. 456 ist," or ttlibertarian" to indicate per sons possessing varying degrees of commitment to the concepts of lim ited government, personal liberty and a willing exchange economy, .recognizing the intrinsic hazards in throwing together a mass of discrete individuals and applying an all-en compassing mark or brand to them.