[R-G] [BillTottenWeblog] The Federal Reserve

[Bill Totten]

by Jerry Voorhis {1}

from his Beyond Victory (1944) {2}


The Constitution of the United States says: "Congress shall have power
to coin money and regulate the value thereof". Congress does no such
thing, which is the heart of our trouble. Private banks coin our money
and regulate its value. In doing so they take from the government and
people of the United States a large chunk of their sovereignty, a large
chunk of the taxing power, and the key to a prosperous economy without
inflation.

For example, in testimony before the Banking and Currency Committee of
the House of Representatives in 1935, Marriner Eccles, then Chairman of
the Federal Reserve Board itself, said: "In purchasing offerings of
Government bonds, the banking system as a whole creates new money, or
bank deposits. When the banks buy a billion dollars of Government bonds
as they are offered - and you have to consider the banking system as a
whole as a unit - the banks credit the deposit account of the Treasury
with a billion dollars. They debit their Government bond account a
billion dollars; or they actually create, by a bookkeeping entry, a
billion dollars."

Mr Eccles' statement is exactly as true today as when he made it. Here
is how it works: The private banking system of our country creates our
money in the form of demand deposits on the banks' books. The reason it
is able to do this is because no bank is required to have in its vault
anything like the amount of money which its depositors think they have
in the banks.

Banks are only required by the Federal Reserve System, which the banks
are sure they own, to have in their vaults anywhere from $1 to $1.50 for
every $10 of demand deposits on their books. Thus for every $1 or $1.50
which people - or the government - deposit in a bank, the banking system
can create out of thin air and by the stroke of a pen some $10 of
checkbook money or demand deposits. It can lend all that $10 into
circulation at interest just so long as it has the $1 or a little more
in reserve to back it up.

This is, of course, the "fractional reserve system" of banking. It is
more or less controlled by the Federal Reserve System, whose only stock
is held by the private banks of the Federal Reserve System. Not a single
share of such stock is held by the government or people of the United
States, although if "national sovereignty" means anything at all, these
banks of issue should be the property of the nation.

But what actually happens when our government engages in deficit
financing? The obvious way the government can get more buying power into
the people's hands is by itself putting more money into the stream of
commerce than it takes out in taxes. The tragedy of the situation is
that, up to date, the only way our government has enabled itself to
spend more money than it takes in has been by forcing this sovereign
nation to borrow its own credit from private sources.

This has been true, despite the fact that if deficit financing
accomplishes its purpose at all it will increase production and trade,
enhance tax revenues, and broaden the base of government credit.

To the extent that government bonds are sold for cash to individuals or
to institutional purchasers other than banks the government is taking
out of circulation approximately as many dollars as it will put back in
when it spends the money.

To accomplish its purpose, deficit financing must result in the creation
of new money, and the use of it to increase mass buying power. Only if
this happens will there be any stimulation of idle plants to go back
into production, or more employment.

Under these circumstances what ought to happen is that the credit of
this great nation should be drawn upon directly by the government - not
that it should go more deeply into debt.

For the credit of this or any nation is squarely based upon and derived
from the production of wealth by the nation plus the power of the
government to tax. A nation like the United States thus possesses an
almost unlimited amount of credit. Otherwise it could not possibly have
persuaded investors to buy $480 billion of government securities.

By whatever percentage it can be anticipated that production and hence
potential tax revenues will increase as a result of deficit spending, by
that same amount the credit of the nation and its government will be
increased. This same percentage of the volume of money previously in
circulation should appear on the books of the Treasury as a credit entry
to be drawn upon just like tax revenues. To do that would be nothing
more than rational and proper bookkeeping. It would also be morally
right bookkeeping. And it would make some sense of Mr Nixon's "full
employment budget" idea.

But this is not what happens at all. Instead the sovereign government of
the United States goes hat in hand to the private banking system and
asks it to create the new money that the economy needs. The government
gives - the word is used advisedly - it gives to the banking system,
including the Federal Reserve banks, government bonds, the debt of all
the people. Interest-bearing bonds, that is, bonds bearing as high an
interest rate under today's regime as the banks decide to demand. Else
they won't buy the bonds. The banks "buy" the bonds with newly created
demand deposit entries on their books -nothing more. It is fountain-pen
money and considerably more inflationary than would be the same amount
of dollar bills created by the government. The deposits the banks create
with which to own the people's debt are backed by nothing except the
bonds themselves! In other words, they are backed by the credit of the
American people.

What the government has "borrowed" from the banks, what the people must
for years pay interest on, is nothing more nor less than the credit of
the nation, which obviously the nation possessed in the first place or
the bonds themselves would be no good!

At long last, a few years ago the Federal Reserve made tacit
acknowledgment of these facts. As a direct result of logical and
relentless agitation by members of Congress, led by Congressman Wright
Patman as well as by other competent monetary experts, the Federal
Reserve began to pay to the US Treasury a considerable part of its
earnings from interest on government securities. This was done without
public notice and few people, even today, know that is being done. It
was done, quite obviously, as acknowledgment that the Federal Reserve
Banks were acting on the one hand as a national bank of issue, creating
the nation's money, but on the other hand charging the nation interest
on its own credit - which no true national bank of issue could
conceivably, or with any show of justice, dare to do.

But this is only part of the story. And the less discouraging part, at
that. For where the commercial banks are concerned, there is no such
repayment of the people's money.

When the commercial banks create money, as they do when they acquire
government bonds, they levy a tax on every person in the United States.
This is so because every new dollar that is created makes every dollar
previously in existence worth somewhat less than it was worth before.
This is the very heart of inflation.

It is also taxation without representation with a vengeance. Until this
system is changed, our debt will continue to skyrocket without limit and
the fixing of debt limits by the Congress will continue to be an
exercise in utter futility.

What ought to be done?

Banks should lend existing money. But, as the Constitution clearly
requires, the money (or credit) of the nation should never be created by
any private agency, but by an agency of the nation itself. It is the
duty of Congress to provide for this by a carefully drawn statute.

The stock in Federal Reserve Banks should be purchased by the government
from their present private bank owners. The Federal Reserve should then
become our national bank of issue. It should create reserve Bank Credit
as it does now. But that credit should be credited to the United States
Treasury, not charged against it and the people as debt. As much such
new credit should be created each year as is needed to keep our economy
running at or near capacity - and no more than that. A stable price
level could result. Then and only then can we expect to overcome
recessions, to put our people to work, and do this without the danger of
inflation and the ever-increasing debt which are inescapable under the
present monetary system.

--- Jerry Voorhis, The Strange Case of Richard Milhous Nixon (1973)


HOW TO NATIONALIZE CREDIT

Congress [could] provide for governmental purchase of the capital stock
of the twelve central Federal Reserve Banks from the member banks which
now own it. This would cost $144,000,000 in round figures, and would
correct the present anomalous situation of a privately owned bank of
issue. The Federal Reserve Banks could then create money in the form of
"Federal Reserve Bank credit" entries on their books just as they do
now. A "National Credit Account" (in contrast to present national debt)
could be established on the central banks' books in favor of the United
States Treasury. To such an account would be credited each year such
amounts of newly created "Reserve Bank credit" as would provide the
increased purchasing power needed to maintain economic balance and a
stable price level.

The Treasury would draw checks against their account and pay them out to
those to whom the government owed money, thus getting it into the
purchasing power stream. In this way the whole nation would derive the
benefit from the creation of the additional supply of money which its
own growth had made necessary. No interest bearing debt would be
incurred, but only a bookkeeping transaction between two public
agencies. Should inflation threaten so that it was desirable to reduce
the volume of money in circulation, the process could be reversed and
the Treasury could transfer a portion of its tax revenues to the central
banks for cancellation and retirement of the requisite amount of money
to restore stability.

Links:

{1} http://en.wikipedia.org/wiki/Jerry_Voorhis

{2}
http://www.amazon.com/Beyond-Victory-Jerry-Voorhis/dp/B001JKN3KE/ref=sr_1_3?ie=UTF8&s=books&qid=1236334566&sr=1-3

http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html


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