Fed policy nevertheless remains stuck on the "Quantity Theory of Money," which says that increasing the money in the system will decrease the value of the currency, driving up prices. The theory omits the supply factor. As long as workers and materials are available, increasing "demand" (money) can generate the supply needed to meet that demand. Supply and demand increase together and prices remain stable. And while the speculative economy may be awash in money, today the local productive economy is suffering from a lack of demand. Consumers are short of funds and heavily in debt. Moreover, plenty of workers are available to generate the supply needed to meet any new demand (injection of money). According to John Williams at ShadowStats.com, the real unemployment figure as of April 2018, including long-term discouraged workers who were defined out of official existence in 1994, was 21.5 percent. Beyond that is the expanding labor potential of robots and computers. A vast workforce is thus available to fill the gap between supply and demand, allowing new money to be added to the productive economy.
But the Fed insists on "sterilizing" every purported effort to stimulate demand, by making sure the new money never gets into the real economy. The money produced through quantitative easing remains trapped on bank balance sheets, where the Fed pays interest on excess reserves, killing any incentive for the banks to lend even to other banks; and the central bank has now begun systematically returning even that money to its own balance sheet.
The High Price of Challenging the Fed
An article in The Economist on July 28, 2018, contends that Nixon was pressuring the Fed to make the economy look good for political purposes, and that Trump is following suit. But there is more to the Nixon story. In a 2010 book titled The American Caliphate, R. Duane Willing says the Nixon White House had quietly drafted and sponsored a Federal Charter Bill that would have changed U.S. financial history. Willing worked for the Federal Home Loan Bank Board during the Nixon era and was tasked with defining the system requirements that would make a central computerized checking account and loan system available to the new banking system. He write s:
Only John Kennedy and Abraham Lincoln and two other assassinated presidents, James Garfield and William McKinley, prior to Nixon, had actively contemplated changes of such magnitude in the U.S. financial system.
President Garfield observed that "whoever controls the volume of money in our country is absolute master of all industry and commerce . . . and when you realize that the entire money system is very easily controlled, one way or another by a few powerful men, you will not have to be told how periods of inflation and depression originate."
. . . The hidden secret since the beginning of modern capitalism is that money is created and managed by bank control over checking accounts in the loan-making process.
Willing says Nixon was preparing the Federal Home Loan Bank Board to change the traditional role of American savings and loan associations, giving them money creation powers like the big Wall Street banks had, providing a full-service nationwide banking system. The national money supply would thus be regulated according to needs at the local level rather than dictated from the top by the central bank. The proposed legislation provided for a separate central bank to backstop local credit unions and a much greater degree of competition for a wide array of financial services.
But Nixon's plan for national finance, along with his plan for healthcare and a guaranteed income, alarmed the Wall Street/Federal Reserve power block, which willing says was about to be challenged like never before. Nixon was obviously not blameless in the Watergate scandal, but Willing contends it was pushed by "the Wall Street Great Merchants as owners of the Senate," who "were making certain that the money dreams of 'Tricky Dick' and his vision for the Republic protected with a network of converted Savings and Loan associations was doomed."
An "Independent" Central Bank or a Public Central Bank?
Challenging the Fed is thus risky business, and the president should be given credit for taking it on. But if he is planning to change the makeup of the Federal Reserve Board, he needs to appoint people who understand that the way to jumpstart the economy is to inject new money directly into it, not keep the money "sterilized" in fake injections that trap it on bank balance sheets until it can be reeled back in by the central bank. Interesting proposals for how the Fed could inject new money into the economy include making direct loans for infrastructure (as the Chinese central bank is doing), making low- or no-interest loans to state and local governments for infrastructure, or refinancing the federal debt interest-free.
Better than changing who is at the helm of the central bank would be to change the rules governing it, something only Congress can do. Putting the needs of the American people first, as Trump promised in his campaign speeches, means making the Fed serve Main Street rather than Wall Street.
___________________________
A previous version of this article was posted on Truthdig.com. Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including Web of Debt and The Public Bank Solution. Her 300+ blog articles are posted at EllenBrown.com.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
2
2
2
