Sometimes, between sleep and the time I fully awaken, I have this fantasy about the Federal Reserve Chairman. I imagine that Ben Bernanke will testify before an exasperated, desperate Congress someday and say something like the following, perhaps near the end of his term:
Members of Congress, and members of the banking committee, thank you for allowing me to testify today.
As you know, our nation suffers greatly under ever-increasing amounts of debt. These debt burdens impose a tax on our citizens, constrain the power of government to apply money into the economy by relegating tax revenues to debt payments instead. Though this figure is currently at 6 percent of tax revenues, that relatively low percentage is largely due to the Federal Reserve's current policy of highly accommodative near zero interest rates. Would the Federal Reserve feel compelled to raise rates, for example, to combat inflation, the recurring loan obligations taken out by the federal government would then include a much more onerous, and possibly highly recessionary, net interest payment -- one that would crowd out other obligations of the government, under current budget scenarios. So, it is correct to say that both the federal government and the Federal Reserve are constrained by the debt obligations facing the nation.
The nation continues to suffer from lack of effective demand. (Effective Demand in economics is defined as demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not constrained in any other market). And while the Federal Reserve's powers are great, they are not unlimited, and even recent QE purchases have had limited effect in stimulating demand in the areas of the economy that need it most. Many sectors, if not most, of the economy remain, effectively, in recession, even depression.
Furthermore, the Federal Reserve's mandate requires it to be able to act independently, so it cannot rightly be considered part of the government, even though, as the members of the committee know, there are many rules and restrictions covering the Federal Reserve enacted by Congress. Because of that key fact -- sometimes not even acknowledged by our own governors -- every dollar we create for the government comes with a debt. This seigniorage loss is worth hundreds of billions to the government account every year, adding further to the government debt, even as the Federal Reserve returns money it does not need for its own operations to the Treasury. A recent lawsuit against Treasury illustrates this matter of accounting fact.
Worse, Federal Reserve actions to date have resulted mainly in boosting bank reserves and in creating asset class inflation -- including stocks and commodities. The last one is particularly troubling because it makes all commodity-based products more expensive to consumers, directly undercutting the Fed's role in controlling inflation and generally depressing economic activity. Although the Federal Reserve's actions were designed to encourage the banks to begin lending again, by boosting reserves, we are now forced to admit that this is not what, for the most part, has happened. We are, as the common parlance puts it, 'pushing on a string.'
However, there is another answer. There are ways for government itself to create money without incurring more debt. Of course, government does this all the time with coins, since the 1792 Coinage Act. Coin values are no longer determined by their metallurgical content under the present fiat monetary system, and should not be. The face value is, in fact, simply that which the government assigns to the coin itself. So, in fact, there is no limit to the nominal value of a coin. The government mint, operating at the behest of Treasury, could issue a $50 coin, and has in the past, as a collector item. But it could also issue a $500 coin, a five million dollar coin, or even, as has been suggested by several economic writers, a trillion dollar coin. (Bernanke pauses while the banking chairman bangs his gavel to restore order, as the audience gasps. Someone yells out "you lie!" Turning slightly red-faced, Bernanke responds: "No, I do not lie" then continues with his prepared remarks). But the government can also produce, and has produced, paper money, independent of the Federal Reserve, not to pay down the debt directly, which has been legally impermissible since president Lincoln first issued United States Notes with the first legal tender act in 1862, but to channel directly into the economy, for infrastructure, to shore up Social Security, or for any number of public works projects that Congress could specify. This would eventually indirectly pay off the debt by circulating revenues that would then be partially collected back as taxes. As we saw during the Clinton years, it is possible to outgrow the deficit and begin to pay off the debt, if growth is strong enough. Curbing unemployment while creating true wealth is the most important factor in growing the economy again. While we would all like the private sector to do more, the fact is, it is not, and there is now an opportunity for government to take over this function, albeit, one hopes, temporarily. While it is outside the scope of the Federal Reserve to create jobs, as you know, Congress can, through appropriate legislation. (There is more gavel banging and cursing from the Republican members of the banking committee).
For your reference and to establish precedence, I direct you to article 1, section 8 of the Constitution, first employed, as mentioned, by president Lincoln, to "coin Money" - here, meaning paper money, during the Civil War. A total of $450 million was produced in 1862-1863, which would be worth nearly $10 billion today. The seigniorage effect of adding to the government account was immediate even though this money was not directly used to pay down the debt. The money was used to pay the needs of the northern army to re-unite our country. Contrary to expectations at the time, inflation did not reign out of control, and after the war, and the shortages induced by it, prices even declined. Gold spiked initially, but also came down after the war, while the new Greenbacks, as they were called, continued to circulate. The Greenbacks were so popular that a Greenback party to promote them was formed from 1874 -- 1889. Unfortunately, due to actions of my banking predecessors, the Greenback was eventually reduced to just $351 million in circulation, while private banks continued to produce the ever-increasing share of the nation's money, until the 1913 Federal Reserve Act created the Central Bank that I head today. However, United States Notes, debt-free money, were continued in production until 1972, and not fully recycled -- i.e. burned -- by Treasury until 1996. Today, they remain in small quantities as collector's items on eBay (nervous laughter erupts and the chairman smiles his beatific smile).
United States Notes, aka Greenbacks, can be produced by Congress at any time, in any amount, for any purpose. This constitutional right was last affirmed by the Supreme Court in Juilliard v. Greenman, and has never been legally challenged since. United States Notes are, in fact, our country's longest-lasting currency.
As you know, wealth inequity has risen to historic levels, perhaps surpassing that of even the gilded age or the 1920s. This has deleterious effects on the economy, and on the American people, who cannot find employment or pay for goods that have been inflated due to speculative activity in the commodities and futures markets - oil is a particularly good example of this.
Congress has a constitutional power the Federal Reserve does not have, and I am speaking to you today only in an advisory capacity, with whatever expertise you see fit to grant to me, but to strongly urge you to consider this debt-free option to inject necessary capital into the economy where it is needed most.
That is all, and as always, I am happy to take your questions."
(Bernanke looks up with his beatific smile, countering the shocked, and in some cases, deeply scowling, faces of the banking committee).
Then I remember that Lincoln was assassinated by a banker-financed assassination ring that also tried to take out Secretary of State Seward, and Vice President Johnson (this was aborted when the co-conspirator chickened out last-minute). Other reform-minded presidents like Garfield and Kennedy may also have been assassinated, in part, by conspiring banking interests.
Ah well, back to reality.....