classical economics
for analysis,  forecasting
and policy design

Doing Monetary Reform

By Wayne Jett © November 17, 2010
    The Federal Open Market Committee announced November 3 its plan to create $600 billion-plus to buy Treasury bonds so the federal government could spend the money. The audacity and timing of FOMC’s action – one day after the electorate turned out of office a historic number of congressional incumbents – sparked the first political opening for reforming U. S. monetary policy in three decades. An opportunity so rare should not be squandered, either in failure or in acting inconsequentially.
America Slips Toward Global Bank Abyss
    Time and space is too precious to permit reiterating the pitiful record of the Federal Reserve. The Fed is owned and dominated by elite financiers who use the institution to prey upon American and global populations. Those financiers now wish to proceed to a global central bank outside the reach of the U. S. Constitution and Congress. This explains why the best proposal for monetary reform from an official source in nearly 25 years comes from a global organization – the World Bank – not from the Fed or Treasury.
    World Bank president Robert Zoellick proposes that major currency values should be stabilized relative to the price of gold.  President Ronald Reagan’s second secretary of the Treasury James A. Baker III voiced that proposal in September, 1987. The newly appointed Fed chairman Alan Greenspan then expressed affection for a declining dollar, which provoked the October, 1987, crash in U. S. equity markets.
     Why was Baker’s proposal not heeded, and why has neither the U. S. Treasury nor the Federal Reserve moved towards that stabilization of international currencies? Financiers play currency instability to profit greatly at the expense of middle class producers – yes. But an overarching game plan is in place to destroy the dollar as the world’s reserve currency by chronic mismanagement. Readers should know that, before creation of the Federal Reserve in 1913, a global network of privately owned central banks was conceived as a primary tool for undercutting middle class prosperity and political power, thereby achieving return to a two-class society
in the U. S.
Real Monetary Reform Defined
    Real monetary reform means revoking the charter of the Federal Reserve System and conducting monetary policy directly through Treasury under statutory mandate of Congress. Currency issued directly by Treasury would not have to be borrowed from the Fed, so no interest would be payable on new federal debt. Existing federal debt could be repaid with new currency, eliminating interest. Importantly, new federal currency would be valued by markets and subject to a statutorily fixed target; e. g., $1,000 per ounce of gold. Treasury issued “greenbacks” directly during the war of 1861-1865 without a target value in gold.
    Real progress towards monetary reform means revoking the employment/price statutory rule and replacing it with a mandate to stabilize the dollar’s value in markets at a target stated in gold; e. g., $1,000 per ounce, to be achieved by the Fed draining or injecting dollars through purchases or sales of Treasury securities. This will enable the dollar to resume performing the fundamental purpose of any currency: to maintain permanently the true value of labor or production exchanged for it. This is the ethical duty of the dollar to Americans and all populations who use it.
Proposals in Congress
    Senator Bob Corker (R-TN) and Representative Mike Pence (R-IN) are introducing legislation to amend the federal statute which tells the Federal Reserve what its responsibility is in managing the dollar. In 1978, the Humphrey-Hawkins Act told the Fed to optimize productive output (employment) and to stabilize prices. The Corker-Pence bill would remove the employment goal and retain only the price stability goal.  Both goals appear laudable on first inspection, but sad experience proves the Fed will not achieve either goal when left to its own designs.
    For most of nearly 40 years, the Fed has pretended to manage the dollar by targeting the interest rate charged by banks for interbank loans of overnight bank reserves. In fact, the overnight funds rate target has served to assist major banks in setting non-competitive lending rates for business and personal loans. The point has been proved to a mathematical certainty that manipulation of the overnight funds rate is incapable of providing a stable value for the dollar. No formula can be written showing a proportional relationship – much less a controlling relationship – between the overnight funds rate and the dollar’s value.
    Another fact to be weighed is this: the Fed has manipulated the dollar’s value towards undisclosed (except to Fed insiders) objectives by injecting or draining liquidity through open market operations without regard to the overnight funds rate. Never has this been more publicly obvious than since late 2008. That is when the Fed effectively floated the overnight funds rate by announcing a “zero to 0.25%” funds rate target and proceeded to create liquidity in unprecedented proportions as required to achieve bailout objectives for its dominant owners. In the past five years, the dollar has lost 43.2% of its value relative to gold, with most of the fall coming in the last two years. The CPI conceals and delays this real, existing monetary inflation.
    The Corker-Pence bill as drafted would do nothing to stop the Fed’s manipulative gamesmanship. Manipulation of interest rates with increased emphasis upon destroying jobs to fight inflation would be the new rule. Economic growth would be hurt and dollar stability would not improve unless the Fed saw fit to do so intermittently for political purposes.
     The proposed rule change conveys an erroneous message that jobs are not a concern in setting monetary policy. It even aids the Fed in achieving mercantilist goals to destroy middle class jobs and increase monopolization. Unwittingly, the sponsors would arm the Fed to raise interest rates to levels which assure small and mid-size business cannot access bank credit – again benefiting the Fed’s mercantilist owners. The Fed meekly responds that it is not seeking a rule change.
Consequences of Status Quo
    In a typically diversionary tactic, Greenspan says federal fiscal policy must be reformed before the bond market collapses.  Separately, Greenspan concedes the Fed “is pursuing a policy of weakening the dollar.” Bond market risk would be reduced significantly by real monetary policy reform, since bonds repaid with sound dollars need not price high inflation into their yield. Federal spending deficits endanger market prices of Treasury debt more directly than of corporate bonds, though collapse of government certainly unsettles all markets. The salient point is that a stable dollar is essential if crisis in the corporate bond market is to be avoided.
    Currency devaluation as trade war has been trumpeted here repeatedly, and that reality was clearly portrayed during the recent G20 Asian disarray. Brazilian president Lula correctly states that boosting imports through currency devaluation is the pathway to bankruptcy for every nation rather than to economic recovery. Trade war instigated by Smoot-Hawley Tariffs contributed to global depression in the 1930s and to World War II. Nationalist policies are no less inflammatory and dangerous now than then.
    The mercantilist, elitist agenda is more powerfully positioned now than when it produced the Great Depression and World War II. Paul Krugman confirms the elitist agenda now includes death panels and a Value Added Tax in the near future to “solve” fiscal concerns.  Death panel opponent and middle class political champion Sarah Palin agrees with China and Germany, plus Brazil and prominent economists. Reform of U. S. economic policies is the preferred path, beginning with monetary policy. The opportunity is here for the taking. ~