CONGRESS, THE FED AND THE JOURNEY INTO THE FISCAL UNKNOWN

[Morpheal]

CONGRESS, THE FED AND THE JOURNEY INTO THE FISCAL UNKNOWN

Thomas Jefferson (Letter to James Monroe, January 1, 1815)

“If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their
fathers occupied. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.

We are completely saddled and bridled, and the bank is so firmly mounted on us that we must go where they ill guide. The dominion which the banking institutions have obtained over the
minds of our citizens...must be broken, or it will break us.”

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Of course many in government would say that Jefferson was well heeded, and that the Federal Reserve being the "issuer" of money follows Jefferson's advice. That too is a debatable point because we then have to determine how much of government fiscal policy is really determined, decisively and legislatively, by Congress. The Fed is in fact largely independent of Congress, even if considered under its oversight. (That pun might be appropriate. It does appear to be somewhat of an oversight.) I think Jefferson would have been equally concerned about a quasi independent “bankers’ bank” controlling money, and for his original reasons.After all the federal reserve banks operate somewhere in the netherworld having many of the characteristics of private corporations.

There is another side of the problem, quite apart from the nature of the Fed and its relation to Congress. Private currencies used to be a concern, with banks wanting to issue script of all variant types, as forms of legal tender, but I am not sure that just because a piece of paper does not say "currency" and "legal tender" and does not look like currency, avoids financial institutions (extending far beyond the area of banking as such) "issuing" what amounts to paper that has implied, real or unreal, value. You can create paper with value, other than money, in infinite amounts, today. All sorts of documents quite outside the amount of currency in the system, can be issued and in various ways honored by financial institutions without actual money changing hands. So, where does the equation balance out between what the Fed prints and issues and what other paper is out there ? Does anyone actually add the paper pile up and balance it against the actual printed currency and say whether one heap is larger than the other ?

We might well ask how much other paper of any potential financial value, that is not hard currency issued by the government, is there in the financial system ? Does anyone know ?
Not likely.

What you have to do is to add up the entire total for all instruments that have any potential fiscal value within the whole financial system. This is something quite different from adding up the amount of actual hard currency within that system. It is far different from a money supply question, that we tend to get tangled up in when discussing economics.

Now, if all the presumed and assumed “valuable” paper, other than actual currency were suddenly to be redeemed by the holders of that paper, there is no telling what amount of currency might be needed for that total redemption. Fact is that we assume that could never happen and would never happen. Only a percentage of such “valuable” paper is every likely to be redeemed at any given time, when it comes to redemption as actual hard currency, or as gold. The amount of hard currency only needs to cover that portion, not the whole total of “valuable” paper. However, you can see how errors of judgement can easily get into such a vague and nebulous scenario as unlimited, essentially unknown, amounts of “valuable” paper can be introduced into a system that does not even openly consider that question.

Furthermore, the actual value of such paper, at any given time, versus any assumed or original value, whichever is presumed most accurate, is at variance. There is no real and accurate way to determine this, until the “valuable” paper is redeemed for cash at any given moment in fiscal history. So accounting for it, in precise terms, is not even possible. We can only make assumptions (“educated” guesses) what those numbers are, and the probability is extremely high that any such guess would be wrong.

No one really knows for sure. Also no one can be really certain when something might be redeemed for hard currency. Similarly no one can be sure how much paper, considered to have value might be redeemed at any given time.

Clearly this very same problem because much larger, and larger to an unknown extent, when you “globalize” radically “free market” and “free enterprise” economics. You then introduce a much larger number of economic players, who cannot be expected to abide by the vast number of often unwritten, and also written and inadequately understood, existing rules. The assumption that new players learn and follow those same conservative rules tends to be naive and contrary to human behavior in what is an increasingly competitive system.

Jefferson would have been aghast at that fact.

Cheers.

Robert