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This is the Introduction to the book "A Primer on Money"
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1 -- (front cover)
Page #2 -- (pages 3, 4 and 5 are blank)
Page 6 -- Letter of transmittal /
Page 7 -- THE PATMAN CRUSADE -- Introduction /
Page 8 -- CONTENTS /
INTRODUCTION to "A Primer On Money"
1. Most people, when asked about money, will say that all they know about money is that they don’t have enough. This is unfortunate. Money is a manufactured item. The amount of money available to the economy is determined by the manufacturers. And this amount, usually called the money supply, is one of the two or three most important influences determining business activity, incomes, prices, and economic growth.
2. Under the Constitution, it is the right and duty of Congress to create money. It is left entirely to Congress.
3. Congress has farmed out this power -- has let it out to the banking system, composed of the Federal Reserve and the commercial banks. Only these two can manufacture money, i.e., currency: and demand deposits (checkbook money) which are instantly available to make purchases and pay bills. (Exactly how this system creates money will be explained in the body of the book on page.) None of the other financial institutions of any nature has this power to manufacture money.
4. The manufacturers of money possess immense power which, if properly used, can work in the public interest. But the same power, if abused, can be greatly detrimental to national welfare. The power has been abused, and reforms are needed to promote the public interest.
5. The ability to manufacture money is the heart of the commercial banking system. Bank profits depend on the lending and investing of bank created money. Banks are given this privilege, of creating the very money they profit from, because they have an important economic function to perform. Banks provide the money which the economy needs to prosper and grow. This money is not unlimited. The banking system can only create so much money at any time. (Who decides how much money can be created, and how the decision is made effective is another subject dealt with in the body of this book on page.) Since money is limited, someone must decide where the best places are to put the available money and under what conditions. This the banking system does. Bank earnings are the return for the wise and proper placing of the money supply.
6. Individual banks are chartered primarily for the purpose of serving the areas in which they operate. xxxThis is implied in xxx The public interest is served if the bank creates money to satisfy the needs of its area, as far as possible, and help the progress of the community.
For some time now, banks have been forgetting their primary purpose. They have become less and less interested in extending credit to the local businessman or farmer, especially if he is small. They have been reaching out and using their money-creating power to purchase long-term U.S. Government and tax-free municipal bonds. The Government, with its credit rating, doesn’t need their money; their local areas do. But purchasing Government and municipal bonds is profitable and requires almost no time or paperwork.
Bankers, like other people, can forget their duties and look at their activity purely from their own, narrow viewpoint -- the level of bank earnings. When they do, their obligation to help the people of their area with expanded credit is shunted aside, they are no longer operating in the public interest.
7. Originally, there was a residence qualification for bank directors. They were required to reside within the same limited area where the bank was to operate. The purpose of the requirement was to assure bank operation by local people who had the interest of the area at heart. State laws also required that bank directors live nearby.
These laws have been changed in recent years. Now only a certain number of directors must live in the locality. The others, in some cases, can live outside the State; in other cases, they are not bound by any residence requirements. Still other laws have been altered. Holding companies are now permitted, whose directors may live in another city or State, and who maintain control through local dummy directors. The local bank is then actually operated by absentee owners.
This, too, is a serious matter and requires careful attention. The independent bank, locally owned and operated, is a bulwark of strength in our country. Its disappearance is an abuse and should be stopped. If the present trend continues, the commercial banking system in the near future will be owned largely by absentee owners and a handful of financial centers.
8. The questions at issue do not include whether banks should be permitted to make ample profits from their money manufacturing franchise. Of course, they should. Commercial banks are an important part of our economy. They have served our country well both in peace and war. The required reforms are called for only to assure that banks serve the public interest while earning their profits. The country needs banks and an efficient banking system. And banks must have fair profits to do an adequate job.
9. The Federal Reserve System, consisting of 12 regional Federal Reserve banks. The Federal Reserve Board in Washington, is the control organization guiding the money manufacturing process-as will be explained later. The System was created by Congress and is a creature of that body.
As the ultimate controller of the money supply, the Federal Reserve has immense power. It is widely admitted that its influence on the level of business activity is significant. In fact, an important group of economists believes that the money supply is the main factor causing the ups and downs of the economy.
10. Although a creature of Congress, the Federal Reserve is in practice, independent of Congress in its policymaking and operation. The same holds true with respect to the executive branch. The Federal Reserve neither requires nor seeks the approval of any branch of Government for its policies and operations. The System itself decides what ends its policies are aimed at and then takes whatever actions it sees fit to reach those ends. That is certainly dangerous if there is no outside body with control over group under discussion -- it is easy to make grand or benign policies and violate those policies in practice.
This independent arrangement raises two major problems. First: in a democracy the responsibility for the Government’s economic policies, which so affect the economy, should absolutely rest with the elected representatives of the people: in our case, with the President and the Congress. If these two follow economic policies inimical to the general welfare, they are accountable to the people for their actions on election day. With Federal Reserve independence however, a body of men exist who control one of the most powerful levers moving the economy and who are responsible to no one. If the Federal Reserve pursues a policy which Congress or the President believes not to be in the public interest, there is nothing Congress can do to reverse the policy. Nor is there anything the people can do. Such bastions of unaccountable power are undemocratic. The Federal Reserve System must be reformed, so that it is answerable to the elected representatives of the people: or abolished.
Second, by tolerating an “independent” Federal Reserve, the country is in the position of having two control centers independently trying to guide the economy. The President and the Congress dispose of a major influence over the economy in their power to tax and spend -- their fiscal xxx power. The Federal Reserve is the overlord of the money supply. If these two are not steering in the same direction, they can either neutralize each other or have the economy lurching in all directions. This is not a rational system for setting economic policy, It has given us trouble in the past, as the text will establish, and will inevitably in the future. But even more important than the problem of coordination is that of final control. When the “independent” Federal Reserve clashes with the President and the Congress, whose will prevails? Under the present regulations for appointment and tenure on the Federal Reserve Board, there is no pat answer. For all his power and responsibility for the welfare of the country, the President is not master, even with the approval of Congress, of the country’s economic policy.
This is no mere theoretical debating point. Economic policymaking is a matter of choosing where to place the weight of policy. The Federal Reserve and the President sometimes make different choices. An example of that possibility has just occurred. The President and the Congress together fashioned an $11 billion tax cut with the express purpose, among others, of helping to keep the economic upturn alive through 1964 and into 1965. Yet the President found it necessary in his annual economic report to Congress to ask the Federal Reserve not to nullify his efforts to reduce unemployment and raise incomes.
Should the President have to ask any congressionally created body to go along with his policy as approved by Congress?
Obviously not. The President is elected by the people. He should, by right, have a fair chance to carry out his policies and views. The Federal Reserve may advise and counsel but It must not be allowed to veto. Reforms are needed to achieve this end.
11. As bad as “independence” is, the main fault of the Federal Reserve System -- an admirable system if conducted in the public interest -- is that too much power and control rests in the hands of people whose private interests are directly affected by the Federal Reserve’s actions.
It is indisputable that the commercial banking community wields considerable power within the Federal Reserve. Each of the 12 regional Federal Reserve banks is operated by 9 directors -- 6 of them selected directly by the privately owned commercial banks. Further, the central decision making body, which decides whether the System will press the accelerator or the brake, is the Federal Open Market Committee. (The Committee and its work are thoroughly discussed in the main text.) The Committee has 12 members. Seven are so-called public members -- the members of the Federal Reserve Board -- who are appointed by the President and ratified by the Senate. They (supposedly) represent the public interest. The other 5 members are drawn from the presidents of the 12 regional banks. Each bank elects its own president by a vote of the nine-manboard of directors, with six private bank-selected directors on it.
This is not all. When the Open Market Committee meets every 3 weeks in Washington, all 12 regional bank presidents participate in the discussion, though only 5 can vote. The “discussion” committee then consists of the 12 regional presidents and the 7 “public interest” board members. The 12 presidents, of course, are free to persuade as they see fit.
In addition, the Federal Reserve Board confers periodically with a Federal Advisory Council that both advises and consults on business conditions. The board of directors of each regional bank selects one member of the council, and he is usually a banker -- representing the bankers of his district.
12. Here, then, is the private banker influence. What does this mean? It means simply that the private banking interests are intimately if not decisively involved in determining the Nation’s money supply and, consequently, the general level of interest rates. And interest rates are the very prices bankers charge for the use of their product -- money. It means that decisions absolutely crucial to the public interest are arrived at by a body riddled with private interests, and these interests can easily conflict.
13. When the original Federal Reserve Act was being shaped in 1913, President Woodrow Wilson was aware of this conflict of interest. He refused to allow private bankers on any board that would have the power to fix interest rates or determine the money supply. When some prominent New York bankers asked for representation on the proposed Federal Reserve Board, Mr. Wilson asked, “Which one of you gentlemen would have me select presidents of railroads to be on the Interstate Commerce Commission to fix passenger rates and freight rates?”
But institutions evolve. By 1934 and 1935, with Congress totally preoccupied by the cares of the great depression, new laws were passed essentially setting up the Federal Reserve System as it is today: a powerful central bank, as opposed to a conglomeration of regional banks, with a strong private banking voice on the decision making Open Market Committee.
14. The Open Market Committee, as presently established, is plainly not in the public interest. This committee should be operated by purely public servants, representatives of the people as a whole and not any single interest group. The Open Market Committee should be abolished, and its powers transferred to the Federal Reserve Board -- the present public members of the committee, with reasonably short terms of office. Also, the Federal Advisory Committee should be enlarged and reorganized. Members should be chosen for the broadest possible representation of the public interest, their main qualification: ability.
15. It may seem strange, but Congress has never developed a set of goals for guiding Federal Reserve policy. In founding the System. Congress spoke about the country’s need for “an elastic currency.” Since then, Congress has passed the Full Employment Act, declaring its general intention to promote “maximum employment, production, and purchasing power.” But it has never directly counseled the Federal Reserve.
The Federal Reserve has filled this vacuum itself. The ends its policies are intended to achieve are those chosen by the Federal Reserve -- all certainly admirable, but not necessarily those which the Federal Reserve should take on itself to pursue. For example, there have been times when the Federal Reserve has restricted the money supply and raised interest rates to gain an end, which had much better been left to another Government agency or the Congress to attain. The country could have had lower interest rates and taxes without sacrificing anything else.
Congress must be more explicit. Guidelines for monetary policy should be laid down. And an annual review of the Federal Reserve’s policies should d be held by the Senate and House Banking and Currency Committees. Reports should be filed and recommendations made, if any.
16. These criticisms and suggested reforms of the commercial banking and Federal Reserve systems are offered for one purpose: to assure that the needs of the people and their Government are served to the fullest possible extent. The commercial banking system has a clear-cut responsibility to its local area that it must fulfill. The Federal Reserve System can have only one consideration: the public interest. The Nation’s monetary system cannot be governed by or for the private interest of any one group.
There is no room in these criticisms for anything that smacks of unsound money. Neither inflation nor deflation is wanted. What is wanted is prosperity and high employment under the terms of the Full Employment Act. Our banking system, possessing the great monetary power of the United States, must serve that end.