At David Stockman’s Contra Corner, Stockman calls the Federal Reserve “the Alpha and Omega of almost everything that threatens the future of capitalist prosperity and constitutional liberty in America.” He writes:
Yes, the Alpha and Omega of almost everything that threatens the future of capitalist prosperity and constitutional liberty in America is the Federal Reserve. And its untoward impact goes back decades and decades, taking the form of multiple phases and transmutations as it made its way over the last 110 years to its current malefic incarnation.
To be sure, it didn’t start that way upon its legislative enactment on Christmas Eve 1913. The original statute as crafted by the great Congressman (and later Senator) Carter Glass actually omitted—and deliberately so —the two core features of today’s rogue central bank, which features underlie all our present-day troubles. To wit, there was no provision for the nation’s new central bank to own, borrow or collateralize the public debt. There was also no mandate or mechanism for it to be in the macroeconomic management business, nor was it contemplated that the 12 new Federal Reserve Banks, spread among the regions of the United States, would play any role at all in the stock and bond markets and that only one of these 12 banks— the New York Fed—would ever get within 100 miles of Wall Street.
Most importantly, rather than function as the dominant, centralized influencer and price-setter in the banking and financial markets, as per today’s Fed, the new Federal Reserve system was designed to be a decentralized price-taker and last resort liquidity provider to Member banks within each of its 12 regions. That is to say, the gold coin standard was the basis for anchoring the value of hand-to-hand currency and commercial bank deposit money, and the free market was the forum for pricing money claims, debt, equity and other financial assets.
Accordingly, today’s modality of monetary central planning and financial domination by a monetary politburo comprised of a dozen central bank apparatchiks was not even a gleam in the eye of the Fed founders. All of this was a product of relentless mission creep over the years and the raw grasping for power by Fed officials and their enablers on both ends of today’s Acela Corridor.
In this original setting, therefore, the Federal Reserve was a passive player even when it came to the issuance of central bank credit. Rather than proactively targeting either Milton Friedman’s money supply or Alan Greenspan’s Federal funds rate, Fed officials were only empowered to don green eyeshades, figuratively pull up a chair behind the discount window of each of the 12 Reserve Banks and sit back and wait for customers in the form of Member banks seeking cash advances. In responding to these discount window requests, they were to assess the collateral presented by Member banks to support their discount loans strictly in terms of commercial soundness and the prospects for near-term repayment.
Consequently, the expansion or contraction of Federal Reserve credit at each bank and for the system as a whole would be driven by the ebb and flow of main street commerce, not the whims of central bankers targeting either financial or macroeconomic variables. Moreover, “eligible” paper was called “real bills” during that era—that is, claims on goods already produced or sold and usually due for repayment with 90-days or less.
Properly administrated, the real bills doctrine was inherently noninflationary for two reasons, First, holders of bank deposit money (checking account balances) could always convert it to currency upon demand under this arrangement, and, in turn, currency could be redeemed for gold, also upon demand.
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