Should We Abolish the Federal Reserve?
Congressman Ron Paul has introduced his bill to abolish the Federal Reserve. Every new Congress he introduces this legislation. It is H.R.2755 in this 110th Congress.
[click here] to read the language of the legislation.
To abolish the Federal Reserve raises the question, “what happens afterwards?” On the first day, there would likely be no change at all. Bank of America, Wells Fargo, Chase, and your local credit union would keep on using the ACH to debit/credit dollars just as they have done for the last five decades. The stock market will still open tomorrow morning and people will buy and sell securities in “dollars.”
Even if the Federal Reserve were abolished, the 12 “member banks” of the Federal Reserve system are private corporations; they would still be in business, and the payments-clearing system they operate would still be in operation. They would still buy coins from the U.S. Mint to distribute to banks, and they would still provide currency services on behalf of the U.S. Bureau of Engraving and Printing.
In other words, abolishing the Federal Reserve Board of Governors, and the Federal Open Market Committee, would not be a large loss. Milton Friedman recommended doing this small step years ago. The monetary base does not need to increase or decrease, in the short run, and the interest rates do not need manipulation by Ben Bernanke.
The Problem is Monopoly
It is important to understand the basic problem with the Fed is mainly its monopoly role, which takes two forms.
The first is a collection of various laws that make Federal Reserve accounting unit dollars (F.R.A.U.D.) our official “legal tender,” and do not allow the same status to private paper money, such as American Express traveler’s cheques and the BerkShares used in Great Barrington, Massachusetts.
There is no essential need for anything to be “legal tender,” except to define what the government will accept in payment of taxes. As long as the government is going to collect taxes, it might be appropriate for legislation to define what the U.S. Treasury will accept.
The second “monopoly” question is, what should the government use as the digits with which to keep its own books of accounting, and what should it pay out as salaries and for purchases from the private sector? Whatever it adopts will overwhelmingly affect the private financial markets, although government does not need to mandate a unit of accounting for private use.
The classic coin, “dollar,” no longer exists, and the new substitutes, the pure silver troy ounce medals (e.g. “Liberty Dollar” and the U.S. Mint’s troy ounce coin, which even says “legal tender: one dollar”) are somewhat large in size/weight for pocket money. Nevertheless, the silver troy ounce (31.1035 grams of .9999 silver) could become the new bookkeeping unit, and private banks and individuals could issue demand deposit accounts, debit/credit cards, and paper banknotes to facilitate their use in commerce and finance.
I have always liked the gram of gold as a bookkeeping unit. Although nobody would manufacture a one gram coin, a 10g coin would be about the size of a U.S. quarter, assuming either 90% alloy (classical U.S. standard) or 92.5% (classical U.K. “sterling” standard = 22 carat). But in either case, debit/credit cards and EFT/ACH would be more common for transactions and the gram of gold would be worth about $30 in todays F.R.A.U.D.-value.
More Important: Government Bookkeeping
The second “monopoly” issue is more important: what should the government itself use for bookkeeping? I advocate the government should adopt a law saying that individuals themselves shall always have the right to keep their books of account and transactions in whatever form they select, without any government mandate. (The Tax Reform Act of 1986 [Internal Revenue Code, Sec. 985(b)(1)(A)] was the first enactment of Congress to require use of the U.S. dollar, i.e. the legal tender F.R.A.U.D. This was recommended by the I.R.S. because following the 1970s inflation, some people had adopted bullion units of weight for bookkeeping.) The law enacting this monopoly should be repealed.
Whatever the government itself adopted would become an “elephant in the chicken yard,” and would immediately become the most commonly adopted unit of account for private transactions and finance. It would be unfortunate if the silver troy ounce were adopted, since it would overshadow gold, which Mises has argued is a superior basis for a modern monetary system. Therefore, I would hope Congress would adopt the gram of pure gold as the basic unit of governmental bookkeeping.
The current paper dollar economy could continue on for decades after the Federal Reserve disappears, because the dollar-monetary base would simply remain as a frozen, fixed quantity of government liabilities. It would become a “parallel currency” (there is extensive literature in economics about parallel currencies) and could operate quite smoothly in the same manner as foreign exchange markets work today, with a competitive exchange rate quoted every few minutes on electronic financial exchanges.
And, then, in the alternative, there are the suggestions of Prof. Leland Yeager of Auburn University. (See his “An Evaluation of Freely-Fluctuating Exchange Rates,” PhD dissertation, Columbia University, 1952, and subsequent work.) He suggests the government should define its own new unit as a composite of several different commodities (oil, metal, grain, et al.) and having defined the new unit of account, should entirely leave the creation of the tangible exchange media/cards/ETF up to the private sector.