Monday, June 25, 2012
Why can't the Treasury borrow directly from the Fed
Hat tip to Scott Fullwiler.
Marriner Eccles, Chairman of the Board of Governors of the Federal Reserve System 1947:
There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.
Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.
It boggles the mind to see yet another reminder of how thoroughly this was understood 60 years ago. It's not feasible to imagine that later Fed staff, economists and financiers didn't know this. Most had to consciously choose to not believe it, and therefore to not teach the truth to later students.
Four score years ago, our forefathers set up a workable fiat currency system, with much trivia modified unchanged from the shambles of the failed gold-std. It is our job to see that monetary policy of the people, by the people and for the people does not vanish from the face of the earth?