The Money Revolution

The extraordinary Federal Reserve response to the financial crisis of 2008 forever changed our concept of money and, in effect, started the revolution. The fight will be over the changing nature of our money and who will control it.

Traditionally, the Congress taxes and appropriates money which the treasury then spends to maintain the government, buy our wars, maintain a social safety net and manage fiscal policy. The Fed manage monetary policy using the money supply and interest rate. (I wrote,12-11-08, about the differences between treasury appropriated money and Fed created money.) These two types of money did not intersect until the Great Recession of 2008 when the Fed used the full constitutional power that Congress had delegated to issue and regulate money.

Fiscal and monetary policy use money differently. Fiscal policy spending puts money that is taxed, appropriated or borrowed and paid back directly into the real economy. It goes into the production of goods and services. The Fed on the other hand creates and destroys money to maintain the financial system and manage monetary policy. The action of the Federal Reserve is supposed to be the application of technical expertise free of politics. That is why the bank maintains that it must have independence from the Congress or administration.

In 2008 all that changed. The Great Recession and the financial crisis presented a unique threat to the system itself. The Bush and Obama administrations, in consort, proposed and implemented a stimulus package of an un-heard of proportion, a proposed $700 billion. This stimulus may have ended up something less than that but it was still enormous in traditional terms. It was not, however, large enough to make up the lost aggregate demand or to adequately stimulate the economy. In any event, it is peanuts compared to what the Fed can and did do.

The Fed not only did all the traditional quantitative easing that takes place in the presence of a deflationary threat, but it turned on the money spigots full blast. The Fed sprayed trillions of dollars it created into not just the banking system but, and this is important, also into the real economy. The Fed was not just managing monetary policy. It mingled tax money and created money as though they were interchangeable. In effect, the Federal Reserve system changed our understanding of the nature of money.

Two lessons are particularly important. First, the Fed can now do with created money anything that the treasury can do with appropriated money. Second, this makes the present system of appropriation, deficits and debt obsolete.

This raises serious political questions. What is the sense of scraping and scrimping over borrowing and spending $38 billion or $60 billion or even $100 billion when the Fed is handing similar sums to individual firms with only the vaguest guarantee that loans and grants will be repaid?

The Federal Reserve injected at least $3.5 trillion into the economy since the crisis began. Most of that has remained in reserves at the Fed, collecting interest, of course. Yet much of it, and no one knows how much, went into the real economy.

The important fact is that there is no longer any distinction in use between money collected in taxes and money created by the Fed. There is no longer any distinction between borrowed money which has to be repaid and created money which never has to be accounted for.

The Fed may now be in a position to govern the country but this political attack by the financial industry has not gone unnoticed by the politicians. Those who have spoken out include as disparate a group as Senators Al Franken, Bernie Sanders and Rand Paul, all of whom want to rein in the Fed. These senators have forced the Fed to publish a list of those who got money and how much they got. But, there is still not the badly needed audit of the Fed. Nor have the Senators, and a good number of House members, yet aroused the citizenry but they are working on it.

I don't know who will take control of our money. Nor do I know a candidate who should. It could be the bankers, the great multinational corporations, the military-industrial complex, an independent commission or who knows. It is unlikely to be the Congress which failed so badly to manage treasury money nor is it likely to be Ben Bernanke and an independent central bank, though the Fed did a better job with created money than Congress did with tax money.