[Congressional Record Volume 146, Number 108 (Thursday, September 14, 2000)]
[House]
[Pages H7646-H7648]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  INTEREST AMERICANS PAY FOR CURRENCY

  The SPEAKER pro tempore (Mr. Vitter). Under the Speaker's announced 
policy of January 6, 1999, the gentleman from Washington (Mr. Metcalf) 
is recognized for 60 minutes as the designee of the majority leader.
  Mr. METCALF. Mr. Speaker, I would like to speak on the topic, 
Interested in the Interest that Americans Pay for Their Own Currency, 
and I hope we are. I think we should be.
  The interest owed on our national debt to the Federal Reserve System 
is a disgrace. One day it will be the single largest budget item in our 
national budget. It ranks number two presently, but not by much. And 
Americans pay interest also on their currency. I will repeat that. 
Americans pay interest also on their currency; indirectly, of course, 
but it is still true.
  Currency is borrowed into circulation. Actually, we pay interest on 
the bonds that needlessly back our currency. The U.S. Treasury could 
issue our cash without debt or interest as we issue our coins today. 
Member banks must put up collateral, U.S. interest-bearing bonds, when 
they place each request for Federal Reserve notes, according to the 
Federal Reserve Act, section 16, paragraph 2, in the amount equal to 
that request. The cost to each American is about $100 each year to pay 
interest on these bonds, or really the cost of renting our cash from 
the Federal Reserve. So we actually pay a tax on, or a rental fee, to 
use the Federal Reserve's money. To repeat, our Treasury could issue 
our currency debt- and interest-free just like we issue our coins debt- 
and interest-free.
  We understand all of this, I think, in that we use Federal Reserve 
notes to pay most of our bills and taxes. In the Federal Reserve Act, 
it originally stated in section 16 that these Federal Reserve notes 
shall be redeemed in lawful

[[Page H7647]]

money on demand at the Treasury Department of the United States, or at 
any Federal Reserve Bank. I am quoting from the act itself. An 
interesting question is, What is the lawful money mentioned in the 
original Federal Reserve Act that we will get when we redeem the 
Federal Reserve notes? That question is never answered.
  But here is where the ``money muddle,'' as James Warburg once called 
it, begins to get really muddy. When we redeem Federal Reserve notes, 
we get Federal Reserve notes in exchange. That is interesting. When we 
borrow from our bank, any bank, we do not get Federal Reserve notes in 
hand; we do not get cash. We open an account at the bank we are 
borrowing from and receive a bank draft to deposit in the new account 
that we were made to open when we borrowed the money. Well, not money, 
per se, but the notes. Today, this is all done through ETF, or 
electronic funds transfer.
  Here is the point to all of this. There are no Federal Reserve notes 
on hand for us to borrow. According to the Federal Reserve Bank of 
Chicago, in their publication, Modern Money Mechanics, they state, and 
I quote: ``Changes in the quantity of money may originate with the 
actions of the Federal Reserve System, the Central Bank, the commercial 
banks, or the public, but the major control rests with the Central 
Bank. The actual process of money creation takes place in the 
commercial banks. As noted earlier, demand liabilities of commercial 
banks are money. These liabilities are customers' accounts. They 
increase when the customers deposit currency and checks, and when the 
proceeds of loans made by the banks are credited to borrowers' 
accounts. Banks can build up deposits by increasing loans and 
investments, so long as they keep enough currency on hand to redeem 
whatever amounts the holders of deposits want to convert into 
currency.''
  The Federal Reserve Board of Governors sets our interest rates, which 
then determine the price of money; not the quantity or the amount of 
money, but the price of money. The quantity of money I will discuss 
presently. The money aggregates, or the money supply indicators, like 
M-1 and M-2 used to be utilized in that determination. Interest rates 
went up; the money supply shrank. Interest rates were lowered, more 
money or credit really was released to the banks to lend. The money 
supply went up.
  The Federal Reserve Board and its chairman have repeatedly stated 
that the M-1 and M-2 indicators are out of control and are no longer 
used in determining Fed policy. What is Fed policy, in capital letters. 
Well, Fed policy has always been to fight inflation and keep the 
overall economy going, prosperously going. But inflation, while still a 
minor concern of the Fed, though I do not agree, is of less concern.
  Price stability is the clarion call for Fed policy today. The 
corporation's price stability, presumably, although one may argue that 
this would be good for everyone, including consumers; but price 
stability as the goal only informs us of what the Fed seeks, not how it 
intends to achieve it.

                              {time}  1915

  If not money supply aggregates, M-1 and M-2, then what are the new 
indicators? It was announced several years ago in the business journals 
mostly, that the one new indicator, of the many used, is today what is 
called wage inflation. I shall return to that momentarily, but first we 
must look at the quantity of money again, not the price of money.
  Businessmen, for example, and consumers as well, consider the price 
of money when they borrow. If interest rates are 7 percent rather than 
6, the businessman will make the deal, rather than wait. Consumers 
often buy at the higher rates, rather than waiting for the price to go 
down some.
  But even with interest rates on the rise, even if with just quarter 
point increases, the money supply used to shrink. Yet, that is not the 
case any longer. The Fed now places money in the hands of member banks 
in what are called repurchase agreements, or repos. It may be placed 
with the banks overnight, or for 7 days, or for whatever time the board 
wants. They can roll it over at will. They can reclaim it at will.
  The member banks do not have the option to take or not take the funds 
and they pay interest on these new funds, but as a noted financial 
adviser stated, the banks only have the right to say, ``Thank you very 
much, sir;'' in other words, they have no choice in the matter.
  Where does this new money go? That is the real point, here. The new 
money goes almost immediately into the financial markets; the stock 
market, primarily. It depends on the quantity the Fed pumps into the 
banks' hands.
  Here is a fine example. During the 6-months period just prior to year 
end, that is, Y2K, Chairman Greenspan expanded the adjusted monetary 
base dramatically. It is a spike almost vertical on the chart supplied 
by the St. Louis Federal Reserve Bank.
  At certain points, the annual growth rate for a given month was as 
high as 50 percent. During the entire 6 months it was running at about 
25 percent annual growth. This was far outstripping growth in 
productivity. Billions of dollars were pumped into the banking system, 
some $70 billion.
  Where did the money go? It had to go into the financial markets. No 
other area of the economy could absorb such an enormous increase so 
suddenly.
  The banks called upon everyone, from brokerage houses to money 
managers. They were having to give the new money away at ridiculously 
low rates of return. Most of the new money was loaned into the 
financial markets, the stock market, and most in the high-tech 
industry.
  Most was pure speculation on margin; that is, much of it by folks who 
today believe there is no risk any longer in investing in the stock 
market. This was the real cause for our much acclaimed boom in the 
market run-up prior to the year end 1999.
  Many market participants understood that this was a false boom, an 
anomaly created out of thin air by Chairman Greenspan's governors. They 
immediately took their winnings, the profits on the run-up. They paid 
dearly in capital gains taxes levied, about $70 billion in capital 
gains taxes.
  Curiously, that windfall for the administration matches pristinely 
with the acclaimed surplus President Clinton immediately took credit 
for in his wise oversight of the economy.
  But if this surplus was real, why did the national debt continue to 
rise? There is no surplus, is the answer. There was just a sudden 
windfall in capital gains taxes some argue was orchestrated by Chairman 
Greenspan.
  I would ask the chairman if I were given more time, what did he think 
would happen when he expanded the adjusted monetary base upwards in 
such a dramatic fashion? Does he no longer believe Milton Friedman's 
axiom regarding the reckless increase in the supply of money? Is it not 
supposed to cause dislocations any longer because of this new economy?
  If that is true, then what of the actions of the Fed the week after 
Y2K? Within 7 days, the Fed policy reversed itself just as dramatically 
downwards. The Fed repurchased the funds by nearly the same amount over 
the next several months, beginning with the year 2000.
  The dramatic decline in the adjusted monetary base corresponds 
directly with the violent corrections in the stock market, and 
especially NASDAQ. Those with less savvy, like so many speculators, 
gamblers, really, were wiped out. This is no coincidence, but 
correspondence. This is not just convoluted, but consequences. What did 
Chairman Greenspan think was going to happen?
  Let me quote the chairman from a speech this July 12, 2000, the year 
2000, at the appropriately titled ``Financial Crisis Conference at the 
Council on Foreign Relations.''
  ``Despite the increased sophistication and complexity of financial 
instruments, it is not possible to take account in today's market 
transactions of all possible future outcomes. Markets operate under 
uncertainty. It is therefore crucial to market performance that 
participants manage their risks properly. It is no doubt more effective 
to have mechanisms that allow losses to show through regularly and 
predictably than to have them allocated by some official entity in the 
wake of default.''

  If that statement were not sufficient to rile a risk-taker as market 
participant Greenspan goes on to dryly add, ``Private market processes 
have served

[[Page H7648]]

this country and the world economy well to date, and we should rely on 
them as much as possible as we go forward.''
  This is how the Fed managed price stability? Now, let me return to 
wage inflation. Is wage inflation inflation inflation? As I pointed out 
above, wage inflation is the newest indicator the Fed looks at in 
determining fed policy on interest rates.
  Members will read in the business pages that the Fed determined that 
there was no real wage inflation concern, so interest rates remained as 
they are. Or should there be some indicator that wage inflation is a 
factor, interest rates may have to be increased.
  If Members can understand the relationships, they should be as 
outraged as I am. Everybody knows that labor is almost always, and 
everywhere in industry, the number one and always at least number two 
cost of operations figure for every company, especially the largest 
monopoly multinationals, and it is the largest multinationals' bottom 
line that the Fed protects when it talks about price stability. That is 
a frightening thought.
  Price stability is achieved by keeping wage inflation under control. 
This means nothing short of this: If wages of workers begin to rise, 
should workers begin to see the benefits of this booming economy, the 
Fed will raise interest rates, slowing the economy and driving wages 
down. More workers will lose their jobs, thus driving down wages.
  We do this for the corporations' stability in pricing the goods these 
workers help to produce. And we call this free enterprise, the hidden 
hand working through our free system?
  Let me quote Adam Smith, father of the so-called free enterprise: 
``Masters are always and everywhere in a sort of tacit, but constant 
and uniform, combination, not to raise the wages of labor above their 
actual rate. To violate this combination is everywhere a most unpopular 
action, and a sort of reproach to a master among his neighbors and 
equals. We seldom, indeed, hear of this combination because it is 
usual, and one may say the natural state of things. . . . Masters, too, 
sometimes enter into particular combinations to sink wages of labor 
even below this rate. These are always conducted with the utmost 
silence and secrecy, 'til the moment of execution.''
  There shall be no more silence on these efforts by our masters. It 
may be, but it was never intended to be, ``the natural state of 
things'' to sink wages of labor below their actual rate, not in the 
United States of America; not where the people, mostly wage-earners, 
are the sovereigns. This statement is surely a reproach to a master, 
the Fed master, among his equals, if not his neighbors.
  But there is more, much more. Congress has found that Federal reserve 
notes circulate as our legitimate currency, otherwise called money, 
issued by the Federal Reserve in response to interest-bearing debt 
instruments, usually the United States bonds. I already pointed out 
above that member banks must put out an equal amount of collateral when 
they request any amount of Federal reserve notes. They pay interest on 
this amount, too. That is to say, we indirectly pay interest on our 
paper money in circulation. Whether bonds, loans, et cetera, we pay 
interest.

  The total cost of the interest is roughly $25 billion annually, or 
about $100 per person in the United States. Over $500 billion in just 
United States bonds are held by the Federal Reserve as backing for the 
notes. The Federal Reserve collects interest on these bonds from the 
U.S. Government, returning most of it to the U.S. Treasury.
  The Federal Reserve is paid sufficiently well for all of the services 
it provides: regulatory, check-clearing, Fedwire, automation, 
compliance, and so forth. There is no rational, logical reason why 
Americans must pay interest on their circulating medium of exchange.
  Why are we paying interest to the Fed for renting the Federal Reserve 
notes that we use? Why do we not issue United States Treasury currency 
that can be issued like our coins are issued, debt-free and without 
interest?
  Donald F. Kettle in his book, one of the better books on the Fed, 
actually, ``Leadership at the Fed,'' stated, ``Members of Congress were 
far more likely to tell Federal officials what they disliked than what 
policy approaches they approved.''
  As an understatement of all time, given wage inflation as indicator, 
John M. Berry in the journal Central Banking stated that FED officials 
are not all that forthcoming in their policy announcements because they 
``prefer to be seen as acting essentially as controllers of inflation, 
not employment maximizers.''
  I do not wish to be seen as one of those Members of Congress that 
only expresses his displeasure at the Fed policies. I shall therefore 
propose some solutions as a starting point. It is but one place to 
begin.
  Congress must pass a law declaring Federal Reserve notes to be 
official U.S. Treasury currency, which would continue to circulate as 
it does today. The Federal Reserve system, then freed of the $500 
billion in liabilities, which the Federal Reserve notes are now 
considered to be liabilities, but if we freed them from that liability, 
they would then simply return the U.S. Treasury bonds which backed the 
Federal Reserve notes to the U.S. Treasury.
  That is, if they are holding the notes to back our currency and we 
declare they are United States Treasury currency, no longer Federal 
Reserve currency, then they no longer need the backing, and could 
return some $500 billion in liabilities or in U.S. Treasury bonds back 
to the Federal Reserve, back to the U.S. Treasury.
  This reduces the national debt by over $500 billion, and reduces 
interest payments by over $25 billion annually, with no real loss to 
anyone.
  Let me repeat that. If we did this, merely declared that the money we 
use is officially United States Treasury currency, then the Fed could 
return the $500 billion in bonds that they hold and reduce the national 
debt by $500 billion, reduce our annual payments by about $25 billion, 
with no real loss to anyone. We do this while protecting the member 
banks' collateral they each put up when they requested the notes 
originally. This is not a complicated proposal, and the rationale 
behind it is seen by many financial minds of note as logical and 
doable.

                              {time}  1930

  Then the Fed officials that have devised the monetary indicator 
called wage inflation should reconsider just exactly who is paying the 
real price for price stability and report to the Banking Committees of 
both Houses what indicators they might utilize rather than this 
horrendous approach, an approach that even Adam Smith denounced over 
200 years ago.
  Finally, the Fed must restrain the drastic monetary expansions and 
retractions using the methods described above. For whatever reasoning 
the Adjusted Monetary Base was inflated, causing the wild speculation 
in the financial markets just prior to Y2K and the subsequent disaster 
for so many when the base was suddenly deflated like a child's balloon, 
this should be subject to the most minute scrutiny.
  My intent here was not just to demonstrate my dislike for some of the 
Fed's policies. I could write a discourse on the area that the Fed has 
done well. But so many of my colleagues prefer that course, I should 
seem redundant. In any case, the Federal Reserve Board has more than 
enough congratulatory praise from various corners that my praise would 
fall upon deaf ears.
  I hope my unapologetic approach may serve to give some pause to these 
most important issues for all Americans, investors, owners, and workers 
alike. Clearly the Fed Board and the Fed Chairman especially are the 
single most powerful individuals ever granted, delegated the most 
important enumerated powers guaranteed to this Congress by the 
Constitution. It should be little to ask that they take heed in how 
they wield that power. If they are going to act like Masters, Fed 
Masters, then I strongly urge those individuals to rethink some of the 
policies they put forward and rethink in whose interests they serve.

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