How Not To End The Fed

by Gary North
www.GaryNorth.com

Recently by Gary North: Social Security Checks Raided To Pay for Student Loans

It would be very easy to end the Federal Reserve System. Congress would write the following bill. The President would sign it.

1. The Federal Reserve Act of 1913 and all subsequent amendments to that Act are hereby revoked.
2. The gold that belongs to the United States government, and which is kept on deposit with the Federal Reserve System, is hereby transferred to account of the United States Treasury.

If the Federal Reserve System has made any secret agreements with other central banks regarding the ownership of that gold, those arrangements would become legally null and void. The FED would own no gold of its own to deliver. Ownership would revert to the United States government.

If other central banks wanted to sue the Federal Reserve System, an exclusively private entity acting on its own authority alone, to recover any gold the FED had promised to deliver, they would have the right to do so. If they really thought the FED could deliver on those agreements merely because a court ordered it to, they could hire lawyers and sue.

ANDREW JACKSON VS. CENTRAL BANKING

There is a legal precedent for all this. In 1832, Henry Clay and his allies in Congress decided to make a political issue of the Second Bank of the United States, the Federal Reserve System of that era. It was a Presidential election year. Clay proposed the re-chartering of the Bank four years early. The bill passed Congress. The Wikipedia account of what happened next is accurate. A confrontation took place between Nicholas Biddle, the most arrogant central banker in history, and President Jackson. How arrogant? He believed he could crush Andrew Jackson, and said so in private letters.

Jackson mobilized his political base by vetoing the re-charter bill and – the veto sustained – easily won reelection on his anti-Bank platform. Jackson proceeded to destroy the Bank as a financial and political force by removing its federal deposits, and in 1833, federal revenue was diverted into selected private banks by executive order, ending the regulatory role of the Second Bank of the United States.

In hopes of extorting a rescue of the Bank, Biddle induced a short-lived financial crisis that was initially blamed on Jackson’s executive action. By 1834, a general backlash against Biddle’s tactics developed, ending the panic and all recharter efforts were abandoned.

In February 1836, the Bank became a private corporation under Pennsylvania commonwealth law. It suspended payment in 1839 and was liquidated in 1841.

Jackson did not have to do anything else besides pull its accounts. The Bank could not compete. It was a legal appendage of the U.S. government, although privately owned. It went belly-up.

So would the Federal Reserve System. Its profits would henceforth be taxed by federal and state governments. Its authority to regulate commercial banks would end. It would no longer establish reserve requirements. Excess reserves owned by the commercial banks that are held on deposit at the Federal Reserve would no longer be backed by the U. S. government in any way. They would probably be pulled out overnight – all $1.5 trillion worth. This would be a bank run like no other in banking history.

The Federal Reserve and its allies – virtually the entire intellectual class – use this fear to maintain its position as the quasi-public bureaucracy in charge of America’s money. It lured the nation into the lobster trap of debt – debt undergirded by Federal Reserve fiat money and Congressional deficits – and the country cannot see a way to get out on a pain-free basis. There is no pain-free escape, as we will find over the next two decades: hyperinflation or the Great Deflationary Default or both.

The government’s debt and the monetary inflation cannot go on indefinitely. Either the dollar dies or else the debt is repudiated. Maybe both.

GOODBYE, FED

What would replace the Federal Reserve System? Nothing. Without any federal government connection, there would be no central bank.

What would be the new currency of the United States? Not Federal Reserve Notes, I suspect. Something else. But what? Whatever the free market creates.

Who would bail out Congress when it runs huge deficits? Not the Federal Reserve System. Then who? Maybe nobody. Preferably nobody. What would be there with QE3? Not the Federal Reserve System. Then what? Preferably nothing.

There is an old political slogan: “You can’t beat something with nothing.” But the free market’s system of supply and demand, profit and loss, is not nothing. Replacing crony banking and the legal authority to print counterfeit money is positive. It is like replacing cancerous cells with normal cells. It is a vast improvement.

Problem: removing cancerous cells surgically with no anesthetic is painful. People put off the operation as long as they can. The cancer spreads.

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