An Alternative to the Federal Reserve

A Better Alternative to the Federal Reserve?

A reader has an interesting suggestion:

Here’s whats needed– a new constitution:

The Federal Reserve shall, each quarter, determine if there is a need to print more money. The growth in the money supply shall not exceed the growth in GDP. If money does need to be printed, it shall be distributed evenly to the people. Banks will need to then compete for capital from the citizenry. This will be the world’s first bottom-up credit based monetary system.

A constitutional amendment is not needed. Congress created the Federal Reserve, and has the power to terminate it or limit its powers. But the idea of a bottom-up distribution of enough money to allow growth is an interesting one (assuming that we stay with a fiat money system, and don’t switch to a gold-backed currency).

By way of background, Milton Friedman showed that a formula could be used to adjust the money supply to promote economic growth and prevent bubbles. Friedman showed that a formula could work better than the decisions of the Federal Reserve open market committee.

Steve Keen showed that money given directly to the little guy stimulates the economy much better than money given to the big banks. (This is especially true given that the Fed is intentionally curbing lending by the banks, and keeps choosing the too-big banks over the little guy, which prevents a recovery and only dooms both.)

The economy is tanking, unemployment is skyrocketing and we’re stuck in a ditch because government policy is redistributing money from the American people to the wealthiest .1%. Like a poker game where one guy gets all of the chips, the game is ending because the American people don’t have enough chips to “play” the game anymore.

Economists say that the Federal Reserve should be ended – or its powers be dramatically curtailed.

According to non-partisan government observers, the Federal Reserve is corrupt and riddled with conflicts of interest.

Many high-level economists have blasted the Fed for bungling virtually everything it does, and causing both the Great Depression and the current economic crisis.

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  • Carl Herman

    Great idea to shift the creation of money for the public good.

    OWS, as I’ve argued, wants this result as a central goal: maximizing the public good from creating money. Our current system allows banksters to create credit and then gamble with it. And yes, for the Fed and political “leadership” to represent that system as “helping” in any way is criminal fraud.


    Rewriting the Constitution has to be the worst comment I have ever seen on this blog.
    How about we look for ways to enforce the Constitution on the 99%?

  • Ben Wolf

    The Federal Reserve does not and cannot print money, all it does is swap assets. I’m afraid your ode to Friedman is also misplaced: spending money into the economy is a fiscal operation, not a monetary. Friedman didn’t understand that distinction either.

  • The Patriot

    I have been trying to post on this site for quite some months now, and this is the first time it’s ever worked.
    I am deeply concerned to see anyone talk about rewriting the Constitution, but when I see it suggested here, one of my all time favorite Patriotic Blogs, it’s distressing.
    That is exactly what the Globalists would like to see, the final destruction of the Constitution, and as always, they will present it as a new improved Constitution, one that will remedy the myriad of ills that have befallen America.
    But, our ills are not the result of our Constitution, but rather the result of our Government ignoring the Constitution and doing as the Corporations bid them to do.
    I would like to discuss some things with the site Admin, so if you have a chance, please email me?
    Thanks, A Daily Reader

  • Bruce

    The Constitution that we have is fine. It’s just a matter of Congress doing their job instead of allowing the Fox to guard the henhouse…

    U.S. Constitution – Article 1 Section 8
    To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

    “Permit me to issue and control the money of a nation, and I care not who makes its laws.” – Mayer Amschel Rothschild, International Banker

    “’The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again… Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and happier world to live in. But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit’.” – Sir Josiah Stamp Director, Bank of England 1928-1941 (reputed to be the 2nd richest man in Britain at the time)

    April 2, 1792 Chapter XVI.–An Act establishing a Mint, and

    regulating the coins of the United States.

    Penalty on de- Section 19. And be it further enacted, That

    basing the coins. if any of the gold or silver coins which

    shall be struck or coined at the said mint

    shall be debased or made worse as to the

    proportion of the fine gold or fine silver

    therein contained, or shall be of less weight

    or value than the same out to be pursuant to

    the directions of this act, through the

    default or with the connivance of any of the

    officers or persons who shall be employed at

    the said mint, for the purpose of profit or

    gain, or otherwise with a fraudulent intent,

    and if any of the said officers or persons

    shall embezzle any of the metals which shall

    at any time be committed to their charge for

    the purpose of being coined, or any of the

    coins which shall be struck or coined at the

    said mint, every such officer or person who

    shall commit any or either of the said

    offenses, shall be deemed guilty of felony,

    and shall suffer death.

  • Joseph

    What has the Constitution got to do with the Federal Reserve? All it would take is an act of Congress, proposed legislation by Dennis Kucinich he calls the NEED Act, for example, and the Fed is gone

  • There is a much better solution: Create a very broad index fund which invests in as many categories of assets as possible, roughly uniformly, and use the “shares” in this fund as dollars. Once the assets themselves are priced on the open market in these same units, the system becomes completely self-regulating. (In fact it is self-regulating before that, but once closed like this it becomes essentially inflation-proof, deflation-proof, and mostly bubble-proof as well.) This is similar to a gold standard where you have a real asset backing the dollars, but instead of gold which is fixed and limited you use a broad class of assets which are (relative to cash) essentially infinite in supply.

    What happens is when there is demand for more currency, the asset prices start dropping, and this makes it profitable for the “fund” to buy them up with a corresponding number of issued shares, thus creating more dollars on the spot in a completely fair way (nobody gets the new dollars for free–they’re always traded for fair value; the only profit is the tiny disbalance in price that self-corrects as the new dollars are issued, and in principle anyone could be allowed to be a “market maker” of dollars in this way by buying and selling baskets of assets and trading them in for blocks of new dollars).

    Likewise, when there is less need for cash, asset prices rise (people start buying stuff with their cash) and the fund sells off assets and the incoming cash vanishes. The system is innately responsive to demand in a way that creates no market distortions because when currency comes and goes it is for fair value at the time (with no implicit maturity transformations or whatnot as with the current federal reserve).

    Furthermore, people holding “cash” would now be implicitly invested in real assets including growth assets and so would be earning returns (i.e., the currency would be slightly deflationary in practice).

    Imo, this is far and away the best system devised to date, but afaik has never been tried in practice…

    • (And if it wasn’t clear from the above: This system can be bootstrapped from scratch without creating money from nothing. Even if we had no currency at all today, say just a barter system, people could start selling assets, and companies could start selling shares, to the “fund” which would issue aggregate shares–i.e., dollars–in return. For example, you sell an acre of land to the fund worth $100k, the fund issues $100k new dollars and pays you with them. Those dollars are your claim to $100k of value in the fund, so neither you nor the fund got something for nothing–you simply pooled the value of your land with the fund to create a more liquid asset–“cash” representing $100k worth of fund assets.)

  • That idea is no stranger to this thought experiment, in fact, they dove tail.

  • robbie

    I like Ron Paul’s approach. DUMP THE FED AND REPLACE IT WITH NOTHING!

    Why does everyone feel like they have to “do” something?

    PLANS, PLANS, PLANS, plans, plans, plans… equals OVERLORDS.

  • Wayne

    In the early days of the financial crisis, MarketWatch columnist and economist Irwin Kellner suggested something akin to this. Kellner proposed giving every taxpayer and Social Security recipient in the country a $3,000 federal debit card that could be used only to purchase items – no debt-reduction allowed – and carried a near-term expiration date. That, he suggested, would do more to stimulate the economy than any of the lame homebuyer tax-credit or other banker-centric programs being considered at the time. But it was a doomed concept – entirely too equitable to be of much interest to either the banking cartel or its captive lawmakers in D.C.