Monetary Mission Impossible, Part 5
The Fed’s only real role in the inflation equation is inherently a negative one—the prior emission of too much central bank credit in violation of Say’s Law. That is to say, when the latter is strictly observed demand follows production and income—so there is no excess demand and no inflation.
Consequently, the ultimate way to stop inflation is to shutdown the Fed’s printing presses and either:
Close the Eccles Building and turn it into a homeless shelter, or
At minimum, abolish the FOMC and return to a discount window based modus operandi based on the real bills doctrine upon which the Fed was founded in 1913.
Indeed, the real bills doctrine was the monetary companion of Say’s Law. The former held that the only paper to be accepted as collateral at the discount windows of the new Federal Reserve Banks was commercial bills backed by goods already produced and sold into commerce.
Yes, discount window loans collateralized by commercial paper in this manner would bring new central bank credit into existence. But, crucially, that would occur only after new supply of goods had already been generated and circulated in commerce and only if the collateral was self-liquidating and minimally risky (i.e due for repayment within a few months by sound borrowers).
In effect, the real bills approach to central banking is the long-lost monetary component of supply-side doctrine. Shackle the Fed’s printing press to production and commerce on main street and you enable an honest-money playing field where supply side incentives can work their magic without the horrible investment distortions and asset inflations caused by the Keyensian money-printers at the central bank.
Above all, the beneficent marriage of real bills money and a supply side disciplined state that restrains fiscal burdens and regulatory interventions to an absolute minimum enables a key pre-condition of sustainable capitalist prosperity: To wit, aggregate outcomes that are driven by the actions of millions of entrepreneurs, workers, consumers, savers, inventors, investors and speculators on the free market, not a monetary politburo domiciled at the central bank. That is to say, a government that has no Humphrey-Hawkins “goals” for jobs, growth, investment, housing starts, investment and the rest because these are properly outcomes on the market, not the fruits of state interventions.
In this context, government debt would have been the very worst type of collateral for new central bank credits. By definition, it represents a net decrement, not an addition, to supply, and is therefore inherently inflationary. And that’s to say nothing of the risk that government debt might eventfully accumulate to such massive levels as to become unrepayable.
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