America's Money Machine

Out of the Pit 261
A fourth misconception is as to the power of the Federal Reserve to
influence the economy-a misconception written into law in the Full
Employment Act of 1946 and the later Full Employment and Balanced
Growth Act of October 27, 1978. "Fine tuning" became a phrase to
describe its efforts to achieve these political ends by adjusting the socalled
money supply. It did so-at least in theory-by buying or selling
its own debt instruments, which thereafter became money equivalents in
the banks to which they were sold, and permitted the banks to extend
their own debt commitments through deposit liabilities.
Apart from the debased subsidiary coinage, money supply was defined
as the legal tender currency in circulation plus demand deposits in the
banks and designated MI. Neither represented substance; rather they
were debt instruments. The awareness soon dawned that M 1 was not an
adequate measure of the demand debt outstanding, since savings banks
customarily paid out time deposits on demand. The money-supply concept
was now broadened to include such deposits and termed M 2 • Eventually
there was an M 3 , an M 4 and an M 5 to designate various levels of
debt. By the time M 5 was reached the monetary authority was struggling
to control or modify a mass of debt in the market totalling some $1.6
trillion in various forms and extensions.
Vast and powerful as its resources were, here was a behemoth of debt
to which no bit could be fitted, upon which no bridle nor saddle could
be laid. But. the end was not yet. Struggling to determine the extent of
its responsibility, the Federal Reserve has oflate been trying to determine
how much money-equivalents are in circulation in the form ofcredit card
credits, and when that is done they may proceed down the scale until it
encompasses such items as the IOU's that circulate around the poker
tables and game boards of the land.
In sum, the theory that money supply can be controlled, when it exists
in the form of debt, is little short of ridiculous.
An allied misconception is that of the power conferred on government
to manage the economy supposedly found in the Constitutional authority
of Congress to coin money and·regulate the value thereof. During the
debates in the Constitutional convention the proposal to give Congress
the authority to "emit bills of credit"-forbidden to the States-was
voted down; the power to regulate the value of coinage had nothing to
do with the economy, but related to the fact that coins of two different
metals, gold and silver, were legal tender. 'I'he maintenance ofan official
parity between the two when the market value ofthe metals diverged had
created a continuing dilemma for governments ofthe time. The problem