Government market control without the Federal Reserve

One concern that people who are against full reserve banking have is the idea that the government would not be able to control economic situations that are causing so-called recessions or depressions. In the nearly 100 year history of the Federal Reserve in the United States, the outcome of near recessions has been for the Federal Reserve to create new money/credit (monetary inflation), which has postponed recessions only to create bigger problems through asset or investment bubbles. The Federal Reserve acknowledges its own responsibility in creating the Great Depression (first by creating too much money, and then by destroying that money too quickly, causing banks, borrowers and the poor to go bankrupt). Now, the Federal Reserve’s policy is to create new money to keep markets and economies “stable,” but in the long run just continues to create bigger and bigger asset bubbles. The dotcom bubble was “fixed” by the Federal Reserve, leaving us with a housing bubble. The housing bubble might be “fixed” by creating more money, which will create a new bubble in other markets.

It is my strong belief that even if the Federal government ended the Federal Reserve, it could still regulate economies through controlling the money supply, although not be creating or destroying dollars as the current Federal Reserve does. Because all governments have the power to levy taxes on residents, this gives any government at any level (local, state, federal) the ability to regulate economies through the act of hoarding or spending.

Right now, many or most governments work on a negative budget, or a debt-backed budget. This means that they borrow future taxes now with the promise to pay those funds back with future tax collections. At the Federal level, the government also has the power to create new money/credit through Federal Reserve monetary inflation. If we end the Federal Reserve system, some say that the government could not inject new money into a recessing economy, or remove money in a bubbling economy. This is untrue.

By forcing governments to live on a budget, nothing could really stop any government at any level from hoarding current taxes to utilize in future market concerns. If the economy is moving strongly, a government could save a portion of collections for “rainy days.” By spending less than it is taking it, the act of hoarding money would remove that money from the overall market (in Federal Reserve-speak, this is considered monetary deflation). If there is a situation where that particular government level sees economic strain, it can use this hoarded money in a controlled spending fashion. While this would still cause market fluctuations, malinvestments by the populace, and market bubbles or busts at some level, it would be significantly less painful because it would not introduce new money into an economy, which usually goes to the elite connected few first. Instead, the government would use this controlled spending towards the parts of the economy it deems as recessing.

Example: The Federal government spends 10% less than it collects. It puts this 10% directly into vaults so the money is not loaned out to the market, but is hoarded from the market entirely. It then decides that there is a recession coming to the housing market. The Federal government would then have that hoarded cash to use to try to “save” the housing market, either by loaning the money out directly to home buyers, or by purchasing land/homes, or by granting the money to companies to build more homes or convert older homes. This is still government intervention in the economy, which always has some negative consequences, but it is also a more moral and just system since it doesn’t rely on the act of creating new money.

This is also more acceptable Constitutionally as it gives the government no additional powers over the people: anyone (including individuals, corporations, charities, local and state governments, etc) could also hoard money as they feel is needed to weather future economic storms.