A Dark Hole of Democracy: How the Fed Prints Money Out of Thin Air

By William Greider, The Nation. Posted July 17, 2009.

President Obama has announced the goal of building a high-speed rail system. Ours is the only advanced industrial society that doesn't have one (ride the modern trains in France or Japan to see what our society is missing). Trouble is, Obama has only budgeted a pittance ($8 billion) for this project. Spain, by comparison, has committed more than $100 billion to its fifteen-year railroad-building project. Given the vast shortcomings in US infrastructure, the country will never catch up with the backlog through the regular financing of taxing and borrowing.

Instead, Congress should create a stand-alone development fund for long-term capital investment projects (this would require the long-sought reform of the federal budget, which makes no distinction between current operating spending and long-term investment). The Fed would continue to create money only as needed by the economy; but instead of injecting this money into the banking system, a portion of it would go directly to the capital investment fund, earmarked by Congress for specific projects of great urgency. The idea of direct financing for infrastructure has been proposed periodically for many years by groups from right and left. Transportation Secretary Ray LaHood co-sponsored legislation along these lines a decade ago when he was a Republican Congressman from Illinois.

This approach speaks to the contradiction House Speaker Pelosi pointed out when she asked why the Fed has limitless money to spend however it sees fit. Instead of borrowing the money to pay for the new rail system, the government financing would draw on the public's money-creation process -- just as Lincoln did and Bernanke is now doing.

The bankers would howl, for good reason. They profit enormously from the present system and share in the money-creation process. When the Fed injects more reserves into the banking system, it automatically multiplies the banks' capacity to create money by increasing their lending (and banks, in turn, collect interest on their new loans). The direct-financing approach would not halt the banking industry's role in allocating new credit, since the newly created money would still wind up in the banks as deposits. But the government would now decide how to allocate new credit to preferred public projects rather than let private banks make all the decisions for us.

The reform of monetary policy, in other words, has promising possibilities for revitalizing democracy. Congress is a human institution and therefore fallible. Mistakes will be made, for sure. But we might ask ourselves, If Congress were empowered to manage monetary policy, could it do any worse than those experts who brought us to ruin?

See more stories tagged with: federal reserve, financial crisis

William Greider is the author of, most recently, "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country (Rodale Books, 2009)."

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