At times I think that traders and bank depositors operate in sandboxes oblivious to the rest of the playground that surrounds their play area. The media offers enough noise to distract market participants from the philosophy that orders the interaction between the State, the banking system, and transactional markets. I consider banks to be the retailer of US currency providing the payment system with conduits that ensure the validity of the legal tender by getting it into as many hands as possible.
But as I explore the origins of money, I have learned that I may have overlooked an important component of the rationale for money or, placed this factor on the wrong rung of importance.
Money is the derivative of tax liability assessed by the State.
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The State imposes its will over a jurisdiction (via coercion and/or military might). It assesses a tax liability on the populace and requires the populace to pay taxes using the legal tender or currency of the State’s making or choice. The populace seeks out employment and other economic activity to generate the cash it needs to make tax payments. Government chartered banks lend money into existence to the business firms that eventually hire the labor. The lending process creates the money. A portion of the yield (income) earned by both businesses and labor is then turned over to the State.
The tax liability, according to economist L. Randall Wray, turns a useless item with no intrinsic value into money. Money is a tax credit that creates the demand for paid work.
I am not going to say that I endorse the modern monetary theory that embodies Professor’s Wray’s observation about money and its creation, but his observation that money is a tax credit that creates the demand for work ties in with an observation I have made about the business firm. The prime purpose of the business firm is not to make profit. The prime purpose is to create taxable revenue and generate enough of the production capacity necessary for turning unemployed labor into income tax generators.
The profit is important because it incentivizes the owners of business firms to continue operations, but as far as the State is concerned, the generation of taxable income is the primary benefit.
How does the judicial power fit into State money creation? Can the State’s judicial power be used to promote monetary policy? My answer is no.
Under Article I Section 8 of the U.S. Constitution, the power to regulate money and determine its value is exercised by the Congress. Congress has turned its power over the regulation and issuance of money to the Federal Reserve System. Via its monetary policy, the Federal Reserve System influences the borrowing rates for money. For example, 12 USC 225a the Board of Governors of the Federal Reserve System and the Federal Open Market Committee are tasked with conducting monetary policy. Monetary policy is made up of the actions the Federal Reserve System take to bring about stable prices, maximum employment, and moderate long term interest rates. Constitution wise, the Congress has the power over currency. In actuality, that power belongs to the Federal Reserve.
The court’s job is not to determine the appropriate monetary and credit aggregates necessary for determining discount window rates, federal funds target rates, or interest on reserve balances. The court’s job is to resolve cases and controversies arising from the interpretation of the Constitution. As the court found in Committee for Monetary Reform with Various Other Plaintiffs v. Board of Governors of the Federal Reserve System, 766 F.2d 538:
“Courts lack both the competence and the authority to determine such abstract issues which are better addressed through political and economic debate over the role of monetary policy in the national economy.”
I don’t necessarily expect traders and bank depositors to file petitions against the Federal Reserve if the central bank decides to raise rates next year as opposed to pivoting. They should not expect the courts to provide any guidance or redress for economic harms that traders or bank depositors perceive to be a result of bad Fed policy. Again, from Committee for Monetary Reform:
“Allowing all persons indirectly affected by an agency’s decision to challenge its constitutional authority would open up the courts to generalized grievances shared in substantially equal measure by all or a large class of citizens and require the court to answer abstract questions of wide public significance even though other government institutions maybe more competent to address the questions.”
Alton Drew
13 December 2023
(For more of my take on the political economy, purchase my book at amazon.com/author/altondrew)
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Lawyers Write the Bets. Bankers Sell the Bets. 