Episode 34 – The Legal Nature of Money and the History of the Federal Reserve with Rohan Grey

Macro N Cheese – Episode 34 
The Legal Nature of Money and the History of the Federal Reserve with Rohan Grey 
September 18, 2019 

Rohan Grey [intro/music] (00:00:05): 

Money is first and foremost, a relationship. It’s a state of social relations between people. When the Constitution was formed in large part, it was designed to remove a lot of those monetary powers from the state level and move them up to the federal level. 

Geoff Ginter [intro/music] (00:01:26): 

Now let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine. 

Steve Grumbine (00:01:34): 

Yes, this is Steve with Macro N Cheese. We are about to do a very special two-part interview with Rohan Grey. And I’ve got to tell you, the first part is amazing. He describes the Federal Reserve in all its glory and all the details behind it and debunks almost all of the myths and legends, while simultaneously adding in an understanding of the nature of money.  

The second part, just as incredible, takes us through the national debt and goes into public banking, ending with a Green New Deal and a job guarantee. It’s very, very wonderful to have the opportunity to speak to such knowledgeable people. And with that, I give you the show. This is part one of my interview with Rohan Grey. 

Steve Grumbine (00:02:27): 

Yes, this is Steve with Macro N Cheese. I haven’t spoken to Rohan Grey in a very long time. And Rohan is one of my favorite guests. When he’s come on here, he always provides the most riveting and insightful critique as it pertains to things like the Federal Reserve. And he always gives you just a little bit extra.  

And so, you know, knowing Rohan and knowing that his mission in starting the Modern Money Network has been to marry law with the use of money and understanding the relationship of money. I just couldn’t think of anyone better to bring on than Rohan Grey. Rohan, welcome to Macro N Cheese. 

Rohan Grey (00:03:10): 

Thanks for having me, Steve. It’s a pleasure. 

Steve Grumbine (00:03:13): 

Absolutely. So I guess before we get started, I would like to do a proper introduction. You’ve been in law school for some time now. You’re the president and founder of the Modern Money Network. And you also are into your third annual Modern Monetary Theory conference coming up here. Tell us a little bit about your background for those who don’t know you. 

Rohan Grey (00:03:37): 

Yeah, sure. Well, if you can’t hear it, I hope you can. I’m an Australian. I grew up in Sydney. Uh, I come from a family, my mother’s a musician. My father is a lawyer. So of course being a very original person, I spent a bit of time being a musician and a music teacher. And then I decided to go to law school.  

I had studied heterodox political economy in undergraduate. So I had a bit of an introduction to that world, but it was only when I moved to the United States on exchange at the end of my undergrad degree, that I really started getting into MMT, mostly through reading blogs, initially. I went to law school, first of all, to go into education policy education law, but it became clear that that wasn’t an area where there was sort of much progressive work being done.  

So I switched over or kind of pivoted a little bit into family law. And I spent a few years after law school practicing in family court in New York City, representing children in custody, visitation, abuse, neglect, those kinds of issues, where one of my sort of claims to fame, at least for me, is that I never litigated a single dollar in those contexts.  

The more important things that you fight over who has access to the children who has decision-making power, what is in the children’s best interests in a lot of those issues about dollars and cents in the immediate sense. At the same time, I got very interested in MMT because I was a progressive and a lot of the issues I cared about always kind of ended up getting dashed on the shores of the age-old question, “how are you going to pay for it?”  

I had met a number of people during undergrad on exchange at the University of Pennsylvania who were in the Wharton Business School. And a lot of them ended up working on Wall Street after graduation. And they sort of kind of condescendingly or kind of patting me on the head saying, “Well, you know, it’s nice that you’re such a bleeding heart, but this is how the world really works.  

You need to sort of understand finance and things.” And I said, “Okay, fine. I’ll go and understand finance then.” And I think I have sort of spent the last seven or eight years doing that and I still have the same bleeding heart views I had at the beginning, if not even stronger. So I don’t think that was really the issue, but they kind of forced me to take seriously the other side’s point of view and the expertise that the other side had on these issues in order to win these arguments and to understand the sort of areas that we need to be able to fight with expertise and with sort of policy knowledge.  

So then when I got to law school and I found out that most law professors also didn’t know anything about money, I decided to put on a series of educational events, which ultimately became the Modern Money Network. And since then I’ve been working to try and bring various disciplines, obviously law, but also working with other colleagues in the humanities division and other disciplines like history and sociology and political science, to try to move MMT to the next phase of growth and adoption and to identify areas where it can be built upon, strengthened, deepened – new areas, such as technology and digital currency, where MMT insights can point to newer solutions that people haven’t been talking about, or ways of thinking about it while also trying to build the Modern Money Network as a network of people who care about these issues, who can be trusted, who can be people that the rest of the MMT community looks to for leadership, for new ideas, for expertise.  

And of course that involves organizing events and building connections between other groups and social movements and things like that. But I like to describe MMN nowadays as a technical support for social movements, because we don’t think that the answers to everything come from the academy, but that often the role of technical experts is to help clear the way for other technical experts, or other people with expertise, so that the social movement of groups can do the good work that actually makes social change happen. 

Steve Grumbine (00:07:27): 

You know, it’s interesting you say that because as we talk about what things like, neoliberalism, this loaded term that is oftentimes just thrown around as a pejorative. We look at how pervasive it is, and it has saturated every aspect of our lives from our sitcoms we watch to the radio programs and, you know, our schools teach it and live it.  

Our churches teach it and live it. It’s everywhere. It’s in the political discourse, it’s in the colleges and universities. It’s in high schools, elementary school. It’s everywhere. It’s in our textbooks, it’s in our fantasy novels even. And you know, what you’re doing is masterful because in order to dislodge such age-old thinking, it seems like a countermeasure that’s infiltrating all those areas – water finding its level – is exactly what needs to happen.  

I commend you for that. It’s really, really fascinating to watch. I had a little bit of a preview of it going years back, the old… what was it called even now? Now it’s called the Modern Money Planning Committee, but it used to be called… was it Deficit Owl? 

Rohan Grey (00:08:38): 

MMT Deficit Owl USA, yeah, I believe. 

Steve Grumbine (00:08:39): 

Absolutely. I mean, we’re talking about, you know, 10 years ago, you guys were doing this stuff, and it was a very, very small, and to watch it grow from then to now is just mind-blowing. It’s epic. It’s wonderful. 

Rohan Grey (00:08:55): 

Thanks. Yeah, well right back at you with Real Progressives. 

Steve Grumbine (00:08:58): 

I mean, I know where you’ve come from. I’ve watched the connections you’ve made. The stuff we’re doing is regular people, but you have bridged together the best and brightest minds across the globe. I just am in awe of the work that you guys have done. And I just am forever in your debt because the things you guys do, you know, you have answered so many questions in my mind.  

And so what I’m hoping to do with talking to you here is to answer some of the questions that I think that the average activist that would love to embrace this has missed because of the lack of understanding of the relationship – the legal relationship – between money, things such as the Federal Reserve, which are an act of law, the actual unit of account, which is an act of law, and the credit relationship of money and so forth.  

I think people need to understand what money is. Tell me in your best way, what is money? 

Rohan Grey (00:09:56): 

Sure. Before I do, I mean, just to sort of build on what you were saying about these things being legally constructed. I sort of sometimes think of the scene in The Matrix where he’s kind of looking at everything and then you see the green lines of code. Not that I would ever recommend somebody go to law school, but one of the things that is good about going to law school is it sort of trains you to see the legal kind of code behind almost any issue.  

You know, you’re walking down the street and you see something, you go, “Wow, that’s a lawsuit waiting to happen.” Or you see someone putting up electrical wires and you think, “I wonder who approved the local council ordinance for that to happen this way,” or something, you know? So there’s just so many different things where, to borrow a line from the poet Rilke, you know, “Don’t be confused by surfaces; in the depths everything becomes law.”  

And so when you think about what money is, there’s a lot of times that people sort of get hung up on either the physicality of it, whether it’s paper or a coin or a blip on a computer screen, that they think money is the thing that they can point to or the thing that they can hold. There are other people that think that, sort of very crudely speaking, money is what money does.  

So, you know, if something is a store of value, if something is a medium of exchange, then it is money. Whereas I think what we would say is that money is first and foremost, a relationship. It’s a state of social relations between people and those social relations are structured by law and legal dynamics.  

So just to give sort of an example or an analogy, when people talk about what property is, property isn’t the “thing.” You know, if I have a house, which I don’t, but if I had a house, that wouldn’t be my property. My property would be the legal title to the house. And that wouldn’t mean that I suddenly owned the house. It would mean that I had a set of legal rights and legal claims against other people. So even though when we talk about the property right in a house, the first thing that comes to your mind is that house.  

What we’re really thinking about is the relationship between me and everyone else in the world with respect to the house. It’s that web of sort of invisible filaments between me and the state, me and you, me and you know, other people who inhabit the house. That web is what the property right is, not the house itself.  

So to take that idea to money, it doesn’t matter whether we’re talking about a coin or a paper note or an account entry on a balance sheet or a computer blip on a screen. The essence of money is the legal relationships that are structured between me and other people with respect to some sort of instrument or some sort of monetary value.  

And that relationship can be structured in different ways. It can be a form of private credit. So if “I owe you one” in the kind of broad favor sense, that might not be money, but if I owe you $1 – and you know, you can take me to court over that – and then you can take that IOU that I have to you and give that to somebody else.  

You can sign it over with your signature so that now I owe that person and that person can take me to court. Then that might be money, right? So it’s something that started off as a sort of personal informal favor can become money once it gains certain legal properties. Another kind of money, or the kind of money that the MMT story starts with, and thinks is the most central to modern societies where most relationships go beyond the people that you know by name, can call up their parents, and say, “This person’s misbehaving,” or, you know, you’re going to know their family for 10 generations afterwards.  

In most societies where people have impersonal relationships that are governed primarily by social norms, social institutions, and special laws, the dominant form of money is the money that the state issues and says, “We will accept this for any legal debt that you owe to us or to other people.” But the way that MMT sort of boils that down for the average person, they say, “Taxes drive the value of government money.” And that of all the kinds of money that could be out there, of all the kinds of private credit relationships, or I owe you X dollars or some sort of transferable amount of nominal value, a number that corresponds to a certain amount of dollars in a unit of account, the most important is the one that the state says will be acceptable for its own IOUs, its own debts to itself, for taxes, court judgments, criminal fees and fines, the DMV to get your driver’s license, whatever else.  

Or that if you and I go to court because I ran over your dog, or because I promised to deliver you some bushels of wheat and I didn’t do it, or because I snuck onto your property late at night and accidentally hit your car while I was joyriding or something, that kind of money has the most wide acceptability, because everybody knows that at some point they might incur legal damages.  

They might be sued. They might have to pay taxes. They might have to pay some sort of fee or fine. And if they don’t have to pay, someone else is going to have to pay, which means that if they accumulate some money, at the very least, they’re going to be able to offload it to somebody else who needs it.  

So the other line that I often talk about when I teach this, is that famous saying, “There’s only two things in life that are certain: death and taxes.” I might modify that a little bit to say, “There’s only two things in life that are certain: death and legal liability or, legal liability risk.” 

Steve Grumbine (00:16:03): 

[Laughter] 

Rohan Grey (00:16:03): 

Further, even if… 

Steve Grumbine (00:16:03): 

You’re such a lawyer. 

Rohan Grey (00:16:07): 

Even if you think you’re off grid, you know, even if you’re living in the Canadian wilderness, and you’re sort of hunting bison with a bow and arrow, like the kids book with the guy who gets there in the plane crash. You know, even if you think you’re completely off grid, somebody could come along and get into an altercation with you, and the next thing you know, you’re getting a court summons because they’ve sued you for, you know, hurting them or you can pay your property taxes and think you’re off grid and someone could come onto your property and then get hurt and sue you because you didn’t put the right signage up, or you could be walking down the street and accidentally bump into someone and they could fall over and hurt themselves and you could be sued for not exercising sufficient duty of care.  

So it’s almost impossible to imagine a world where you’re not at risk, even if you don’t have an actual sort of bill from the government due tomorrow, that you’re at risk of facing a bill from the government, even if you don’t have to pay taxes. Right? So that idea that at some point you might find the need to pay some sort of legally denominated debt means that you and anybody who is in a similar position is going to want to make sure you have access to some of the money that can pay that debt.  

Which means the best way to think about money, as Warren Mosler likes to say, is that it’s a tax credit, or that it’s a legal credit and therefore, any instrument, whether it’s virtual or physical, that legally is recognized as being a tax credit is going to have some degree of money. 

Steve Grumbine (00:17:43): 

Very good. So the concept of moneyness or, dare I say, the spectrum of what money is, is a kind of like lesser, you know, from stamps or IOUs to actual tax credits. Is that a fair statement? 

Rohan Grey (00:18:00): 

Yeah, absolutely. Hyman Minsky used to talk about the hierarchy of money and he had a line that said, “Anyone can create money. The challenge is to get it accepted.” So, you know, we talk often about the public money because it’s the sort of most important for most people on a daily basis and certainly most important for most public policy issues.  

But you can imagine other contexts where something works like a tax or a fee or a fine, maybe even slightly less sort of hierarchical, maybe a little bit more voluntary, where you’re putting yourself into that situation. To give an example. My organization MMN requires people as a condition of membership to give six hours of their time a year.  

That’s sort of 30 minutes a month, one minute a day, pretty small amount. I mean, they can always pay money directly if they prefer, but if they don’t want to pay money, they can give some of their time. And if they give their time on a project, they can get recognition for that. If they give more time than they need to, they can store the rest of that as credits and they could even give them to other people if they wanted to.  

So we have created a community where people are voluntarily incurring an obligation to stay part of that community. You can imagine that also in the case of complementary and local currencies, either in certain communities, you know, out in the world or in the university, for example, like the Buckaroo at University of Missouri – Kansas City, where students have to earn a certain amount of currency to get a certain amount of their final grade in certain economics classes taught by MMT economists.  

So in that situation, the desire to earn the grade functions kind of like a tax or like an obligation that needs to be fulfilled. So anytime there’s some sort of obligation that could be satisfied, whatever can satisfy that can gain a degree of moneyness. But that’s not to say that it would necessarily sort of supersede public money.  

In most situations, most people still want the kind of money that has, you know, dead presidents on the front, or the queen of England, or something. 

Steve Grumbine (00:20:16): 

Right. I want to dig back cause I wasn’t anticipating this. This is really, really interesting. So explain to me the role of this kind of a social, you know, value construct within the MMN volunteership, if you will, this skin in the game approach that kind of provides a sort of currency within the organization. Tell me more about that. This sounds really exciting. 

Rohan Grey (00:20:43): 

Yeah, I mean we’re still in the early stages of this. We’d love to, you know, get more of the platform technology up so we can use this as even more of a kind of teaching tool as well as just an organizing tool. But in the same way, as Warren talks about the fact that the purpose of the monetary system, in the first instance in the government, is to provision the government with real resources.  

You know, a fancy hat for the king, with soldiers that have weapons and armor, with schoolteachers, with, you know, hospitals, with intelligence services that listen in on your phone calls or whatever else. And in order to do that, they need people to give up real stuff. They need to give up their labor, they need to give up their creativity.  

They need to give up the stuff that they, you know, break their back getting it out of the ground, the stuff that they make in their factories and, historically speaking, it’s a lot of work to do that by sort of putting a gun to someone’s head and forcing them to do it under direct scrutiny, 24 hours a day.  

The easier way to do that is to say, “Well, at the end of the month, you have to give me a certain amount of stuff.” But the challenge there of course is “what stuff?” You can’t always presume that you’re going to know, you know, who’s the best chicken farmer and who’s the best soldier and who’s the best, you know, spy. That’s by knowing their names. So the easiest way that governments have worked out how to do this over time is tax people in their own money, a certain amount, and then pay people to do the most important work that the government needs.  

So to take this back to MMN, what we want, ideally, is people who contribute to the organization, who give their time on transcribing events that we do, or helping to organize events, or to help edit videos, or to help edit and write articles, or, you know, maintain the website or help with classes that we might want to teach.  

So those are the kinds of things that we want. And if we say to people, as a condition of membership, you need to give us the equivalent of either a hundred dollars, say, a hundred dollars – or whatever it is, $60 a year – or a hundred of these credits. Then we can begin to create a list of things that we’re willing to pay for.  

And in doing so, shift our priorities as things come along. If there’s a month where we have a lot of need for transcription, we might say, okay, we’re going to offer to pay a hundred of these credits for transcription, and people who need to sort of earn their credits for the year might do that transcription.  

Another month, where we have a really big need for people to help with events, we might say, “Okay, we’re not going to pay for any transcription this week, this month, but we are going to pay for people who volunteer to help organize these events.” And what we end up doing is using our ability to pay these credits out into the world, which of course we’re going to get back eventually. And it’s all virtual. We’re not sort of printing pieces of paper. We’re just putting these in a spreadsheet, but we give these credits to people on the spreadsheet.  

They do the work, and then we take the credits back when the time comes to pay membership. And it’s very clear to everybody involved, that we don’t need the credits. We created the credits, the credits don’t exist outside of an Excel spreadsheet that we created. What we need is for people to do the work and earn the credits.  

And the fact that we are imposing, you know, quote/unquote a tax… Although I think membership dues are maybe a little bit less violent than the average tax. Maybe not. You know, it depends who you are. Certainly no one’s telling me if it is violent. 

Steve Grumbine (00:24:31): 

[Laughter] 

Rohan Grey (00:24:31): 

But the tax is just there to create a demand for the currency. Now I could say to people, “Look, there’s no membership dues, but if you do something, you know, someone else in the organization doesn’t like, they can sue you and we might, you know, award damages in the amount of a hundred credits.” Then people might be very scared that they’re going to be sued by someone else in the organization and want to earn the credits as well.  

So it’s possible to imagine a world where, even without what we would consider a direct tax, people still want to earn things, but for the purposes of a basic organization like MMN, the simple tax circuit does enough of the work to get what we want out of it. 

Steve Grumbine (00:25:11): 

I like that term. I use this term and I didn’t do it because I’m smart. I did it because it just seemed like the right thing to say. You said the “tax circuit.” 

Rohan Grey (00:25:23): 

Yeah. Simple fiscal circuit is another way to describe it. 

Steve Grumbine (00:25:25): 

Absolutely. 

Rohan Grey (00:25:26): 

You could imagine a world where people only earn enough currency to pay their taxes. And then they go home and go back to living, you know, in the Canadian wilderness. That’s one option. In the modern world, that isn’t how it works because, as I said earlier, there’s only two things certain: death and taxes.  

There’s always future taxes for us. And there’s always future taxes for other people. What happens is the desire to accumulate money starts to take on its own life so that it’s not like everybody is waking up in the morning and in their mind going, “I need to earn exactly enough to pay my taxes and then that’s it.”  

They go, “It’s always good to have more money because more money means more freedom.” Freedom from what? Well, freedom from a healthcare bill. If you get sick, you might not end up being bankrupted. Freedom from, you know, if you get a speeding ticket, it’s not going to have your car taken away. Freedom from the knowledge that if you’re engaged in business, you’re not going to find yourself suddenly in an expensive lawsuit that’s going to mean you can’t do anything else with your company.  

Freedom in the sense that other people who also want freedom would love to sell you stuff and therefore, you know, if you have more money, you can have more real goods and services from other people. So the desire to accumulate money takes on its own life and becomes the center. Even when the starting logic was the tax credit. 

Intermission (00:27:00): 

You are listening to Macro N Cheese, a podcast brought to you by Real Progressives, a nonprofit organization dedicated to teaching the masses about MMT or Modern Monetary Theory. Please help our efforts and become a monthly donor at PayPal or Patreon, like and follow our pages on Facebook and YouTube, and follow us on Periscope, Twitter, and Instagram. 

Steve Grumbine (00:27:50): 

That’s really interesting. I remember going back, you know, we ran around, you know, as kind of a “grab you” kind of headline saying, “Taxes, don’t fund spending.” And it made a lot of people say, “What are they talking about?” You know? And that was really the net effect that we were gunning for. That’s – hey, “What are we talking about?  

Ask us, what are we talking about?” But then Warren, you know, there was a lot of discussion about the very technical finance term of “funding,” and what is a “fund,” and so forth. And it got kind of mixed down into semantics, but ultimately Warren said something and it kind of echoes what you said. He said, “You know, that’s kind of interesting to think of funding.  

I don’t think of funding necessarily as creating buyers and sellers of goods. And that’s really what the tax is there for.” The tax isn’t actually quote/unquote funding, although the proper term is, probably “financing spending.” But the idea here is: the role of this is to create buyers and sellers of goods, so to speak.  

In the particular case of the government, the government wants to purchase our goods and services. They want to purchase our labor, etc., to provision itself, as you so eloquently placed it earlier. Which brings me to another point that I think kind of walks us through this lane that we’ve been going down.  

You know, ultimately a lot of interesting things are going on today in politics. A lot of interesting things are going on within the progressive movement. And you guys are front and center with a lot of this as well, being tied in deeply with Stephanie Kelton and folks like Bob Hockett and others. There’s a lot of push right now with the situation, as it were, both within the climate, within the jobs, within all these, you know, very, very key areas like healthcare and education.  

And so there’s an awful lot of desire for the government to provision itself or to serve the public purpose and, as you said, public money. I think a lot of the resistance that we see in the progressive movement is the fundamental lack of understanding of what money is and what the government’s role in its creation is.  

And this comes back to that legal construct, and it always comes back to the Federal Reserve. Last time we spoke, you gave one of the most eloquent descriptions of the Federal Reserve. And as a legal entity within our federal government, or whatever the relationship there is, the Federal Reserve is our nation’s central bank.  

Can you describe, I guess in technocratic terms, in legal terms, the role of the Fed and maybe even give us a nice history of how it came to be, through the legal lens, and then we can kind of get to the reason why it matters in terms of, you know, financing a Green New Deal, as it were. 

Rohan Grey (00:30:45): 

Yeah, so I’m going to take a bit of a run up on this because I think it’s important to get this run up. If we think back to before the Constitution was drafted and signed, you had a bunch of different states and a number of these states – Massachusetts, Pennsylvania, and others – realized that there were limited amounts of gold coming in and out of the United Kingdom and that they had internal economies that were suffering from a persistent lack of demand and investment.  

And this is a time when gold and gold-backed debts served as a kind of international money between countries. Most importantly, backed up by the British money markets and silver of course, as well. Silverback dollars and things like that. But what certain states realized was that they could issue essentially tax credits and use them to finance local development.  

And this process, which is really well laid out by the legal historian, Christine Desan, and her book, “Making Money,” not only helped revitalize and boost these local economies, but really became the democratic lifeblood of those economies because suddenly they had to start having collective conversations.  

And this is at a time when, you know, these are quite small colonies. So you could actually kind of have a kind of town hall style, almost direct democracy, or at the very least very accountable state legislators, about what to spend and who to tax to make sure that there was that tax reflux. So the debate at that time, wasn’t about necessarily that much borrowing and lending.  

It was about creation and destruction. Who benefits from the creation of new money? Who does it go to for what purpose? And then who does it get taken back from to be destroyed, to keep the overall kind of amount in balance? And that process really started to turn these colonies into their own independent political communities.  

They were very proud of these decisions.. The process by which they came to those decisions was the democratic process itself for a lot of these communities. When the Constitution was formed – and the historian, the constitutional historian, Woody Holton, has a whole book on this, which is really, really good – in large part, it was designed to remove a lot of those monetary powers from the state level and move them up to the federal level.  

The Constitution has a provision, Article 1, Section 10, which prevents state governments from accepting anything other than gold or silver or US dollars in payment of taxes. Now there’s another provision, Article 1, Section 8, which is the power to coin money. So often, you know, if you want to be sort of clever or trick people in teaching this in law school, I say, you know, “What do you think is the most important monetary provision in the Constitution?”  

And they’ll usually say, “Oh, it’s Article 1 Section 8, you know, the power to coin money. That’s where it is.” I say, “No, it’s Article 1, Section 10, because in order for the federal government to have the power exclusively to create money, it had to take it away from the states first.” And Woody Holton traces this out in his history, but basically a lot of the founders were very explicit about this, that if they got Article 1, Section 10, then they could sort of go home and everything was going to be fine.  

That was the ballgame for them. And that was a deliberate attempt to take away that power from state legislatures that were seen to be far too accountable to average people. The sort of rich aristocratic class didn’t like more money being created because it was inherently kind of against creditors.  

It was a sort of cheaper money than they wanted. If money is more expensive, then the people who already have money are the ones who get to sort of earn more off that. So the fact that these democratic communities were realizing they had the power to create money, just…. As I said before, it’s the sinews between each other, it’s those filaments of social connection that is money.  

And there’s no limit to the number of social relationships we can create in the same way as there’s no quantitative limit on the number of contracts that could be created between people. Right? You know, I can create a contract with you about this thing, and I can create a contract with you about that thing.  

You’re not gonna run out. The courts aren’t going to say, “Oh, sorry, we’ve run out of contracts this month. We haven’t taxed enough contracts back from other people.” Of course, not. I can create as many contracts as there are pieces of paper that I can sign or verbal agreements I can make. So once the public, “the demos,” started realizing that the monetary power was within them all along – to kind of use a, you know, kids movie term – that was disempowering for the people who previously were in control of them.  

So what the states tried to do shortly thereafter, and this happened, you know, within a few decades after the Constitution was formed, was to start trying to work out how to get around this prohibition.. Because they weren’t particularly happy about it, it was sort of a bit of a coup by the framers.  

They loved the revolution. And then the Constitution was almost kind of a counter-revolution to the revolution, a reassertion of power by a new ruling class that just happened to not have a king at the top of this time and happened to be, you know, based in DC rather than based in London for a change.  

And that process was primarily fought through banks, was fought through state-chartered banks. To understand the Fed, we really – this is why I sort of had a run up – we need to understand the existence of bank notes as a form of money in the 19th century, because these bank notes circulated issued by state-chartered banks.  

Not federally chartered, state-chartered. Would circulate as money because state governments would accept them in payment of taxes or in payment of legal fees and fines. And there were constitutional cases that went up to the Supreme Court about this. They’re the sort of first cases you read about when you take constitutional law in law school.  

Is it legal for states to issue these notes that function like money? Doesn’t that violate Article 1, section 10? And various justices kind of came up with legal justifications for why it’s allowed that were pretty unconvincing, or at least were really kind of functional decisions designed to accept the reality of what was going on even if it wasn’t directly consistent with the plain language in the Constitution.  

Things like saying, “Maybe the fact that the states don’t own the banks outright, but they’re sort of only shareholders means the banks are independent entities and therefore the banks can issue their own form of money that isn’t violating the rules against states issuing.” And there’s an interesting parallel to this right now, actually in Germany because the Eurozone has imposed a number of budgetary rules saying that governments, including Germany, can’t run deficits. But finally, after so many years, there’s really pressure in Germany to start spending more because Europe is sort of imploding around them.  

And one of the ways that they just suggested yesterday of doing that is to create a sort of new agency and let that agency issue debt. And that debt wouldn’t be counted under their own government budget rules. So, you know, don’t call it government money, [laughs] don’t call it government debt, but we’re just going to issue it and have it backed by the government.  

So that’s the exact kind of thing that happened in the 19th century. The states were quote/unquote, not allowed to issue their own money, but they were allowed to charter banks who could issue money. And for a brief period of time, every bank kind of, you know,…if you’re a rich person who happens to be a legislator, you’re a smart guy so the first thing you do is go out and charter your own bank.  

This is an era of rank corruption. And if you’re on the Supreme Court, maybe you want to have a bank as well if your name is… 

Steve Grumbine (00:38:30): 

Indeed. 

Rohan Grey (00:38:30): 

…Justice Story. So these people realize that this is a sort of privatization of the money power. This is great. You know, we can use all this energy at the state level to take the money power back, and then we’ll take most of the gains for ourselves. The problem of course, is that it causes a huge amount of instability to have a hundred different banks with a hundred different kinds of monetary instruments that are all fluctuating in value against each other.  

If you can’t trust that one bank is going to be alive next week, then you can’t trust that its notes are necessarily worth anything, or at least certainly not worth a stable amount. So this issue ends up becoming quite problematic for a whole range of reasons. There’s a great article by a guy named Shane White called “Freedom’s First Con” talking about the fact that – one of the things he talks about is that African Americans were often the victims of a form of double racial discrimination because not only would they get charged a higher price for goods and services than white people would because, you know?  

“Screw it. We can charge you more. What are you going to do about it?” Not only will they charge more, but then when they tried to pay, people would give them a bad rate. They’d say, “Okay, you’ve got a $10 note from the bank of, you know, Pennsylvania or something. Well, I think that’s only worth $5.  

So I’ll only give you $5 for that $10.” And maybe that $10 note, if someone else held it, they would give them $10 for it. They think it’s a good note, but because I can kind of screw you twice, I will. And then of course, if somebody thinks a bank is good and it turns out it’s bad, then you’ve lost a lot of money on your balance sheet and the entire economy becomes very volatile around the confidence that these different banks and all the various grifters that are involved in the banks.  

This kind of went on for a while in the 19th century and then near the end of the 19th century, a group of private banks started to come together and say, “Well, we need to start getting some stability in all of this. It’s bad for business. It’s, you know, it’s bad for our other industries” -you know, a lot of these people who own banks also owned other kinds of businesses – “We need to get some stability in all of this.”  

And they started forming bankers’ associations. Adam Smith used to have a great line. He sort of said, “Well, people might think competition is bad, but I’m most scared when all the competing businesses get together and start talking without any consumers in the room. That’s when you know, someone’s going to get really taken advantage of.”  

So all the banks started to come together to form a group association in part to help stabilize and clear transactions between each other. Because imagine you want to sort of make a payment from your bank to someone else’s bank, but that other bank doesn’t trust your bank. So it won’t accept its notes.  

And then it only will take gold because it’s the only, you know, instrument that it will trust, or it will only take the government’s units, and that becomes a problem. And there was a brief period with Abraham Lincoln in 1860, where they created greenbacks and they created a national banking system where federal banks had to be part of this banking union and federal banks had to hold certain government debt against their notes.  

And that helped stabilize the value, but that didn’t last and there were still state banks doing other things. And in the very end of the 19th century, they started forming what they called a clearing union. But of course the clearing union helps individual banks smooth out risk, but it doesn’t help the risk of the whole financial system collapsing.  

You know, you can fool some of the banks some of the time, but you can’t fool all the banks all the time. And in the same way as with 2008, when they finally all collapsed together, the collapse is far worse than any individual one collapse. So what happened in the very end of the 19th century, early 20th century is they started to be these big systemic collapses until there was enough political pressure at the federal level saying, “We need to step in and basically nationalize this banking union.”  

So you had sort of public money at the start, then you had private banks come in although they had a state kind of charter – state grant – then you had the National Banking Act, and then you had this sort of private clearing union that formed afterward, and then you had a nationalization of that clearing union with the Federal Reserve.  

And some people wanted it to basically be a cartel of kind of privatized gains and socialized losses, so they wanted the Federal Reserve to be seen as very, very private, really just a sort of private association of banks with some public support. Other people said, “No, come on. We’re making this public.  

Let’s really do it right. Let’s nationalize the whole thing and call them kind of national banks. We’re a national banking system.” And the fight between those two groups was not about necessarily kind of smart economics. It was about power and about class interests and the uneasy compromise that was reached at that point was that the entity that would be created would be a hybrid.  

It was a sort of split the baby down the middle kind of solution. So on one level, it was clearly a public entity; it was a creature of Congress through the Federal Reserve Act. It was designed to be managed according to explicitly public aims and it had the backing of the government. On the other hand, it was designed to also have an element of being a banking union, all these sort of chartered banks, which had convinced themselves they were completely private, even though they only existed by the grace of state and federal charters.  

So that’s sort of where the things started at the beginning, but of course after the Great Depression and after FDR in the mid-thirties, there was a kind of second revolution of the Federal Reserve. And at that point, a lot of the power that might have been arguably delegated to regional banks up until that point, because in the same way as the circuit courts under the Supreme Court are divided into circuits of the country -you sort of carve up the map of the United States into 11 sections and each one gets assigned a court – there were a series of different Federal Reserve banks for different regions, and they had quite different identities.  

Some were more, you know, industrial city oriented, some were more farming oriented, some were former slave plantation areas, some were the sort of gold rush, California and Western front. But after the 1930s, it was pretty indisputable that the center of power laid with the Board of Governors and the Federal Open Market Committee, which were based in DC.  

So there was a sort of internal civil war and the centralizing government bureaucrats won. And after that point, the entities that made the policy decisions for the whole of the Federal Reserve were the people who sat down in DC and considered themselves bureaucrats. Some of them might have been nominated by the local regional reserve banks, but they were ultimately part of an entity that was not owned by any regional reserve bank, that only existed with respect to the Federal Reserve Act.  

So the Board of Governors of the Federal Reserve and the Federal Reserve Open Market Committee are not accountable to any shareholder banks. They’re not comprised of a member bank association. They exist purely on top of all of those local regional reserve banks and their job is, as laid out in the Federal Reserve Act, to uphold the statutory commitments of the Federal Reserve System and it was the Federal Reserve System that became the sort of way to think about the Fed after the mid-1930s.  

So, you know, people often talk about before the Civil War, people used to say, THESE United States. After the Civil War, it became common to say THIS United States. Because before, it was considered a sort of collection of individual states that were sort of bound together, and afterwards it was seen first and foremost as a union.  

In the same way, the Federal Reserve was seen for a long time as a series of regional banks with a loose central head of the snake. But after 1935, it was seen as the central policy-making Board of Governors and the Open Market Committee, and then some stuff underneath whose job is to carry out the wishes of that central committee.  

And at the same time though, that entity now that it started to be its own singular entity – you know, the Federal Reserve System, not regional Federal Reserve banks – it started to build an institutional identity. That is to say it started to see itself as a cohesive whole and started saying, “Well, we don’t necessarily want to be dictated by other entities within government.”  

If you look back at the framing of the Constitution, one of the first things the first chief justice of the Supreme Court, John Marshall, did was declare that the Court was not accountable to the other branches of government, but was its own branch and had its own power, that it could declare laws constitutional or unconstitutional.  

That wasn’t necessarily what the founders thought would happen – that wasn’t necessarily what George Washington thought would happen – but the minute the Court had the chance to sort of say, “Hey, we’re on our own. We get to make our own decisions. We are our own institution”, it did. So the minute the Federal Reserve got to start flexing its power and saying, “Hey, we don’t want to answer to other parts of the government.  

Yes, we are part of the government, we have a statutory mandate, but within that statutory mandate, we get to make decisions. We are our own people,” they started to do that, and that fight between the Treasury and the Fed over who was dominant about the Federal Reserve’s own decisions, was a fight that kind of endured for a lot of the 1940s until it came to a head with the Treasury-Fed Accord in 1951.  

And it was a bitter fight. It was a bitter political fight. It was on the front of the New York Times, it was on the front of the Wall Street Journal. It was fought directly by the president and the treasury secretary against the chairman of the Fed. It was sort of, “You have to do what we say, you’re subordinate to us.”  

“No, we’re not. We’re independent. We get to make our own decisions and you can’t tell us what to do.” That fight was nothing at all to do with public versus private. It was to do with an agency of the government and the executive led by the president, and whether that agency had its own discretion and autonomy relative to the president’s whim.  

It was an intra-governmental dispute and since 1951, the Federal Reserve, when it won, has done everything it can to hold onto that power, which is why you hear all these conversations about Federal Reserve independence, because it’s desperately trying to justify its own autonomy as an agency within the government, in the same way as the court will say, “Well, the president can’t tell us what to do.  

We are an independent branch of government.” It’s the institution wanting to exercise its own power, not because it’s private or in the pocket of bankers – although I do think a lot of the people who are in the leadership of the Fed are representing the class interests of the banks, don’t get me wrong – but it’s not because it’s privately owned.  

It’s because the Fed doesn’t want to be accountable to the democratic forces and the direction of the legislature or the president. And the way that it found the best way to do that is to say, “We have unique technical expertise and you have to respect that expertise,” in the same way as that’s what the Supreme court says, “We’re the ones who understand the law.  

You have to respect that.” But that’s the kind of fight that’s actually going on today. And that’s why people quibble about things like Treasury/Federal Reserve dynamics and interrelationships, because for a lot of people, it is politically and ideologically important that the Federal Reserve be allowed to say “stuff you” when the Treasury says you have to help us out.  

And, legally speaking, it’s not strong. It’s not a strong case. It hasn’t been a strong case since 1951. There were reasons why politically, in 1951, Harry Truman lost that fight, because he was sort of facing other fights at the same time and was losing the battle for public opinion. But there’s no legal basis that says the Federal Reserve can do whatever it wants even if it undermines what the Treasury and the president need to do, and in fact, there are statutes that say the opposite: that nothing in the Federal Reserve Act shall be considered to take away the powers of the treasury secretary.  

And in the event that there’s a dispute between the two of them, the powers of the treasury secretary should win out. And there’s so many other powers that are unique to the president. For example, you know, emergency powers, war powers, etc. that there’s no way in hell if the president said, “We’re at war, this is what we need for national security,” that A, the Fed would try to intervene and say, “No,” and have a fight or B, if it did, that the courts would back it up.  

The courts would say, “No, the president’s powers are far more important when there’s a dispute.” 

Steve Grumbine (00:52:02): 

This brings up something that I’ve been wanting to ask you, because there’s a next level here and it goes with the understanding of the difference between what fiscal policy is, what monetary policy is, why states are unable to do certain things that the federal level can do. And looking back at some things that I’ve heard Warren say in the past, that basically says the Federal Reserve could be reduced to a spreadsheet, nothing more.  

And a lot of people talk about rolling the Fed into the Treasury, like this is going to solve some problem. Can you talk a little bit about that concept of why it does or does not make sense or why it doesn’t even matter one way or the other, if they roll the Fed into the Treasury and perhaps why Warren would say, “Really in fairness, the role of the Fed could be boiled down to a spreadsheet”? 

Rohan Grey (00:52:59): 

Yeah. So one reason that he would say that is because, from the sort of consolidated government perspective, the Fed is adding nothing that wasn’t already there. If you imagine the whole government as just one budget, one balance sheet, one spreadsheet, the act of creating the Federal Reserve in this sense is like spinning out a subsidiary.  

And it might be useful for, you know, internal accounting purposes to keep that subsidiary separate, but it isn’t adding anything to the parent entities financing capacity that didn’t already exist, you know? If I create Rohan LLC, and then I create, you know, sub-Rohan LLC, that doesn’t suddenly make me able to spend more money than if I just had the original company.  

So in that sense, you can fold the two entities together. And one of the reasons why there’s a lot of confusion about what fiscal versus monetary policy is, is because for some people, anything that the central bank does is monetary policy and anything the Treasury does is fiscal policy. For other people, monetary policy means anything that affects interest rates.  

But there are things that the Treasury could do that affect interest rates. It could change the amount of debt that it chooses to issue. It could change the duration of the debt that it chooses to issue. And simultaneously, if fiscal policy is not about interest rates, but it’s about the amount of new money injected and removed from the economy – what we could sort of colloquially call “spending and taxing” – then there are things that the Federal Reserve could do that have a spending and taxing component.  

Paying interest is a form of fiscal subsidy, as Warren likes to say. Negative interest rates are a form of a tax, from one level. So, you know, you could have monetary policy with fiscal characteristics. You could have a fiscal policy with monetary characteristics. Or you could say whatever one institution does is fiscal and the other institution does is monetary, but that doesn’t tell you very much other than who’s doing it.  

It doesn’t tell you very much about what’s being done. So on one level, yes, it really is just a sort of matter of adding another spreadsheet and creating a sort of subsidiary that then you have rules about how the parent company, so to speak, and the subsidiary interact with each other. But from a legal point of view, it does have some significance because you’re creating another agency within the government that has some degree of autonomy.  

Whether it can fight the Treasury and the president to the death in a battle royale is a different question, but on a daily basis, it does have some autonomy. People have famously said “The courts? Well, you know, that’s your decision. That’s great. How are you going to enforce it? You know, with whose army?”  

So on one level, it boils down to who’s got the army. But on the other hand, if the army thinks that it’s important that the courts, you know, have power because of the rule of law, then you might not want to challenge that and risk taking a hit to your political credibility. So that if enough people believe that central bank independence is an important thing, even if it isn’t functional, it might have real political power, it might have real political effects.  

I think the best argument against having an independent central bank or, you know, even for folding the central bank into the treasury is this institution has not justified its existence. It hasn’t helped average people. It hasn’t been more effective than a consolidated fiscal-monetary institution could have been.  

And it continues to be insufficient in solving the problems which it is tasked with solving, either due to lack of will, or lack of policy firepower, or just due to the kinds of people who end up being structurally placed in its leadership. I like to joke or, not even a joke, I guess – it’s true – there is no Federal Reserve in the Constitution.  

There isn’t. There are three branches of government. So the authority for the Federal Reserve to exist comes from one of those branches, or comes from a combination of power from those branches. And what we should be thinking about is how we could design better institutions, institutions that have a wider remit, or have a more nuanced remit, or have different people in leadership, or more democratic accountability, or more electoral accountability than the ones we have today and to think about it in those terms.  

Just to give a very brief example, I work on digital currency design. One of the issues that comes up in questions about designing new digital fiat currency systems. Some people like to call it central bank digital currency, but even that is ignoring, already, the possibility for the Treasury to be involved.  

Today, the Treasury issues coins and the Treasury issues the notes that become the Federal Reserve notes. It sells them to the Fed and the Fed sort of sends them out to banks, but it’s the Treasury that creates them at the Bureau of Engraving and Printing. And the Mint, which makes coins, is a Bureau of the Treasury.  

So already there are monetary powers that are not within the purview of the central bank. And if we think about creating a digital currency system, for example, one of the issues that is very important is privacy and consumer privacy, not just privacy for you and me, but international privacy issues around money laundering, issues around “know your customer” and, you know, terrorism, and things like that.  

These are questions that the Treasury Department – which interacts with the Department of State, which interacts with the president, which has to think about national security, which has to think about the broader economy – is far better positioned, in terms of its expertise and policy remit, to deal with than the central bank.  

The central bank might, you know, have people who have expertise in macroeconomic models and financial markets. They are not privacy experts. They’re not national security experts. They’re not used to going and signing international treaties on behalf of the United States. So if we want to design a digital currency system, there’s a very good argument that the agency, the entity – the institution within government – best place to do that is not the Federal Reserve, but the Treasury.  

And if we think that the central bank is the be-all and end-all of the monetary powers of the government, we’re just ignoring the much, much bigger sibling in the room, which is the Treasury. You know, the Federal Reserve has two notes on an instrument. The treasury has twenty. It’s a much richer, more multifaceted, kind of economic power. 

Steve Grumbine (00:59:47): 

That’s just fantastic. 

End credits (00:59:55): 

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