From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Subject: Re: Clinton's Econ Conference and Non-Traditional Economics
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota
Date: Thu, 17 Dec 1992 16:54:12 GMT

wmartin@STL-06SIMA.ARMY.MIL (Will Martin) writes:

>During the election, I heard various "fringe" candidates, like Bo Gritz,
>discuss the evils of the Federal Reserve, and how the entire national debt
>could be wiped out overnight by the production of a single 4-trillion-$
>coin (actually of negligible intrinsic value), which woul be turned
>over by the US Government to the Fed and thus negate the entire existing
>debt. This woul be followed by the elimination of the Fed and the return
>to United States Notes and eventually a bullion-backed currency.

This appears to ignore the fact that a large portion of government
debt is not held by the Fed.  So the transfer of the supercoin would
balance the Treasury's books by creating a positive balance on deposit
at the Fed, offsetting the privately held Treasury debt.

Example: Suppose that the Federal Debt is $4 trillion, and $1 trillion
of this is held by the Fed (I don't know the actual numbers).  Then
after the transfer the Treasury would have a net surplus on deposit at
the Fed of $3 trillion, exactly offsetting the net obligation of $3
trillion in debt still held by the public and foreign governments.  So
the net Treasury deficit would indeed be zero.

Problem: If you now abolish the Fed, you lose a $3 trillion asset and
are therefore $3 trillion (net) in debt again.  So this scheme does
not change the net indebtedness of the U.S. Government + the Federal
Reserve system.

We haven't discussed what we do with the Fed's assets and obligations
when we abolish it.  There is that super-coin to dispose of for
example.  Perhaps someone in the private sector would like to buy it.
And then there is the matter of all of the money that banks have on
deposit at the Fed.  They will want their money back before the Fed
shuts down.  Perhaps some of them will take the supercoin as payment.
Or maybe the Japanese want it and will pay Yen for it.  What do you
think?

Alternative Strategy: Before abolishing the Fed the Treasury could
withdraw its assets from the Fed so that it doesn't lose them.  It
could ask the Fed to print up $3 trillion dollars and deliver them to
the Treasury office on Pennsylvania Avenue, for example.

On second thought that wouldn't work, since Federal Reserve Notes are
just certificates of deposit at the Fed and would become legally
worthless when we eliminated the Fed.

Third Try: Instead of taking dollar bills out of the Fed, the Treasury
could borrow another $1 trillion from the public, give this to the Fed
to make the balance $4 trillion, then withdraw its money by taking
back the super-coin.  Now the debt has been eliminated (net), since
the Treasury owes the public $4 trillion, but owns this coin "worth"
$4 trillion.

Fourth Try: Why doesn't the Treasury just mint the super-coin and then
keep it itself?  Then the debt would be eliminated too, just like in
the last example, and we wouldn't have to bother about closing the Fed
at all.

Do you begin to get the picture why these people are on "the fringe"?
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209
Newsgroups: sci.econ