The Fed’s ‘Open Scandal’

We were delighted to read the latest number of Grant’s Interest Rate Observer, in which the editor of the famed newsletter, James Grant, proposes that the new Fed chairman appoint a sixth task force in addition to the five he has already established. The sixth would serve as “a kind of ‘truth and reconciliation’ repository,” Grant’s writes, to “expose the facts” and call for the recapitalization of America’s central bank.Mr. Grant pulls no punches, including in respect of the Fed’s net worth, which, by classical accounting, is negative. Grant’s and, among others, the Sun have been nursing this story for years. Mr. Grant calls the Fed’s “covering up its own insolvency with home-cooked accounting” an “open scandal.” A sixth task force would enable the central bank a way to open up the issue to serious critics who are animated by friendly sentiments and real reform.Mr. Grant reckons that “no reform is possible” absent “reference to first principles.” The first principles Mr. Grant mentions include using, as the United States once did, gold and silver as the basis of bank capital (along with Treasury securities, in the case of the first Bank of the United States). Bizarrely, the Fed and the Trump administration have lately been praising Alexander Hamilton for his views on trade — without mentioning his monetary first principles.Yet it was Hamilton who oversaw the writing of the first major law passed by Congress exercising the power granted to it to coin money and regulate the value thereof and of foreign coin. That law, the Coinage act of 1792, based our currencies on silver, gold, and copper. Why in the world would a Fed that wants to reprise first principles fail to feature the first principles that the first Treasury Secretary caused to become the first monetary law of the land?“Call it a first principle, and apply that dictum to the reconstruction of the Fed’s balance sheet,” the newsletter’s editor, Mr. Grant, writes in its July 17 number. Mr. Funk quotes him as saying in a recent conversation that the Fed “has lost money on its fixed income holdings, bond holdings, far in excess of what it shows in stockholders equity, and it has lost in operating income far more than it shows.” “Ironically enough, the guardian of the American banking system is itself in a state of solvency by courtesy,” Mr. Grant writes. He adds that the Fed would be insolvent if it were not for the Treasury agreeing to stand up for its losses. This issue has been covered for us by our Alex Pollock in several brilliant columns, including one last month noting that the Fed reported large net losses for the three calendar years 2023, 2024, and 2025.“Mind-boggling” is the word Mr. Pollock uses in the Sun last month to describe the losses, totaling as much as $211 billion, at the Fed. Mr. Funk notes that the central bank uses for itself a special accounting treatment that it would never allow its regulated banks to follow. Grant’s, in any event, suggests that a recapitalization with gold and silver would rehabilitate the Fed and allow interest rates to fall by the renewed confidence of America’s creditors.We understand — believe us — how long a campaign a reform such as Grant’s is proposing would take. We returned from the war but weeks before the Nixon shock of 1971, when America defaulted on its obligations under Bretton Woods. It’s a story we’ve stuck with ever since, and Congress has yet to get to first base. All the more encouraging is to see what is happening at the Fed and to read the latest from Grant’s.

The Fed’s ‘Open Scandal’

The Fed’s ‘Open Scandal’

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