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Accusations aside, the Federal Reserve does not ordinarily play a large role in money creation - they merely set restrictions and incentives. Only complete lunacy or ignorance would lead one to think that money creation is best left to gold mining firms.
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There was no income tax prior to 1909 and we had money. Prior to 1913 there was no Federal Reserve and we still had money.
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Income tax is not the only kind of tax there is (and it had been around prior to 1909 in the US). And most of the "money" being used prior to this period was not government-backed currency, but rather bank notes. National currency was only fully established after 1913 and earlier efforts to establish a national currency also coincided with efforts to estabish national banks and an income tax.
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The Federal Reserve inflates the money supply through open market purchases of governemnt securities.
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They do extremely little of that. For the most part, they just lend or borrow money through repo agreements in order to control short-term rates. That in turn affect incentives to borrow. And it's borrowing that creates money. They can, hypothetically, increase the money supply greatly, but that's not what they actually do. In fact, they don't have to do very much because 1) they decrease rates when there's less demand and increase rates when there's more, thus they largely follow the market and 2) to the extent they don't, the market often voluntarily follows their target. The extent of their open market operations has been greatly exaggerated.
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Taxes do not create money, they just redistribute money in an ineffecient manner.
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You mean capital, not money. No one's arguing that taxes create capital but money itself is government obligation and no entity's obligation is worth anything without the ability to repay - which governments only have because of taxation.
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After reading your post I can see we do agree on some things. One is the Fed does not control the market but is rather a large market participant that many times is responding to market forces and not dictating them. Nevertheless, the FED does have the ability to increase the money in circulation even if they do not have the ability to control interest rates. Their size does make them a powerful market force.
Repos by the Fed do add to bank reserves and hence the creation of money.
http://www.federalreserve.gov/releases/h41/Current/
M3 has grown at over 10% for the past several years while stocks and real estate soared and our dollar plumetted. I attribute this to the easy monetary policy carried out by Greenspand and now Bernanke.
You say taxes are needed so our governemnt can back the "obligation" of our money. I am aware of no obliagtion of our money, they simply state money is legal tender for all debts public and private. There is no obligation as to its value. Its value is deeply erroded by expanisve monetary policy. This monetary policy is carried out by non elected officials whose actions are often debated by respected economists.
Banks, not Government, used to be the issuers of our currency, bank notes, which represented physical deposits of gold and silver. This gave way to a central banking system and eventually the discontinuation of the link between physical assets and our paper money. The government no longer had any obligation as to the value of money.
Taxes are not needed to support a currency, they are needed to pay for spending which has spiraled out of control. Our income tax system is complicated, unfair and panders to special interests. We need a consumption tax to support government activities that will greatly reduce cheating and collect from the underground economy. A negative income tax for low income earners would also be a good idea for those of whom the consumption tax is too onerous.