From across the political, social and economic spectrum, there is widespread agreement that there is something wrong with the money system in this country. There is not widespread agreement on what that something is.
Some blame Greenspan, Bernanke and Geithner; some blame laissez-faire capitalism or just plain greed. Others blame dropping the gold standard, or the Community Reinvestment Act.
When looking for the cause of the financial collapse, I blame the debt-money system.
What do I mean by the debt-money system?
All modern economies need a system of money to provide a means of exchange between its people acting as producers and consumers of goods and services. The money for every sovereign nation needs to come from some type of money system. Since 1913, when Congress passed the Federal Reserve Act, the private bankers of the Federal Reserve system have created all our money –as debt– whenever some person, government or organization takes out a loan, and ONLY when they take out a loan.
There is no money in the bank to lend out when you walk in looking for a loan. The money only comes into existence at the point that the banker makes a deposit to your account and you sign a promissory note to pay back that amount to the bank with interest, and you sign a form of securitization that provides the bank with the ownership of the asset that is being purchased. Be it a house, car, furniture, boat or gold coins. The bank creates and lends you the money to buy each of them on the spot, and owns them until you pay back the loan(or if you fail to pay back the loan). This is difficult for many people to understand. But this type of system, where all money is created as a debt that enters the economy as a bank loan is the debt-money system. More on this in the literacy course/primer.
It is rarely discussed that there can be an alternative to having the private bankers at the Fed create our money as debt. That alternative is through a debt-free money system, where money is created directly by the government, as equity, and spent into the economy through the U.S. Treasury.
But that’s inflationary!
Critics often chime in at about this point in the presentation: “The Government can’t just create the money ‘out of thin air’. That would be inflationary!”
Short of going to a system of using some form of metal-based money, somebody is going to create our money under the euphemism of ‘out of thin air’. Right now, the bankers do just that, and lend it into existence. I claim that’s more inflationary than debt-free money assuming both systems are creating the same amount of money. As Stephen Lachance says, when money ”is created through loan origination, an obligation above and beyond this sum is also created in the form of interest.”
The direct result of this is a need to take additional money out of the economy in each future year in order to pay off that original loan (principal plus interest). The debt-money system requires a greater amount of money be used for the same level of goods and services — the definition of inflationary pressure, in my book.
Under the debt-free, government-issue money system that we propose, the government creates and pays into the economy as equity the same amount of money that the banks would have created as a debt. This debt-free money creation by the government could be used in place of taxes or borrowing to pay for a portion of the federal government’s budgetary needs, a so-called seigniorage benefit that now goes to the banks.
Is debt-free money some new fangled idea?
No way! Abraham Lincoln’s original Greenbacks were debt-free money. In addition, one of the major disputes that led to our War of Independence was over the rights of the Colonies to continue to create their own debt-free money, rather than become indentured to the debt-money system of the private Bank of England. There is more on our debt-free money heritage in my Montpelier Talk and in the primer.
Another important part of our monetary history surrounds the Chicago Plan for Monetary Reform, a plan for debt-free money formulated by U. of Chicago economists and presented to FDR and the US Congress in 1933 . Under this plan, the federal reserve banks would be absorbed into the Treasury department and would no longer create money as a debt. The banks would go back to banking.
Instead of private debt-money, the government would issue all new money into existence debt-free, through direct payments to people and businesses. Importantly, the Chicago Plan would have repealed fractional reserve banking, the result of which is to require banks to operate on a full (100%) reserve basis, thereby eliminating the risk to depositors.
Note: With full-reserve banking, also called 100-Percent-Money, banks are limited to lending out an amount “equivalent to” their total deposit base. Some falsely claim that full-reserve banking prevents banks from making loans. This description is either based on ignorance or chicanery. Nobel-prize winning monetary economists would not propose a full-reserve banking system that stifles or prevents loan-creation.
In the legislative compromise that followed the Chicago Plan debates, the bankers won out. We settled for the Glass-Steagall banking reforms, the Federal Deposit Insurance Corporation and Credit Union legislation. Not bad, but not debt-free money.
In the Post-War period, conservative economist Milton Friedman basically endorsed the Chicago Plan in his paper titled A Financial and Monetary Framework for Economic Stability when he proposed:
“A reform to the banking system to eliminate the private creation and destruction of money, and the discretionary control of the the quantity of money by the central banking authority.”
It was good enough for the Colonies, the independent United States during the war, and Abraham Lincoln. We almost had it along with FDR’s other great programs under the Chicago Plan, and its concepts were totally supported by America’s most noted monetary historian, with all due respect to Mr. Galbraith.
After today’s financial crash, we can follow along the Summers-Geithner-Bernanke plan of borrowing a few more Trillion this year, and quite a few more next year, with the grandkids on the hook for our debts as far into the future as the eye can see.
Or we can try it a different way.
Abolish the debt-money system and replace it with a system of debt-free money. That, plain and simple, is the purpose of economicstability.org. We welcome you to the conversation. What do you think?