Economic Stability

Let me introduce you to “the money power,” which is the right to create new money and be the first one to spend it. The money power confers all of the marvelous, obvious benefits of counterfeiting—without the downside, because in a democracy, it’s legal!  It is truly the mother of all free lunches.

Any economy that aspires to more complexity than barter needs money.  Any country with a growing economy and a desire for price stability needs new money. (If an economy grows but the supply of money doesn’t, then the same amount of money chases more goods and services, and the price of almost everything drops; this is the classic definition of deflation. There are those, particularly among the Austrian economists, who think deflation is actually desirable, but we at EconomicStability advocate a reformed monetary system that is managed with the goal of being neither inflationary nor deflationary.)

One of the key concepts students of the monetary system encounter sooner or later is seigniorage (SEN-yer-idge), defined by Merriam Webster as “revenue from the manufacture of coins, calculated as the difference between the face value and the metal value of the coin.”

If it costs the mint five cents in metal and manufacturing to make a quarter, then the entity with the right to create that quarter gets a twenty cent windfall profit when it spends it the first time!  The concept applies in spades to paper money which has an even lower production cost relative to its face value.  Think of the windfall in printing $100 bills.  And today, banks create money digitally, so there is no production cost at all.  Hence the name money power.

In feudal times, the King had the money power and he ate plenty of lunch.

But the feudal era passed; in certain countries, democracy, or valiant attempts at it, took its place.

Now that democracy has replaced the King, who should get the free lunch that comes with the money power?

Isn’t it obvious that the people should?  I don’t mean some socialistic concept; I mean all of the taxpayers who get up every day and create the economy. The same people who are on the hook financially if the whole affair goes horribly wrong, which it seems to be doing right now.  Shouldn’t they get the free lunch?  After all, the US Constitution gives it to them in Article 1 Section 8.

Guess what.  They don’t.

How big of a free lunch would the people of the US get if we adopted monetary reform?

I am no economist, so please correct me if I’m wrong here, but consider this: as the graph shows, under our current money system, the Fed and the banks increased the money supply by almost $6 Trillion between 1995 and 2005.  In other words, the money supply grew by an average of $600 Billion dollars per year (as measured by M3.)

(Many would argue that $600 Billion a year is too much to add to the money supply; we experienced inflation rates of about  3%/year during those years. I’m not going to touch that right now.  But that’s how much the money system did create, so that’s the figure I’m using here.)

What if the US government, not the banks, had created $6 Trillion between 1995 and 2005? Any money it creates it doesn’t have to borrow.  As the Fed’s Flow of Funds Report shows, Federal Government Debt (only) grew $1.1 Trillion during that ten year period.  So, if the Government had created the money (just like Lincoln did, with the original “capital G” Greenback) it could have done all of the things it did do during those years (as inefficiently as it did them) without adding to the national debt, and the American public would have saved $4.9 TRILLION in taxes.

Here’s another way to look at it:  our national debt stands today just shy of $12 Trillion.  If the US Government had created the $6 Trillion dollars the banks did between 1995 until 2005, our current national debt would be half of what it is today. If we (our government) had created all of the money the banks created since 1960, there would be virtually no national debt!

This is truly the mother of all free lunches!  And the Fed and the banks have been eating it since our Congressgave it to them in 1913.

To be fair, defenders of the Fed point out that it remits its profits to the US Treasury after it deducts its expenses. To quote a recent Fed release: ”The Reserve Banks transferred $31.7 billion to the U.S. Treasury in 2008…”  But don’t count on it.  As Fed Vice-Charman Donald Kohn intimated this summer in Jackson Hole , the payments to Treasury are not reliable, especially now when we need them most.

…even in the unlikely event that a sharp rise in interest rates forced us to suspend remittances to the Treasury temporarily, we would still maintain our ability to implement monetary policy to foster our statutory objectives of maximum employment and stable prices.  (emphasis mine)

Which would you choose?  The money system that confers hundreds of billions of dollars a year to the benefit of the U.S. taxpayer and leaves us with no national debt, or Mr. Kohn’s, that confers $31 Billion a year, maybe, and helped to create our $12 Trillion national debt?

If passed, the Fed Transparency Act (Ron Paul’s H.R. 1207), which has over 300 co-sponsors in the House, should expose the Giant Sandwich in the middle of the room.  Of course, Bernanke will fight transparency with everything he’s got, arguing once again for the Fed’s vaunted independence.

There is reason to be hopeful.  We are suffering from the proverbial hitting ourselves in the head with a hammer; all we have to do is put it down.  Fortunately, it won’t take a Constitutional Amendment as Congress reserved the right to repeal the Federal Reserve Act, in Section 31.

Last month, Dennis Kucinich announced that he will introduce a bill into Congress this fall that does just that.  This legislation is the only solution I know of that attacks the real cause of our current financial crisis , which is debt.  If debt is a hole in the ground, our stimulus of the economy over the past several years has dug it deeper.  A debt-free money system like that envisioned by this legislation, would start to fill it back in.

The Kucinich bill will based on the American Monetary Act (pdf) a draft of legislation developed over the past several years by the American Monetary Institute .