The privilege of creating and
issuing money is not only the supreme prerogative of government,
but is the government's greatest creative opportunity. By the
adoption of these principles, the taxpayers will be saved immense
sums of interest. -- Abraham Lincoln
Most of what follows is the work of the extraordinary and admirable
Stephen Zarlenga of the American
Monetary Institute. We have taken excerpts from various of
his writings - including a 2003 speech to US Treasury staff -
and blended it into one piece. Also included is an article we
ran 1994 by Bob Blain and an excerpt from Sam Smith's Great American
Political Repair Manual, published by WW Norton in 1997.
Stephen Zarlenga, American Monetary Institute - The money system
is society's greatest dispenser of justice or injustice. A good
one functions fairly, helping create values for life. A bad,
unjust one obstructs the creation of values; gives special privileges
to some and disadvantage to others causing unfair concentrations
of wealth and power; leading to social strife and eventually
warfare and a thousand unforeseen bad consequences - physical
and spiritual. . .
One reason economists have failed mankind so badly is their poor
methodology - an over-reliance on theoretical reasoning. Alexander
Del Mar the world's greatest monetary historian noted: "As
a rule economists. . . don't take the trouble to study the history
of money; it is much easier to imagine it and to deduce the principles
of this imaginary knowledge.". . .
In England the struggle became the goldsmiths vs the monarchy
representing society. Later it was the Bank of England vs. society.
Until then England's money power was in the monarch's hands.
But from that point, Bank of England credits would be substituted
in place of public money. This promoted a confusion between credit
and money to this day. But they are different things. Credit
depends on the creditor remaining solvent. Real money does not
promise to pay something else. Money is on a higher order than
Those behind the Bank of England obscured the real source of
the bank's power - its legal privilege. Its notes were accepted
in payments to the government. Recovering the science of money
for the private profit of a small group produced harmful results:
120 years of continuous warfare spawned an unpayable national
debt leading to excessive taxation leading to horrors like the
Irish potato famine.
Before then, when a nation's money system was used for taxation,
the revenue generally aided the society. But the Bank of England
concentrated society's resources in the wrong hands, crippling
the possibility for government to function properly, leading
to a growing contempt of government.
Today it's still the bankers versus the society. At base, the
battle remains private money vs. public money. The outcome determines
whether the money system operates to serve the few in control,
or the whole society. . .
Mankind can live under various forms of government from dictatorship
to republic, but the best systems are those in harmony with human
nature. Likewise many things can be made into money, but the
best will be the ones in harmony with the nature of money.
Remember: don't confuse money with tangible wealth. Yes, commodities
can be improperly monetized by law. The result will make the
money system hostage to the commodities situation; hostage to
the people, companies, countries that control the commodity.
Ultimately it removes the monetary power from society and places
it into the hands of the wealthy.
And don't confuse money with credit - either private or public
credit. Yes private credits can be improperly monetized by law.
But that gives great privilege to those whose credits have been
monetized, to the detriment of the whole society. The money system
then becomes an engine of injustice - as it is now. . .
How private central banking started in America
First Step: Our Constitutional Convention, considered two grand
themes on humanity: First whether mankind could be self-governing.
This American experiment is still in doubt because the Convention
mishandled the other grand theme over the nature of money.
They met from May to September 1787 but the money subject didn't
came up til August 16. Jefferson and Paine weren't there. Franklin
was too old to speak.
A curious book on money appeared, written anonymously by Calvinist
clergyman John Witherspoon. The book attacked government money
and promoted Adam Smith's primitive view that only gold and silver
are money. . . .
The power for government to create money, long considered a necessary
part of sovereignty was already in the articles of Confederation,
but the Federalists fought to exclude this crucial power from
the new government, arguing that it could not be trusted with
it. Some of them intended to get hold of the power privately
as had been done in England.
The supreme importance of understanding the nature of money now
becomes evident: For if money obtains its value from "intrinsic"
qualities, it could be viewed more as a creature of merchants
and bankers than of governments.
But if money's essence is an abstract social institution obtaining
value through law, then its a creature of government and the
Constitution had better deal with it adequately. Describing how
a uniform currency is to be provided, controlled and kept reasonably
stable, in a just manner. The Constitutional Convention faltered
on this crucial question.
The delegates accepted Smith's primitive concept of money and
didn't firmly place the money power into government's hands,
leaving it ambiguous.
But the power would still exist. What I'm suggesting is that
human affairs require government to have four branches, not three;
the fourth branch to administer the money power.
The Constitution left the money power up for grabs. Alexander
Hamilton wasted no time in grabbing.
Second Step: The Constitution went into effect in late 1789.
Hamilton's first move as Secretary of the Treasury, was to assume
$15 million of the state debts. . . an extremely unpopular act.
The worthless debt was held by the revolutionary soldiers, farmers,
manufacturers and merchants who furnished its supplies. As Congress
secretly passed the bill behind closed doors, the country was
overrun by speculators, buying up the certificates for pennies
on the dollar.
Third step: Next Hamilton and associates, having kept the monetary
power out of government, moved to assume it themselves. . .
Hamilton's Federalists quickly put through legislation chartering
the First Bank of The United States, as a privately owned central
bank on the Bank of England model. The Bank would be issuing
paper notes not really backed by metal, but pretending to be
redeemable in coinage, on the one condition that not a lot of
people asked for redemption. They never had enough coinage.
Thus the real question was whether it would be private banks
or the government that would issue paper money. Will the immense
power and profit of issuing currency go to the benefit of the
whole nation, or to the private bankers? That's always been the
real monetary question in America.
Gold and silver served as a smoke-screen. What the bankers counted
on were the legal considerations of the money. They knew that
all that was needed to give their paper notes value, was for
the government to accept them in payment for taxes. That, and
not issuing too excessive a quantity. Under those conditions,
the paper notes they printed out of thin air, would be a claim
on any wealth existing in the society.
Just where did the money for first bank of the U.S. came from?
. . . The $10 million subscription for the banks' shares, was
oversubscribed within two hours. Only 1/10 of it was ever paid
in gold. The rest was accepted in the form of bonds - the government
bonds that Hamilton had turned from pennies on the dollar to
full value. The money for the private bank actually came from
the American people.
Thanks to Jefferson's efforts, the bank was liquidated in 1811.
Three quarters of it was found to be owned by English and Dutch.
AMI's proposed reforms
- Nationalize the Federal Reserve System. Reconstitute it in
the US Treasury, to evolve into a fourth branch of government.
Only the government would create money.
- Remove the privilege which banks presently have to create money.
This is done through an elegant and gentle process which automatically
turns all the previously issued bank credit into real American
money. 100% reserves are reached not by calling in loans but
by increasing reserves. This would be neither inflationary or
- Institute programs for automatic, constitutionally determined
government money creation, starting with the $2 trillion which
the civil engineers need to bring our infrastructure up to acceptable
levels. From there we go forward carefully determining how to
best run the monetary system. . .
What difference would reconstituting the money power in government
make? Government money goes into infrastructure; better life;
better jobs; education, safer roads, cleaner water; better health
care; social security, etc. Society is empowered by being able
to direct the money power to solve pressing problems rather than
into useless speculation. We no longer have to say we can't afford
it, when so many people and resources are unemployed!.
These three reforms can be closer than we think; and in a crisis
situation if only 5% of the citizenry has an awareness of the
societal/legal nature of money, they could be enacted.
The need for monetary reform
The power to create money is an awesome power - at times stronger
than the executive, legislative or judicial powers combined.
It's like having a "magic checkbook," where checks
can't bounce. When controlled privately it can be used to gain
riches, but more importantly it determines the direction of our
society by deciding where the money goes - what gets funded and
what does not. Will it be used to build and repair vital infrastructure
such as levees to protect major cities? Or will it go into warfare
or real estate loans, creating asset price inflation - the real
Thus the money issuing power should never be alienated from democratically
elected government and placed ambiguously into private hands
as it is in America in the Federal Reserve system today.
Indeed most people would be surprised to learn that the bulk
of our money supply is not created by our government, but by
private banks when they make loans. Most of our money is issued
as interest-bearing debt.
We are borrowing this money system from private banks when instead
we should own the system, not rent it. Our government has the
sovereign power to issue money (Art.1, Sect.8) and spend it into
circulation to promote the general welfare through the creation
and repair of infrastructure, including human infrastructure
- health and education - rather than misusing the money system
for speculation as banking has historically done. Our lawmakers
must now reclaim that power. . .
Unhappily, mankind's experience with private money creation has
undeniably been a long history of fraud, mismanagement and even
villainy. Banking abuses are pervasive and self-evident. Major
companies focus on misusing the money system instead of production.
For example, in June 2005, Citibank and Merrill Lynch paid over
$1.2 Billion to Enron pensioners to settle fraud charges.
Private money creation through fractional reserve banking fosters
an unprecedented concentration of wealth which destroys the democratic
process and ultimately promotes imperialism. Less than 1% of
the population claims ownership of almost 50% of the wealth,
but vital infrastructure is ignored. The American Society of
Civil Engineers gives a D grade to our infrastructure and estimates
that $1.6 trillion is needed to bring it to acceptable levels.
That fact alone shows the world's dominant money system to be
a major failure crying for reform.
Infrastructure repair would provide quality employment throughout
the nation. There is a pretense that government must either borrow
or tax to get the money for such projects. But the government
can directly create the money needed and spend it into circulation
for such projects, without inflationary results.
The false specter of inflation is usually raised against suggestions
that our government fulfill its responsibility to furnish the
nation's money supply. But that is a knee jerk reaction - the
result of decades, even centuries of propaganda against government.
When one actually examines the monetary record, it becomes clear
that government has a superior record issuing and controlling
money than the private issuers have. Inflation is avoided because
real material wealth has been created in the process.
From Stephen Zarlenga's 2003 speech at the U.S. Treasury
Perhaps the chief failure of economics is its inability, from
Adam Smith to the present, to define or discover a concept of
money consistent with logic and history. Economists rarely define
money, assuming an understanding of it. It's still being argued
whether the nature of money is a concrete power, embodied in
a commodity like gold; or whether it's a credit/debit issued
by private banks. Does its value come from the material of which
it's made? Or is it, as we have concluded, an abstract social
power - an institution of the law, having value because its accepted
in exchanges due to the sponsorship of government? The correct
answer leads to conclusions on the proper monetary role of government;
whether the power to create and control money should be lodged,
as at present in a somewhat ambiguous private issuer - the Federal
Reserve System and its member banks - or should be wholly reconstituted
within government. An accurate concept of money will light the
way to solving the present fiscal crisis.
We have two basic approaches to understanding money: A theoretical
method based on logic; and an empirical approach based on experience
or history. Practitioners of the two methods arrive at very different
conclusions. Theoreticians usually support private commodity
money and private credit money. Historians normally want a much
larger role for government.
Let's start with Aristotle who gave the culmination of Greek
thought and experiment on money around 330 BC: "All goods
must therefore be measured by some one thing. . . now this unit
is in truth, demand, which holds all things together. . . but
money has become by convention a sort of representative of demand;
and this is why it has the name nomisma - because it exists not
by nature, but by law (which in Greek was nomos) and it is in
our power to change it and make it useless." So Aristotle
calls money a creature of the law. Not a commodity from nature
but an abstract social institution. Its essence is not tangible
wealth in itself, but a power to obtain wealth.
Plato agreed with Aristotle and advocated fiat money for his
Republic: "The law enjoins that no private individual shall
possess or hoard gold or silver bullion, but have money only
fit for domestic use. . . . wherefore our citizens should have
a money current among themselves but not acceptable to the rest
of mankind. . . " And: "Then they will need a market
place, and a money-token for purposes of exchange."
So both Aristotle and Plato noted the paramount principle - that
the nature of money is a fiat of the law, an invention or creation
of mankind. This principle, part of a lost science of money,
must now be relearned in the Third Millennium in order to achieve
the monetary reforms needed to move back from the brink of nuclear
disaster, to move away from a future dominated by fraud and ugliness,
toward a world of justice and beauty.
This "private vs. public" battle for the control of
the money power is part of a great ongoing social battle recurring
throughout history to this day. This factor shapes the most important
outcomes determining how well a money system works. A good system
functions fairly; helping the society create values for living.
A bad one obstructs the creation of values; places special privileges
in the hands of some to the disadvantage of others, and promotes
unfair concentrations of wealth and power, and disharmony and
Now it may be surprising, but the historical record actually
shows that publicly controlled systems function much better than
private ones. Furthermore, it shows that the concept of money
- how money is defined - usually determines whether the system
will be publicly or privately controlled. . .
Our American experience contains many of the best case studies
for understanding money. We have been a great monetary laboratory
- every conceivable solution was tried at some time, and we've
been a paper money nation from colonial days. Our development
was inseparable from it - without it there'd be no United States.
English and Dutch laws forbade sending coinage to the colonies,
placing them in continual distress. The intent was to extract
raw materials, not for the colonists to trade with each other.
An early form of globalization. The colonies had to devise monetary
In the period 1632 - 92, seventeen different commodities were
monetized by law at specified prices. It didn't work - everyone
wanted to pay with the least desirable commodity, in the worst
condition. . .
Private land banks were set up but were shunned by the colonists,
who considered money a prerogative of government, as it was in
England until 1694.
Then in 1690, four years before the Bank of England, Massachusetts
embarked on a radical course and issued paper bills of credit,
spending them into circulation. Rather than a promise to pay
anything, they were a promise to receive them back for all payments
to the commonwealth. The colony thrived. Other colonies copied
them and infrastructure arose.
In 1723 Pennsylvania's system loaned the bills into circulation,
charging interest on them and using it to pay colonial expenses.
Ben Franklin wrote:
"Experience, more prevalent than all the logic in the World,
has fully convinced us all, that paper money has been, and is
now of the greatest advantages to the country." . . .
Some long lost principles of the science of money quickly resurfaced:
- Money need not have intrinsic value; its nature is more of
an abstract legal power than a commodity.
- Accepting the government paper back in taxes was the key feature
needed to give it circulating value.
- The quantity of money in circulation had to be regulated to
maintain its value.
- They observed that paper money helped build real infrastructure.
- Most importantly, the colonies did not issue more money than
their legislatures authorized. They have an outstanding record
issuing currency. Of over a hundred colonial issues I found only
one case of fraud. In Virginia, a Mr. Robertson who was supposed
to be burning the old notes as new ones were printed, was giving
them to friends instead.
But in the battle for monetary dominance, the colonial monetary
experience has been miscast as irresponsible inflation money.
This was the result of 18th century Boston's medical Dr. William
Douglas' inaccurate writings. The error was corrected by Alexander
Del Mar in 1900 in The History of Money in America, but was ignored.
It was authoritatively cleared up again by Professor Leslie Brock
in 1976 and again ignored. Many economists, and especially the
libertarians, still haven't got the message that colonial government
paper money was crucial in building the colonies.
In 1764, England's Lords of Trade and Plantations prohibited
all colonial legal tender issues, and that became the underlying
cause of the American Revolution, not some tax on tea.
The continental currency became the lifeblood of the revolution.
$200 million was authorized and $200 million issued. The currency
functioned well. In late 1776 the notes were only at a 5% discount
against coinage, when General Howe took over New York City and
made it a center for British counterfeiting. The Brits counterfeited
billions; newspaper ads openly offered the forgeries. . . In
March 1778 after 3 years of war, it was $2.01 Continental for
$1 of coinage.
The continentals carried us over 5 1/2 years of Revolution to
within 6 months of its final victory. Thomas Paine wrote: "Every
stone in the Bridge, that has carried us over, seems to have
a claim upon our esteem. But this was a corner stone, and its
usefulness cannot be forgotten."
Our constitutional convention considered two grand themes of
humanity: First whether mankind could be self-governing or had
to be ruled by authority. Often referred to as the American experiment.
We are still learning the outcome, and one of the reasons it's
still in doubt is because of the way the convention mishandled
the other grand theme - the nature of money. By the time of the
convention, the great benefits of the continentals was nearly
ignored; along with much of the rest of our hard won monetary
experiences. Some wanted to emphasize that the continentals became
worthless and rejected the idea of paper money altogether.
They ignored that paper money was crucial in giving us a nation;
that abstract money requires an advanced legal system in place;
that the normal method of assuring its acceptability is to allow
the taxes to be paid in it. . .
The convention met from May to September 1787 but the money subject
didn't come up until August 16. Remember, Jefferson and Paine
were not there. Franklin was too old to speak.
A curious book on money appeared just then, written anonymously
by Calvinist Minister John Witherspoon, - the only clergyman
signer of the declaration of Independence. The book attacked
government money and promoted Adam Smith's view that only gold
and silver are money. . .
The power for government to properly create money, long considered
as a necessary part of sovereignty, was contained in five magic
words - to emit bills of credit. This provision was already in
the Articles of Confederation, but the Federalists - the merchant/commercial
interest, largely responsible for calling the Constitutional
Convention in order to strengthen the national government, fought
to exclude this monetary power from the new government, arguing
that it could not be trusted with it. Some of them intended to
get hold of the power privately as had been done in England.
The supreme importance of the concept of money now becomes evident:
For if money is primarily a commodity, convenient for making
trades, which obtains its value out of "intrinsic"
qualities, then it could be viewed more as a creature of merchants
and bankers than of governments.
But if the true nature of money is an abstract social institution
embodied in law - obtaining its value largely through legal sanctions,
then its more a creature of governments, and the Constitution
had better deal with it adequately - describing how a uniform
currency is to be provided, controlled and kept reasonably stable,
in a just manner. It was on this crucial question that the Constitutional
The delegates accepted Adam Smith's primitive commodity definition
of money as gold and silver and didn't firmly place the monetary
power into government, leaving it ambiguous. Later they'd argue
over what they had done. But the power would still exist, since
it is as important as the legislative, judicial and executive
I am suggesting that the nature of human affairs requires government
to have four branches, not three; the fourth branch to embody
and administer the monetary power.
The Constitution trusted the people with the political power;
but didn't firmly place the monetary power in their government.
This (along with slavery) is the original sin of American politics.
As a result the power was left up for grabs. Alexander Hamilton
wasted no time in "grabbing."
The Constitution went into effect in late 1789; Van Buren described
Hamilton's first move as Secretary of the Treasury, in 1790:
"Hamilton assumed some $15 million of the state debts. .
. an act. . . neither asked nor desired by the states, unconstitutional
and inexpedient. . . "
What was so bad about it? "A large proportion of the domestic
debt (was held by) the soldiers who fought our battles, and the
farmers, manufacturers and merchants who furnished supplies for
their support. . . .When it became known to members of Congress,
which sat behind closed doors, that the bill would pass. . .
every part of the country was overrun by speculators, by horse,
and boat, buying up large portions of the certificates for (pennies
on the dollar)." Madison, attempted to have the law pay
speculators less than the original holders, but was voted down.
Next Hamilton and associates, having kept the monetary power
out of government hands, moved to assume it themselves. The Bank
of North America was the only bank in the US, formed in Pennsylvania
on Tom Paine's initiative to assist the revolution. Arguing that
it was only a state bank, Hamilton suggested it come forward
if it wanted to alter itself for the national purpose. Curiously,
the bank took no steps toward this obvious increase in profit
Hamilton's Federalists quickly put through legislation to charter
the First Bank of The United States, as a privately owned central
bank on the Bank of England model. The Bank would be issuing
paper notes not really backed by metal, but pretending to be
redeemable in coinage, on the one condition that not a lot of
people asked for redemption. They really did not have the coinage.
The bank would do what they had blocked the government from doing.
Print paper money.
While gold and silver served as a smoke-screen what the bankers
really counted on, were the legal considerations of the money.
They knew that all that was needed to give their paper notes
value, was for the government to accept them in payment for taxes.
That, and not issuing too excessive a quantity of them. Under
those conditions, the paper notes they printed out of thin air,
would be a claim on any wealth existing in the society.
And we see why the Bank of North America was not put forward
for this purpose: the U.S. government had owned 60% of it. .
. . The government would only own 20% of the new bank.
Just where did the money for first Bank of the U.S. came from?
The $10 million share subscription for the banks shares, was
oversubscribed within 2 hours. Less than 1/10 of it was ever
paid in gold. The rest of the payment was accepted in the form
of bonds - the very government bonds that Hamilton had turned
from pennies on the dollar to full value. So you see where the
money for the bank actually came from - from the American people.
That's how private central banking started in America.
Thanks in large part to Jefferson's efforts, the bank was liquidated
in 1811. Three quarters of it was found to be owned by Europeans
- English and Dutch.
The 2nd Bank of the U.S. - the bank from hell - operated illegally
from inception, accepting IOU's instead of the required gold
in payment for its shares. So again the banker's gold "requirement"
turned out to be a masquerade.
This private central bank immediately embarked on a wild monetary
expansion. Beginning operations in April 1817, by July it had
19 branch offices and had created $52 million in loans on its
books and an additional 9 million in circulating currency, based
on gold and silver coin reserves of only $2.5 million. This tremendous
expansion caused a wild speculative boom. Then in August 1818,
the bank turned abruptly and began an insane contraction, causing
the panic of 1819. It cut its outstanding loans and advances
from a high of $52 million, down to $12 million in I819. Its
circulating notes dropped from $10 million to $3.5 million in
1820. A massive wave of bankruptcies swept the nation.
The subsequent history of this bank and its fight to the death
with President Jackson reads like a financial soap opera. The
story of various state chartered banks is similar.
Meanwhile the US government acted responsibly In the aftermath
of liquidation of the first and second bank; US Treasury notes
were substituted in place of banknotes. About $65 million were
authorized and only $37 million actually issued. The U.S. Treasury
spent them into circulation. Initially they were all large denomination,
paid interest; were redeemable in gold and required formalities
to transfer. By 1815 they became bearer certificates with no
redemption date, paid no interest and were in smaller denominations.
Thus they were nearly a true money form. The fact is that the
US government has always acted responsibly in creating money.
Not so the private banks.
Greenbacks were on balance our best money system to date Thanks
to 100 years of misreporting, the image of the greenbacks coming
down to us is as inflated or worthless paper money. In fact,
$450 million were authorized and $450 million were printed. Counterfeiters
couldn't duplicate the Greenbacks. Every Greenback was eventually
exchangeable one for one with gold coin.
But greenbacks were not promises to pay money later - they were
the money. Since they were not borrowed, they did not give rise
to interest payments and did not add to any national debt. The
U.S. Treasury printed them and spent them into circulation.
Economists usually harp on the Greenbacks dropping to 36 cents
in gold, and they leave it at that. While that happened, its
highly misleading. . .
What did happen was that in June 1864, Congress limited the amount
of Greenbacks to $450 million.
There was inflation, but remember 13% of the population was fighting
a terrible war. 625,000 died. Greenbacks performed well despite
being spent on destruction. They were also being abused by the
bankers. For every greenback created by Congress, the banking
system created $1.49 in bank notes.
What if instead of being spent on destruction, they went into
building infrastructure, and canals and roads? Spending such
money on infrastructure need not be inflationary. For example
the Erie Canal lowered freight prices from $114 a ton down to
$9 a ton.
The great lesson of greenbacks is that in times of crisis - and
other times too - our nation has power to do what is financially
necessary, through our government. We don't have to beg or borrow
money from the wealthy and, create an astronomical national debt.
We don't have to tax the middle class into oblivion, or cancel
necessary programs. We can carefully use the nations' sovereign
money power far more than we presently have been allowed to realize.
At the time of the greenbacks there were those who fully understood.
Senator Howe said: "We must rely mainly upon a paper circulation;
and . . . that the paper, whoever issues it, must be irredeemable.
All paper currencies have been and ever will be irredeemable.
It is a pleasant fiction to call them redeemable. . . I would
not expose that fiction only that the great emergency which is
upon us seems to me to render it more than usually proper that
the nation should begin to speak the truth to itself; to have
done with shams, and to deal with realities."
The struggle between private versus public control of money continued
throughout the 19th century. The greenbacks continued to constitute
about a third of our money supply. Generally the private money
power dominated. But in periods when the government exercised
control, an excellent record was established- superior to that
of private control. The bankers continued their pretense that
gold was the basis of the system, and even the Federal Reserve
in 1913 appeared to be a gold-based system. But immediately upon
inception, we were pushed into warfare. Within 20 years Americas
farms, cities, exchanges and money system were all wrecked, ending
in the great depression. It was again left to our government
to rescue the nation.
It's forgotten today, but the Thomas Amendment passed with legislation
in 1933, gave the President the power to create $3 billion in
greenbacks if the banking system didn't co-operate. . .
The de-funding of government at the local, state and federal
levels, arises out of this disease of attacking government as
This attack on government starts with Adam Smith. His purpose
in smearing the English government was to keep the monetary power
in the hands of the privately owned Bank of England. . .
To summarize the argument: The nature of the money power is societally
derived, not one originating in the activities of private corporations.
Because of its great importance to all, control over the process
belongs under public authority. Both logic and history show that
its not safe to delegate this power, and certainly not acceptable
to allow its usurpation.
The current bailout
The demand for immediate action to avoid a meltdown is misplaced.
Immediate and wrong action will accelerate the meltdown. There
is only one thing Congress can do to inspire confidence and avoid
a meltdown - that is to take deliberate and careful and good
workable action to help resolve the crisis. In other words to
fulfill its congressional duty to America. . .
Getting it right means requiring several conditions to protect
the American people from the gang that's been financially raping
the nation; that gave us the unnecessary Iraqi war. It means
facing the facts on where the banking crisis is and how it got
there. It means examining the monetary and economic reforms of
the Federal Reserve System that will assure that such thievery
or foolishness won't happen again; and taking back from those
who improperly benefited from the tragedy and prosecuting them.
At the heart of the problem is that our money system has been
privatized. Naturally it's being run for the benefit of the "privates"
in control, with minimal concern for the public interest. . .
Rather than borrowing the $700 billion being demanded, and ending
up paying back about 3 times that amount after interest charges,
The US government could issue the money the same way the banks
do, instead of borrowing it from them. But while the banks issue
credit that substitutes for money, the U.S. would issue actual
money. Our government has the power to create the money, in an
account, or by simply printing it as greenbacks.
There would not be inflationary effects, because it was already
believed that those moneys existed in the form of the real estate
values and loans. In effect this would stop a deflation which
would follow from writing down those assets and loans to their
present market values. Some conditions would be needed to assure
that the banking system did not use those greenback dollars for
further credit creation, as that would be inflationary. In essence
the greenbacks would not be "re-discountable" by the
banking system to create more loans, but would be legal tender
for all debts public and private. . .
What the administrations proposal is doing is almost identical
to what Keynes did during the Great Depression. He insisted that
the bailout be in terms of government going into more debt to
the banking system, whereas the Chicago Plan by the greatest
economists in the nation at that time, was promoting the government
to create money (greenback equivalents) instead of debt. . .
Keynes won the argument but his program did not work and it was
only WW2 and [with] wartime employment, creating tanks to be
blown up, airplanes to be shot out of the sky, and ships to be
sunk, that Americans went back to work and we worked our way
out of the depression, and into more debt. That's where this
proposal leads. Keynes answer was that "in the long run
we are all dead," but not our posterity. Based on what happened
following his program before, our descendants, and society that
survives become enslaved.
Unless monetary reform is in the mix now, it could take a tremendous
worsening of the situation to come up again soon. One articulate
friend, George Romero, summed it up for me: "The private
sector has failed. The public sector is expected to rescue them,
and it will. Therefore the public sector should be in control
of the money system to benefit the country."
The Chicago Plan of the 1930s
Henry Simons from the University of Chicago created the proposal
and prominent economists from other universities joined him in
what became known as the "Chicago Plan."Economists
like Paul Douglas of the U of C.; Frank Graham and Charles Whittlesley
of Princeton; Irving Fisher of Yale; Earl Hamilton of Duke; and
Willford King of NYU, to name a few. One version was sent to
all the academic economists about a thousand total. Of
those responding, 235 from 157 universities agreed with the proposal;
another 40 approved it with reservations and only 45 disapproved.
So the plan had broad professional support. Variants of the Chicago
Plan usually started by condemning the banking structure as foolish
and harmful: "If the purpose of money and credit were to
discourage the exchange of goods and services, to destroy periodically
the wealth produced, to frustrate and trip those who save, our
present monetary system (does that) most effectively!"
They dispensed with the gold standard as not a real standard,
because the value of gold had changed violently up and down against
commodities. From 1914 to 1917 wholesale prices rose 65% and,
then increased another 55% to May 1920, So Gold coins lost over
75 % of their value against wholesale prices in the Fed's first
six years. Then by June 1921wholesale prices fell 56% against
gold. "Hard money" advocates who believe that gold
money has been stable should study these facts. One version of
the plan quoted Roosevelt's referring to gold as an "old
fetish of so-called international bankers."
The main features of the Chicago Plan were:
- Only the government would create money. The Federal Reserve
banks would be nationalized, but not the individual member banks.
The power to create money was to be removed from private banks
by abolishing fractional reserves the mechanism through
which the banking system creates money. So the plan called for
100% reserves on checking accounts which simply meant banks would
be warehousing and transferring the money and charging fees for
- The Plan separated the loan-making function, which can belong
in private banks, from the money-creation function, which belongs
in government. Lending was still to be a private banking function,
but by lending deposited long-term savings money, not created
credits. In this way they'd restrict an unstable practice known
as borrowing short and lending long making long term loans
with short term deposits.
- The proposal recognized the distinction between money and credit,
which had been confused through fractional reserves and what
was called the "real bills doctrine." The confusion
was seen as one of the causes of the depression, because when
businesses reduced their borrowings on commercial bills which
occurs during any downturn, parts of the money supply had been
automatically liquidated. The Chicago Plan saw the instability
of this that it aggravates a downturn.
Simon made this grand observation: "The mistake. . . lies
in fearing money and trusting debt. Money itself is highly amenable
to democratic, legislative control, for no community wants a
markedly appreciating or depreciating currency. . . but money
is not easily manageable alongside a mass of private debt and
private near-moneys. . . or alongside a mountain of public debt."
Some variations of the plan had the U.S. government lending banks
all or part of newly printed cash needed to achieve 100% reserves.
This was a crucial part of the plan, because depositors were
going to the banks and withdrawing their accounts, deflating
This loaning of reserves feature also elegantly converted all
the previously monetized bank credits into real US money on which
the banks paid interest to our government. It post facto made
them intermediaries, earning some reasonable spread for their
Paul Douglas wrote: "This proposal will of course be opposed
by the bankers from whom it takes the lucrative privilege of
creating purchasing power. It would however insure the safety
of deposits, give large revenues to the government, provide complete
social control over monetary matters and prevent abnormal fluctuations
in the capital market. At the same time it would permit the allocation
of productive resources. . . to remain primarily in private hands.
All in all it seems the most promising program for the reform
of our monetary and credit system. . . "
Marinner Eccles, who became Fed Chairman under Roosevelt, testified
that the best course would be for the government to nationalize
the Federal Reserve banks.
Congressman Jerry Voorhis made the case for hundred percent reserves
and putting money into circulation by paying pensions and disabled
persons. As late as 1945 Voorhis introduced legislation for a
U.S. Monetary Authority as our sole creator of money.
Maurice Allais, the great French economist, backed the plan and
published a book on it in 1948.
Irving Fisher of Yale, wrote on it extensively and popularly
well into the 1940s. . .
There was no understanding or support for the proposal among
the electorate. Only Irving Fisher seems to have understood the
necessity for popularizing the matter.
Simons himself got cold feet and shied away from promoting the
plan, desiring to remain on a level of professorial discussion.
He even threw a wet towel on Fisher who was promoting the reform
suggesting that Fisher avoid popularizing the idea!
The Plan was mishandled politically. . . The last attempt at
100% reserves was when Senator Nye of North Dakota tried to place
it in part of the administration's 1935 banking reform legislation,
but his amendment was defeated.
The FDR administration had its own banking reform bill and remained
ambiguous on the Chicago Plan, never commenting on it even though
the political climate and professional support for the plan was
sufficient to get it passed, had they made some effort. Instead
his Treasury Secretary Morganthau was trying to make minor adjustments
without fundamentally challenging the banking system. . .
Can we learn from what John Maynard Keynes was doing during all
this? He was squarely behind the bankers and against such real
reform. Yet he knew that he had to break out of orthodox economics
or the whole system was in danger of being overturned. Keynesianism
was a way to allow banks not government to keep control over
the money-creation process, and while the more narrow minded
economists fought Roosevelt's attempts to create money and jobs
as inflationary, during the nations worst deflation, Keynes knew
The New York Times in December 1933. . . got Keynes to write
an open letter to Roosevelt, which they published. Keynes wisely
advised Roosevelt that "Only the expenditures of public
authority" could turn the tide of depression. . .
However, Keynes inappropriately warned Roosevelt not to create
the money for this, but only to borrow it, and wrongly advised
him that there was already enough money in circulation, and that:
"increasing the quantity of money. . . is like trying to
get fat by buying a larger belt."
Keynes was therefore not "revolutionary" except in
relation to the utter backwardness of the financial establishment.
He didn't come close to a real solution, but essentially protected
his class. The real question has always been whether the nation's
money should be created under law, by government, or under the
private caprice of bankers.
DEALING WITH THE NATIONAL
Bob Blain, Progressive
Review, 1994 - From
1790 to 1993, taxpayers were charged $3.2 trillion in interest
on federal debt. . . . The original debt at 5.53 percent interest
compounded for 204 years equals $4.4 trillion. The present federal
debt is arguably the original debt enlarged by 204 years of compounding
According to the Federal Reserve Bulletin, the total money supply
(currency, travelers checks, demand deposits, and savings accounts)
in the U.S. economy in March 1993 was $4 trillion. The total
debt of the federal government, state and local governments,
corporations, farmers, home buyers, and consumers was in excess
of $15 trillion. If the total money supply is $4 trillion, where
is the other $11 trillion of borrowed money?
Here is another curious fact. We have been told for years that
government borrowing to cover hundreds of billions of dollars
of deficits would drive interest rates through the roof. Instead,
interest rates have fallen dramatically. In March, 1993 they
were between 4.9 and 2.2 percent, far below what they were in
the early 1980s when federal debt was a small fraction of what
it is now.
The explanation for these anomalies is that the missing money
never existed. We never borrowed it, in the normal sense that
it was turned over to us and spent. Most debt is not the result
of people borrowing money; it is the result of people not being
able to repay what they owed at some earlier time. Instead of
declaring them bankrupt, creditors just add more to their debt.
The federal government has been adding interest to its debt for
204 years. James Jackson, Congressman from Georgia, predicted
that this would happen in a speech he made to the First Congress
on February 9, 1790. Jackson warned that passing Alexander Hamilton's
plan to base the country's money supply on the existing federal
debt of $75 million would "settle upon our posterity a burden
which they can neither bear nor relieve themselves from."
He predicted: "In the course of a single century it would
be multiplied to an extent we dare not think of," He clearly
saw that Hamilton's plan would put in place an exponential process
of debt growth. To support his warning he cited the experience
of Florence, Genoa, Venice, Spain, France, and England.
Hamilton's plan was for Congress to commit the country to pay
interest on the debt until the debt was paid. In the meantime
the debt certificates would circulate as money. He argued that
this would turn a $75 million debt into a $75 million money supply.
The problem was that interest payments would have come out of
the money supply. This would reduce the quantity of money that
remained in circulation -- and cause recession -- until new loans
returned the interest money back into circulation. The history
of federal government finance shows such periodic swings between
debt reduction and recession to debt increase and recovery.
The power to deal with this problem that Congress has neglected
all these years is the power "to coin money and regulate
the value thereof." It has overused its power "to borrow
money on the credit of the United States." According to
the Federal Reserve, 98 percent of the U.S. money supply is borrowed.
Only 2 percent is coined.
The First Congress set the wrong precedent. It should have created
$75 million in money and paid off the debt. With a population
of 4 million people and an economy starved for a medium of exchange,
that would have increased the money supply by $18.75 per person.
Why did the First Congress borrow instead of coin money? Newspapers
at the time accused members of Congress of acting to serve their
own interests. They sent agents into the countryside to buy up
debt certificates that the general public thought were worthless.
They then passed the Funding Act knowing that it would give themselves
and their heirs a source of income that would grow exponentially
with the debt. For every debtor there is a creditor. What is
a $4 trillion debt for debtors is $4 trillion in claims for creditors.
To get out of this trap Congress has a range of options:
First, it could stop paying interest on the debt. Interest is
the fuel that is exploding the debt. Cut off the fuel; stop the
explosion. Since 1790 over $3 trillion in interest has been added
to the original $75 million. Cutting interest would immediately
cut the annual deficit by about $300 billion. Experience shows
that all other conventional actions, no matter how painful, do
no more than slow slightly the rate of debt growth. Then Congress
could begin the process of paying off the debt.
A political problem with stopping the payment of interest is
that people with money control politics. And many of them would
have their interest income stopped. Insurance companies and pension
funds are invested in federal debt and foreign holders would
also be upset. Economically, however, we cannot continue to add
compounding interest to existing debt. The biggest debtor is
not the federal government. It is business corporations. It is
impossible for them to increase the physical production of goods
and services in order to keep up with exponential debt growth
that is limited by nothing but arithmetic. Unlike the debt, the
physical economy has limits.
The question holders of federal debt must ask themselves is this:
Do we want to insist on more interest that will add debt to existing
debt until the only option is debt repudiation and we lose everything?
Or are we willing to stop where we are while we may still be
able to recover our original investment plus a reasonable profit?
A second option is for Congress to create the money necessary
to fund public works. As a sovereign government, Congress' power
is unique. It can create money debt-free and interest-free. Congress
needs to stop thinking of itself as the same as other organizations
that must take money in before they can spend it. Money does
not grow on trees. It must be created. The only choice is whether
to have it created as loans at interest from private banks or
to have it created by Congress debt-free and interest-free.
How can Congress create money without causing inflation? Congress
must regulate its value. The power to create money includes this
A good way for Congress to regulate the value of money is by
funding projects at the current national price level. The current
national price level can be calculated by dividing the most recent
gross domestic product by the number of hours of work that produced
it. For example, in 1991 the total gross domestic product was
$5.6 trillion. The employed labor force produced it with 237
billion hours of work. So the GDP was produced at the rate of
$23.95 per hour of work. By now the price level per hour is probably
$25.00. So let Congress fund projects at $25 per hour. How this
amount is allocated among labor, land, and capital can be negotiated.
How much money should Congress create? How about enough to reach
full employment? We have about 9.5 million people actively looking
for work. That includes a million managers and professionals;
two and a quarter million technical, sales, and clerical people;
a million and a quarter precision production, craft and repair
people; over two million operators, fabricators and laborers;
and 305,000 framers, foresters and fishermen. That's a skilled
labor force as big as many nations -- all now idle. Employed
at an average $25 per hour, ($50,000 per year), they would add
$475 billion to the nation's gross domestic product and reduce
spending for unemployment compensation. The pie would grow as
unemployment went down. Congress could start by creating, say,
$50 billion, or $200 per person, in debt-free interest-free money,
then fund $50 billion worth of works projects, monitor the results,
and make adjustments as needed. Meanwhile the Fed could raise
bank reserve rates, not interest rates, to make checking accounts
A third more conservative option is being proposed by an organization
called Sovereignty, which believes that a country that borrows
money loses its sovereignty to its creditors. Their proposal
is intended to restore U.S. sovereignty by reducing our dependence
on borrowed money.
The Guernsey experience. . .
Guernsey is an island state located among the British Channel
Islands about 75 miles south of Great Britain. In 1816 its sea
walls were crumbling, its roads were muddy and only 4 1/2 feet
wide. Guernsey's debt was 19,000 pounds. The island's annual
income was 3,000 pounds of which 2,400 had to be used to pay
interest on its debt. Not surprisingly, people were leaving Guernsey
and there was little employment.
Then the government created and loaned new, interest-free state
notes worth 6,000 pounds. Some 4,000 pounds were used to start
the repairs of the sea walls. In 1820, another 4,500 pounds was
issued, again interest-free. In 1821, another 10,000; 1824, 5,000;
1826, 20,000. By 1837, 50,000 pounds had been issued interest
free for the primary use of projects like sea walls, roads, the
marketplace, churches, and colleges. This sum more than doubled
the island's money supply during this thirteen year period, but
there was no inflation. In the year 1914, as the British restricted
the expansion of their money supply due to World War I, the people
of Guernsey commenced to issue another 142,000 pounds over the
next four years and never looked back. By 1958, over 542,000
pounds had been issued, all without inflation.
In 1990 there was $13 million in interest-free state issued notes.
A visitor to the island that year later wrote:
"I returned from Guernsey last weekend. It is a fascinating
little island. There are about 60,000 permanent residents on
the island. The average family owns 3.3 cars, their unemployment
rate is zero and their standard of living is very high. There
is no public debt. There is a surplus of public funds which earn
interest. The Guernsey Treasury increased the Ml of the island
by 40 percent in the last three-year period, and this increase
did not do anything to inflation. The price for a gallon of gasoline
in England translates to about $5US whereas, the price in Guernsey
is about $2US. Contrary to the teachings of current economics
in all higher institutions, inflation is not related to the volume
of money but rather to the size of the commercial debt."
Sovereignty proposes that Congress create money and lend it interest-free
on a per capita formula to tax-supported bodies for capital projects
and to convert existing debt to non-interest-bearing debt. Since
first proposed in January 1989, the Sovereignty loan plan has
been endorsed by over 1,814 city, town, and county governments
and school boards, as well as by the U.S. conference of Mayors,
the Michigan state legislature and the Community Bankers Association
of Illinois, which represents 515 banks.
As loans, the money would be repaid, so money injected into communities
would fund projects, then be removed. Of the three methods for
putting money into circulation available to Congress, giving,
paying, and lending, lending is the most cautious.
Benjamin Franklin attributed the economic success of the colonies
to their creation of all the money they needed. He said that
the root cause of the Revolution was the act of Parliament that
prohibited the colonies from continuing to issue their own money.
The moneylenders of England thought it more profitable that the
colonies borrow their money.
We hear from Washington that we need to sacrifice to bring the
deficits under control -- cut consumption, save, and invest.
When that slows the economy, we will be told to spend more to
stimulate the economy. We have heard it all before. Neither method
works. We need debt-free interest-free money to fund the work
that needs to be done. It's not sacrifice we need; it's productive
employment. Let Congress use its unique power to coin money and
regulate its value to fund that employment.
Money is no more than an accounting device, a system of notes
certifying that the bearer has done a share of the work and deserves
a share of the wealth. Money's backing is the goods and services
produced by the labor force. By creating money Congress can activate
the idle productive power of our people. And what they produce
will add real wealth to the U.S. Treasury and add nothing to
the federal debt.
Sam Smith's Great American Political Repair Manual, 1997
- A report of Guernsey's States Office in June 1946 notes that
island leaders frequently commented that these public works could
not have been carried out without the issues, that they had been
accomplished without interest costs, and that as a result "the
influx of visitors was increased, commerce was stimulated, and
the prosperity of the Island vastly improved." By 1943,
nearly a half million pounds worth of notes belonged to the public
and was so valued that much of it was being hoarded in people's
homes, awaiting the island's liberation from the Germans. About
the same time that Guernsey started to fix its sea walls the
town of Glasgow, Scotland, borrowed 60,000 pounds to build a
fruit market. The Guernsey sea walls were repaid in ten years,
the fruit market loan took 139. In the first part of the the
20th century, Glasgow paid over a quarter million pounds in interest
alone on this ancient project.
How did Guernsey avoid the fiscal disaster that conventional
economics prescribed for it? First and foremost by understanding
that when you build roads or sea walls or colleges or houses,
you are not reducing your society's wealth. In fact, if you do
it right, you are creating something that will add to its wealth.
The money that was created was simply backed by public works
rather than gold or "full faith and credit." It was,
in fact, based on something more solid than the dollar bills
in our wallets today. In contrast, tacking on an interest charge
to public works -- as we do in the US -- creates no new wealth,
but merely transfers claims on existing wealth from debtors to