Our monetary system is irrational

By Brian O’Brien

thetyrannyofthefederalreserve@yahoo.com

10/14/2015
 

Thomas Edison said he determined from a questionnaire that only 2 percent of the people think. He hoped for the day when the thoughtful 2 percent could be shouted down no longer on the money question and would lead us forward to monetary reform. He said this in an article in the New York Times in 1921. Nearly a century has passed since then. Today, unfortunately, the money question is rarely even asked.

 

Are you one of the thoughtful 2 percent?

 

Stop for a moment and try to explain our monetary system. Do you understand it? The system is not that complicated. Can you explain it to a high school student?

 

Well, can you do it?

 

Fortunately, the system is succinctly explained in an article titled Money creation in the modern economy, published by the Bank of England in 2014. According to the Bank of England, the volume of the money supply in our modern economy is determined by bank lending. Money enters circulation when banks make loans.

 

When banks increase lending, the money supply expands. When they decrease lending, the money supply contracts. The Federal Reserve, and central banks around the world, control the volume of the money supply by influencing bank lending through monetary policy (setting interest rates, setting bank reserve ratios and buying and selling treasury securities).

 

Money is created and entered into circulation as debt that must be paid back to banks. Our money supply is based almost entirely on debt.

 

No debt, no money. That’s our monetary system in a nutshell.

 

The fatal flaw with this system is that when banks make loans, only the principal on the loans enters circulation. However, the banks charge interest on the principal. So the banks collect more money from their loans than they enter into circulation.

 

Stop and think that one over. Money enters circulation when banks make loans. The loans have interest attached. But only the principal enters circulation. And the principal is the basis of the money supply. So where does the money to pay the interest come from? This is a riddle modern economists don’t ever seem to discuss.

 

In each generation, members of the thoughtful 2 percent figure out the answer to this riddle and become outraged. In each generation, as Edison pointed out in 1921, these American thinkers are shouted down by supporters of the system, and supporters of the system just so happen to dominate our media and academia.

 

So what is the answer to our riddle? How does the money to pay interest on bank loans enter circulation?

 

The answer is: The money to pay the interest on loans is never entered into circulation. For there to be enough money in our economy to pay interest on existing bank loans, the money supply must be continuously expanded by the issuance of new loans. Money that enters into circulation when banks issue new loans is used to pay the interest on old loans. But the new loans also have interest attached.

 

Banks must continually increase lending or there won’t be enough money in the economy to pay the interest on existing loans. In our monetary system, total debt must always exceed the money supply. That’s the way the system is designed.

 

Our current monetary system fits the classic definition of a Ponzi scheme. And all Ponzi schemes end in the same manner—collapse.

 

Once banks run out of borrowers who can take on more debt, lending slows. When lending slows, there is not enough new money entered into circulation to service existing debts. That is when defaults become more frequent. And when a borrower defaults, the lender can seize the borrower’s tangible assets.

 

Our current monetary system causes a predictable debt cycle of inflation, deflation and confiscation. Repeat this cycle decade after decade, generation after generation, and the bankers will own the Earth.

 

This system is entirely irrational, at least from the point of view of those of us who work for a living.

 

The foundation of our current system was laid in 1913 when Congress passed the Federal Reserve Act. The Act created the Federal Reserve System, which was designed by the leading bankers of the day to put themselves in control of the issuance and volume of the American money supply. The system was designed so that Federal Reserve bankers could make decisions and policy independent from the oversight of Congress or any other government agency.

 

In 1912 during the height of the debate about monetary policy in the United States before the Federal Reserve Act was passed, a Midwestern attorney named Alfred Owen Crozier published a book, titled U.S. Money vs. Corporation Currency. In his book, Crozier warned that Wall Street bankers were attempting to set up a “money trust” that would give them control of the bank reserves of the American people. He warned that Wall Street bankers were attempting to seize control of the American money supply for private profit and power, and if successful, no good would come of it for American workers, farmers and small businessmen.

 

Crozier wrote that if Wall Street got its way, “Then we shall have only corporate currency, and a government of the corporations, by the corporations and for the corporations—a 'soulless' corporate republic.”

 

Have his warnings not come to pass?

 

What Crozier wanted instead of the Federal Reserve was a “U.S. Monetary Council” consisting of 75 members appointed to two-year terms by Congress and the state legislatures. Each member could be impeached for cause. A majority vote of the people of any state could recall and replace their representative on the council. This U.S. Monetary Council would be responsible for regulating the American money supply.

 

Crozier’s Monetary Council was intended to be a public institution, not a private corporation. He wanted his council to have the power to regulate the banking system, fix the general discount rate, and issue and determine the volume of the public currency, under strict regulations and legal safeguards. His council was to be tasked to protect the country and commerce from bank panics and the evils of excessive currency—from credit inflations and contractions. Crozier imagined his council would guard against Wall Street influences and instead create monetary policy to serve the interests of the public, commerce and the nation at large.

 

It should be obvious to all by now that the Federal Reserve has failed to give us a stable monetary system. Instead, this system was designed to empower Wall Street banks at our expense. Is there any doubt that this statement is true? The system has enriched Goldman Sachs, Citibank and JPMorgan Chase, but it has been a disaster for the nation.

 

Perhaps it is time to listen to Crozier. We should replace the Federal Reserve with a U.S. Monetary Council designed under the American principles of separation of powers, transparency and accountability to the electorate. We could design a modern American monetary system that is not under the control of Wall Street banks, but instead designed to serve the interests of the American people, commerce and the nation at large.

 

Money does not have to enter circulation as debt owed to profit-seeking banks. In fact, that is probably the worst possible way to provide a medium of exchange for any nation. 

 

Currently, our government finances itself through taxation while covering its deficits by issuing interest-bearing bonds sold for cash to international banks. The government taxes our wages to pay interest on these bonds, which is profit for the bond holders. Currently, that interest amounts to over $400 billion a year, paid with our income taxes.

 

This is entirely unnecessary and destructive. It is a transfer of wealth from the people who do the work of the nation to people who collect interest off other people’s money. Instead of this ridiculous state of affairs, the Treasury should issue debt-free U.S. Notes to pay the federal government’s expenses. These U.S. Notes could then serve as a medium of exchange for the nation once entered into circulation when the government pays its bills. Under a system of debt-free U.S. Notes, the government does not need to finance itself through taxation and the selling of interest-bearing bonds. Instead, taxes would serve merely as a means to remove excess currency from circulation to prevent inflation and speculation. Under such a system, income taxes would be unnecessary and we could return to a constitutional tax system.

 

In 1729, Benjamin Franklin wrote an essay, titled A Modest Enquiry into the Nature and Necessity of Paper Currency, which supported Colonial Pennsylvania's issuance of colonial scrip and advocated for additional issuances. In the essay, Franklin pointed out that there is a certain quantity of money needed to carry out the commerce of a country. Too much money gives no advantage in trade and too little is exceedingly detrimental to it. The trick is finding the right balance between issuing too much, which causes rising prices, currency devaluation and economic ruin; and issuing too little, causing usurious interest rates, falling prices and depression.

 

Colonial Pennsylvania was able to find the right balance and experienced economic benefits from its issuance of colonial scrip. The Pennsylvania legislature printed the Pennsylvania pound and created public loan offices to lend the scrip to colonists who used their lands as collateral for the loans. The colonists spent the scrip on improving their lands, which increased productivity in the colony. Once they spent the scrip, it entered into circulation and was used as a medium of exchange, replacing scarce gold and silver coins. The legislature used the interest it charged on its loans as a replacement for taxes. It spent the interest on improving roads, ports and on other public services, which further enhanced commerce. Franklin commented that this system created prosperity in the colony.

 

In our modern economy, we could scrap debt-based Federal Reserve Notes and replace them with debt-free U.S. Notes. Our U.S. Monetary Council could be tasked to determine the proper volume of the money supply to ensure a stable medium of exchange that enhances commerce and serves the needs of the people, without ruinous inflation or deflation. The council could be made responsible for determining the volume of the money supply based on population, gross domestic product and the needs of commerce.

 

In our modern economy, we could use Colonial Pennsylvania’s example as a way to enter U.S. Notes into circulation at the local level. We could set up public loan offices in each congressional district. These public loan offices could lend U.S. Notes to home buyers and small businesses. The public loan offices could collect nominal interest on these loans and the interest could replace taxes and be spent for the public good—to fund schools, police and fire departments, roads, bridges, parks, or whatever the voters deem important in their communities. These public loan offices would be overseen and regulated by our U.S. Monetary Council. (I elaborate on such a system in my book.)

 

This American monetary system could give us a stable medium of exchange and serve the needs of the American people and our free enterprise system. It would be a system that serves Main Street, not Wall Street.

 

Congress created the Fed and Congress can end it. To break the power of Wall Street banks and retake control over our monetary system, we must elect monetary reformers to replace the current crowd of Wall Street-supported opportunists in Congress. 

 

We can reform our monetary system. We can abolish the Fed. We can replace it with a U.S. Monetary Council that provides us with a stable medium of exchange. We can replace debt-backed Federal Reserve Notes with debt-free U.S. Notes. We can create public loan offices to supply credit to home buyers and small businesses in our local economies. 

 

“Maybe they can't shout down American thinkers any longer,” Edison said. But American thinkers were shouted down back then.

 

However, today we have an advantage over Edison's contemporaries. In our era, information is available to us like never before in human history. The mysteries of our monetary system are being solved by more and more people. The irrationality of our current monetary system is gradually becoming common knowledge. This irrational system must change. A new rational system must replace it. 

 

“The only dynamite that works in this country is the dynamite of a sound idea,” Edison said. 

 

“If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collector—for the whole national debt is made up of interest charges—then you will see an era of progress and prosperity in this country such as could never have come otherwise.”

 

It is high time we take Edison’s words to heart. We will be shouted down no longer.

 

Brian O’Brien is the author of “The Tyranny of the Federal Reserve.”