By Brian O’Brien
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.”
