Carl Herman, Contributing Writer
There are five topics to understand for civic competence in creating and managing money. The first four are standard to economics curriculum; the last is rational analysis. The first three topics are in the first part of the article; this has the final two:
- Money and bank credit.
- Fractional reserve banking.
- Debt (public and private) and money supply.
- Historical struggle between government-issued money and private bank-issued credit.
- Cost-benefit analysis for monetary reform in your world of the present.
I promise you can easily understand each topic and that your understanding will give you an informed policy voice over trillions of dollars. I encourage you to verify and supplement the information in this article through additional research discussed below.
My experience as a teacher is that the best tool to visualize this information is to literally see it through an online 78-minute video, “Money As Debt II: Promises Unleashed” (and for your use: background and transcript of Money as Debt). Four other sources of information that I recommend: an excellent overview of our monetary system from Want to Know.info, incisive articles from the most-read authors on this topic, Ellen Brown and Stephen Zarlenga, and the most-viewed documentary, Zeitgeist: Addendum.
“The process by which banks create money is so simple that the mind is repelled.” – John Kenneth Galbraith, Money: Whence it came, where it went (1975), p.29. Galbraith wrote five best-selling books on economics (best-selling to the public), was President of the American Economic Association, economics professor at Harvard, and advisor to four US Presidents.
Please be advised that the ideas most people have about how money is created and managed are false. Because the facts are so different from what most people believe, cognitive dissonance will push some people to reject the facts. Please reaffirm your commitment to embrace the facts.
Here we go:
Historical struggle between government-issued money and private bank-issued credit:
“The treasury, lacking confidence in the country, delivered itself bound hand and foot to bold and bankrupt adventurers and bankers pretender to be money-holders, whom it could have crushed at any moment. …Yet there is no hope of relief from the legislators who have immediate control over this subject. As little seems to be known of the principles of political economy as if nothing had ever been written or practiced on the subject, or as was known in old times, when the (bankers) had their rulers under the hammer. It is an evil, therefore, which we must make up our minds to meet and to endure as those of hurricanes, earthquakes and other casualties: let us turn over therefore another leaf.” – Thomas Jefferson, October 16, 1815 letter to Gallatin. Letters and Addresses, edit. William Parker, (New York: 1905).
“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson — and I am not wholly excepting the Administration of W.W. (Woodrow Wilson). The country is going through a repetition of Jackson’s fight with the Bank of the United States — only on a far bigger and broader basis.” – Franklin Roosevelt, letter to Col. Edward Mandell House (21 November 1933); as quoted in F.D.R.: His Personal Letters, 1928-1945, edited by Elliott Roosevelt (New York: Duell, Sloan and Pearce, 1950), pg. 373.
“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the worlds’ central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.” – Mentor to Bill Clinton and Georgetown University History Professor, Carroll Quigley in Tragedy and Hope.
As you can imagine, privately-owned banks would love to have the legal right to create and manage a nation’s money. This authority gives a whole new meaning to “taking your work home with you.” For an excellent comprehensive history, watch “The Money Masters” online (made in 1996: among many) and/or read the transcript. Watching “Money As Debt II” will give you a general appreciation of the history, as will the historical quotes at the end of this lesson.
Watching “Money As Debt II” is important. From my conversations among AP Economics teachers, their reports are in agreement with my experience that students (of all ages) will not be able to understand our monetary system and creation of debt without a walkthrough demonstration. I highly recommend that you watch the beginning of “The Money Masters;” if you like what you learn, keep watching. The entire video is 3.5 hours, so you might want to watch in chapters. A short written parable might also help: The Money Myth Exploded. The bottom-line of the history is a centuries-long struggle of wealthy bankers who have endeavored for the ultimate banking job. In the US, this struggle was won by the banks with the passage of the Federal Reserve Act in 1913. This allowed for the legal practice of fractional reserve banking and a monetary system of perpetual debt. Let’s consider the alternative envisioned for the Constitution but not included because the debate took so much energy and time at the Constitutional Convention that the members tabled the issue for Congress to resolve later.
Cost-Benefit Analysis for Monetary Reform:
“That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. …But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. …It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people.” – Thomas Edison and Henry Ford, interview with NY Times, 1921
“The art and mystery of banks… is established on the principle that ‘private debts are a public blessing.’ That the evidences of those private debts, called bank notes, become active capital, and aliment the whole commerce, manufactures, and agriculture of the United States. Here are a set of people, for instance, who have bestowed on us the great blessing of running in our debt about two hundred millions of dollars, without our knowing who they are, where they are, or what property they have to pay this debt when called on; nay, who have made us so sensible of the blessings of letting them run in our debt, that we have exempted them by law from the repayment of these debts beyond a give proportion (generally estimated at one-third). And to fill up the measure of blessing, instead of paying, they receive an interest on what they owe from those to whom they owe; for all the notes, or evidences of what they owe, which we see in circulation, have been lent to somebody on an interest which is levied again on us through the medium of commerce.” —Thomas Jefferson to John W. Eppes, 1813. ME 13:420
Monetary reform would nationalize the Federal Reserve (this name is deceptive so the public would perceive it as a government entity) and retain its use for bank administrative functions. Fractional reserve lending by private banks would be made illegal, with the US Treasury having sole legal authority to issue new money for the benefit of the American public rather than the benefit of the banking industry. About 40% of the national debt is intra-governmental transfers and 10% held by the Fed; this debt would be cancelled as it becomes a bookkeeping entry with nationalization. Of the publicly-held debt of various parties holding US Securities, the US Treasury would monetize (pay) the debt in proportion to fractional reserves being replaced with full reserves over a period of one to two years to monitor money supply and avoid inflation. The American Monetary Institute has a proposal called The American Monetary Act. Ellen Brown has extensive articles, including how states can act now rather than waiting for federal reform.
The governmental cost of this reform is negligible. The benefits are astounding: the American public would no longer pay over $400 billion every year for national debt interest payments (because 30% of the debt is intra-governmental transfers, this is a savings of ~$300 billion/year). If lending is run at a non-profit rate or at nominal interest returned to the American public (for infrastructure, schools, fire and police protection, etc.) rather than profiting the banks, the savings to the US public is conservatively $500 billion. If the US Federal government increased the money supply by 3% a year to keep up with population increase and economic growth, we could spend an additional $400 billion yearly into public programs or refund it as a public dividend. This savings would allow us to simplify or eliminate the income tax. The estimated savings of eliminating the income tax with all its complexity, loopholes, and evasion is $250 billion/year. The total benefits for monetary reform are conservatively over a trillion dollars every year to the American public. One trillion is $1,000,000,000,000. I invite professional economists and committed citizens to analyze and comment on my observation of costs and benefits.
To give you an idea of this amount, imagine a new stack of $1 bills. New bills are about 200/inch. Imagine if you laminated bills in a horizontal stack; this would be the same size as a 2×4 board. Now imagine that this board of money was to travel on your nearest freeway. How far would the money-board go to equal $1 trillion? Make your guess, then check the footnote.
The private sector economic costs of monetary reform are transfers of wealth from the banking industry to the American public. The replacement would be either non-profit banks operating as needed with minimum public cost such as fire departments and the postal service, for-profit banks lending time-deposits in regulated free-market competition, or a hybrid of the two (perhaps with government mortgages at a non-profit rate of 1%).
Monetary reform stops the current built-in increases of the money supply through fractional reserve banking, and redirects it for direct payment of taxes for public goods and services. Each dollar transferred from bank creation to public benefit is one dollar less in public tax payment.
He can be reached at Carl_Herman@post.harvard.edu