Monetary Policy – Reform – “THE BIG ONE”
On December 23, 2013 marked the 100th Anniversary of the Federal Reserve Act, creating the Central Bank for the United States. The Federal Reserve is NOT a Federal Agency. It is mostly a private agency that regulates commercial banks, which create the majority of our money supply. The Federal Reserve is not a reserve; it directly creates the rest of our money supply. In its 100 years of existence, we have had many recessions, depressions and inflationary periods creating extensive human hardships. It is time to end these cycles. Increasing and/or changing banking regulations are not a substitution for reform.
Monetary Policy is the policy decisions that run the current monetary system, which was given to the Federal Reserve in 1913 by Congress. This system creates new money only by issuing debt – private and government. Private debt-money is only created by the commercial banks under the regulation of the Federal Reserve. U.S. Treasury debt-money is only created directly by the Federal Reserve’s open market operations at the Fed’s bank in New York. This is called, “Monetarization of the Debt.” The Federal Reserve is called a central bank. Other important central banks are The Bank of Japan, The Bank of England and the European Union’s Central Bank. This is basically the fourth branch of government, which has more influence on the economy than taxing and spending (fiscal policy).
There is NO cost of creating money except for creating too much in circulation creating excess or hyperinflation. Creating too little with narrow circulation severely costs the economy in recessions, depressions and extreme human hardships. There is only a small cost for distributing new money.
New Money Creation and Distribution
The following example gives you a brief overview of the steps involved in creating money under our current system. The U.S. Government needs $1,000 to pay the salary of a federal employee. The U.S. Treasury issues a $1,000 Treasury Note, Bill or Bond. This note is transferred to the Federal Reserve, which records it as an asset, and in return sends a check or deposit credit to the U.S. Treasury for $1000. The check is recorded by the Fed as a liability against the government and the Note becomes an asset of the Fed.
The Fed has created the $1000 check with simple keystrokes on their computer without actually getting the money from any specific place. In other words the Fed issued this money against no funds of its own. Thus we see why many call this money creation process “money created out of nothing or thin air”. This is also called “fiat money”, which all countries use. It is in reality debt money or debt backed money.
This fraction reserve system allows a bank to create new money on a fraction of deposits made with that bank. This fraction is determined by the Federal Reserve Board, as part of its monetary policy, and is called the reserve requirement. If the reserve requirement is 10% then the bank can loan another of $900 from the deposit of the $1000 salary check or 90% of the value of the $1000. Then this new $900 loan is deposited in another bank, which then can make another $810 loan. This process repeats itself until a maximum of $9000 is loaned out by the commercial banks from the initial deposit of $1000. All the new money created was created out of nothing; or to describe the process more correctly, it was created out of debt. Therefore, it can be labeled – debt backed money. (With the merger of commercial and investment banks and loans driving the creation process, the supposed restrictions provided by the reserve requirement is very limited) Also, in reality, banks extend credit (loans) first, creating deposits in the process, and then they look for reserves by raising capital, deposits or borrowing from the Federal Reserve. Therefore, it is almost pure credit money not fractional reserve creation, much of which was created for their own trading department.
The big questions are: If all money is created through debt principle, where does the money come from to pay the interest charges by these banks?? Where is it written that we have to create money only through debt? Nowhere.
When you review monetary history, every country, and I mean every country, has gone through significant monetary crisis. In our nation’s last 175 years, the immature and under diversified monetary system and lack of fiscal spending (recirculation) in the U.S. created the panics of 1837, 1857, 1873, 1893, 1907; the Banking Crisis of 1884; the recessions of 1892-6, 1904 and 1921; the severe depression form 1873 to 1879 and the Great Depression of the 1930’s; post WW II recessions in the 50’s, 80’s and 90’s; culminating in the current Great Recession, which began in 2007. This was caused by the monetary, sub prime collapse, which we spread to other parts of the world. WHY? Why was this necessary?
Reasons for Reform
The following reasons will hopefully convince you that we need evolutionary monetary reform with substantial diversification in order to create a 21st Century Win-Win Economy:
- Eliminates the benefits of monetary creation only going to a few private citizens. Diversification dilutes the power that anyone system brings to monetary creation. Why should only one financial industry system of commercial banking have the monopolistic power of money creation and infusion?
- Diversification reduces banking favoritism, nepotism, bribes, political cronyism, shoddy management and criminal activity.
- The boom/bust scenario we see in various assets, industries and regions will be greatly reduced by not over-lending in successful industries, companies and individuals. It makes managing risks less difficult. The current dilemma of regulation is that it is difficult to deal with borrowers when life is good. Who tells the banks not to lend to real estate when real estate is the hottest part of the economy and running up great profits? Or shipping? Or Oil and Gas? Or High Tech? Having other systems with different objectives will more effectively control over-lending, thereby reducing boom/bust scenarios within an industry or an entire economy.
- Diversification gives more capitalistic opportunities to others creating more owners and increasing competition while, at the same time reducing human hardship and inequality. This means growth!
- In actuality, the current system of higher interest rates to control the money supply punishes the weakest, smallest players first and most severely, while the largest and more powerful enterprises are able to withstand the increased cost.
One of the major reasons for business failures is still the lack of capital, along with competition or mismanagement. Diversification provides more funds for investment.
- Diversification expands credit based on the ability to succeed and not solely on the ability to repay. It is also based on the quality of your talent and need for your enterprise rather than focusing only on the quantity of your collateral.
- Diversification reduces the effects of any errors of monetary distribution during expansion or contraction. This means that the new distribution systems can divert new money from industries that do not need it to those who do. This allows for errors on the monetary expansion/inflation side of the equation rather than the contraction side. The end result is a lesser chance of recession/depression.
- Excessive wide range defaults and bankruptcies (domestic or foreign) will not hurt the new money delivery systems as much, because it’s spread among many systems rather than a single banking system. Therefore, the monetary system will have less stress due to economic volatility.
- Diversity and transparency helps control the amounts of new money used for aggregate demand (consumer loans and mortgages) and supply (business loans), depending on the needs of each. Having more control of the quality and quantity of new money being issued results in less of a chance of an over expansive money supply that creates a bubble economy.
- Diversity can provide more capital to areas with high need, such as low-tech industries, environmental businesses, and lower income areas.
- Monetary policy is an art not a science! Monetary policy requires judgment at every stage of the process, from the initial formulation to the final implementation. Judgment is susceptible to human error. If there is an error in the one major system, like the 2008 crash, it can lead to tragic consequences. With more diversified delivery systems, there is less of a chance any single judgment error will cause a substantial financial collapse.
- The fiscal systems operate on a much more diversified basis. There are many governments-Federal, County and City. In those governments there are many delivery systems – military, police, fire, Medicare, Social Security, education and welfare both social and corporate. Why shouldn’t new money?
- Credit risk formulas and models of private commercial banks, which are inherently flawed, will be reduced in consequence because money creation is moved to governments and distribution is diversified. Continuing to improve and increase regulation and risk models helps but it is not the answer! Reckless lending will be scattered and there will be fewer defaults especially with the use of an equity component rather than all debt.
- A key element in the art of monetary policy is coping with change. The current, most important change is accelerating globalization. Again, with more transparency and decision-making based on volume using diversified distribution systems, it will be easier and safer to cope with change.
- We need transparency and diversity to reduce the negative effects of excessive greed.
- The central banks attempt to have many regulations in order to offset factors of self-interest and other human frailties. But with the delivery basically in one system with reduced transparency, any errors that do get through are certainly overly accentuating the negatives i.e. sub-prime mortgages.
- Our single, private, commercial banking system is less and less willing to share risk. It has lost the ability to foster the development of novel or non-standardized risky private enterprise. This means that economic development slows and future generations are disadvantaged.
- Banking crises will not be as detrimental to the overall economy and other financial systems because these crises will not be as severe or as influential in the monetary-financial sector. Consequently, human hardships will be greatly reduced.
- Diversification reduces the “herd behavior” of financial institutions and investors in whatever country or market is fashionable at the moment. Herd behavior can lead into excessive bank lending and over-borrowing within a particular country, or group of countries.
- Diversification will make the repeal of the Glass-Steagall Act less important as the power to control large quantities of money will be lessened, reducing the ability to control and manipulate markets.
- The current system charges excessive interest (usury) and unfairly transfers income from investors, workers and owners to the banking sector resulting in lower level of production and investment to the detriment of the economy. Removing the monetary creation process from the banks and increasing the diversity of distribution provides more support for the real economy rather than the financial sector. It also increases competition and reduces inequality. It funds new means of production not just collateral based lending.
- Reduction of the tax burden on a vast majority of the population. This is a direct result of paying for some federal government programs with newly created dollars and a diversification of systems will give more stimulation to the economy resulting in greater total tax revenues. Having the monetary system providing for some spending programs substantially reduces the fiscal pressures of balancing budgets.
- If all the debt and interest had to be paid off at once, there would not be enough money in circulation because the current money-debt system does not create the interest charges but only the principle. Since it does not have to be paid off at once, there is enough money in circulation to pay interest, but it does create unnecessary scarcity that causes hardships, conflicts and additional borrowings to pay the debt service. This creates a bubble economy.
We believe we have listed more than enough reasons to support the elimination of fractional reserve banking and creating a transparent monetary creation system with a diversity of delivery systems. It is a system based on human fallibilities not a single system based on attaining human perfection through regulations.
Truths About Money Summary
- Money is not scarce! It takes a simple push of a computer key board to create.
- The cost of this creation is ZERO ($0) except for excess inflation. There is a small cost for distribution.
- There is no such thing as the “National Debt”. A debt is something that has to be paid back. We have not paid it off since 1835. It is the National Monetization account.
- The current Great Recession was 100% caused by the private money system not the tax and spend-fiscal system!
- Direct currency issue by government (without debt) causes excess inflation. There is no historical evidence of this occurring in the U.S. All the global hyperinflationary incidences in the last 100 years have occurred with the current credit money system in place, including asset bubbles.
- There is no such thing as a “business cycle for an entire economy”. It is a monetary cycle.
The solution is complete monetary reform with diversification of new money delivery systems. Because this reform is so important and revolutionary, this summary might not convince you. Therefore, you should do your own historical research. We have narrowed down our recommended resources to three books. They are: “The Lost Science of Money” by Stephen Zarlenga, “The Bubble & Beyond” by Michael Hudson, “The Secrets of the Temple” by William Greiger, and “The Web of Debt” by Ellen Brown. Zarlenga’s book is a long and well-researched human history of money. Greiger’s is a long and well-described U.S. history of money. Brown’s is a shorter with more recent history of the current monetary crisis. You should also review the website of the American Monetary Institute at www.monetary.org.
Considering the many failures of private and central banking over centuries, we have now come to the conclusion that we must eliminate the private fractional reserve system of monetary creation from the commercial banking system and eliminate the interest charges on the National Debt. We stand with Jefferson and Lincoln and insist that monetary creation belongs in government not private banks. Franklin, Madison, Jackson and Wilson joined Jefferson and Lincoln in that belief.
People are not perfect in practice or theory, therefore delivery systems have to be diversified to reduce severity of wrong decisions and the money creation power has to be placed back into a democratically elected government with checks and balances.
How New Money Should Be Created and Distributed?
Money should be created by a governmental process with as many checks and balances as possible. It should not be a private process! It is much too powerful to be in private hands and with all the benefits going to a mere few. Besides historical evidence, money is created by law and by allowing taxes and government usage fees to be paid by its currency; it creates a basis for legitimacy and acceptance by the population. The creation has to be based on volume using various inflationary formulas and statistics as guidelines.
The next decision is who decides how much and where does it go. There are three alternatives: executive branch, legislative branch or a separate entity. We don’t care which is chosen because they are all operated by humans who have built in biases, beliefs, and political influences. We are more concerned with implementing monetary reform rather than who is running it. In fact, we would like see variations among governments to determine the best way. (We will discuss specifics in Appendix B)
We believe there are three basic, overall processes that creating money can be a structured within a government:
- Use monetary creation to fund government spending that is not funded by taxes (deficits). This would allow an increase in spending until the inflationary guidelines are met.
- Use the current fiscal system (tax and spend) to fund programs that do not have a return to the Treasury. Then use the monetary system to fund programs that have some type of return to the government using debt and equity vehicles.
- We eliminate the fiscal (tax and spend) system all together and have only a monetary system. The legislative body makes spending decisions and funds it only by creating money. Then creates a taxing system to reduce the money supply to control excess or hyperinflation.
The following is a list of potential distribution systems. A majority of these systems should be in private hands with the government providing the amount of new money, operational oversight, and the regulatory guidelines for their operations. They will use direct currency issue, equity and debt vehicles to deliver the new money. These are NOT creation systems but distribution systems. We call them banks lacking for a better term. We will discuss each of these potential distribution systems in some detail in Appendix A.
- Environmental Bank
- Primary Housing Bank
- Venture Capital Bank
- Land and Infrastructure Bank
- Community and SBA bank
- Student Loan Bank
- Microfinance Bank
- Nonprofit and Cultural Bank
- Agriculture Bank
- Local and Pension Assistance Bank
- Commercial Banking Assistance
- Food Stamp Bank
- Public Banks – State, City and County Banks and/or directly to local governments
- Paying the Federal deficit with created money
The next reform is increasing the type of distribution vehicles to distribute new money. This was the root of the 2008 financial crisis. Where is it written that new money is distributed only by debt i.e. loans. By the way we cling to our old, antiquated system; you would think using debt to create and distribute new money was one of the Ten Commandments! There is no reason why we can’t establish private institutions to partially distribute new money through equity (common stock), combination of equity and debt, low cost long-term debt, along with straight issuance of currency by the government through spending. The reason we should have debt and equity distribution vehicles and not all just direct government issuance is because this process reduces the monetary supply as it is paid off. This reduces the chances of excess inflation, thus allowing more issuance depending on the inflationary environment.
There is precedence for equity and direct currency issuance. Believe it or not, Islamic banking provides equity return rather than just interest return. Because of religious beliefs, a mutual risk and a goal of non-clashing interests have developed into the shared risk banking. There is a less adversarial relationship between lenders and borrowers. Actually, our big banks and insurance companies currently make these types of participation loans to large commercial real estate projects. Any equity-based new money system still yields return and maybe a greater return- but it occurs at sale, gifting or refinancing.
We have had three successful occasions where the government directly issued currency into circulation Colonial times, the Revolutionary War and the Civil War (Greenbacks). When these currencies were withdrawn, it caused economic downturns. Special Note: The Revolutionary War script issued by the Continental Congress worked well until several British ships in New York harbor started printing and distributing counterfeit money, flooding the market.
Many positive things happen when there is no or less debt service (interest charges). Business survival is heightened, competition increases, production is improved, more economic stability and consequently prices are kept lower. This also allows for more monetary expansion without excess inflation. There is less displacement of employers and employees. Even when interest rates rise, industries will continue to grow. The housing industry usually first hit by rising interest rates i.e. subprime, will stay healthier. When mortgage payments are lowered by equity participation returns, more folks can get into and stay in their homes, which mean fewer foreclosures. Also, business survival is heightened by lower loan payments, thus fewer bankruptcies. This causes substantially less strain on the entire financial system. (Interest rates do not control the money supply under monetary reform. Therefore, there is no rising the short-term notes to unbelievable heights like the early 1980’s.)
In an effective monetary program, in order to reduce the extreme negatives effects of interest rate fluctuations and the reluctance of private enterprises to invest, especially in economic down turns and extreme uncertainty, new money equity structures become an absolute necessity. See Appendix A under Venture Capital Bank.
These recommended systems and reforms do NOT replace the current private financial system! They actually expand this system by providing more capital and opportunities for individuals and businesses to participate.
Summary of Monetary Solutions
1. Pay off all U.S. Treasuries as they mature with Zero Coupon Treasuries or just money.
2. Eliminate “Fractional Reserve Banking” by making them direct financial intermediaries but retaining FDIC insurance creating a Win-Win scenario.
3. Move the Federal Reserve into the Treasury for bank regulation.
4. Increase the number of new money distribution systems from 2 to 13.
5. Use direct currency issue for some of our government spending.
6. Use equity as well as debt instruments as distribution vehicles for new money.
7.Make the creation of money as a power of a transparent democracy with many checks and balances.
OPERATIONS AND AVOIDING EXCESS INFLATION
As we have seen over the centuries, the power to create money in private hands has been devastating. It is now time to turn it back to democratic governments with checks and balances.
The first task is for Congress to take back this power, which is very similar to the power of the purse strings – spending. Move the Federal Reserve into the Treasury Department to continue to regulate the commercial banks. Then the Treasury should start paying off the National Debt as it matures with 0% Treasuries or plain money. This will eliminate the interest on the National Debt, a significant part of the budget-or deficit.
This money is basically investment money and would not be spent causing any significant spike in inflation. A significant portion is already in and will stay in the Federal Reserve and its Banks and other countries’ Central banks as their reserves. Some of the money, mostly from investors, will be looking for a new home with some rate of return.
The first place they will look will be the FDIC insured deposits in our banks, which are now pure intermediaries. This will easily fund the commercial banks for their continued operations. Others will move to the financial services industry with their extensive array of investment vehicles. Thus, we will still maintain a very active private financial system. Also, if we continue to promote competition and productivity, it reduces inflationary pressures and allows for more issuance of money. If you want more information on the banking transition and answering other objections, you should read Chapter 5 of “Creating New Money” by Huber & Robertson of the New Economics Foundation and other Professors have modeled and answered this transition question.
The next task is to create and distribute new money with as little concentration of influence and corruption that the power of creating money can bring. Also create a government structure to reduce the possibility of excess or hyperinflation. (see appendix B)
Hopefully, most of you will feel that the number of distribution systems, many in private hands along with all these checks and balances, will allow for an adequate monetary creation and distribution system to be created for the 21st Century modern economy without excess inflation, a system based on human error not perfection!
For the economists who like numbers and econometrics, please check Professor Karoru Yamaguchi of the University of Doshisha in Kyoto, Japan at firstname.lastname@example.org. He has created a modeling that substantiates this evolutionary change.
Summary of the elimination of Excess/Hyperinflation & Asset Bubbles
Since the only objection perceived or real anyone can give you for monetary reform is that of excess inflation, we decided to summarize the many reasons why our recommended reforms will not cause inflation or asset bubbles. These reasons are in the body of the text. But, remember in the last 100 years most hyperinflationary environments had a Central bank present!
1. Diversity of monetary delivery systems. This especially helps in avoiding asset bubbles and allows for more monetary expansion.
2. Production and Productivity. We now live in an abundance world. The private sector is extremely productive and can produce most of the goods and services. We have excess capacity for most goods and services, which is a deflationary factor. We just don’t have enough quality consumers. The expansion and diversity of the monetary functions will aid in this production.
3. Reduction of the high interest rate charges which is a cost of doing business and places an upward pressure on prices.
4. Encouraging savings and investing rather than over consumption of goods.
5. Encouraging spending on personal services rather than over spending on goods.
6. Having the Commerce Dept. creating and publishing an array of inflation statistics.
7. Having many checks and balances in the creation and distribution of money in the Federal Government. (President, Treasury, Judiciary, Commerce, Senate, House) The debate will be how much and where to increase or decrease monetary creation based on the inflationary statistics instead of this philosophical debate.
8. Voters will be able to cast their votes based on inflationary management of the country.
9. Currency markets should be monitored in the long term to help control any excess
10. Increasing taxation removes money from the system.
11. Competition usually keeps upward spirals of prices in check. Increasing anti trust enforcement and/or regulating monopolies and oligopolies helps.
12. Substantially encourage renewables and recycling to reduce the demand pressures on raw materials-commodities.
13. Elimination of “fractional reserve banking”. This current system creates money buy making loans – but it doesn’t create the interest to pay for the loans which can’t get paid unless there is a supply of new money continually coming along. This forces new loans causing inflationary conditions.
Inflation should be at least 2% as any lower is too close to human error bringing deflation causing recession/depression and severe human hardship.
The world needs capital to fund, expand, explore, invest, research, clean up the environment and to create goods and services cleanly and efficiently. Private capital (old money) cannot do it alone. The private monetary system was the cause of the current crisis and the answer to fund the future, not the usual tax and spend debate. By providing our nation with a medium of exchange that truly reflects the productive and consumptive capacity of our own citizens rather than burdening us with unsustainable debt in order to get currency into circulation, we will then have the means through which we can, at long last, become a truly independent country able to preserve our natural resources, invest in needed infrastructure, create a business boom and adequately reward our citizens. In addition, we would no longer need to mortgage third world countries—or ourselves—in order to support our growing “so-called” debt. As we have seen over the centuries, the power to create money in private hands has been devastating. It is now time to turn it back to democratic governments with checks and balances and create a 21st Century Win-Win Economy.
Appendix A – Monetary Creation Operations
The following is a brief description of various distribution systems (banks). Many of these systems are new; some are changed to adjust to the creation of money without using debt. New firms do not have to be established; currently existing firms, like banks, credit unions, and other loan brokers, would take on some of these operations.
Deficit Reduction or Increased Spending: – The basic monetary reform movement’s proposal is to have monetary authority issue new money either to pay for the deficits or to fund additional programs. This is labeled “spending into circulation”. It is simpler to operate than having a substantial number of different distribution systems. This will work but has it limits in distribution diversity. We believe we need substantially more variety of distribution to create a vibrate economy and overcome the negatives for political passage.
Family Housing Bank: – This will consolidate all the current Federal Housing Agencies (Fannie Mae, Freddie Mac, etc.) into one monetary system for home loans
only on primary residences up to a maximum amount similar to the FHA limit. This agency will provide variety of low interest rate (1-4%), long term mortgages (30-40 years) for qualified individuals throughout the country. The only restriction will be the annual geographical allotment to avoid another housing bubble. Underwriting, distribution and administration of these mortgages will be handled by the current private mortgage brokerage and service industry. All other real estate loans (residential and nonresidential) will be issued by the commercial banking system and private mortgage market.
Environmental Bank: – This is probably the most important new distribution system. The major reason that new environmental technologies have not been implemented by businesses and individuals is lack of low cost capital. Instead of providing tax credits and other tax incentives, affecting fiscal budgets, for this retooling, the monetary authorities can provide very low cost, long term, no down payment loans for this equipment. These loans do not start repayment until 30 days after the technology is operational. This provides a much greater incentive for owners to purchase this equipment as there is no initial out of pocket cost and the payment would be substantially less than the savings the new technology brings will provide. This system could be only governmental but I see no reason that private loan brokers could not be heavily involved in the underwriting and servicing of these loans.
Example 1: A large industrial building owner wants to install solar units on the roof. This bank would loan him a Length of the Equipment loan of 30 years at 1%. A $100,000 loan would only be $377 per month. This would be substantially lower than the savings to the power company leaving room for maintenance and profit. Then, he could sell any extra generated power that was not used. There would be a line around the block to get these loans. Therefore, you would need to limit the total quantity of loans in a geographic area so there would be no price gouging or control prices on the installers and manufacturers. (Currently, there is a glut from lack of sales.)
Example 2: There are many areas around the globe with severe water shortages that are still using regular irrigation and not micro-drip irrigation. This is low tech conservation and the same loan can be acquired to install these systems. Again, the savings on their water bill will cover the loan payment and, maintenance and as well as provide a profit. Therefore every farmer, large and small, will be in line for this loan.
Venture Capital Bank: – This can be created to provide new money to industries and in those regions that need investment capital. Instead of distributing these funds using debt with current, ongoing payments (debt service), this system would use equity as a return. The monetary authority would create the money and mostly private firms would do the distribution. This government equity position would be non-controlling and nonvoting. (We do not want any hint of socialism.) It would receive its return upon sale, liquidation, dividends or refinancing. This nonvoting stock can be managed similarly to standard portfolio management. If the stock is public, sales of this equity must be managed without substantial price fluctuations of all the stock coming to market at once. If the stock is private, it would be held until its sale, liquidation or going public. There is enough brain power on Wall Street to assist the government with any public stock sale decisions but most of the non public stock would not be a government decision. The private managers would handle this decision making process.
This equity process can operate in three different ways.
- We currently have a successful, private Venture Capital industry. The monetary authority could create money and invest with these Venture Capitalists with a matching program with the same terms as their other investors. It would be voluntary for the Venture Capital firm who would license with the monetary authority. There would be no cherry picking; it would have to include all their investment alternatives. In boom times, it would probably only be necessary to match 10% of other funds raised. In down times, like 2008, it could go to 90% to help stimulate the economy. The first thing these firms do is invest in firms who begin hiring new employees. Also, there could be some general direction of allocation or the amounts of matching funds to specific industries, geographical regions and environmental companies that are deemed necessary.
- The monetary authority could create a whole array of private firms that would directly provide new equity capital for needed areas and deserving companies. They could coordinate with other sources of debt funding i.e. commercial and community banks, SBA, home loans, to provide a 100% of a funding source.
- The government could have its own internal allocation system that could fund direct equity capital to large and small firms in needy areas and/or environmental projects. A pure government agency does not need to have a quick turnaround or profit. It only has to keep excess inflation under control by limiting amounts and reducing default.
Examples: A Fortune 1000 company is considering a facility. If the company places it in an area of the country that needs employment, the monetary authority invests 10%-50% of the capital requirements for the facility. In return, it receives nonvoting equity, such as stock options. It would be management’s choice but it would certainly be an attractive option to use its own capital or pay debt service on a loan.
Another example allocates capital to new and old, businesses in blight areas. If the owner is qualified has an effective business plan and the business is needed, the infusion of money would provide immediate employment and services to the region. The absence of interest and principle payments enhances the survival rate unlike the SBA and Community Bank debt financing. Certainly this is a higher risk scenario, but there is a higher return upon sale, gifting or refinancing. This equity financing can also be used in financing primary residences for needy families. Many families with successful employment histories cannot come up with the down payment or afford no or low down payment loans. This funding can provide down payments for qualified buyers. A return, again, comes from the sale, refinancing or gifting of the home. (There are similar programs in existence but they are limited in scope.)
This Venture Capital Equity distribution system represents a joint effort with the monetary authority and private capital mainly infused using private firms to only private enterprises. The lack of cash flow drain enhances the chances of success. Of course, there will be allocation errors, but not to the extent that the current debt system has made throughout its existence. This system would be more diverse, provide for more competition, more employment, increase the variety of goods and services creating a healthy economic environment without excess inflation.
Special Note: Some people feel that the government is too heavily involved in this recommendation. We want to reiterate that this system is mainly using private firms for distribution, similar to our banking structure, providing equity funding to only private enterprises.
Land and Infrastructure Bank: – Land is a non wasting asset, the government can create money to purchase land for any reason. Military, bridges, roads, schools, etc. This land purchase is held in collateral and can be sold well into the future, if not needed. An example would be the federal government purchasing land for a local school. It would lease this land to the school district for a dollar per year. When the school closes many decades in the future, the government sells the land. This same system can also be used to purchase lands for national parks and preserves and selling some of its land holdings that are not needed. Buying the land would increase the monetary supply and selling land would decrease the monetary supply. This would be solely a government operation using private real estate brokers.
The Community Bank and SBA: – These loan systems should be expanded to include a wider variety of small and local businesses. These are job builders! Create them with a lower interest cost and longer amortizations to increase successes. They can also be participating (equity) loans to lower the cost of the debt service. This would remain a private operation as it is now.
Student loan bank: – We believe that all education from preschool to the 14th grade should be basically free. But, on any student loans there should be a maximum interest charge of 2% with long maturities. This would be a government operation delivered through the schools. The current supply of student loans provides a perfect example of lack of regulation and/or too much money going into one arena. The increase in school tuitions far exceeds the other inflation rates. In all the monetary delivery systems we have to watch out for excessive price increases and bubbles.
Microfinance Bank: – Most of these programs are funded through charitable donations. The monetary authorities could create additional new money to help fund these job creating and anti poverty programs with substantially less interest charges and possibly an equity component. This would be a private operation as it is now.
Agriculture Bank: – Instead of providing substantial subsidies on the fiscal side, the government can provide more emergency loans and low or no cost long and short term loans for small and organic farmers. The large corporate farmers have the girth to use the commercial banking system. Distribution operations could be the same as those being used today.
Nonprofit and Cultural Bank: – This area should provide low cost loans with long maturities for nonprofits and cultural institutions (new and old) that have a revenue stream to repay. An example is funding the construction and ownership of a museum that charges admission to repay the loan. Because the maturity can be 40, 50 or 70 years and the interest charge is low, the actual payment becomes so low a fraction of the admission charge will repay the loan. This system will become one of the more important areas in the global economy. We are becoming extremely productive with machines and robots. This means we need fewer workers to produce all the goods and services the globe can consume. Innovation and service jobs will help, but will be nowhere close to employ the global working population. This funding will provide those jobs that will be needed to continue to have enough quality customers and create a healthy 21st Century, Global Win-Win Economy. Special private loan brokers can handle the distribution.
Commercial Banking Assistance: – The current commercial banking system should retain their insured deposit competitive advantage. In the absence of the need to issue Treasuries, these insured deposits will replace them and cause a significant increase in deposits. Therefore, the current banking system would not need any allocation of new money. But, there should be an emergency provision that allocates new money to the banks, if needed. This emergency feature could be made broader to include other finance service companies. This retention of insured deposits is just as important to the many depositors as it is to the banks. The banks would pay an unregulated, competitive interest (maybe a cap) and be allowed to invest in a regulated, substantially diversified portfolio backing these deposits. This would allow a majority of families to have a safe savings account with a reasonable return.
Local Governments: – Any new money system needs to include local governments either in the form of a direct payment or to be used to help fund local public banks (City, County, and State Banks.) North Dakota has the only public bank in the United States. There are plenty of them in other countries. It is 95 years old and has been very successful. It is currently, partially funded within the “fractional reserve system” which would be eliminated under monetary reform and replaced by direct grants by the Federal government. In the management of this system, the authorities need to make sure there is not excessive local spending. Also, the states and other local governments will have more flexibility in their taxation because of the reduction of Federal taxation caused by a new monetary creation and diversified distribution system funding many of their programs and providing stimulus to the economy.
Food Stamp Bank- Since food is a basic necessity for life and is currently paid for by a credit card, which is basically money, it can be paid for on the monetary side of government.
Appendix B – New Methods of Money Creation – NOT Distribution
The creation of money has been primarily in private hands through the creation of debt. We feel it is too powerful of a process to be in private hands, which primarily benefits those private owners. Therefore, we feel that the process should be exclusively in governments’ hands with transparency and many checks and balances. The monetary reform movement’s major recommendation is to create separate monetary authority. We will review this recommendation and discuss leaving it in a democratic legislature because it is very similar to their current spending decisions. Keeping in mind that deficit spending eventually forces monetary creation. We feel that monetary reform is such an important issue that we will accept either! It is far more important to have a correct system without debt creation than who is running the system.
There are several recommendations for the formation of a new government agency or agencies to handle the creation and distribution of new money. Many feel that there would be less self-interest decision-making in a separate monetary authority. We agree. But, they will still be made up of people with their own conflicts, biases, obligations and political influences. Also a self-contained committee will have less transparency then an open legislature. Then you have to answer the major questions: What branch does it fall under, executive, legislative or a new branch. Who appoints them and confirms them. What is their term? What is the party make up of this agency? Do the President and/or legislature have veto power? One can see a whole new set of conflicts and politics. It will definitely be more difficult to establish than an already operating legislature.
The big question is will a legislature pass monetary reform that gives this power to another body? We doubt it! They did it once in the 1913 Federal Reserve Act. They probably learned their lesson! The Banks have used this separation issue to retain this monetary power. In the United States, there is no history to back them up. In fact it is the opposite with the successful Colonial Currency, Continental Currency and the Civil War currency-Green Backs.
The current, major political arguments are basically on economic philosophy (and power) not on operations. The debate should only be on how much and where to spend, tax and create money, not philosophy. It should be debated, argued and fought over! It should be more civil than arguing over macroeconomic philosophy. These decisions would be in the political arena for voters to decide who is making the correct decisions and managing the country without excess inflation or recessions.
The next task is to create a government system under its current structure to create and distribute new money with as little concentration of influence and corruption that the power of creating money brings with it. Also create a government structure to reduce the possibility of excess or hyperinflation.
Since spending bills are started in the House of Representatives, so should money creation, which is very similar. There are two things the House should do. First establish with regulations and oversight of the various distribution systems-banks. The second is to determine how much new money is issued and distributed each year in each banking system.
The House needs to set up a new, major committee labeled the Monetary Committee whose major function is to determine how much money to issue each year. There should be a subcommittee set up for each distribution-banking system recommending how much should be allocated to each system. The Deficit Subcommittee would be in charge of determining how much to create or borrow to cover the deficit, if any. This is then approved by the overall Monetary Committee of the House, followed by the process of the entire House approval, the Senate approval and then the President’s signature or veto. This provides the first set of checks and balances.
The Treasury Dept. will operate the government banks and oversee the private banks. This will provide another check and balance. There will be a monetary computer in the Treasury that creates and sends out the digital money approved by the Congress and the President. The Defense Dept. along with the Treasury should protect the “Monetary Creation Computer”. We have learned from the past that counterfeiting can lead to a major destruction of the currency (Revolutionary War).
The Commerce Dept. will continue and expand its inflationary formulas and statistics to cover geographical regions, industries and asset bubbles. Plus monitor the currency, gold and other commodity markets. They will also make it completely transparent and provide public access through the Internet. This will help guide our representatives in not creating excess inflation. It will also provide the public awareness so that the election process becomes another check and balance.
The Justice Dept. will also set up a monetary inspector general to make sure the rules and regulations are followed in the creation and distribution of new money both in the private and public sector. This is another check and balance.
This is the basic flow of creating new money in the United States without creating a new monetary authority or another branch of government. What is important is that it is not just spending money into circulation but also loaning and investing money into the economy. This will allow more new money to flow into the economy without excess inflation, creating a 21st Century Win-Win Economy.