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CPE Articles, Essays and Position Papers


— Page 4 of 10

The Fourth Flaw:

Under-diversified Monetary System

Monetary Policy (the creation of new money) is as economically important as fiscal policy (how much the government taxes and spends). Currently, the monopoly of creating and distributing new money is accomplished by the commercial banking system – i.e. Bank of America, Wells Fargo etc. – by the creation of debt. We thought it was well controlled and regulated by the Federal Reserve – central bank, until the recent sub-prime fueled financial crisis. We have learned that no matter how much regulation there will always be errors in a human system.

Over the last two hundred years, we have seen many monetary crises in every country on the globe. There are many reasons for these failures, such as over-corrections, mismanagement, cronyism, familism, corruption, and political interference. Since human behavior is not perfect, when this single system over lends, usually in the booming sectors, it has substantial problems when those sectors start their decline. Also, having one system with its strict guidelines reduces competition and diversity. “You can only borrow if you already have money – collateral!” This means the single banking system for the distribution of new money is too limited and too under-diversified in its infusion of new money. This stifles growth, competition, the recirculation of money and employment.

These failures can be drastically reduced in three major ways: (1) by having many systems deliver new money reducing the ravages of human error; (2) and by educating the public with full disclosure and transparency regarding monetary and financial functions and products; (3) elimination of debt created money/fractional reserve banking.

The evolution of our monetary system, which is based on an archaic banking structure, developed several centuries ago, needs modernization. The future evolution of our monetary system is of vital importance. It can fund appropriate programs that have a return relieving the burden on the fiscal side of government.

There are many different and substantial proposed reforms of our monetary systems by the American Monetary Institute and others. The important concept is diversification of delivery systems and the paying off of much of the U.S. debt by issuing of new money or zero-coupon Treasuries without excess or hyperinflation.

Conclusion on the Four Flaws of Capitalism

Government funded programs, such as education, unemployment compensation, wage-protecting tariffs and laws, and minimum wages are a necessity. In the general global economic debates, especially after the fall of communism and the unsuccessful socialistic efforts, we hear very little of the flaws of capitalism – free market systems. But, like all human endeavors, these flaws definitely exist and it is important for public and private institutions alike to help overcome them if we want to expand our economic future on this planet.

Capitalism does significantly raise the standard of living but not for all and not enough for many. Therefore, it is up to government to take a more active role in the economy in order to overcome these flaws with as little hindrance as possible. In other words, one of the major missions of a federal government has to be macroeconomic well being. But, the vigorous policies of government can also promote private solutions to these flaws. Private philanthropic and labor union measures can be encouraged, as can pension programs, profit sharing and equity sharing plans, job training, child care and medical insurance.

For some reason, many do not believe that these flaws exist. All they have to do is look at the economic record prior to the extensive gov’t involvement starting in the mid 1930s: the panics of 1837, 1857, 1873, 1893 and 1907; the Banking Crisis of 1884; the recessions of 1892-6 and 1921; the severe depression from 1873 to 1879 and the Great Depression of the 1930s. The record after this period of the modern industrial age is much less volatile with the average population living substantially better lives because steps were taken by the government to correct the flaws of capitalism. 

Although we will be discussing these flaws, and other areas of how to improve our capitalistic system, it might seem to be an overly negative analysis of capitalism.

Therefore, I want to impress on you the enormous success of our system, which provides the tax dollars and wealth to fund our government. There is a necessity not to hinder capitalism but to enhance it thru effective government policies.

Many of these programs can be funded by the monetary side resulting in lower tax rates and balanced fiscal budgets.


Enhancing the system of capitalism increases the total tax revenue, which helps the government provide the services that are needed. The government should pursue policies that encourage and facilitate business formations, operations and competition. Local and National governments need to reduce or maintain low the barriers to the formation of new businesses – entrepreneurship. The government can also play a key role in entrepreneurship by improving the environment for entry and operations. All government fiscal policies need to encourage and not hinder incentives, initiative, innovation, productivity, investment, research and development. The government always needs to continually simplify tax laws and regulations – red tape to facilitate business growth. It needs to not over-regulate the good but look more for the bad and increase their punishments. Government needs to insure a level playing field in the business environment to insure fair competition.

The government must discourage competition within an industry and geographical area based on the cost of an individual’s labor, as that reduces the quality of customers. It needs to insure labor utilization and flexibility of hiring and firing while protecting employee rights and unemployment benefits. It needs to create portability of benefits, income tax averaging and other features for today’s more mobile labor force. Government fiscal policy can boost productivity by creating more accessible and affordable quality education for all thus creating a more capable labor force.