New View on Money
Blog Columns by Richard Kotlarz
Daily columns from 2008-2009 posted on econonomictree.blogspot.com
Column #1 A PERSONAL INTRODUCTION
(Week
1 – Monday July 28, 2008)
I
was born at the cutting edge of the baby boom generation, and raised
in the American heartland. I grew up in what I experienced as the
halcyon 50’s, came of age in the turbulent 60’s, returned home
radicalized after a tour in Vietnam, embarked on a technical career,
and then worked in human services. Along the way I raised more than
one family, and left the big city to build an earth-sheltered
homestead deep in the woods along the Canadian border. I ventured
into political activism, but eventually matured out of its partisan
spirit. Perhaps the most fortunate aspect of this serpentine odyssey
is that I became intimately acquainted with the members and struggles
of every generation that spanned the transformative twentieth
century, and now beyond.
Over the course of this journey I
became increasingly mindful of the stubbornly persistent problems
that don’t make sense to me in our economic lives:
•
What is the story behind all the bad economic news that comes at us
constantly from the newspaper headlines?
• Why are we
not richer by our burgeoning physical wealth, instead of being poorer
by a snowballing “debt”?
• How could it be
that an innocent babe in the U.S. today is already (according to
pundits on TV) some $200,000 in “debt”? When did babies
borrow this money? Why are they responsible for it? How are they
expected to “repay” it? Is their future mortgaged before it
starts? Is this “original debt” the new form of “original
sin”?
• If every dollar in circulation is borrowed
into existence through loans from private banks, and is required to
be paid back with “interest,” where does the money to pay
the “interest” come from?
• After a century of
explosive growth in real economic activity, why have we not grown out
of our “debt”? Why is it compounding at an ever-more
quickening pace? Is more growth the answer, or is the problem
something else? Could it be that there is a perverse logic built into
the system that is causing us to grow into it our “debt”,
with no hope whatsoever of growing out of it?
• After
generations of living on the land and feeding the nation, why in the
last fifty-plus years have family farmers been forced off the land by
financial foreclosures, or the threat of foreclosures, until now they
comprise less that two-percent of the population.
• What is
this “debt” burden doing in real terms to our civilization,
our earth, ourselves? What is “debt” anyway? What is its
effect on the psyche of generations growing up in saturation of its
cultural presumptions and social devastation?
• If I am
working hard and “playing by the rules” in the “richest
country on earth,” why can I not pay my bills?
•
Has fear of being without money replaced fear of dying as the most
dreaded eventuality in people’s lives?
I am not an
economist. In fact, I am not officially credentialed in any
discipline. Rather, I consider myself to be a rather ordinary fellow
who has sought diligently through the weavings of my life to learn
the truths about what lie behind it. I have lived a “middle-class”
financial life that has ranged from episodes of modest prosperity to
periods of great stress. My foray into the subject of economics began
with only native intuition and a burning desire to know the truth. I
completed the standard Econ. 101 and 102 courses at age 48; old
enough to have my own questions.
One who approaches the
study of an established discipline from a direction rooted in life
experience ingests over time the same points of knowledge as the
on-track student, but his understanding is not necessarily ruled by
the orthodox assumptions that are dictated by the gatekeepers of the
craft. There is a native discernment developed whereby the founding
“truths” of the discipline are not swallowed whole, but
scrutinized as to whether they indeed are truths. This can make all
the difference.
This is the introduction to a proposed
series of columns in which I will attempt to initiate a new
conversation about money. It will touch regularly on the stories in
the headlines, but from a point of perception that is virtually
missing from the current public debate. As currently conceived, these
offerings will be short, typically 400 to 500 words; just enough for
a quick economic perspective of the day and “antidote” to
the news over morning coffee. The initial idea is to send one out six
days a week, Monday through Saturday. Where will it go from there? I
don’t know. We shall see what develops. I welcome any thoughtful
input, and will try to be as responsive in a personal way as time and
energy allows.
Column #2 A DISTURBING IMAGE FROM THE PAST
(Week
1 – Tuesday July 29)
On the front page of the Tuesday,
July 15 edition of the New York Times, was a photograph of a long
line of people anxiously waiting to get into a bank the day before. I
experienced this as a disturbing image, the like of which I had seen
only in history books. It was, in a manner of speaking, an
old-fashioned “run on the bank.” To my knowledge, not since
the Depression has such a picture been emblazoned across the front
page of an American newspaper.
The particular institution
being besieged was IndyMac bank in Pasadena, California, but the
accompanying article offered the view that the banking sector itself
was experiencing a growing crisis of confidence in the eyes of the
public and the financial world alike, and that this initial rush on
one of their members was feared to be the start of the unraveling of
the banking system itself.
Of course, this is barely the
tip of the catastrophic-financial-news iceberg. One could go on to
find all the “latest” on the sub-prime housing crisis, the
Bear-Stearns collapse, the galloping federal deficit, the personal
debt crisis, the balance of payment deficit, the loss of jobs to
poverty-wage foreign districts, the lack of money to repair crumbling
infrastructure, the tens of millions of people without health
insurance, the shrinking middle class, plus failing companies, public
budget crises and private bankruptcies virtually everywhere. Such
distressing stories are invariably accompanied by the calming voices
of experts, officials and politicians assuring us that there is no
reason for alarm, and offering their own good advice on how all this
might be remedied. Notwithstanding, over the decades the problems
seem only to be mounting.
When it comes to matters of
money, it might be fairly asked, is there any good news anymore?
Moreover, in the realm of finance, is “the news” even news,
or has it become essentially a dreary rehashing of the same old
statistics, economic jargon, and outmoded theories?
As I
read and listen through all the supposedly insightful analysis on the
economy in the media, I never fail to experience the sinking feeling
that I have heard all of this before. Despite the masses of words
offered daily, I detect hardly a new idea. The whole public “debate”
about money and economics seems to drone on endlessly, with no
solutions in sight.
Are there solutions? Seeking the
answer to this question is critical, and it suggests other questions
as well.
Is the seemingly insoluble economic dysfunction
of our time something that has descended haplessly upon us, or does
it have causes that can be identified, understood and remedied?
Clearly, we are a society that is preoccupied with money, lives
immersed in its flow, and prides itself on its financial
sophistication. Moreover, we have developed complex skills and great
institutions with which to manipulate the medium. Still, it might be
asked, do we, individually and collectively, yet lack critically
needed wisdom and understanding about money’s essential nature?
In
my own mind, I liken our society’s current experience with respect to
money to a school of fish that is just now becoming aware of the
water it has been swimming in. We have attained an impressive
facility in navigating its immersion in an outer mechanical sense,
but the headlines suggest that a deeper consciousness of the medium
eludes us, and that the price of that failing has become
unsustainable. Money, it might be argued, has taken on a life of its
own, and has effectively gotten out of human control. So, how can we
begin to see money clearly? I will pick up on that thread in the next
column.
Column #3 WHERE DOES OUR MONEY COME FROM?
(Week
1 – Wednesday July 30)
As I travel around the country
talking about money, I often ask people – “Where does our money
come from?” I don’t mean where do the paper notes that are used
to represent dollars come from. Those are obviously printed. No, I am
talking about money itself; the credits that paper dollars represent,
which convey the power to buy something.
For greater
specificity, the question might be broken down into three parts:
(1)
What is the procedure by which dollars are created?
(2) How do
they enter into circulation?
(3) Who controls the process?
Over
the years I have only rarely found a person who can offer a clear and
accurate answer to the where-money-comes-from question. Surprisingly,
politicians, financiers, and even economists, fare only marginally
better than the man on the street. This is astonishing in a nation
that prides itself on its financial sophistication and has built up a
vast financial network that now reaches around the world. What is
more ironic still is that virtually every citizen of the country has
had a direct personal experience of the process by which our money
comes into being. Indeed, many of us participate in one or more of
its various forms almost daily, and yet remain completely unconscious
of what we are actually doing. The process I am talking about is the
deceptively simple act of borrowing money from a bank.
For
purposes of illustration, I will choose a straightforward example.
When a person goes to a bank to apply for a loan, he or she fills out
an application, submits it to the banker, and, if all goes well, the
“loan” is approved. This banker will then place in front of
the applicant a contract, the signing of which obligates the borrower
to “pay back” the money “lent,” plus an
additional charge that is designated as “interest.” After
the paper is signed, the banker hands over the money, and the
borrower goes out and spends it for whatever purpose he had in mind
when he asked for the loan. Over time the borrower will, by the terms
of the contract, be obliged to “pay back” the “loan,”
plus the “interest.” Supposedly, when the terms of the loan
are satisfied, the contract is stamped “paid,” and life
goes on (or so it would seem; more on this later).
To all
appearances, this transaction is very up-front, honest and
understandable, but there are several questions about it that need to
be asked. The first is –”Where did the banker get the money to
loan?” My experience has shown that by far the majority of
people assume that he had the money on-deposit in his vaults or
accounts, and is now handing some of it over to the borrower for a
period of time, until he or she “pays it back.” This is a
fundamental misunderstanding of this process (which, as will be
shown, has great consequences).
The truth is that the
banker did not go back into his vault to get the money. Rather he
created it with the “stroke of a pen” when he wrote the
check. This strikes many people that I talk to as a startling
assertion. Not a few will declare that this simply cannot be true,
but, as stated by Robert Hemphill, former credit manager of the
Federal Reserve Bank of Atlanta, “If all bank loans were paid,
no one would have a bank deposit, and there would not be a dollar of
currency or coin in circulation. . . We are completely dependent on
the commercial banks. Someone has to borrow every dollar we have in
circulation, cash or credit . . .”
In modern banking
practice, there may or may not be a physical writing of a check (the
funds could have been credited electronically to an account, or there
may even have been cash passed across the desk), but the actual mode
of transference is a technical detail that concerns mainly the
convenience of the parties to the transaction. The crux of the matter
is that before the banker “signed the check” (or credited
the borrowers account with new funds), the monetary credits (the
“dollars” of whatever form) the banker is “lending”
(in reality issuing) did not exist.
The borrower accepts
the check, and then, after cashing or depositing it, spends the
proceeds for whatever purpose he took out the loan to accomplish.
This newly-created money now enters into circulation and becomes
blended into the public money supply which we all use to conduct our
business.
The mistaken notion that we actually borrow
money from banks, in the common sense use of the term “borrow”
(i.e. that the banker lends us something of substance that he has in
his possession, and will have to do without it until he is “paid
back”), constitutes a fundamental misunderstanding of what is
actually happening in this process. At the point of the “loan”
transaction the banker is actually creating and issuing money. What
is more, virtually all the monetary woes of the modern world arise
from the nature of this “private-bank-loan” transaction by
which our money comes into being.
In the next edition of
this column we will begin to examine why this is so.
Column #4 THE PROBLEM OF “INTEREST”
(Week 1 – Thursday July 31)
In yesterday’s column I stated that, within our present system, the money “loaned” by a banker is created with the “stroke of a pen,” so to speak, when the banker writes “the check” (or electronically credits the account). Most people assume that he gets the funds from money on deposit at his bank. Not so! In the moment before the banker “signed the check” (or approved the deposit) he is passing to the borrower, the money did not exist. The moment after he “signs the check,” it does exist. This is the threshold of money creation within our monetary system. This confirmed in the Federal Reserve’s own publications. In a booklet published by the Fed, “Everyday Economics,” the section titled “How Banks Create Money” states as its opening sentence “Banks actually create money when they lend it.”
The money so created (the principal sum) will be spent into circulation by the borrower. By the contract associated with the loan, the borrower agrees to pay back the principal sum borrowed, but also a compounding “interest” fee. I stated in yesterday’s column that virtually all the monetary woes in the modern world arise from the nature of this “private-bank-loan” transaction by which our money comes into being. It is this compounding “interest” fee that is the source of the problem. Permit me to explain why.
Soon after a person “borrows” money from a bank, he “cashes the check” or puts it on deposit (at the same bank, or another), typically in a checking account, and then proceeds to spend the money. As he spends the money, it enters into circulation, and becomes blended into the already existent monetary pool. That monetary pool already exists because millions of other people have, before our representative borrower came along, also borrowed money from a bank and spent it into circulation. He is only adding his little stream.
It follows, then, that the monetary pool (the public’s “money supply”) is the sum total of all outstanding principal balances of all money still out on “loan,” at any given time, from the banking system. Therefore, the principal sum of money owed to the banking system through these loans in fact exists in circulation, and can therefore be paid back. The money to make the “interest” payments, however, was never issued, and so does not exist in circulation.
But, one might say, people make interest payments, and bank loans are satisfied all the time. This is true, but the pertinent question then becomes, if the money to make the “interest” payments was never issued, where are these “interest” payments coming from? The answer is that it is subtracted out of the principal sum of other people’s loans still in circulation (what is commonly called their “outstanding principal balance”). The fact that this subtraction takes place means that when these folks come to make the payments on their loans, there will not be enough money circulating in the money supply, on the whole, to make them. Eventually, someone will be obliged to borrow more money from a bank so that these funds become available.
If we were talking about an isolated transaction here, then one could say that this was not much of a problem, but the simple truth is that principal sum of every loan (i.e. every dollar) in existence will have to be repaid, with “interest,” and so over time the entire money supply is being turned back in to the banks, accompanied by a net subtraction from the principal sum of outstanding balances still circulating.
If one “follows the math” on this, one comes to see that the only practical way bank loans can be paid back, “interest” payments made, and an adequate money supply maintained, is for the participants in the economy in the aggregate to borrow more money into existence (go deeper into debt) on a continuous basis. The alternative is a catastrophic contraction of the money supply (which is what caused the “Great Depression”).
Relatively speaking, there will be winners and losers in this process (and many who “win” will point out that they stayed out of debt, and offer their personal case as evidence that with hard work and diligence it can be done by anyone), but it is a virtual certainty that the mass of the people, mostly those who are the producers in the economy, will be obliged to slip further into “debt” on a continuing basis.
Eventually
any society that issues money this way will find itself staggering
under an unpayable burden of “debt,” until, financially and
otherwise, it collapses. Judging by the newspapers, we are getting
very close to that point now. The sheer magnitude of the proposed
“bailout” schemes ($30 billion for Bears-Stearns, $300
billion for Fannie Mae and Freddie Mac), the gargantuan and still
exploding size of the Federal “debt” ($9.4 trillion), the
staggering size of the “balance of trade deficit” ($700
billion last year), and the burden of financial misery people endure
in their lives are all unmistakable signs that the time of reckoning
with the flawed basis of our monetary system is fast approaching. The
view I hear almost continuously now from people that I talk to is
“This can’t go on.” Clearly, it can’t.
This
private-bank-loan process, with its compounding “interest”
fee is the very engine of the economic trauma we are facing at the
present time. To see this clearly would be the essential first step
in setting our economic house in order.
Column #5 WHERE DOES OUR MONEY GO?
(Week
1 – Friday Aug. 1)
Two days ago, in Col. 3, we examined
the question “Where does our money come from?” I described
a the classic bank-loan process whereby the banker actually creates
the money “loaned” when he “writes the check” (or
credits the borrowers account with new funds), and then the borrower
puts the money into circulation when he spends it for whatever
purpose he took out the loan to satisfy.
Yesterday, in
Col. 4, we examined the “problem of interest.” That is, I
described how the total outstanding principle balances of all loans
from the banking system constitute the money supply with which we
conduct our business, and that, in the aggregate, the money to pay
back the principal sum of the all these loans is thereby available. I
also pointed out that the money needed to make the “interest”
payments was never issued, and so can be obtained only by subtracting
it from the outstanding principal balances of other people’s loans.
This creates a situation whereby for people to continue to repay
their loans, make their “interest” payments, and keep in
circulation an adequate money supply, those participating in the
economy must as a whole go continually deeper into “debt.”
If that fails to happen within the present system, we all face a
catastrophic contraction of the money supply.
The subject
for today is, “Where does our money go?” Our money
circulates between the participants in the economy until we make a
payment on our loan from the bank. When received at the bank, this
payment is divided into two parts. A certain portion is applied to
the principal sum originally borrowed; i.e. it is credited toward the
retirement of the debt. The bank created this money “out of thin
air,” and it is extinguished “back to thin air.” It no
longer exists.
The part of the payment applied to the
interest, however, is not extinguished, but is credited to the
account of the “owner” of the “debt.” This is to
say, it is paid to whoever bought the rights to the “mortgage”
(or whatever contract secured the loan). Typically, banks gather up
(“bundle”) the contracts, and sell them to speculators who
have an interest in being the beneficiaries of the “interest”
payments. These “interest” payments constitute the “profit”
on the speculator’s “investment,” and they are deposited in
speculators accounts.
Technically, this “interest”-payment
money has not been withdrawn from circulation, and so cannot strictly
be said to have been subtracted from the money supply. Indeed, it
could be freely spent (or gifted to someone) by the investor, and in
that way reenter the money supply, where it would still be available
to pay back the principal balances on outstanding loans.
In
practice, though, by far the majority of investors in “debt-paper”
or “debt-instruments” (as such mortgages or other debt
contracts might be called) are not interested in spending the
profits. Their purpose is to turn them into still more money.
Typically, they will withhold the money they collect from interest
payments out of general circulation, until, that is, someone offers
to borrow it from them (“at interest,” of course). This can
take many forms (direct lending, buying municipal bonds, buying the
rights to more loan contracts, etc.), but in any case it means that
this money will re-enter circulation with more “debt”
attached to it.
Now we have the same money supply, but an
additional “debt”-payback obligation has been added to it.
Of course, there is not only one borrower’s “interest”
payment that is being transferred into and re-lent out of the
accounts of monetary speculators, but everyone’s. Eventually the
entire money supply is run through this
interest-payment-converted-to-more-debt mill. Those that have money
to “invest” in this particular way (not all investment
money fits this description) get richer, and the relatively poorer
folks who are working for a living and paying their bills continue
going deeper into debt. The “interest” charged on bank
loans is (under the current system) the main engine of unearned
wealth transfer in the society, and the problems unleashed thereby
are written in the dire financial headlines of our morning
newspapers.
Column #6 RECAP OF PRIVATE BANK LOAN TRANSACTION
(Week
1 -Saturday Aug. 2)
In Col. 3 I posed the query, “Where
does our money come from?”, and then suggested that for greater
specificity the question could be broken down into three parts. These
can now be answered concisely:
(1) What is the procedure
by which dollars are created? – Dollars are created in the moment a
banker “writes the check” to, or credits the account of, a
person who is in the process of borrowing money from a private bank.
The principal sum of the “loan” is newly-created
money.
(2) How do they enter into circulation? – These
newly-created dollars enter into circulation when the person who
takes out the loan spends the money for whatever purpose the loan was
taken out for.
(3) Who controls the process? – The money
creation process is controlled by a private banking system.
In
Col. 4, “The Problem of Interest,” I made what to many must
seem to be, at least a bold, perhaps an outlandish assertion that the
attachment of a compounding “interest” fee to the basic
private bank loan transaction by which our money is created and
enters into circulation constitutes “the very engine of the
economic trauma we are facing at the present time.” This point
can also be described in three parts:
(1) Within the
present system, there is attached to the issuance of money a
compounding “interest” charge. By the terms of the basic
bank loan transaction, the money to repay the principal sum of the
loan was created and issued, but the money to pay the “interest”
was not.
(2) This leads to a situation whereby the money
to make the “interest” payments can only come from (be
taken out of) the outstanding principal balance of other people’s
loans still in circulation.
(3) This creates the effective
necessity for people in the economy as a whole to go deeper into
“debt” (i.e. borrow and spend more money into circulation)
on a continuous basis in order to make the principal payments on old
“debt,” keep up with the demand for ever-compounding
“interest” payments, plus maintain enough money in
circulation to have an adequate money supply.
Finally, in
Col.5, I offered an answer to the question, “Where Does Our
Money Go?” when we make a payment on a loan we took out from a
private bank. I said that the bank divides the payments received into
two parts. Again, this process can be summed up in three points:
(1)
One part of the payment is applied to retiring the principal sum of
the money borrowed. This money is extinguished, and no longer
exists.
(2) The other part, the payment on the “interest”,
is not extinguished, but passes into the account of a speculator who
has purchased the contract by which the loan was secured (the
contract signed by the borrower).
(3) The speculator who
buys the contract, typically, is not interested in returning the
money to circulation within the public money supply, which he could
do by simply spending his profit from holding the loan contract.
Rather, he elects to “re-invest” the money. That is to say,
he holds it out of circulation until he finds someone who is willing
to borrow his money at still more interest. The new borrower, then,
will spend it back into the monetary stream.
This
“re-investment” can take on many guises (which we will talk
about as these columns unfold). In any case, the net effect is to
cause the “debt” burden against the money supply to grow,
without increasing the size of the money supply. As these
“interest”-payment dollars are loaned back into circulation
there are no new dollars created and spent into the money supply, but
these “interest”-payment dollars have thereby been
transformed into new “debt”. The resulting shortfall in the
money supply in relation to the “debt-load” it is obliged
to support eventually forces someone to go to a bank to
borrow-&-spend more money into circulation, which, in turn,
initiates a whole new round of the private-bank-loan,
debt-money-creation process.
While for simplicity I am
describing this cycle in terms of an isolated case, it is a process
that happens millions of times daily, and is causing the nation’s,
and now the world’s, economy to sink ever further under a crushing
“debt” burden. I have never found this described in any
explicit way in the media. In fact, I have found it very difficult to
find an explicit description of what is happening in academic
offerings, yet the way money is created at present is the very engine
that is driving our economic distress. I would suggest that we will
never see what lies behind the headlines unless we understand the
nature of the money-creation-by-private-bank-loan transaction.
If
I seem to belabor this point, I ask the reader’s patience. I feel
that the relatively small amount of time spent in coming to an
understanding of how our money is created and controlled will pay
great dividends in arriving at an understanding of what we are seeing
in the news. I thank you for your considerate patience.
Column #7 ANNIVERSARY OF A BRIDGE COLLAPSE
(Week
2 – Monday Aug. 4)
I am writing this column little more
than a mile away from where the Interstate 35W bridge over the
Mississippi River in Minneapolis collapsed on August 1 of last year.
This tragedy that took the lives of 13 people was marked over the
weekend in somber memorial events. These were accompanied by
lamentations throughout the media that the nation has taken few steps
since this “wake-up call” to rejuvenate its crumbling
infrastructure. The determination on the part of the body public to
rectify this deplorable situation is, it seems, still there, but
where is the money? I would assert that it is readily available. We
just aren’t seeing it.
The I35W bridge is part of what
might be termed the “commons”; i.e. the property that is
held in common by all the people for the benefit of the common good.
The “commons,” of course, includes almost all bridges,
roads, schools, emergency services, parks, provisions for the common
defense, and other public assets that are indispensable to the full
pursuit of life, liberty and happiness in a healthy society. There
is, however, one element of the commons that is perhaps the most
essential, and yet I have never specifically heard it recognized as
such. It is our “money.” It is the one element of the
public domain that we all hold most in common.
Think about
it. Anyone in the nation was free (while it was standing) to pass
over the I35W bridge in Minneapolis, but in reality only a very small
portion of the population of the nation ever would. What is more,
after the bridge went down, ways of circumventing it locally were
quickly identified, and the life of the city went on essentially
normally. The bridge served the nation, but only a small portion
directly.
Now think about a dollar in your pocket. It
looks exactly like the dollar in anyone else’s pocket. Do you not let
it rest there complacent in the assurance that it can be brought out
when needed to pay for anything a dollar will buy? This could be for
a cup of coffee (assuming one can find one that cheaply these days)
in New York, California, Florida, Alaska or Minnesota. Is this not an
assurance that we all hold blithely from corner to corner of the
nation, even to the point of hardly actually thinking about it? Is
not our money in fact the most commonly held and used element of the
public domain?
The founders of our country knew how
essential public ownership of public money was. That is why, for
example, the Colonies before the Revolution insisted on the right to
issue their own currency (“bills of credit”), instead of
having to borrow their money supply from a private bank (Bank of
England) at “interest.” It is why they financed the
establishment of the nation with the publicly issued “Continental
Currency.” It is also why, when the nation was again locked in a
struggle for its very existence, Abraham Lincoln issued $450 million
dollars worth of publicly issued bills, popularly known as the
“Greenbacks” (after, of course, coming under intense
pressure to borrow the money from banks).
This first
anniversary of the Minneapolis bridge collapse is a reminder that the
nation is again under threat, in part from the crumbling of its very
physical base, and as before, money borrowed at “interest”
from banks is not going to save it. In fact, I would argue, the
reliance on debt-based private money is how we got into this
predicament. It has for some generations been the norm that when any
community, be it local or the nation as a whole, saw the need to make
investments in the common infrastructure, it was faced with the
(assumed) necessity of paying for the project two or three times over
due to the compounding “interest” charge attached to money
needed to implement the project. This means that over the years a
vast amount if infrastructure construction and revitalization did not
get funded. Part of the cost of that backlog manifested in
Minneapolis, and it proved to be high. In New Orleans it was
incalculable. What will be the physical and human costs in the
future?
We as a nation have forgotten that money too
(perhaps money above all) is a fundamental element of the commons.
Why, then, cannot public money be issued out of the Constitutional
authority of the Congress “To coin Money, regulate the Value
thereof . . .” to provide for the common good (a critical bridge
or levee when needed)? The answer, I believe, is that it can be done,
and is indeed the economic, legal and moral way to finance essential
public works.
Column #8 FORD & EDISON ON FINANCING OF PUBLIC WORKS
(Week
2 – Tuesday Aug. 5)
Yesterday I put forth the idea that
the natural way to finance essential public works is to create and
issue the necessary funds directly out of the U.S. Treasury. This
would limit the cost of the project to payment for actual work done,
and avoid multiplying the “cost” by, typically, a factor of
two or three due to “interest” charges attached to the
money. I have often been met with looks of incredulity when I have
proposed such a thing. If this is such an obvious method, some say,
why is it not talked about all the time in the debates about how to
finance public works?
This is a fair question, but it is
not possible to do it justice within the limitations of this short
missive. I suggest that a fuller answer will unfold over the course
of this dialogue. For now suffice it to say that such matters have
indeed been debated as part of the great economic heritage of this
nation, but we have as a people have virtually forgotten our
heritage. It would be easy to invoke a veritable chorus of voices
from our past to buttress this argument, but for now the subject is
public financing of public works, so permit me to offer the following
as a case in point.
During the 1920’s Henry Ford and
Thomas Edison teamed up in an article in the December 6, 1921 edition
of the New York Times to express their views on the monetary system,
and to propose that the Federal government issue currency, rather
than bonds, to finance the huge Muscle Shoals nitrate plant in the
Tennessee River Valley.
Ford asserted:
“The
function of money is not to make money but to move goods.”
“The
youth who can solve the money question will do more for the world
than all the professional soldiers of history.”
“It
is well that the people of the Nation do not understand our banking
and monetary system, for if they did, I believe there would be a
revolution before tomorrow morning.”
Thomas
Edison added:
“If
our nation can issue dollar bond, it can issue a dollar bill. The
element that makes the bond good makes the bill good, also. The
difference between the bond and the bill is that the bond lets the
money broker collect . . . whereas the currency pays nobody but those
who contribute . . . in some useful way.”
“If
the Government issues a bond, it simply induces the money brokers to
draw $30,000,000 out of the other channels of trade . . . if the
Government issues currency, it provides itself with enough money to
increase the national wealth . . . without disturbing the business of
the rest of the country. And in doing this it increases its income
without adding a penny to its debt.”
“.
. . it is the people who constitute the basis of government credit.
Why then cannot the people have the benefit of their own guilt-edged
credit by receiving non-interest-bearing currency . . . instead of
bankers receiving the benefit of the people’s credit in
interest-bearing bonds?”
“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 would never have come otherwise.”
“And
it is the control of money that constitutes the money question. It is
the control of money that is the root of all evil.”
“There
is a complete set of misleading slogans kept on hand for just such
outbreaks of common sense among the people. The people are so
ignorant of what they think are the intricacies of the money system
that they are easily impressed by big words. There would be new
shrieks of ‘fiat money,’ and ‘paper money,’ and ‘greenbackism,’ and
all the rest of it – the same old cries with which the people have
been shouted down from the beginning.”
“Ford’s
idea is flawless. They won’t like it. They will fight it, but the
people of this country ought to take it up and think about it. I
believe it points to many reforms and achievements which cannot come
under the old system.”
In
fact, there is a group of citizens who have taken up the idea and are
trying to create an initiative to make public financing of public
works a reality. I will pick up on that thread in tomorrow’s column.
Column #9 THE CONCORD RESOLUTION
(Week
2 – Wednesday Aug. 6)
In the last two columns I have put
forth the idea that public money issued out of the U.S. Treasury is
the economic, legal and moral way to finance essential public works.
This is a concept that is not new to the history of our nation, but
it has been forgotten in our time by all but a very rare few.
But
now, a vanguard of brave souls in and around the town of Concord,
Massachusetts has revived the idea, and is seeking to put it back on
the national agenda in the form of an initiative dubbed “The
Concord Resolution.” This is a grassroots educational and
political effort aimed at formulating and bringing to the Concord
town meeting a Warrant Article (“resolution” in more common
language) to petition the town’s Congressional representatives to
introduce a bill which would set up a procedure whereby counties and
municipalities across the nation could, in an orderly way, apply for
interest-free loans issued directly out of the U.S. Treasury to pay
for essential public works. This is in lieu of their feeling obliged
to sell bonds on the private bond market to raise needed funds.
The
problem with the bond method is that it typically causes the
financial cost of the project to double or triple due to “interest”
payments made to bond dealers and speculators. What the Concord
Resolution proposes is the complete elimination of these “interest”
fees through the issuance of public money for public works.
The
town of Concord is a relatively wealthy community that in an
immediate sense stands certainly in lesser need of the money-saving
virtues of this proposed measure than others across the nation. Why,
then, has the initiative arisen from this particular locale? The good
citizens of Concord deserve some recognition for that. They are
sensible people who, naturally, do not wish to pay any more money
than is right and necessary for their schools, roads, bridges, parks
and utilities.
Beyond that, there is a growing realization
that this in not only good for building public works and saving taxes
in their town, but is indeed necessary to redeeming the crumbling
physical infrastructure of the nation as a whole.
Taking
the idea a step further, this may be a first practical step to, not
only save the cost of the “interest” charges on public
works across the nation, but, more fundamentally, to redeem the
American monetary system itself. What is more, the fact that this
resolution arises from the soil of Massachusetts has profound
historical significance. These are bold statements, I know. They will
be the topic of tomorrow’s discourse.
Column #10 MASSACHUSETTS, 1690; BIRTH OF A REVOLUTION
(Week
2 – Thursday Aug. 10)
As early as 1652, the Colony of
Massachusetts had experienced a chronic shortage of circulating
medium (i.e. lack of an adequate money supply), and so tried to
remedy this situation by opening a mint to strike its own coins. This
provided only very temporary relief, as the new coins soon found
their way back to London in exchange for manufactured goods. The
Colony remained poor and in debt to England, and its early commerce
and development were severely stunted.
Then in February
1690, they got the idea for a “radical” solution to this
problem. The Colony began to print its own money, called “bills
of credit.” By July 1692 these notes were declared “legal
tender” (i.e. good for paying all debts), and began to circulate
freely. These bills became the first government-issued paper money in
the history of the Western world. What is more, they were not
“backed” by gold, silver, commodities, land banks, mortgage
contracts, or other schemes which mainly facilitate control of the
system by an elite portion of the population. Rather they were issued
publicly, in proportion to the practical need for a money supply, out
the natural right of a society to issue its own money, and backed
only by the free economic activity of the people of the Colony as a
whole.
Massachusetts prospered with its newly printed
“scrip” (paper money), and the other colonies soon copied
its example. The Crown set itself in continuous opposition to these
unapproved issues, and Parliament passed laws in an attempt to curb
them. This set up conditions whereby there arose an open and
widespread violation of the law, even by merchants and statesmen.
Bonds of nationhood began to form, even as the colonist’s unapproved
currency facilitated its physical development. This, in turn, created
an effective training ground for resisting subjugation which
eventually found expression in Revolution. According to monetary
historian
Steve Zarlenga:
“The
skirmishes at Lexington and Concord are considered the start of the
Revolt, but the point of no return was probably May 10, 1775 when the
Continental Congress assumed the power of sovereignty by issuing its
own money.”
Ben
Franklin served in France as America’s first ambassador. When asked
about how he could explain the prosperous condition of the Colonies,
he replied:
“That
is simple. It is only because in the Colonies we issue our own money.
It is called colonial scrip, and we issue it in proper proportion to
the demand of trade and industry.”
We
as a society have been subjected to much myth-making regarding the
American Revolution. Selected parts have been endlessly quoted and
manipulated to promote partial agendas. I would assert that, without
sufficient understanding of the central importance of the struggle
over who had the right to create, issue and control the colonies’
money supply (the public through its elected representatives – vs.-
the monarchy through the Bank of England), we cannot comprehend fully
the meaning of the Revolution. We need to understand what Franklin
meant when he said:
“The
Colonies would gladly have borne the little tax on tea and other
matters had it not been that England took away from the Colonies (the
right to issue) their money, which created unemployment and
dissatisfaction.”
This
leads us back to the inspiration behind the Concord Resolution, which
I will take up in tomorrow’s column.
Column #11 MASSACHUSETTS, 1690; REDUX
(Week
2 – Friday Aug. 8)
When in 1690, the Colony of
Massachusetts began to issue the first paper money by any government
in the history of the Western world, how must that act have appeared
in the hearts and minds those responsible for carrying it out? Did
they see it as merely a straightforward common-sense attempt to solve
a practical problem, or did they recognize that it as an
unprecedented act of defiance towards the Mother Empire that in the
end could only lead to an epic contest over the very rights and
essence of sovereignty. The power to print money had been fiercely
reserved by whoever deemed themselves to be the sovereign throughout
the history of civilization, and any challenges over the matter were
swiftly suppressed. In fact, British gold coins were called
“sovereigns,” lest anyone miss the point.
Massachusetts
was only one of many colonial dependencies that were being set up by
the British and other European powers throughout the world. Some
three-plus centuries have passed since then, and the global order,
including the old colonial arrangements, have undergone many
transformations. It seems, however, that the territories around the
globe that were demarcated as colonies still live in the main with a
legacy of underdevelopment, dependency and debt.
The
primary exception to this is that band of colonies along the Atlantic
seaboard in North America that had the temerity, or the wisdom (as
one chooses to view it), to issue their own money in spite of
imperial edicts, and, incidentally, grew to be the dominant nation of
the world for the last century and a half. Is that a coincidence? Was
the exercise of their own monetary power the critical factor that
allowed the North American colonies to emerge as a strong and
independent nation, as opposed to the languishing disunited even
until now in a “third-world” condition?
There
are, of course, many complex factors that guide history, and we
should be careful about being simplistic or dogmatic about
attributing too much to any given one. That said, it still might be
fairly argued that the extent to which a people picks up and
exercises its right to issue and control its own money has been shown
to be a preeminent factor in determining whether nor not it
eventually is able to achieve its potential as a nation.
Fast
forward from colonial times to 2008. The people of Massachusetts
again look out on a bewildering world in which many of them see their
sovereignty, present well-being, and hopes for the future threatened.
The menacing specter is no longer the British Empire and its Bank of
England, but rather a globalist corporate order and private
bank-based monetary system. We are yet standing a bit too close to
the trees to know precisely what to call the forest, and so there are
may views on what this all means and how to characterize it.
Whatever the case, it is growing increasingly difficult
to not feel overwhelmed by the onrushing tribulations of the times.
But, advised Thomas Jefferson, “. . . follow principle, and the
knot unties itself.” It may not be too late to emulate our
forebears and re-plant the seed principle of the public issuance of
public money into our common economic ground. From there, as before,
“the knot” just may start to untie itself. We can only hope
that the Concord Resolution (or inspired initiatives by others across
the land) may in our day and time succeed in effectively re-invoking
the world-transforming deed and spirit of 1690. It has to start
somewhere.
Column #12 SOME AMERICAN VOICES ON MONEY & THE REVOLUTION
(Week
2 – Saturday Aug. 9)
I can imagine that the line of
thought presented over the course of this last week concerning the
American experience with money, how it led to the Revolution, and how
its lessons are applicable to the problems of the today (particularly
those that have to do with the funding of public works), may seem to
the reader unfamiliar, to say the least. To bring a greater sense of
reality to the discussion, I would reach for the words of prominent
voices from our nation’s past.
Senator Robert Owen,
banker, first chairman of the Senate Committee on Banking and
Currency, and widely respected authority on money, explained that
when the Rothschild-controlled Bank of England heard of the situation
in the Colonies:
“They
saw that here was a nation that was ready to be exploited; here was a
nation that had been setting up an example that they could issue
their own money in place of the money coming through the banks. So
the Rothschild Bank caused a bill to be introduced in the English
Parliament which provided that no colony of England could issue their
own money. They had to use English money. Consequently the Colonies
were compelled to discard their script and mortgage themselves to the
Bank of England in order to get money. For the first time in the
history of the United States our money began to be based on
debt.”
“Benjamin
Franklin stated that in 1 year from that date the streets of the
Colonies were filled with unemployed.”
Alexander
Del Mar (1836-1926), who is considered by many to be the preeminent
monetary historian of the 19th century, stated the crux of the matter
with great force:
“Lexington
and Concord were trivial acts of resistance which chiefly concerned
those who took part in them and which might have been forgiven; but
the creation and circulation of bills of credit by revolutionary
assemblies in Massachusetts and Philadelphia, were the acts of a
whole people and coming as they did upon the heels of the strenuous
efforts made by the Crown to suppress paper money in America, they
constituted acts of defiance so contemptuous and insulting to the
Crown that forgiveness was thereafter impossible. After these acts
there was but one course for the Crown to pursue and that was, if
possible, to suppress and punish these acts of rebellion. There was
but one course for the Colonies; to stand by their monetary system.
Thus the bills of credit of this era, which ignorance and prejudice
have attempted to belittle into the mere instruments of a reckless
financial policy, were really the standards of the revolution. They
were more than this: they were the Revolution itself.”
Finally,
perhaps no one stated the matter more prophetically than Thomas
Jefferson:
“If
the American people ever allow private banks to control the issue of
their money, first by inflation and then by deflation, the banks and
corporations that will grow up around them will deprive the people of
their property, until their children will wake up homeless on the
continent their fathers conquered.”
I
leave the reader with a riddle to ponder: “Why is this
quintessentially American debate so conspicuously missing from the
public discourse now?”
This rounds out the set of six
columns for the week. They were initiated by a first-anniversary
looking back at the Minneapolis bridge collapse (and levee failures
at New Orleans) to discern why we as a society have somehow not been
able to follow through on our widely asserted resolve to never again
let the funding of critical public infrastructure lapse. This seeded
a discourse that unfolded around the themes of public works, public
issuance of money, and the American Revolution.
I will try
to pick up on a different line of approach to contemporary
preoccupations about money for Monday’s column, as the events in the
news over the weekend may suggest. The reader is invited to present
his or her own burning question(s) and concern(s) to prompt the
process.
Thank you for your attentive interest.
Column #13 THE CREDIT CARD SWIPE
(Week
3 – Monday Aug. 11)
In Column #3, “Where Does Our
Money Come From?”, I made the statement that “. . .
virtually every citizen of the country has had a direct personal
experience of the process by which our money comes into being.
Indeed, many of us participate in one or more of its various forms
almost daily, and yet remain completely unconscious of what we are
actually doing. The process I am talking about is the deceptively
simple act of borrowing money from a bank.”
This
statement begs the question, what form of borrowing money from a bank
is so common that many of us participate in it almost daily, and yet
remain completely unconscious of what we are doing? It is the act of
using a credit card to buy something, or to get cash.
To
illustrate, I would invite the reader to imagine a person in a
clothing store taking a garment they wish to purchase to the
cashier’s counter. Let us suppose further that they are using a
credit card to pay for the item. The customer will get out the card
and swipe it through a register. If the card is accepted, the price
of the item (let us say $50) will appear on a monitor. A machine
connected to the register will print out a small slip of paper that
lists the terms of the purchase. Typically, the customer will sign
it, and then go off about his or her business without taking much
thought about what has just transpired.
The critical point
to take note of here is that the customer has entered into a loan
contract with a bank (which is why there are always bank logos on
credit cards). This means that the $50 dollars that were used to
purchase the garment did not exist the moment before the card was
passed through the machine. More precisely, the dollars were not
“borrowed,” but rather created with the swipe of the card
and the pre-programmed electronic process by which the card was
quickly approved. Now the $50 does exist (in the retailer’s bank
account), and the signing of the “receipt” by the customer
is essentially the signing of a contract with the bank to whom he or
she promises to “pay back” the $50, with “interest”
if full payment is not received within a month.
This
credit card purchase is one form of the basic bank loan transaction
by which our money is created and put into circulation, just as
surely as if one had walked into a banker’s office to make the
application. If the card is used to get cash from an ATM, the
transaction is still a bank loan, except the money goes into the
pocket of the cardholder instead of the account of a retailer.
Technically, there will generally be a middleman involved in the form
of the credit card company, and they will charge a fee for each
transaction, but this does not change the fact that new money is
created every time the card is taken out and used to access
purchasing power (It should be noted that this does not apply to
debit cards, or credit cards from institutions of deposit (e.g.
credit unions) which operate under rules that prohibit them from
creating money).
I would pose the query to each of us,
“How many times have we gone through the motions of making a
credit-card-purchase and not been mindful of the fact that we, along
with the bank, were causing new money to be created at the point of
transaction?” The answer to this question will give us an
indication of the level of consciousness we bring to what we do with
money. It will also, in my experience, provide insights into why our
financial lives seem to have gotten so out of our control.
In
tomorrow’s column we will pick up the thread of this thought to see
where it leads.
Column #14 THE REVOLVING-DOOR TRAP
(Week
3 – Tuesday Aug. 12)
I invite the reader to return to the
image I drew in yesterday’s column of the person paying for a garment
with a credit card. The card is swiped through the register and
approved in a preprogrammed electronic process, after which a number
appears on the monitor. This number represents new dollars that are
being created in that moment by the bank that issued the card. The
card holder then signs a printed “receipt,” which is in
reality a contract with the bank by which the cardholder promises
“pay back” the money, plus an “interest” charge,
if he does not do so in full within the first month.
The
new money that was just created ($50 in the case of our example) is
passed electronically into the bank account of the store owner, and
now becomes part of the funds he has available to pay his cost of
merchandise, wages, building rent, lighting, etc. As he does so, that
$50 enters into general circulation as part of our public money
supply.
Let us assume that the consumer makes other
charges to the card on a regular basis. He will receive a statement
from the credit card company at the end of each month that lists the
amount of each new charge. The total for these items is precisely the
amount of new money he, along with the bank, created and spent into
circulation by the use of his card.
Looking over the
monthly statement, the consumer will also notice that the credit card
company is demanding to be paid back considerably more money than it
“lent.” There would be an “interest” charge that
can run as high as 39.99%, plus, likely, other fees and penalties. If
he is carrying a significant balance, the cost of these extra charges
can mount to a level where he has all he can do to pay only the
interest and fees, without reducing the balance owed.
He
may elect to make what is noted on the monthly billing as the
“minimum payment,” which often covers little more that the
“interest, “plus fees and penalties. On a $10,000 balance
this can add up to $300 dollars for the month, which, in turn,
diminishes by that sum the amount of money the card holder has
available to make payments against the balance owed. Let us suppose,
as is common, he falls into the routine of making only the minimum
payment month-after-month, and the balance remains essentially the
same (even if he does not make any new purchases). He enters what is
called in the credit card industry the “revolving door.” He
makes hefty payments, but makes little, if any, progress on paying
down the loan.
The important question for this discussion
is, “What are the larger implications of falling into the
revolving-door trap?”
In Col. #5 (“Where Does
Our Money Go?”) I described how, when one makes a payment on a
bank loan, it is divided into two parts. One portion of the money is
applied to retiring the principal of the loan, and is extinguished.
The other passes into the account of an “investor,” who has
obtained the privilege of receiving the money that is paid in as
“interest” by buying the rights to the “debt”
contract by which the loan was secured. Such an “investor,”
typically, will not put that money back into circulation by spending
it, but will instead withhold it from circulation until he finds a
place to “reinvest it” (i.e. finds someone to re-loan it
to). The “interest” payment is thereby transformed into
more “debt,” and released back into circulation. This
constant recirculation of “interest” payments through the
“private-investor” mill, then, is the very engine that is
driving the economy ever further into overwhelming “debt.”
The
point to be noted here is that, with the widespread advent of credit
cards, the predatory practices associated with their promotion, and
the ever more usurious terms of their use, the speed with which we
the people are descending into “debt” has quickened to a
dizzying pace. What is more, the practice has become so widespread
that almost anyone with an economic life in the modern world has
engaged in it, increasingly with a degree of regularity. I would pose
the question, “How many of us ever take thought of the full
implications of what we routinely do so unthinkingly with this one
simple act?”
I would hasten to add a caveat. It is
not my intention here to make moral judgments about anyone’s use of
credit cards. Truth be told, I use them also. My purpose is to raise
our awareness of what we are doing in this act, as in all financial
matters, to the point where we can penetrate to the heart of what is
actually transpiring when we perform it. This will, I believe, helps
us discover a way to move forward into our economic future with a
real solution to our “debt” crisis.
Column #15 FRONTLINE CREDIT CARD REPORT
(Week
3 – Wednesday Aug. 13)
I recently watched the Frontline
report on PBS titled “Secret History of the Credit Card”
(available online). I found it to be a well produced piece that
presented the story of this new fixture in our financial lives from
its corporate beginnings in South Dakota, to the plastic phenomenon
that has spread to every level and niche in society. It was a
balanced and well-researched presentation that, as far as I could
see, strove to include voices from all sides of the credit card
question.
That said, there was one factor that was, to my
mind, conspicuously missing. That is that nowhere was it mentioned
that when a consumer uses a credit card, he is, in conjunction with a
bank, causing new money to come into existence. Nor did I detect any
indication that such a thought was even a glimmer in the minds of the
producer, or any of the people in the film.
There were
experts that offered sober advice about how to use credit cards
responsibly. We do live in a time when they appear to be part of our
financial lives (for better or worse), so how could one argue against
being prudent in their use? I certainly could not. There seemed to be
an underlying assumption, however, that if only we could use them
“responsibly” we could keep them under control. This seems
reasonable if one takes a short term view of the matter. It is
problematic if one takes the longer view.
The truth is
that any level of usage (assuming one does not pay off one’s balance
each month before charges apply) unleashes, given enough time,
financial pressures into the lives of people (both the cardholders
and others) that tend to drive them ever deeper into “debt.”
This is true especially given the astronomical rates of “interest,”
fees and penalties that credit card companies tend to charge.
The
source of this pressure is, as for all bank loans (which a credit
card transaction is), that the money to pay back the principal of the
loan is issued with the loan and retired with the payback, but the
money dedicated to “interest,” fees and penalty payments is
recycled through the financial markets and reemerges as yet more
consumer “debt.” If we are to think through to the end the
full implications of credit card use, this is a factor that must be
fully taken account of.
None of this is meant as a
criticism of the Frontline producers or their show. On the contrary,
I thought it was an excellent, informative and entertaining
presentation, and I would not hesitate to recommend it to others. I
say this despite the fact that this most central element of the
credit card transaction went completely unmentioned in the report,
and as far as I could tell, unnoticed.
My remarks are
intended, rather, as a commentary on the irony of a culture that is
utterly immersed in money and “debt,” and yet does not see
the private-bank-loan elephant in the room. Viewed with fuller
awareness, this Frontline documentary can serve, not only as an
excellent chance to learn more about the credit card phenomenon, but
also as an object lesson for what our culture has become blind to in
our financial lives. When we integrate the two, we will start to come
to answers about the credit card dilemma.
Column#16 CREDITS CARDS: VIEW INTO THE HEART OF THE SYSTEM
(Week
3 – Thursday Aug 14)
There have been many reports in the
media which document the financial distress in people’s lives that
often accompanies the use of credit cards. Is there perhaps, dare I
call it, a “redemptive” side of the credit card question?
If we can approach our experience with their use with sufficient
awareness, it is possible, in my view, that it may yet be turned to
good account.
The emergence of credit cards in people’s
lives can serve as personal view into the inner workings of the
financial system. In earlier times people lived a daily existence
that was far less immersed in the details of money. The business of
banking was some mysterious affair that took place behind the
temple-like facade of a building downtown. The average person made
only a rare visit there to borrow a few dollars when times were
tight. Many lived out there lives without making the trip at all.
They mostly grew corn, built their houses and raised their
families.
Now we carry around the keys to the banking
system itself in the plastic cards in our wallets. At one time, the
decision to create and issue money was made by gray men in paneled
rooms after sober deliberation. Today, we the consumer routinely
cause vast quantities of money to be created and put into circulation
very quickly, often on mere impulse, at the cashier’s counter. That
we don’t realize it doesn’t change the fact of its occurrence.
If
we take care to track the effects of our use of the card through our
monthly statements, it is not difficult to see that the high charges
for “interest,” fees and penalties on that newborn money
quickly absorbs future potential buying power, thus creating a
self-fulfilling need to create and bring into circulation ever more
quantities of money (increasingly not for discretionary items, but
for gas and groceries). The vicious cycle of “debt”
expansion is thereby accelerated, and its workings laid bare before
our eyes.
At length we are drawn into the revolving-door
trap of making minimum monthly payments. Now we are working to pay
only the “interest,” fees and penalties, and making little,
if any, headway in paying down the loan. When we finally stumble and
fall on the minimum-payment treadmill, bankruptcy is the next step.
This financial dead end has been the natural tendency of the
money-issuance-by-private-bank-loan principle all along, particularly
since its formal institutionalization in the Federal Reserve Act of
1913.
Much economic travail has transpired under its
influence, but until recent decades it has been prevented from
running completely amok by the humanity of bankers themselves. This
will be a strange saying to some, and it is not to suggest that
bankers have always been beyond reproach in their dealings (certainly
they have not), but it is significant that at the point of the credit
card loan transaction (and other practices in modern banking) the
banker is no longer there. The human element has been removed, and
now it is between us and the machine.
The credit card
phenomenon is running amok as one aspect of finance that is conducted
virtually completely via electronic means. Both the financial
profession and the people it serves have been shoved equally aside,
but it is alike in both their interests to get back together and
start talking to each other. That is the critical lesson to be
learned from our experience with the credit card.
If we
have the wit to see it, the credit card crisis constitutes a unique
opportunity for people to get a close look into the workings of the
adverse principle at the core of the monetary system from their own
experience, and come to a reckoning with their own part in it. We all
have something to take responsibility for. The respectful dialogue
that could rise out of that epiphany is the first step in
implementing a solution that goes to the heart of the system.
Column #17 “REVOLVERS” & “DEADBEATS”
(Week
3 – Friday Aug. 15)
So far this week I have described the
credit card phenomenon as a great engine of money (and therefore
“debt”) creation that has been handed over to (some say
foisted upon) the common citizen, and is pressuring many into an
unmanageable “debt” burden. In my view, this remains true,
but there is another side.
There is a great loophole in
the credit card scheme. That is, if one pays off one’s balance in
full when the bill arrives at the end of the month, then one does not
have to pay any charges for “interest,” fees or penalties.
That means that by borrowing money from a bank using a credit card,
and then paying off the full balance at the end of every month, one
is causing to be issued into circulation money on which an “interest”
or other charge is never paid (admittedly for only a month, but when
multiplied by millions of such cardholders the numbers add up).
This
is the only significant source of “interest-free” money
currently entering into circulation that I know of, and it comes
directly from the use of the instrument of finance that is greasing
the slide of the less fortunate and the nation as a whole most
speedily into “debt.”
This loophole has not gone
unnoticed by the banks and credit card companies. In fact, there was
talk in the industry about lobbying for legislation that would shut
down this obvious free ride, but that has abated largely because its
beneficiaries tend to be of the wealthiest and most
politically-connected segment of the population. So, naturally, the
cost of the system would just have to be borne by those in the middle
or near the bottom of the economic totem, especially the one’s that
experience the need to rely on the card for necessities.
This
apparently disproportionate burden would be exacerbated by the
passing of a new bankruptcy law (in 2005) that would insure that even
the relief offered by that extreme measure would become more
expensive and difficult to access.
By the way, the credit
card profession has a name for those who pay up their debt every
month – “deadbeats.” For customers, they very much prefer
the
late-paying-trying-to-survive-on-their-way-to-bankruptcy”revolvers”
(those struggling to make minimum monthly payments). From what I have
seen, card-company practices are evidently designed to nudge as many
of their “deadbeat” customers as possible into the
“revolver” category.
This adds a twist of irony
to the words of a credit-card industry spokesman I once saw on TV
testifying to a congressional committee about the proposed
industry-sponsored “bankruptcy reform bill.” He said, in
effect, that it was needed to protect their reliably-paying customers
from the costs occasioned by the irresponsible behavior of those that
were having difficulty in ‘meeting their obligations.’ (i.e. to
protect the “deadbeats” from the “revolvers”).
Lest
I leave the impression that I am being moralistic, permit me to give
the issue another twist. I would say that for those “deadbeats”
that can afford to charge on their card and pay off their living
expenses every month, let them do it (I did when I could afford it).
The money that they bring into circulation thereby will help not only
their personal finances, but also serve to bring into circulation the
only significant sum of currency in the money supply for which nobody
in the society is paying an “interest” charge to keep it
there. That could be deemed as a boon to everyone.
To wrap
it up let me say that I am not offering anyone moral or financial
advice. That is not what I do. What I am trying to accomplish is to
draw a picture that will bring into focus the profoundly paradoxical
effects and implications of credit card use as currently practiced,
and how the credit-card phenomenon is a microcosm of the monetary
system itself in the present era. Tomorrow’s final column of the week
about the credit card will examine what is perhaps the greatest
paradox of all.
Column #18 CREDIT CARDS & THE AMERICAN REVOLUTION
(Week
3 – Saturday Aug. 16)
This week’s series of columns about
the credit card phenomenon was inspired by an article in Sunday’s
(August 10) edition of the New York Times titled “Credit Cards
Tighten Grip Outside U.S.” It was a report on how this American
‘innovation’ is spreading rapidly throughout the world, to the point
where “More than two-thirds of the world’s 3.67 billion payment
cards circulate abroad.”
The article goes on to
provide anecdotal tales testifying to both the terrible effects and
seeming benefits of this burgeoning trend. I do not dismiss the value
of such a discussion, but it overlooks a vastly more fundamental
story.
In the second week of this series of columns
(particularly #’s 10, 11 & 12), I introduced the idea that the
American Revolution was the result most specifically of the British
refusal to agree to the colonists’ demand that they be permitted to
issue their own money through the public sector (the colonial
government), instead of having to borrow their money supply from
foreign bankers, thereby putting themselves perpetually in “debt”
to and under the control of foreign creditors. This was a truly
revolutionary concept that, I believe, was the critical factor that
enabled the American colonies to bind together and form a powerful
nation, while, for the most part, the other former colonial
territories became what is today commonly called the “third
world,” which still struggles to escape its dependency status
and ongoing revolving-door “debt.”
The American
experience demonstrated a shining way out from under the imperialist
boot, but, it seems, we as a nation have forgotten our own authentic
heritage and gift to the world; i.e. the example of a nation that
could truly exercise its sovereignty and freely develop its own
potential through assuming the power to issue its own money.
It
is perhaps providential that the American monetary system even now
reaches out into the world as a transformative force, but it is
utterly paradoxical that it does so as the agent for spreading the
financial machinery of money creation based on “debt.” Even
the Times article picked up on the underlying sense of contradiction
when it observed wryly, “As the American blessing of credit
cards became widespread, so did the American curse of debt.”
Most
of the article focused on Turkey, a largely Islamic nation that
connects the East and West. The Islamic world still holds fast,
relatively speaking, to the ancient prohibition against “usury”
(using money to make money at the expense of one’s fellow man), which
is a foundation stone of the Judeo/Christian tradition also.
The
people of the Islamic world, as well as other emerging nations, have
a rightful interest in sorting out on their own terms how they would
choose to adopt, or not, the material blessings of the Western world,
but thoughtful consideration of such is increasingly overshadowed by
the fact that “moving into the modern world” is effectively
accompanied by the obligation to embrace American modes of finance.
At this juncture this translates into having to accept virtually
whole a system based on usury (as embodied in the private bank loan
transaction). To many in the developing world this amounts to a
profound betrayal of their deepest values, and seeing everything they
hold dear in their lives becoming swallowed up in a tidal wave of
commercialism and “debt.”
I do not mean this as
a blanket proscription against credit card use, or even export. In
the right context, they could be a genuine benefit to those who use
them wisely (as debit, credit union, and other non-money-issuance
cards often are now).
At a time when some of the most
powerful financial institutions are struggling to stay afloat, the
Times article reports that VISA and MasterCard have become “Wall
Street wonders,” with VISA recently making the largest stock
offering in American history, and the value of MasterCard’s shares
going up almost 500 percent since 2006, both largely due to their
success in expanding operations to foreign lands.
It is an
irony of breathtaking (and, dare I say, tragic) proportions that for
the nation that fought a glorious revolution to establish in the
world the right of a people to issue their own money, perhaps its
most “successful” export has become a credit card industry,
whose mode of operation is the very quintessence of the
private-bank-loan transaction that is driving the world into
dependency and “debt.”
Column #19 McCAIN & OBAMA
(Week
4 – Monday Aug. 18)
On Saturday evening the nation was
presented with its first one-to-one encounter between the presumptive
Presidential nominees for the two major parties, John McCain and
Barack Obama. It was a unique “faceoff” in that the two
candidates never actually sat across from each other, but came to the
stage in alternate one-hour sessions (decided by the luck of the
draw), each answering an identical set of questions from the same
interviewer, Rick Warren, pastor of Saddleback Church in Lake Forest,
California.
The form of the event lent itself to a direct
comparison of the two men, but without the posturing and sparring
that dominates the dynamics of more conventional political debates.
In their respective ways each acquitted himself well. Each delivered
what I perceived to be intelligent and heartfelt responses, and the
reception by the audience appeared to be genuinely warm for both. The
event was, it might be said, the American political pageant at its
challenging, but congenial, best.
Within the context of
their respective worldviews, I found the words of both to be credible
in all categories except for one; i.e. almost anything having to do
with money and the economy. My remarks here are in no way motivated
by a desire to cast a shadow on the abilities and good faith of these
two men. On the contrary, on issues related to the economy, as on
others, they seemed to be bright and sincere. What then, the reader
might fairly ask, is this writer talking about?
It is my
experience that when it comes to money and economics, virtually the
whole of the American political discourse lives within a strange
through-the-looking-glass realm where nothing is what it is purported
to be (readers may by now have gotten a feeling for what I mean in
the columns that have preceded this one).
This may seem to
be a bold statement, but, I suggest, it is easy to document from the
newspaper headlines of the present, and of the last half-century or
more. Candidates for Federal office (Congressman, Senator, President)
claim, election cycle after election cycle, that if the nation would
only adopt their particular nuance of taxing and spending priorities,
we would at last turn the corner on “the deficit,” and in
turn the other intractable economic dilemmas of our times. Some
combination of those presented get elected, but when the next cycle
rolls around, the problems are still there, only worse. We hear, in
repackaged form, the same purported remedies and earnestly delivered
promises all over again. I would suggest that we as a nation cannot
afford to go much further without coming to a realization of what is
wrong.
Candidates for office, almost without exception,
treat the economic question as if it were fiscal (i.e. budgetary) in
nature; i.e. as if its problems could be remedied by adopting some
particular combination of taxing and spending policies; be they
liberal, conservative or any variation thereof. I would suggest that
this is an illusion. The “deficit” is not a fiscal problem.
It is a monetary problem; i.e. related to the way we as a society
create, issue and control our money. Prudent budgetary practice is
well, but if by the very mode by which our society gets its money it
always comes up short in the ability to pay its bills, then no
conceivable combination of taxing and spending parameters is going to
remedy the shortfall.
Neither McCain or Obama give any
indication whatsoever that they understand the true nature of the
problem, which is not surprising since almost no other candidate on
the American scene in the last half-century has done so either (there
was a time when many, and the mass of the electorate, clearly did).
The extent to which the economy was addressed in the Saddleback event
was disappointingly brief (Obama hardly touched upon it), but the
candidates’ positions are easily ascertainable from other sources,
and the candidates’ websites themselves.
So, what
specifically is it that the McCain and Obama need to become aware of
to be effective with respect to their economic intentions? We will
address that in the next column.
Column #20 WHAT THE CANDIDATES DON’T “GET”
(Week 4 – Tuesday Aug. 19)
There is an area of critical public concern that John McCain, Barack Obama, and the entire lot of candidates for Federal office (Congress, Senate, Presidency) will no doubt hold forth on endlessly, but it is also true that virtually none of them have a clue as to how to resolve it. “It’s the economy, S#*/@d!” The form this issue most commonly takes is an obsession with how to deal with the yearly Federal “deficit” and mounting Federal “debt.” The range of other economic issues will be derivatives, more-or-less, of the alarm over the rising national tide of red ink.
We will be admonished by each candidate that the government is taking in too little revenue and/or spending too much money. With virtually a single voice they will tell us that when we come to our senses and start running the Federal government more “like a business,” then we will get our economic house in order. Typically, each will claim to have discerned the taxing and spending priorities that will allow us to “grow the economy” so we can “turn the corner” and “start paying down the debt” so “our children won’t have to.”
This is truly a laudable intent, but an utter mischaracterization of the problem. There is no combination of taxing and spending priorities that will remedy the so-called “debt” problem. The “debt” does not come from “taxing-&-spending,” and no variation thereof will fix it.
Our unquestioning attachment to this framing of the “national debt” issue, and the whole array of ideologies, notions and interests that have grown up around it, is the great rock upon which the political process, ship of state, and best intentions of we the people are foundering. If that were not so, why has no generation of elected public servants virtually in the last century succeeded in “turning the corner on debt”? Is the answer as simple as saying that the category of human beings we call “politicians” (and whom we elect and re-elect) is uniquely corrupt beyond any capability of answering their calling, or does blaming politicians too often excuse us from having to think more deeply on the matter?
We the electorate are frequently admonished as to how we can’t pay down the “debt” because we have not achieved enough “economic growth.” In the century-almost since the establishment of the Federal Reserve System, the U.S. economy has in real terms experienced an ongoing explosion of economic production that quantitatively dwarfs the increase of any nation (perhaps all nations combined) before it, and now threatens to overwhelm the capacities of the earth on which we depend. Why, then, has not this “growth” enabled us to “grow” out of the “debt.” Why does the “debt” evidently increase in lockstep with the “growth.” Is more “growth” the answer?
The United States is a sovereign nation with the right to issue its own money supply. There is no cost in doing so, regardless of the amount issued (except for the incidental material cost of handling whatever medium of currency is deemed to be most convenient).
To say that the overall economy of a nation that has the power to issue its own money supply, can also be in “debt” within the circle of its own domestic production-&-consumption cycle is a contradiction in terms. People within an economy can be in debt to each other, but how can an economy be in “debt” to itself? How can a free people who are conscious of what they are doing hold themselves in “debt” bondage? Stranger still, why, supposedly, is it necessary to sell bonds to foreigners so that we can get enough money to circulate as purchasing power in our own domestic marketplace to cover the cost of the products we ourselves make? Stated more succinctly, why are we not richer for all our wealth, instead of poorer by all this “debt”?
These are the questions that McCain and Obama need to be able to answer. I will offer my own suggested answers in very succinct terms as these columns unfold.
Column #21 WHY TAXING & SPENDING ADJUSTMENTS CANNOT ELIMINATE “THE DEFICIT”
(Week
4 Wednesday Aug. 20)
In yesterday’s column I said that
there is no combination of taxing and spending priorities that will
remedy the Federal “debt” problem. This statement is
contrary to conventional economic wisdom, to put it mildly. To make
my case I would direct the reader’s attention to the private bank
loan transaction by which our money comes into being.
We
as a sovereign nation have the right, power and responsibility to
issue our own money supply as a public good and an essential feature
of the commons. The public body to whom this task naturally falls is
the Federal government. Unfortunately the people who compose the
Federal government have long since been pressured into abrogating
that essential trust to private interests, and we the people have not
held them accountable because, to a great extent, we too have been
influenced in ways that are contrary to our true welfare.
Now
if the nation needs a money supply with which to conduct its
commerce, it cannot turn to its government, but is obliged to go to
the banks. As private businesses, banks work for a profit. They are
happy to “loan” to the nation its circulating medium, but
on the condition that they get paid back more than they “loan.”
If a nation (as for a person) borrows at “interest” the
money it needs to live on, it follows that it can only slide ever
deeper into “debt.”
It makes little difference
to the banker whether the “borrowing” is done by persons
from the private or the public sector. The overriding fact of life
within our present system is that someone has to bite the bullet and
take on more “debt.” The struggle over who that will
ultimately be is the hidden engine that drives the fractious nature
of our political life. There are compelling factors that make it
virtually certain that it will fall to the Federal government to do
much of the borrowing. The taxing and spending policies of a
President can affect this balance, but realistically only to a
limited extent.
It should be noted that private banks
within the Federal Reserve System are controlled by what is called a
“fractional reserve formula.” This is a pyramid scheme that
is too complex to describe in detail in this short article, but one
of its features is that the money borrowed into circulation by the
Federal government and deposited in banks forms the “fractional
reserve” base upon which the banking system can create new
money. This means that there has to exist a Federal “debt”
for the system, as it is designed, to even function.
It is
not mandatory that the Federal government assume as large a share of
the taking on of national “indebtedness” as it has done,
but it remains a fact that the private and public sectors combined
must take on more “debt” at a continuously increasing rate
for the nation to avoid a contraction of the money supply, which can
only lead to economic recession, and eventually depression.
The
rate of Federal “debt” aggregation does in fact increase or
decrease from time to time, as when deficit spending increased for
the Reagan/Bush/Bush years, and decreased during the Clinton
presidency. It should be noted, however, that there were underlying
social, monetary and political cycles that were driving the numbers
associated with these periods, and the relative size of the Federal
deficit had little to do with how quickly the country as a whole was
sinking into “debt.”
For complex reasons, during
the Clinton administration the private sector took on “debt”
at a rapid rate, and so the government did not have to. During the
Reagan/Bush/Bush years, in contrast, private borrowing decreased and
the government found itself in the position of having to step in as
the borrower of last resort to keep the economy supplied with enough
money.
None of these Presidents, as far as I can see, ever
gave any indications that they understood the economic wave that they
in their turn were riding. Instead, their spokespersons spent their
energies manufacturing spin by which they attempted to take credit
for whatever favorable numbers emerged, and explain away those that
put them in a bad light.
In the meantime, the nation
continued its uninterrupted combined private and public descent into
“debt,” and has arrived now at a point of reckoning where
the situation can no longer be denied or papered over. This is what
McCain and Obama need to be talking about.
Column #22 WHAT ABOUT RON PAUL?
(Week
4 – Thursday Aug. 21)
Many people have asked me – “What
about Ron Paul?” Is he not talking in a fundamental way about
the monetary issue you are saying is missing from the political
discourse? Indeed he is, but his proposed answer to the monetary
question would, in my view, only make the situation as bad, or
worse.
Ron Paul is a congressman from Texas, and until
very recently was a candidate for the Republican nomination for
President. He is unique in that he is extremely knowledgeable and
articulate about the monetary system, and has built much of his
campaign around his proposal to repeal the Federal Reserve Act, and
re-establish the monetary system on a different (in his view
“constitutional”) basis.
On a personal level, he
impresses me as someone who is genuinely committed on the issue, and
has the courage of his convictions. I find his informed outspokenness
to be a breath of fresh air in the gaff-averse,
talking-point-oriented modern political scene.
He is
something of a throwback to an era when there were many learned and
eloquent voices in the political arena who carried on a classic
debate about what ought to be the basis for how this nation creates,
issues and controls its money, and how it all relates to the ideals
of the American Revolution. That debate has so completely disappeared
from the scene that Paul comes off to many as an anachronism (one
whose time has passed).
The notion that he is somehow
passé is belied by extraordinary grassroots support he inspired
during the campaign, especially from young people. He was beyond
doubt a political phenomenon. Paul espouses many strongly held
positions that together are characteristic of what is often described
as a Libertarian worldview (he was in fact the 1988 Libertarian
candidate for President).
He is adamantly pro-life,
anti-gun-control, opposed to all but the most minimal involvement of
the government in private matters, a foe of the Patriot Act, against
the entanglement of the country in the affairs of other nations, and
a staunch opponent of the War in Iraq. There are many analysts on the
political scene who attribute Paul’s surprising appeal to his
unabashed and principled stance on these issues, and no doubt there
is an element of truth to that. In my experience, though, the
congressman has also touched a deep nerve in the American psyche
about money. For this reason I heartily welcome his contribution to
the political discourse.
That said, there is also an
aspect of his program that I find highly problematic, and that has to
do with the specific change in the monetary system he proposes.
Stated succinctly, he feels that thetrue alternative to a currency
based on “debt,” (i.e. borrowed into circulation from a
private banking system), is one in that is “backed by
gold.”
The debate over whether the currency of a
nation should be based on gold, or the fiat of the sovereign (in the
American case the sovereign being we the people through our
government) is one that goes back to ancient times. This is obviously
too big a story to tell in detail in this short article.
Suffice
it to say that the question had a formative effect in the emergence,
shaping and preservation of the American nation. For example, as the
Civil War was breaking out President Lincoln was pressured to borrow
the money to fight it from the banking system, reportedly at interest
rates ranging from 24 to 36%. Lincoln wisely rejected that advice,
and instead had the U.S. Treasury issue United States Notes, a
currency that came to be known as the “greenbacks.”
The
policy was deemed so successful, and proved to be so popular, that
the nation emerged from the war with a solid majority of the people
favoring the greenback as the basis for the money supply. By many
accounts this led to a great deal of intrigue by which the will of
the people was allegedly subverted, and the nation was denied its
preferred money due to the influence of bankers who advocated that
the currency be based on gold (“hard money” they called
it).
This so outraged the public that a host of “populist”
parties emerged (some becoming very influential and scoring major
electoral victories), plus major pro-greenback factions coalesced in
both the Democratic and Republican parties. Indeed, in the
half-century after the Civil War the dominant issue on the political
scene by a wide margin was who was going to have control over the
creation, issuance and regulation of money, and on what terms.
At
the 1896 Democratic convention in Chicago a relatively unknown
senator from Nebraska, William Jennings Bryan, gave what is widely
recognized one of the most eloquent and impassioned orations in the
annals of American history. Known now as the “Cross of Gold”
speech, it ended with the words – “Having behind us the
producing masses of this nation and the world, supported by the
commercial interests, the laboring interests and the toilers
everywhere, we will answer their demand for a gold standard by saying
to them: You shall not press down upon the brow of labor this crown
of thorns, you shall not crucify mankind upon a cross of gold.”
The
thunderous approval that arose from that hall catapulted Bryan from
being an obscure “prairie populist,” to the Presidential
nominee of his party that year, and in two subsequent election
cycles. Has Ron Paul forgotten this chapter of our history? I would
love to hear his thoughts on the matter.
Column #23 WHAT ABOUT DENNIS KUCINICH?
(Week
4 – Friday Aug. 22)
Some people have asked me – “What
about Dennis Kucinich?” Has he not also addressed the monetary
issue in the course of his campaigns? My answer it yes, but not in
the deep, central and consistent manner that is required to plant it
effectively in the American consciousness (overcoming, in the
process, his marginalization in many people’s minds as a politician
of the “extreme left”).
As someone who followed
the political scene, I had taken notice of Kucinich’s career from his
days as boy-wonder candidate for the office of mayor of Cleveland. He
was for a time a national curiosity. His slight stature, impish
looks, outspoken views and tender age (elected to city council at age
23, to mayor at 31; youngest ever for a major American city) earned
him the moniker “Dennis the Menace” from the media, who
seemed determined to not take him seriously.
In the first
year of Kucinich’s term he ran afoul of the financial establishment
by refusing to sell the Muny Light, the publicly-owned electric
utility, to a private competitor (whose directorates and finances
were thoroughly interlocked with the banks) as a precondition for the
extension of credit to the city to roll over its previously abused
finances. The result was that Cleveland’s loans were called in, and
the city entered into default.
Kucinich was, to all
appearances, committing political suicide in the early stage of a
most promising career, and he did in fact lose his bid for reelection
in ’79. Worse still, he became a pariah in his hometown, couldn’t
find a job, nearly lost his home, and commenced on an inward journey
that took him into the deserts of New Mexico.
He emerged
fundamentally changed, and eventually returned to the political fray
in Ohio, where the wisdom of his principled action, and courageous
nature of his sacrifice was starting to be appreciated; so much so
that he adopted as his campaign symbol a light bulb. His vindication
was complete when in 1998 the city council gave him an award “in
recognition for his courage and foresight.” He was elected to
the state Senate in ’94, and to the U.S. House of Representatives in
’96. Since then he has become a leader on the national stage, and
made runs for the Democratic nomination for President in 2004 and
2008, from which he has established a modest, but dedicated, base of
political support across the nation.
By wildly
serendipitous circumstance, Kucinich met and married Elizabeth
Harper, the close aid of Steve Zarlenga, who just happens to be by
some accounts (mine included) the preeminent monetary scientist and
historian of our time. Now Kucinich, who had demonstrated his
instincts and proved his metal by facing down the banking system, had
formed a close relationship, through his wife, with the person who
could perhaps teach him more about money that almost anyone else on
the planet.
Kucinich learned much from Zarlenga, and
became the keynote speaker at a monetary conference sponsored by his
American Monetary Institute in Chicago in 2005 (a link to the video
can be accessed on the AMI website).
This is a dream
situation. All the pieces are there. In my estimation, however, the
potential of the situation has not (yet anyway) been realized. I
don’t know all the reasons why. It seems to me that Kucinich has the
character, knowledge and brilliance to effectively introduce the
monetary question into the political scene in a profound way, but for
some reason he has not as fully embraced and embodied the issue as he
might. It remained a marginal and infrequently-mentioned topic even
in his 2008 campaign, and it was not fully developed or adequately
featured on his website.
I still have hope that Dennis
Kucinich will one day emerge as one of the key voices that will
reintroduce the issue of money to the American political discourse.
Column #24 WHAT ABOUT THE GREENS & RALPH NADER?
(Week
4 – Saturday Aug. 23)
Some people have asked me, “What
about the Greens and Ralph Nader?” As America’s “third-party”
alternative, many have looked to the Greens as a pivotal movement
around which a force for fundamental change could possibly gather. In
my view, there has been some basis for this hope.
The
Greens have for the most part not been involved in the movement for
monetary transformation on the Federal level. They have attracted a
fair number of activists for local currencies, barter networks, land
trusts, and the like, but they have largely stayed clear of taking on
the issue of national currency reform.
I was for a time a
member of the Green Party, and found the people there to be a fine
and dedicated group of souls who talked a great deal about economic
issues, but the conversation rarely extended to the nature of money.
My Green friends would tell me that this obscure “banking issue”
I seemed to be so obsessed with was all very interesting, but right
now we have starving people to feed, wars to stop, and a planet to
save, so it would just have to wait. I was never able to get them as
a group to consider that perhaps this “banking issue” was
in fact the very engine that was driving all those problems, and to
leave it unaddressed would only insure our ultimate inability to
effect transformative change.
The Greens would do well to
reclaim the historical roots of their own party. They have an
antecedent namesake in the Greenback Party, which was, in fact, a key
player in the anti-bank-money populist movement of the late 19th and
early 20th centuries. There is an evolution that has proceeded from
the populist parties, through the farmer/labor movements, to the
progressive/liberal/grassroots politics of more recent times, of
which the Green Party is a prime beneficiary. They have a genuine
heritage on the monetary issue, if they will awaken to and embrace
it. It represents their authentic vehicle to break out of the
perceived disgruntled-left-wing-of-the-Democratic-Party ghetto.
The
Greens at this point are sometimes deemed to be a radical left-wing
import, and not fully American. By re-invoking the true issues of the
American Revolution, as opposed to the conventional jingoistic
mythology, it could move to the very highest and most patriotic
ground. From that pinnacle there is no major constituency it could
not speak to. There is no argument from the “major parties”
it could not trump. This is a historic opportunity.
The
groundwork that has already been laid down by Ralph Nader should be
taken a critical step further. He is in the eyes of many the most
famous, expert and eloquent (though sometimes a bit demagogic)
spokesman on the predations of corporate practice, yet I have never
heard him say a word about the ruler of them all, the corporation
(Federal Reserve) which has been unconstitutionally granted the
charter for money creation. I can’t be sure he has never done so, but
clearly it has not been the centerpiece of his efforts. Without
making it so, the rest of his heroic labors may find limited success
on particular issues, but are doomed to overall futility, as it will
leave corporate money power still “enthroned” (as Lincoln
had warned about).
If Nader and the Green Party had truly
picked up on the monetary issue, they would have had the formula for
a truly revolutionary program that could transcend all regions of the
political and ideological spectrum. The money-creation franchise is
the linchpin of the entire globalist corporate order, and it would
all come undone if it were removed.
With Ralph Nader as
its presidential candidate, the Greens emerged briefly as a force to
be reckoned with in American politics in the late ’90s. Since then
the party has declined, and Nader has moved on to independent runs
for the presidency in 2004 and 2008. It would appear that whatever
opportunity the Greens and Nader had to be that political force for
monetary redemption in America has been largely dissipated. Still,
for the sake of the country, one can only hope that it could return?
Column #25 THE FORMS OF “NATIONAL DEBT”
(Week
5 – Monday Aug. 25)
There is, in my view, a very direct
and completely effective way to address the problem of the “national
debt,” which is, by my definition, any monetary “indebtedness”
that is taken on by the society or nation as a whole, and not in
particular by any of its members or sectors. We can list four forms
by which the “national debt” manifests at present. These
are:
(1) – The “Federal deficit” – This is
the amount of money borrowed by the Federal government in a given
year from the nation’s semi-private (some say quasi-public) central
bank (Federal Reserve) to make up for the deficiency in tax revenues
collected, which causes it to come up short in meeting its budgetary
obligations.
(2) – The “Federal debt” – This is
the ongoing sum of yearly “Federal deficits,” which
constitutes the total amount of money borrowed by the Federal
government from the Federal Reserve.
(3) – The “balance
of payments deficit” – This is a net monetary imbalance caused
by this country buying more goods from foreign nations than we sell.
When we sell goods to foreign countries we receive a net inflow of
money, or stream of “national income.” When we buy goods
from foreign countries we spend part of that income. If we buy more
than we sell, then there is a net outflow of money from the U.S. to
foreign lands, which is referred to in the current economic discourse
as a “balance of payments deficit.”
(4) – The
“money supply” – This is the amount of money that the
participants in the social order or nation as a whole, including both
public and private sectors, “owe” to the private banking
system for the system’s having made available the supply or pool of
money which society requires to conduct its commerce.
The
first three of these forms of the “national debt,” and the
arguments about them, no doubt look like familiar features of the
national debate over money, and the descriptions that I have provided
above are essentially the conventional ones. I would assert, however,
that they are not what they commonly appear to be. In my experience,
the terms “Federal deficit,” “Federal debt” and
“balance of payments deficit” are misnomers. That is, the
phenomenon that each ostensibly refers to is not what the words
themselves would seem to indicate. They are all abstract figures of
speech that effectively serve to cover up the real nature of what is
happening in the financial affairs of the nation, though, I dare say,
very few people realize it. Typically, these expressions pass for
what a literal interpretation of their words would tend to indicate,
and that, in turn, is the cause of untold dysfunction and misery in
the economic life.
Item #4, the “money supply,”
is one I have never heard identified as being an aspect of the
“national debt,” but previous columns in this series may
give the reader some basis for understanding what I mean by
identifying it as such.
In the next few installments I
will offer very specific thoughts about how, in principle and
practice, these aspects of the “national debt” were formed,
and how they can be eliminated (to be clear, I am not proposing
eliminating the money supply, but rather eliminating it as “debt”).
In the end, we will discover that the very expression “national
debt,” when used in a monetary sense, is a contradiction in
terms.
Column #26 WHAT CAUSES A “NATIONAL DEBT” TO ARISE?
(Week
5 – Tuesday Aug. 26)
In yesterday’s column I defined
“national debt” as any monetary “indebtedness”
that is taken on by the society or nation as a whole, and I then
listed four ways in which this “debt” manifests. The issue
of “national debt” suggests a series of questions, which
can be stated in a fivefold manner:
(1) – What causes a
“national debt” to arise?
(2) – To whom is this
“national debt” owed?
(3) – Is the “national
debt” a real debt?
(4) – Can the “national debt”
ever be “repaid?”
(5) – What is the solution to the
“national debt?”
For this column let us focus on
point #1 – What causes a “national debt” to arise? (1) –
A “national debt” arises when an elite private group (or
person) manages to usurp the power of the sovereign to create, issue
and control a nation’s money. In earlier periods of history this
power was usually vested in a monarch, czar, emperor, dictator, or
other authoritarian ruler. The American experiment represented
something new in that sovereignty was deemed to reside in the people
themselves, and exercised through their elected representatives
within the rule of democratically determined law.
Since
the beginning of civilization there have always been private parties
(as opposed to rulers or executors of the political life) who have
sought to co-opt society’s money power, because in doing so they
could effectively gain control over the whole nation. Indeed, in
important ways it was better than ruling a nation in an overt
political sense. The “money-lenders” got to skim-off the
cream of the wealth of the country, while pulling the strings of
power and staying safely in the shadows. The monarchs and
politicians, on the other hand, were obliged to endure all the
exposure, risk and abuse of being in public office.
Much
could be said about the human motivations that cause people to seek
such an extremely advantaged position in society (some would say, a
stranglehold over it), but whatever the case, it is sufficient for
now to state that whenever a person or group is successful in
capturing the power over a country’s money, it has gained effective
control over the nation itself. That is what Mayer Amschel Rothschild
(founder of the Rothschild banking dynasty) meant when he said, “Give
me control of a nation’s money and I care not who makes the
laws.”
Once the control over a nation’s money has
been handed to private persons, a “national debt” will
arise, virtually as night follows day. This is because they will
invariably use their power to supply the nation they purport to serve
with money on such terms that, not only individuals, but the society
as a whole will become, and remain, perpetually in their
“debt.”
This is not necessarily a simple case of
avarice. Those with control over money may believe that they have
been handed this privilege for good reason, or even as a sacred trust
(and many have articulated a case for their view). The way this has
unfolded in human history is extremely complex, and we should not be
too quick to judge issues of motivation. Nonetheless as a practical
matter, private money goes hand-in-hand with “public debt.”
In
the American experience, the crucial power of sovereignty (the power
to create, issue and regulate money), has been abdicated by the
elected representatives of the people in favor of a private banking
cartel that issues the nation’s money supply through a form of
“private-bank-loan” (actually private-money-creation)
transaction, by which a compounding “interest” fee that
realistically cannot be paid is attached.
Therefore, this
nation has a “national debt.” It is a straightforward
matter of cause and effect.
Column #27 TO WHOM IS THIS “NATIONAL DEBT” OWED?
(Week
5 – Wednesday Aug.27)
Yesterday I offered the view that
the reason we have a “national debt” is that we as a people
and a nation have allowed our sovereign prerogative to create our own
money supply to be usurped by a private banking establishment. This
raises the question, “To whom is this ‘national debt’ owed.”
It
would be easy to assume that because the “national debt”
arises from transactions in which money is “borrowed” from
banks, it must be to these banks that this “debt” is owed.
If we trace carefully the course of the bank-loan-and-payback cycle
we will discover that this is not the case.
I have
described in previous columns how the banker is not really “loaning”
money in the common sense use of the term. He is, rather, creating it
out of his authority to do so as an agent of the banking system.
I
have also described how, when a “borrower” makes a payment
on a bank “loan,” the payment is divided into two parts,
with one portion being used to the pay down the amount of the “loan,”
and the other applied to “interest.” The money credited
towards the pay-down of the “loan” is extinguished back to
“thin air” in a process that mirrors its creation out of
“thin air.”
The part that is credited towards
the “interest” payment goes instead (after the bank
subtracts its operating expenses, that is) into the account of a
speculator in “financial-debt” contracts, usually described
as an “investor,” whose interest typically in the
transaction is not to be a financial partner to a productive
enterprise, but to be the recipient of the “interest”
payments.
It is these “investors” to whom the
“national debt” is owed. So who are these
“investors?”
This is a big question that can be
answered on many levels. At the highest level of finance, they are
the persons who have both the means and the privilege of being in a
position to act as the first link in the buying and selling of
“debt.”
For example, the quantity of money
borrowed by the Federal government that is allowed to circulate in
the economy (the so-called “high-powered money” that serves
as the basis for how much money banks can create according to the
“fractional reserve formula”) is regulated by the buying
and selling of U.S. government bonds through the “Open Market
Desk” of the Federal Reserve Bank of New York. This “open
market” is in reality a strictly limited market, in that the
privilege of buying and selling these bonds is restricted to certain
few dealers.
After the bonds are bought by these dealers,
they are generally sold to “investors,” by whom they may or
may not be resold. Theoretically, they can wind up in the financial
portfolio of anyone in society, even the world, and in fact they do
get widely dispersed.
It is not, however, an equitable
distribution. The system is set up in such a way that those who are
privileged to be the primary bond dealers and their customers (or are
otherwise strategically positioned in the system), as well as others
who already possess an excess of funds to “invest,” have a
distinct and often insurmountable advantage in the game.
To
illustrate, if one person manages to move into the financial position
of being the receiver of “interest” payments (e.g. by
buying mortgage contracts), and another finds himself obliged to be a
regular payer (e.g. by making payments on a mortgage), then
generally, while the latter works to be a producer of wealth (i.e.
earns a paycheck), the first will become wealthy without further
expenditure of effort. I would caution the reader that this
illustration can be simplistic if one tries to apply it dogmatically
to real human situations, but it remains a reality in the overall
picture that the private-bank-loan transaction by which our money is
created is the great engine of inequitable wealth
redistribution.
While much has been said in the public
discourse about the inherent greed of “the bankers” because
they are supposedly getting the benefit of all this money that they
“create out of nothing,” it is evident from the financial
section of the newspaper that the banks too are experiencing
difficulties. In fact, many are on the brink of bankruptcy. That is
because they are not sovereign entities, but instead have been
co-opted themselves as the agents of a perverse principle at the
heart of the monetary system which would tempt persons to use the
control over money to satisfy their desire for undue private gain,
and to exercise control over humanity itself.
To be sure,
there are to all outward appearances people who act as this
principle’s particular promoters, facilitators and even conspirators,
but I think a suspension of judgment is necessary if we hope to
divine all the way to the core of the “national debt”
matter. In truth, the acquiescence to this obverse monetary principle
has become culture-wide. Directly or indirectly, in big ways or
small, virtually all of us are at least partly responsible for the
“national debt.” Would it be too much to say that we are
all part of the problem, and, potentially, the cure?
While
we need not and should not ignore the gross injustices of the
monetary system that do arise, it behooves us also to be aware that
none of us is wholly blameless. This is a topic that will be explored
in an incisive, but dispassionate manner as these columns unfold.
Column #28 IS THE “NATIONAL DEBT” A REAL DEBT?
(Week 5 – Thursday Aug. 28)
When we talk about a “national debt,” does this expression refer to money that actually exists, is loaned out for a time, and is then paid back? Is it “real” in the dictionary or common-sense use of the term “debt”? I would offer a description of two outwardly similar loan transactions, and perhaps through them we can discern the answer to the question.
(1) – A Loan from a Friend:
Suppose I needed to borrow some money, say $1,000. I might approach a personal friend and ask for a loan. He checks his bank account to see if he has the money to lend, and makes an assessment of whether I am likely to pay him back. Let us suppose that he has the money and is willing to lend it, but on one condition; that I agree to pay him more than I borrow (i.e. interest on the loan). After all, is he not foregoing the use of that money for a year, and is there not a risk that I might not pay it back?
We agree that he will lend me $1,000, and I will pay him back the $1,000 principal of the loan, plus a $200 interest charge (for a total of $1,200) at the end of a year. He writes up an I.O.U. on a slip of paper, and I sign it. He then writes a check for $1,000 out of his account, and hands it to me.
At the end of the year when I give him the $1,200, he marks the I.O.U. “paid,” and the loan is deemed by both of us to be satisfied.
(2) – A Loan from a Bank:
Now suppose that instead of borrowing the $1,000 from my friend, I decide to go to a bank. After all, is that not what banks are for? I approach the banker and ask for a loan. Like my friend, he checks what he has in his accounts, but not because he is planning to loan me any of that money. Instead, his intention is to create the money he will “loan” to me out of “thin air” by virtue of his authority as a banker. The reason he checks his accounts is to make sure that he has enough money “on reserve” to create the new money according to the “fractional reserve formula” by which he is governed.
He makes an assessment of my “creditworthiness,” and the loan is “approved.” We agree that he will lend me $1,000, and after a year I will pay back the $1,000 principal amount of the loan, plus a 20% interest charge ($200). He writes up a contract which states that I promise to pay back the loan, and I sign it. He then writes a check for $1,000 out of his authority to create money, and hands it to me.
At the end of the year when I pay him the $1,200, he marks the loan contract “paid,” and the loan is assumed by us, and deemed by the legal authorities, to be “satisfied.”
On the surface there are many similarities between these two transactions. In fact, the operative words of the discussion (“loan,” “interest,” “debt,” “payback” and “satisfaction”) are used in what appears to be identical ways. If one filmed each session, except for the incidental settings (one across a kitchen table and the other a banker’s desk), one would be hard pressed to detect any substantive difference between the transactions.
My experience has shown that when people go into a bank and borrow money, they generally assume that they are involved in an upfront common-sense transaction (like with their friend), whereby the banker is loaning them some money that he will no longer have on deposit in his bank for a time, and that he therefore needs the interest charge to compensate for the risk that he will not be paid back, and further, that when he is paid back all the conditions of the loan will have been satisfied without any residual debt to the borrower, banker or society as a whole. This is mistaken all counts.
If we carefully track the steps of the bank loan transaction we can see that:
● It was not essentially a process to “loan” money, but to create it.
● The banker did not charge “interest” on the “loan” because he was “at risk” of losing something substantial that he had entrusted to the “borrower.” Rather, the compounding “interest” charge was a fee that he was privileged to attach to the principal of the “loan” as the agent of a private banking system that had acquired the power to control the terms by which society would gain the use of its own money.
● This “loan” at “interest” is not a “debt” in any true meaning of the word. The money created and issued was done so out of a prerogative of sovereignty that was unlawfully (in my view) appropriated from the social order of which the borrower is a part. How can we the people be “in debt” for borrowing something that rightfully belongs to us, with an attached compounding “interest” charge to boot?
By logical extension then, the “national debt” is not a real debt.
I would hasten to stipulate that I am not in any way advocating the tearing down of the banking system, or even defaulting on the “national debt.” Rather, I would redeem it, the banks, and the nation’s financial life, by returning the way this country creates, issues and regulates money to sound principle. This, I can imagine, may sound strange now, but the idea will be fleshed out as we go.
Column #29 CAN THE “NATIONAL DEBT” EVER BE “REPAID”?
(Week
5 – Friday, Aug. 29)
In
yesterday’s column we walked through the private-bank-loan
transaction by which our money is created, issued and controlled to
show that the “national debt” does not refer to money that
actually exists, is loaned out for a time, and is then paid back.
It is not “real,” therefore, in the dictionary or
common-sense meaning of the word “debt.” The question
naturally arises, “How then can this “national debt”
be “repaid” (whatever “repaid” might mean in this
case)?”
The quick answer is, it cannot be “repaid.”
It can, however, be eliminated in a systematic manner by changing the
basis on which the monetary
system
operates. Thomas
Jefferson
said, “But follow the principle, and the knot unties itself.”
If the operation of the monetary system were returned to sound
principle, the so-called “national debt” would disappear in
an orderly way over time, virtually of its own accord.
The
present Federal
Reserve System
operates according to what might be called the “private-debt-money”
principle. Our money is created by a private
banking system,
and “loaned” out at “interest,” thus creating a
supposed “debt” of society to that system. The money
required to
pay
back such “loans” is available because it circulates in the
money
supply,
but the money needed to make the “interest” payments is not
because it was never issued. This means that participants in
the economy must, in the aggregate, “borrow” increasingly
more
money
into
circulation
in order to keep making the principal and “interest”
payments on old bank loans, while maintaining a money
supply.
This is another way of saying that the “debt” associated
with older money must be redeemed (rolled over) with “debt”
attached to new money, with the
result
being that the total “debt” the nation “owes” to
the banks builds up continuously in a snowballing manner.
If
the present system issued money directly out of the U.S. Treasury, it
would be operating according to what might be called the
“public-debt-free-money” principle. Our money would
be created by our own government, and then spent or loaned
interest-free into circulation. This public money would for a
time be used to make the principal and “interest” payments
on old bank loans, and maintain a circulating money supply. The
crucial difference is that in the new
system,
more money would not have to be “borrowed” into circulation
from a private banking system to accomplish that. Old “debt
money” would be redeemed with new “debt-free money,”
resulting in an ongoing reduction of the total amount of money in
circulation for which the
people “owe a debt” to the
banks.
With the “private-debt-money” principle,
the life of the nation serves money. With the
“public-debt-free-money” principle, money serves the life
of the nation. The contrast is that stark.
As bank
loans were paid off with public money, the bubble of “national
debt” that is attached to the nation’s money supply would be
deflated without default or economic disruption. By this
process the “national debt” would be retired over time in
an orderly way, and fade naturally
out of existence.
This
states the matter in principle, but the next step is to describe how,
specifically, this would work out with respect to what I described in
Col. #25 as the four forms of the “national debt”; i.e.
the
“Federal
deficit,”
“Federal debt,” “balance of payments deficit” and
“money supply.” I will pick up on that task in the
next installment.
Column #30 WHAT IS THE SOLUTION TO THE “NATIONAL DEBT”?
(Week
5 – Saturday Aug. 30)
In Monday’s column I described the
four forms by which the “national debt” manifests at
present: the Federal deficit, Federal debt, balance of trade deficit
(with foreign countries) and money supply. By tracing the emergence
of the so-called the “national debt” from the
private-bank-loan transaction by which our money is created, I tried
to show that it is not a genuine “debt.” It is, rather, a
fee in the guise of a compounding “interest” charge
attached to our money at its point of creation. It was never anything
“loaned,” and it cannot therefore be “repaid.” It
can, however, be eliminated in an orderly manner by changing the
basis on which the monetary system operates.
(1) – The
“Federal deficit” is the amount of money borrowed by the
Federal government in a given year to make up for the deficiency in
tax revenues collected. If it simply issued the additional money it
needed through the U.S. Treasury there would be no need for
borrowing, and therefore no “deficit.”
(2) – The
“Federal debt” is the ongoing sum of yearly “Federal
deficits.” With a yearly “deficit” no longer being
added to its total, the “Federal debt” would obviously
cease to grow, but what would happen to the “debt” already
on the books?
This “debt” is in the form of
bonds that are being held by the public, both domestically and around
the world. They will, at their date of maturity, have to be redeemed
at a value that is greater than the amount of money the government
got for selling them originally. The difference is due to the
“interest” charge attached to the bonds.
Since
the Treasury is only borrowing (not issuing) money at present, its
only option is to pay the “debt” represented by these old
bonds by printing and selling yet more bonds that, in turn, represent
an even greater “debt” that will have to be paid when they
are redeemed in the future.
If, on the other hand, the
Treasury were allowed to issue money, then these old bonds could be
redeemed with new money (not more bonds), and the cycle of
compounding “debt” would be broken. Over time (about three
decades) all outstanding bonds backing the “Federal debt”
would be turned in for redemption with public money, and the “Federal
debt” itself would cease to exist.
Perhaps the last
great champion of a free public currency in our national government
was Congressman Wright Patman from Texas. He was member of the House
Committee on Banking and Currency for forty-seven years, and its
chairman for twelve. Among his pronouncements on the subject of
“Federal debt” are:
“The dollar represents
a one dollar debt to the Federal Reserve System. The Federal Reserve
Banks create money out of thin air to buy Government Bonds from the
U.S. Treasury . . . and has created out of nothing a . . . debt which
the American People are obliged to pay with interest.”
“In
many years of questioning high experts on the matter, I have yet to
hear even one plausible answer to the question (of) why the
Government should extend money-creating powers to the private
commercial banks to be used, without cost, to create money which is
lent to the Government at interest.”
As far as I
know, Congressman Patman’s question remains unanswered.
In
the next column I will move on to the solution to the “balance
of trade deficit.”
Column #31 SOLUTION TO THE “BALANCE OF TRADE DEFICIT”
(Week
6 – Monday Sept. 1)
The “balance of trade deficit”
is a net outflow of money caused by this country buying more goods
from foreign nations than we sell. Like the Federal “deficit”
and “debt,” it has its root in the private-bank-loan
transaction by which our money is created, but to trace out how it
works takes a longer explanation. The reader is urged to follow this
thread of thought carefully.
The “interest”
payments that must be continuously made in order to maintain a money
supply borrowed from a private banking system cause, from the
perspective of the consumer, a net loss of purchasing power, because
he does not receive anything of value in exchange for it. The result
is that not all the money that is paid to people who produce the
goods in the domestic economy shows up as buying power on the
consumer side of the production-balances-consumption market equation
(I am using a very broad definition of “goods” here that
includes all goods and services).
This causes goods to
pile up as unsold inventory in the marketplace, which means that
orders for more goods will decrease and workers will be laid off.
Those still employed will experience the same cycle of having part of
the money from their paychecks being siphoned off for “interest”
payments, which, in turn, causes a deficiency of purchasing power,
that results in still more goods piling up as unsold inventory, even
at the reduced rate of production. More workers will be laid off. If
this vicious cycle is allowed to continue unchecked, the country will
enter an economic “recession,” or even “depression.”
This
winding down of the physical economy parallels the contraction of the
money supply described in previous columns, both of which are the
result of the requirement to make “interest” payments on
the private bank loans.
The apparent answer to both the
physical and financial shortfalls would seem to be the same; that is,
find a way to bring more money into the circulation. The option that
has been talked about in these columns so far (short of making the
transition to a public monetary system) is for masses of people to
borrow ever greater quantities of money into circulation from the
banking system. There is, however, one other possibility that I have
not yet talked about; that is, achieve a “positive trade
balance” with other nations.
One way that unsold
inventory piling up in the domestic marketplace can be disposed of is
to sell it to foreigners. What is more, such sales would bring money
into the domestic money supply that has been lost to “interest”
charges. It looks like a win-win solution, except for one factor.
That is that virtually all other currencies around the world are also
borrowed into existence from private banks, so the domestic economy
of every other nation exhibits the same problem, and, therefore, the
same need for a “positive trade balance.”
Ideally,
world trade is a zero-sum game. Everyone can’t have a “positive
trade balance” with everyone else. The “positive balances”
must of a mathematical certainty equal the “negative balances.”
For the last few decades, the U.S. has been losing in the
balance-of-trade competition. Therefore it has been running up a huge
“balance of trade deficit” that can only be made up for by
taking on more “debt,” particularly in the form of the
selling of bonds backing the “Federal debt” to other
nations.
We have gotten away with this so far because the
U.S. dollar is the “reserved currency” for the world. This
means that it is the currency that every other nation has to hold a
quantity of to back up their own currency (which is why it is
sometimes called “paper gold”), as well as insure their own
buying power in the international marketplace (e.g. trade for oil is
conducted only in dollars).
If the dollar became
publicly-issued, the rest of the world’s currencies would be obliged
to follow suit and become publicly-issued as well. If that happened,
the people of every nation would have the ability to redeem the full
value of everything they produced in their own domestic marketplace,
because to maintain their money supply they would no longer be losing
the buying power that is currently leaking away due to having to pay
“interest” to the banks.
What is more, it would
also be possible to calculate an equitable trading value for every
currency in the world such that balance of trade surpluses and
deficits would disappear. All trade is essentially goods-for-goods,
and there is no reason why that could not be reflected in equitable
exchange rates between the currencies that facilitate their
exchange.
What stops this equitable exchange from
happening now is the “debt” that attends the creation of
all major currencies, and renders any hope for a just, stable and
sustainable world impossible. This opens up a whole new area of
discourse that there is not room to do justice to here (will be
explored in future columns), but I hope it gives the reader at least
a glimpse of what is possible if we were to return to sound monetary
practices.
Column #32 THE LESSONS OF FLINT, MICHIGAN
(Week
6 – Tuesday, Sept. 2)
On this Labor Day week of 2008, it
would be well to reflect on what happened to Flint, Michigan. This
small city northwest of Detroit was for many years the site of one of
General Motor’s largest production complexes. It was here in 1936-’37
that what came to be known as the “Flint Sit-Down Strike”
transformed the United Automobile Workers from a collection of
isolated locals on the fringes of the industry into a major union,
which, in turn, led to the unionization of the auto industry in the
U.S.
The number of people employed by GM in Flint fell
from a high of 80,000 in 1978 to about 8,000 today. We should pause
to ask, what has been the cause of such a steep decline? Many reasons
have been offered, but almost all boil down to a supposed “lack
of competitiveness” on the part of American industry, and by
implication, the American worker. This is a tragic misinterpretation
of what is essentially a monetary problem, and the industrial
laborer, the country, and indeed the world is paying a terrible price
for it.
In his classic film “Roger and Me,”
Michael Moore pursued the CEO of GM, Roger Smith, to try to find out
why his corporation was closing auto plants in Flint, and reopening
them in seemingly illogical places like, say, the desert in Mexico.
He never did successfully corner Mr. Smith for an answer, but we can
assume that the rationale would have had something to do with
“competitiveness.” Let us take a look at which location is
really more “competitive” from the stand point of the
physical and human realities involved, leaving monetary
considerations aside for the moment.
To begin our
reckoning, let us note that to move the site of production, the
factories that had already been constructed over generations and at
great cost in Flint would have to be disposed of and rebuilt in
Mexico. What is more, those plants are located in Flint for good
reason. They are within reach, via the greatest inland waterways in
the world, of the vast iron ore deposits of northern Michigan and
Minnesota. They have convenient access to the high-quality coal
deposits of Appalachia via a well-developed rail system. They are in
proximity to a bountiful fresh water supply. Flint’s factories are
located in mature communities with good roads, housing, medical
facilities, schools, utility infrastructure, and all manner of
amenities. They are interlinked with a well-developed network of
suppliers and services that have grown up over the years as adjuncts
to the auto industry.
The desert in Mexico is clearly
lacking in all of these. If one were to make a listing of the
tangible features of the Flint-vs.-the-Mexican siting, one would find
that virtually all of the advantages are squarely in the Flint
column. The only plus I can see for a Mexican location is perhaps a
limited potential for assembly for local Mexican consumption, but
even that is dubious. In any case, what reason could one offer for
forcing Upper Midwest residents to buy their vehicles from
Mexico?
But, we are scolded by pundits and politicians,
American workers can no longer “compete.” We need to take a
closer look at this. The workforce at the Michigan plants is already
well qualified for the job by training, experience and cultural
tradition. I know that Mexicans are fine and hard-working people as
well, and are fully capable of learning and performing the same jobs
as those in Flint, but I have worked in the American workplace all my
life, including a number of factories (one staffed almost entirely by
immigrant Mexicans), and Americans labor well and hard also. There is
not much to choose from when comparing the fitness of respective
populations.
This begs the question, “Given the
overwhelming preponderance of bona fide advantages embodied in the
Michigan option, why can a factory in Flint ‘not compete’ with one in
Guadalajara?” The answer is deceptively obvious and simple; the
worker in Michigan gets paid in dollars, while the one in Mexico
collects his wages in pesos.
But, I hear it argued, the
peso is worth less than the dollar. Says who? Where is there written
some universal law that dictates such things? Currencies are abstract
human creations controlled by the banking system. They would find
their own reasonable levels relative to each other if they were not
forced out of such equity by the insatiable need to feed the
“interest” bubble now almost universally attached to all
currencies.
The notion that there is some natural
disequilibrium in the exchange ratio between the dollar and the peso
that impels economic actions which are in such stark contradiction to
any sensible assessment of physical and human realities as there were
in Flint, ought to be a huge blinking red light to alert us to
precisely where the problem lies. The root is with the currencies
themselves. The problem is traceable to the creation and issuance of
“debt”-based currency by a private banking system, and the
ensconcing of the dollar as the privileged “reserve currency”
for the world.
We will continue our look into the lessons
of Flint, Michigan in tomorrow’s column.
Column #33 WHY THE VALUE OF THE DOLLAR REMAINS SO HIGH
(Week
6 – Wednesday, Sept. 3)
In yesterday’s column we noted
that into the late 1970’s the city of Flint, Michigan was the home of
one of the largest automotive production complexes in the world, but
after a concerted program by the management of General Motors to
relocate these factories to other areas (like, for instance, the
desert in Mexico) that in a physical and human sense had virtually no
natural advantages over Flint (in fact were hugely disadvantaged),
the workforce shrunk to only ten percent of its previous size in less
that three decades.
The economic reason widely attributed
in the media and claimed by the GM management to have compelled such
a drastic move was that the Flint plants and workforce were somehow
no longer “competitive” in the “global marketplace.”
By constructing a mental checklist of the relative physical and human
advantages of the Flint-vs.-Mexico siting I attempted to demonstrate
that this could not have possibly been the reason in actual physical
or human terms. The only factor that did seemingly make the move
economically compelling was the relative disequilibrium in the
exchange ratio between the dollar (which currency American workers
get paid in) and the peso (by which Mexican workers are paid).
If
the value of the dollar remains high enough for long enough, this
effectively becomes the reason that American workers cannot
“compete,” supposedly, with their foreign counterparts.
That has evidently been the case for the last few decades, as the
U.S. has run up enormous and mounting “balance of trade
deficits.” The perception that this “imbalance” was in
effect, and would be for some decades at least, must, it would seem,
have been a factor in the mindset of GM management (though perhaps
not consciously in these terms) when they decided that they just had
to move those plants to save the company.
The question
then becomes, what has caused the value of the dollar to remain so
consistently high with respect to the rest of the world that the
American worker, even with every physical advantage, is no longer
“competitive” (i.e. can no longer sell his goods at a
competitive price on the international market)?
The answer
is that the American dollar is the “reserve currency” of
the world. That is, it is effectively the backing for every other
currency. This status was established officially at the Bretton Woods
Monetary Conference in 1944 which set the basis for the post-WWII
monetary order. The dollar was unofficially dubbed “liquid
gold,” and it has since evolved in a way that is consistent with
that nickname due to many factors.
These include that the
U.S. economy for several decades after WWII was by far the largest,
most materially productive and most stable in the world. It is only
natural that the currency which was backed by the economic (not to
mention military and cultural) might of this “superpower”
would become the most sought after in global trade. If one had a
dollar, one could be confident of being able to spend it freely
almost anywhere in the world. If a nation had an ample supply of
dollars in its central bank, that signified in the eyes of the world
that it was “solvent” (much as gold used to indicate the
same),which bolstered the value of that nation’s own currency as
well. World trade in oil was conducted (and still is) only in
dollars. The list goes on.
The demand for the dollar has
been, and remains, huge; so much so that well over half of American
money circulates outside the U.S. (which is not to say that
confidence is not wavering). As we have talked about since the start
of this series of columns, the dollar is a “debt”-based
currency that is created and borrowed into existence through private
banks. It is out of the combination of these two factors that the
potential for the American government to sell trillions of dollars
worth of bonds “backing the dollar” arises. The process
manifests in a cycle that basically unfolds as follows.
Participants
in the U.S. economy borrow hundreds of billions of dollars into
circulation through the private banking system every year. This money
injects tremendous buying power into the American domestic market
(which is complemented by American’s huge appetite for goods).
Americans could use the money to buy the output of their own
factories, but it is often less expensive to purchase what they want
from foreign nations, partly because these nations are willing to
sell their goods more cheaply in order to obtain in the exchange the
dollars that they need. They must, for example, have dollars to buy
oil on the international market.
So, the U.S. runs up a
huge “balance of trade deficit”, and our dollars flow to
foreign countries; but, they can’t stay there. They have to flow
back. Otherwise they will cause inflation in their own domestic
market such that they will lose their “competitive” trading
advantage and the flow of dollars will stop, or reverse.
Generally,
foreign central banks, to support the value of their own currencies,
buy up the “debt” paper (i.e. Federal bonds and other
“debt” contracts) by which U.S. currency comes into being.
They become the recipients of the “interest” payments that
are made to service the “debt” on the U.S. money supply,
and the American people abandon their “uncompetitive”
industries, and borrow more money in an attempt to keep up
lifestyles.
What I have described above is, in very
simplified terms, the cycle that the American productive sector has
been caught up in and driven out of business by, as exemplified by
the fate of the auto industry in Flint.
The ways this play
out are vastly more complex that what could be covered in this short
article. The key to not getting lost amidst all the bewildering
intricacies is to keep in focus that this all starts with the fact
that the entire world is slipping into “debt” because it
borrows its money into circulation from an international banking
oligarchy, and these complexities arise out of the incredible
manipulations that all parties feel obliged to participate in simply
to survive.
Column #34 THE MATTER OF “CHEAP LABOR”
(Week
6 – Thursday, Sept. 4)
The virtual closing down of the
automotive industry in Flint, Michigan is an arch-typical example of
what has happened to the industrial base across America in the name
of industries having to move their operations abroad, driven by the
“realities,” supposedly, of having to remain “competitive”
in a new global marketplace. A less artful way in which the issue is
often stated is that American corporations have felt compelled to
search the globe for “cheap labor.” What, we should ask, is
“cheap labor?”
The very idea that there is
something that can be properly called “cheap labor” implies
that there are “cheap people.” To even utter such an
expression without being mindful of what one is really saying is to
demean inadvertently the work of all people. It is regrettable that
this phrase seems to have been picked up by activists of all hues of
the political spectrum. Even those who have presented themselves
(sincerely so) as heartfelt champions of the victims of globalization
too often repeat, without due reflection, the argument that
industries leaving one country for another ostensibly because of
“cheaper labor” is some new “global reality” that
we have to live with, and premise their arguments from there.
If
only, I have heard it said, we could improve secondary education,
provide universal health care, offer inexpensive day care, inspire
workforce motivation, make more investment in infrastructure or cut
taxes, then we could “compete” more successfully in the
global marketplace. Don’t misunderstand. I am not suggesting that
education, health care, child care, workforce motivation,
infrastructure and wise fiscal management are not essential in their
own right (one could find “debt”-based money at the root of
their debilitations also). My point is that they are not the core of
the perceived “competitiveness” problem, any more that
taxing and spending parameters are at the heart of the “national
debt” (see columns # 25 –31).
The problem is not
“cheap labor,” but rather “cheap money.” If
workers in different countries around the world were paid in national
currencies that reflected the real value of exchanges of goods
between those countries, the values of the currencies themselves
would tend naturally to a just and equitable balance relative to each
other. In fact, this is a long-held principle of classic
economics.
What, then, has kept it from happening after
the passage of centuries of time for such leveling to occur? The
answer is that there have always been inequitable currency patterns
established that more or less guarantee the dominance of one part of
the world over the other.
For example, when the colonial
powers were establishing their dominance over Africa in the
eighteenth century, one of the first measures they would take was to
levy a tax on every household that had to paid in a currency that was
set up for that purpose. The only way the people could get the money
to pay the tax was to work for their new rulers or supply them with
the fruit of their land. As a matter of course, this currency was
kept in short supply so a certain portion of the people, and
eventually the country as a whole, were fated to sink into “debt.”
These patterns of “debt” still exist in “third-world”
countries today, and the essential foreign currency is mostly
dollars.
I sometimes detect in the usage of the expression
“cheap labor” a certain “first-world” hubris that
regards the workforce that lives in relatively “third-world”
conditions as being “less developed,” “less skilled or
educated,” “harboring lower expectations,” or
otherwise being expected to resign themselves to a lesser state of
living. There are many variables at work here, and I don’t want to be
simplistic. Truth is that even such stereotypical labeling reflects
some degree of reality, and/or alternative values and virtues
described in a pejorative manner. For example, the lesser material
“prosperity” of a given society may in part reflect their
authentic valuing of less material wants, and embody its own virtues
in the end.
Whatever the truth of the matter, such
personal and cultural preferences deserve the chance to find their
own natural expression. To have millions of people around the world
laboring under inhumane conditions because they get paid in a
currency that hardly buys anything, while they spend their days and
life energies making luxury goods for those who have borrowed dollars
to spend, is not something that can be lightly attributed to their
misfortune of living in areas where labor is “cheap.” There
is cause and effect at work in such conditions, and one cannot get to
their root without taking into account the monetary parameters under
which each society labors.
The bottom-line truth is that
nobody’s labor is “cheaper.” Humanly speaking, we all exert
and sweat just the same to perform a given task. We all have the
right, in freedom, economic and otherwise, to seek our full measure
of dignity, development and expression. That won’t be fully realized
in a world in which there is “cheap money” posing as “cheap
labor.”
Column #35 THE MAQUILADOROS: MEXICO’S “FLINT”
(Week
6 – Friday, Sept. 5)
The Maquiladoros is a huge industrial
district in Mexico which stretches along the U.S./Mexican border. It
consists of thousands of factories that are foreign-owned, and were
attracted to the country mainly by the “lower production costs”
(a euphemism for “cheap labor”). The output of these plants
is largely exported to the United States and other countries. This is
where many of the factories that used to be in Flint, Michigan were
relocated.
It would be difficult to find a place in the
world where the evident contrast between “first world” vs.
“third world” economics (high-value vs. low-value currency)
is more starkly drawn. In San Diego on the U.S. side of the border,
the average home is priced at upwards of a half-million dollars,
while wages in the often horrific working conditions of the
Maquiladoros on the Mexican side average $3.70; not per hour, but per
day.
Most of the Mexican labor force consists of
hard-working folk who have been driven out of the countryside
because, as farmers, they could not compete with the heavily
bankrolled and highly-subsidized agribusiness production of basic
farm commodities on the American size of the border (where, at the
same time, American family farmers have been losing their farms in
large numbers because they can’t pay their loans to the
banks).
Perhaps the most ironic outcome of this process is
that many of the Maquiladoros industries are themselves now being
closed and relocated to other locales (mostly to China) in the
never-ending corporate search for even “cheaper labor.” As
the Maquiladoros is shut down, thousands of displaced Mexicans feel
compelled to cross the border into the U.S., where, if they make it,
they will likely find economic opportunity that is relatively better
than the desperate options in their home country, but they will also
find themselves in the position of being re-exploited, as they are
obliged to do the most difficult, dirty and dangerous work for
whatever wage and working condition they can find. They have little
recourse because they have scant political rights, being that they
are not only “cheap labor,” but “illegal
labor.”
Where is all this going? We can see in the
Flint-to-Maquiladoros-and-beyond economic progression a compressed
view of what is happening under the influence of the private
“debt”-money system. The world is dividing ever more
starkly into the “rich” vs. the “poor,” the
“haves” vs. “have-nots”; those who use money to
make money vs. those who earn money by doing the work. This is not a
matter of good people vs. bad. It is rather the virtually inevitable
outcome of an inequitable monetary order.
To put it
simply, the “haves” are those who are the recipients of the
“interest” payments on money that is issued as “debt.”
The “have-nots” are the ones who make what is increasingly
a less-than-living wage doing the basic work necessary for the
maintenance of society, while making the “interest”
payments on money they are forced to borrow into circulation to
live.
The vaunted American work ethic is increasingly
being rendered moot, as wealth accrues, not to productive labor, but
to the exploitation of labor (i.e. ownership of the contracts for
“debt” which those who labor are obliged to take on merely
to live).
We are becoming a “civilization,” both
in America and throughout the world, in which the wealthy few
dominate, through their privileged niche in the monetary order, the
working many. There is still enough distribution of wealth in America
to make it look like a middle class society, but the middle is
eroding, as the many who are struggling just to maintain their
lifestyle (or stay in their home) often attest.
The jobs
that pay a living wage are disappearing, the work is being done by
immigrants who are working for inadequate wages, and the middle class
is struggling to hang onto its lifestyle (for now) by taking on more
“debt.” There is a relatively small (and shrinking)
percentage of the population that is growing wealthy by “living
off the interest.” All are basically good people, but they are
caught up in a dysfunctional economic order they don’t quite
understand, and more-and-more can’t seem to control. Its mounting
inequities are ultimately a threat to everyone, and are rooted in how
our money is created, issued and controlled. That is the lesson of
the Maquiladoros and Flint.
Column #36 WHAT COULD THE EXECUTIVES AT GM HAVE BEEN THINKING?
(Week
6 – Saturday, Sept. 6)
The shutting down of the auto
plants in Flint, Michigan, and their relocation to locales (like the
desert along the American border in Mexico), in spite of the
evidently overwhelming preponderance of physical and human reasons
not to do so (see Col. #32), is often held up as a prime example of
the “greed and stupidity” that supposedly has infected
corporate America. To be sure, it would not be difficult to find
justifications to criticize the move, but looked at from a wider
perspective, is the matter really that simple?
I was not
present at any of the board-room deliberations at which it was
decided that the factories in Flint had to go, but I can well imagine
that there were present expert accountants with flip-charts heavy
with graphics and ledgers full of numbers that presented ‘carefully
researched facts’ and ‘reasoned arguments’, the ‘bottom line’ of
which gave ‘incontrovertible testimony’ that GM had no other
financial option than to move those plants. Furthermore, I can well
imagine that these human beings – accountants, board members, even
Roger Smith himself – may have acted, more or less, in what they
perceived as good faith. As they saw it, presumably, did they not
have a company to save, and would not the continuing ‘high cost of
labor’ that would be incurred by a decision to stay in Flint result
in the closing of these plants, and the loss of local jobs, anyway?
After all, they had only to look around them and see most of
corporate world coming to a similar conclusion in their own
respective spheres.
Is it possible that all these
supposedly “best and brightest” people in the business
world could be “greedy and stupid,” or was there some
greater reality (real or imagined) at work in this now global economy
that they felt compelled to recognize and make the necessary
adjustment to? In my experience I have had occasion to work, from
time to time, with people from the executive suites (as well as many
from the factory floor), and have found them generally to exhibit the
same tendencies for human integrity and corruptibility that I find in
any group of human beings. I have experienced them on the whole, in
the terms of their own perceived worldview, to be fine and
conscientious people.
Notwithstanding, the question still
remains, how then could such a judgment (abandoning Flint and
relocating the plants), which seemingly flies in the face of every
physical, human and indeed economic reality that lies around them,
seem to otherwise intelligent, knowledgeable and responsible people
to be a necessary conclusion?
The answer, I believe, lies
in the deceptiveness that is an inherent part of the
private-bank-loan transaction. It arises because the transaction is
not a common sense borrow-money-and-pay-it-back routine (as it
purports to be), but rather a money-creation-and-issuance process by
which a compounding fee (called “interest”), that is in a
practical sense unpayable, is attached. Thus the terms used to
describe this process, such as “borrow,” “loan,”
“debt,” “interest,” “payback” and
“satisfaction,” all have a disarmingly familiar ring, but
the actualities of the steps they identify do not fit the their
common sense meanings or dictionary definitions.
The
building of a whole monetary universe on the foundation of an unsound
mode of creating and issuing currency, and an inaccurate use of
language associated with the process, has spawned a financial culture
that is skewed at virtually every turn. There is not room to do the
topic justice here (it will be explored as these columns continue),
but the extent to which this has compromised the ability of persons
in our civilization to think clearly on matters concerning money is
jarring to behold. I find this to be true across the full spectrum of
society, white collar and blue included.
Not only
management, but the participants in the labor movement in America as
well, would, I suggest, benefit from examining more closely their
roll in the whole Flint drama. Only then will they be able to come to
grips fully with the tragedy that has befallen them, and move forward
with confidence and clarity into the future. I will take up that
thread in the next column.
Column #37 THE LESSON FOR LABOR FROM “FLINT”?
(Week
7 – Monday, Sept. 8)
In yesterday’s column I suggested
that not only management, but also the participants in the labor
movement would perhaps benefit from examining more closely their roll
in the whole Flint drama.
The laborer who lost his job may
indeed, with justification, criticize the board and CEO of GM for
what they perceive as the board’s callous decision to move the
majority of the plants to “cheap labor” locales. On the
other hand, to even suggest that those who lost their jobs may have
had a hand in the disaster may seem to many to be grossly
insensitive, given the difference in the political power, monetary
compensation and personal suffering experienced by those on the
respective sides in the matter.
In last week’s columns I
offered the view that the Flint episode was a prime example of a
phenomenon that is happening throughout the country, caused in large
part by a lack of awareness in the corporate world of the effect of
the private-bank-loan transaction by which our money is created and
issued within our present monetary system.
It is only
reasonable to ask, given that the unconsciousness about the monetary
system is culture-wide, if the labor movement, like management, is
not in its own way susceptible to a narrowed vision on the same
subject, and thereby also an unwitting contributor to the calamities
(like Flint) that have befallen its members.
The heroic
pioneers of the unionization movement truly were the leading edge of
a just attempt by working people to at last secure, among other
things, a better-than-starvation share of the economic pie for their
labors. The lot of, not only the strikers, but virtually all working
people was transformed for the better, and the industries they worked
for benefited as well because they now had customers for their
products with money in their pockets. It was a win-win.
Over
time, however, something began to change. That is that, for a variety
of reasons, the “interest” payments necessary to keep a
burgeoning cold-war, consumer-society superpower supplied with money
began to double and redouble. This meant that, while the economy was
expanding by leaps and bounds, and while it seemed to many (maybe
most) citizens that it could go on doing so indefinitely, there was a
growing shortfall in the ability of the citizens of the nation to, as
consumers, purchase the full value of their own production in the
nation’s domestic marketplace.
For people who worked for a
livelihood this meant that, because so much money was being lost to
the “interest” payments required to service the “debt”
against the large and growing money supply, there was certain to be a
shortage of purchasing power circulating in the economy to pay their
wages, regardless of how high or low they were (or how productive
they were in their labors).
This shortage of buying power
was at core, not a wage-price-and-productivity problem (important as
these considerations are), but a monetary problem. Like the world of
corporate management, the labor movement did not recognize that. The
result was that, like management, they took measures that only made
the matter worse, and hastened the crisis that culminated in the
virtual abandonment of Flint by the auto industry.
Flush
from their victories in the late thirties and forties, the more
powerful unions struck for very high wages and benefits, thinking
that there would be a ripple effect from their gains that workers in
the rest of the economy would be caught up in. Gains were made for a
time, and it seemed to be working, but then it all came undone. Wages
and benefits have since plummeted, and the organized labor movement
itself is greatly diminished and in disarray. The unions were
criticized for using their new-found clout to make demands that
proved to be too high to sustain, relative to other segments of the
workforce. A strong case can be made for this argument.
I
think, though, that whether their demands had been high or modest, a
process similar to what happened at Flint would still have unfolded.
This is because the real issue for the worker is not whether the
numbers on his paycheck are big or small. It is, rather, whether
there is enough money circulating in the economy for the consumer
(who is just the worker when he goes home) in the aggregate to buy
the full value of whatever the workforce (who is just the consumer
when he goes to work) in the aggregate produces.
A problem
arises because this nation’s money supply is borrowed from a private
banking system, and so a large part of the average worker’s wage is
lost to “interest” payments for which he does not receive
anything of value. This makes it inevitable that unsold goods, equal
in value to that lost purchasing power, will pile up in the
marketplace.
The pressure caused by the disparity between
production costs and consumer buying power can be relieved in the
short term by participants in the economy (including the Federal
government)borrowing more money into circulation from the private
banking system, selling the surplus goods to foreign countries,
laying off workers (the cost of which is picked up by a public
welfare system), or by corporations cutting their “short-term
financial costs” by closing plants in the U.S. and relocating
them in locales that have “lower productions costs” (i.e.
“cheaper labor”).
If the nation had a system
whereby its money supply was issued directly out of the public domain
(i.e. U.S. Treasury), a balance between the costs of production and
consumer buying power would be assured. Unions, like management,
don’t seem to understand that. Their strategy of striking for high
wages and benefits for the particular part of the workforce they
represent, and assuming that this would cause a tide that would lift
all boats, has proven to be disastrous in practice. It is time, I
suggest, to reassess this approach.
In the end, I think
that what will be found is that management and labor are not natural
adversaries, but rather productive compliments of the economic whole.
If they could but realize that and join together in the quest for a
just and equitable monetary system, tragic episodes such as what
happened in Flint, Michigan could be a thing of the past. Michael
Moore and the CEO of General Motors might even become fast friends.
Wouldn’t that be worth a movie?
Column #38 THE UNITED STATES AS A “BUSINESS”
(Week
7 – Tuesday, Sept. 9)
The nominating conventions are over,
we know who the candidates are, and now there begins a two-month
media blitz in which they will make their best pitch as to why we
should elect them. If the past is any indication, I expect to hear
strident rhetoric about how we as a nation need to “balance the
budget,” “live within our means,” “practice
fiscal discipline,” “pay off our debt” and otherwise
run America more “like a business.” After all, say even
consummate insiders running for re-election, the problem in
Washington is that all these politicians, lobbyists and bureaucrats
have for the most part never run a “business,” and so have
no feel for the sort of sensibilities and skills it would take to
“balance the budget” for the nation as a whole.
This
is, in my view, a fundamental mischaracterization of the nation’s
chronic problem with “debt.” The United States is ideally
not a business. Rather, it is a sovereign nation within which
businesses operate. To facilitate the people’s commerce within its
boundaries, it has the power to issue a public money supply, without
cost. Businesses need a source of income to offset expenditures, but
the nation, as a sovereign economic entity that can create its own
money, does not.
Unfortunately, the sovereign power to
create the people’s own money (the most essential element of the
commons) has been abdicated to an extra-national (outside national
control) banking cartel. The net effect of this abdication is that
the sovereign socio/political/economic nation we call the United
States has, in effect, been transformed into a “business”
in the portfolio of an extra-national financial order.
Our
elected representatives, who hold the trust to safeguard the people’s
monetary prerogative, have (with the people’s negligent acquiescence,
if the full truth be told) abandoned their responsibility to “coin
Money (and) regulate the Value thereof”, and have instead set up
a scheme (the Federal Reserve System) whereby the only source the
American people have from which to drawn the currency they need to
conduct their commerce is to “borrow” it at “interest”
from private banks.
There are millions of businesses that
exist within this economy, and they each have their respective
revenue flows, but as a whole combined enterprise the American
economy (let us call it “Enterprise U.S.A.”)has only one
source of operating funds, and that is the money supply it borrows
from the Federal Reserve System. “Enterprise U.S.A.” always
owes more to the banks than is in the money supply due to the
“compounding-interest” fee attached to all bank loans. It
follows, then, that “Enterprise U.S.A.” is always obliged
to go further into “debt” in order to meet its expenses. In
essence, it is living by borrowing.
Any financial
enterprise that cannot stay in business except by continually
borrowing more money to finance its operations is by definition in a
state of bankruptcy. “Enterprise U.S.A.” (the American
economy as a whole when seen as a “business,” because it
has given up its power to create its own money) is, therefore, in a
state of bankruptcy. This is not a play on words. It is economic
actuality. Our economic life has been transformed from the free and
lawful expression of a sovereign people, into a “business”
which is perpetually beholden to its creditors.
There is a
sort of perverse “Golden Rule” that is bandied about in the
back corridors of power. It says, “He who has the Gold rules.”
A more relevant version is, “He who is the creditor rules the
debtor.” The people of the United States have allowed their
country to be transformed into a “debtor” nation that, to a
large extent, no longer governs itself.
Column #39 WHAT OFFICE ARE OBAMA & McCAIN ACTUALLY RUNNING FOR?
(Week
7 – Wednesday, Sept. 10)
Barrack Obama and John McCain (as
well as Ralph Nader, Cynthia McKinney, and others) have now gained
the nomination of their respective parties as their candidate for the
office of President of the United States, but, I would suggest, this
is not an entirely accurate description of the office they are
aspiring to.
Yesterday’s column traced out the reasons why
the U.S. has effectively ceased to be a sovereign economic nation,
and has instead become a “business” in the portfolio of an
extra-national financial order. It selected representatives (with the
acquiescence of its people) have abdicated their power to create and
issue the nation’s own money to a private banking system, which then
“loans” to the nation the money it needs to conduct its
commerce, but on such terms that there is never enough in circulation
to satisfy those “loans” without going further into
“debt.”
As an economic entity, the United States
has allowed itself to become a “debtor” that can no longer
pay its bills. Any economic enterprise that has no hope of financing
its operations, except by borrowing ever greater amounts of money, is
by definition in a state of bankruptcy. It can be truly stated,
therefore, that whoever directs such an enterprise is not the chief
executive officer of a viable organization, but rather the receiver
in a bankruptcy re-organization.
It follows, then, that
whoever gains the office of President of the United States will not
be the executor of the democratic will of the nation, as outlined in
the Constitution, but will serve instead as the elected receiver in
the ongoing bankruptcy re-organization of “Enterprise U.S.A.”
(the American economy as a whole when seen as a “business,”
because it has given up its power to create its own
money).
Admittedly, this is a startling assertion, but I
think that it is justified. What is more, it has immense implications
for all aspects of American life. If one starts with this observation
as a point from which to reckon, one can begin to see why the
problems of the nation are so intractable, and why money seems to
control the government. A “debtor” is obliged to do what
his “creditor” tells him to do, or he will not have the
money he needs to survive. This applies to people, and nations.
This
is a consideration that goes far deeper than who makes the campaign
contributions, pays the lobbyists, or passes through the career
revolving door between government and the corporate world. It is a
foundational monetary problem built into the financial structure of
the American nation itself.
I can imagine that the
Presidential candidates have not thought of the position they are
striving for in this way even for a moment, and yet given the
economic realities of the situation, is it not an accurate
description? One candidate will win the “Presidency,” but
it will be a hollow victory because the government he or she will
head is without the essential prerogative of sovereignty; that is,
the power to create and control the money of the nation. He or she
will instead “win” the “office” of receiver for a
national “business” that is in ongoing bankruptcy.
This
is why, precisely, Nathan Mayer Rothschild, who gained control of the
Bank of England, could boast, “I care not what puppet is placed
upon the throne of England . . . The man that controls Britain’s
money supply controls the British Empire, and I control the British
money supply.” By the same principle, whoever controls America’s
money supply controls America.
Column #40 HOW CAN WE HELP THE CANDIDATES?
(Week
7 – Thursday, Sept. 11)
It is a feature of the growing
malaise in American politics that, no matter who we elect, they seem
to do essentially the same thing once they get into office. The sharp
distinctions the candidates were at pains to draw between themselves
prove to be of little consequence because once they assume their
duties their real mandate is to keep the bankruptcy re-organization
process moving forward so the country can at least function while the
“debt” continues to climb.
To make the game
palatable to the electorate, they inherit a tacit public relations
mandate, which is to deflect attention from the fact that the “debt”
is a monetary problem that is caused by the nation having given up
the power to create its own money supply. Instead, they will feel
obliged to exhort the people endlessly that if only we adopted the
right taxing and spending priorities, then budgets would be balanced,
the economy would “grow,” and the “debt” would
start to be paid. Such rhetoric only obscures the real problem.
I
have followed the pronouncements of both Obama and McCain carefully
and have heard no evidence that either is at all aware that of the
true nature of the “debt” problem, though that is not to
assume that they don’t have thoughts in private. Several of the other
Presidential aspirants have given some indication that they possess a
measure of understanding. These are Ron Paul, Dennis Kucinich and
Ralph Nader. Unfortunately, none has demonstrated the level of
urgency on the matter that would show that they realize that, without
rectification of the monetary system, their otherwise laudable
intentions will be in the end moot (to be fair, Ron Paul might be an
exception, but his cure, the gold standard, is as bad as the
disease).
This has not always been the case in American
Presidential campaigns. At the Democratic Convention in Chicago in
1896, Williams Jennings Bryan declared, in what has come to be known
as his “Cross of Gold” speech, “If they ask us why we
do not embody in our platform all the things that we believe in, we
reply that when we have restored the money of the Constitution, all
other necessary reforms will be possible, but until this is done
there is no other reform that can be accomplished.”
The
nominating conventions of that era were not choreographed media
events. They were actual deliberative conclaves. The public at that
time was savvy about the basic principles of money, and the delegates
knew what Bryan was talking about (would the delegates of today?). In
fact they were so moved that the speech propelled him from being the
dark-horse candidate, to the party’s nominee (the position Obama
occupies now) for three election cycles.
What does all
this say about the monetary knowledge, understanding and wisdom of,
not only the current Presidential candidates, but also we the people
who elect them? Shall we passively watch them on TV while they pour
themselves out to pander for our approval, or would it be better to
seek a way to help them become edified through this process? After
all, one of them will be our next President. We the people certainly
have no stake in their futility. Let us hope that whoever is elected
will have a better chance to lead than merely manage the bankruptcy
of our nation.
So, how might this be done? I would suggest
that we the people take on the task of learning about money, and then
work to open up a public discourse in which the candidates can feel
free to join in. I have reason to believe that they have thoughts and
questions about the subject, but do not feel free to give them voice.
Many of us complain that they are scripted, but with our often
gaff-obsessed, litmus-issued judgmental attitude, we keep them
imprisoned in their script. Their evident failings notwithstanding,
these are bright, talented and motivated people. Surely they are
capable of the monetary conversation.
Column #41 POST-SEPTEMBER 11 REFELCTIONS
(Week
7 – Friday, Sept. 12)
On September 11, 2001 two hijacked
airliners slammed into the Twin Towers of the World Trade Center in
New York City, another into the Pentagon in Washington DC, and a
fourth went down in a field in Pennsylvania. This cathartic event is
destined to define the world for our time, perhaps for all time,
contingent upon whether we choose to be merely reactive, or to grow
in the face of the reckoning it presents. Do the commonly invoked
religious/ideological arguments, a supposed “clash of
civilizations,” or even the phenomenon of terrorism constitute
the most fundamental questions presented by this event? Is it not,
rather, about whether humanity is able take a quantum evolutionary
step up upon this calamity, or instead succumb to a descent into
deepening acrimony, violence and darkness. Fear ripples out, the
Constitution is subverted, military forces deploy, dark specters
haunt the media, and World War III is talked about by pundits as a
foregone conclusion. America, many fear, slides towards losing its
principles, its mission, and its destiny, much to the detriment of
the world at large.
Seven years have passed. The task of
civilization now is to redeem horror of “9/11” to a new
meaning. In a veritable sense, this tragic event was a culminating
convergence of an unrecognized historical malady that has its roots
in ancient times. To a great extent, it arose out of the failure of
humankind to come to a profound realization of the true nature of
“Money.” To be sure, heated debate in the public discourse
that touches upon money swirls around the event, but because it
rarely talks about how and by whom it is created and issued, it is
for the most part a distraction that misses the mark. The blessing
that the medium of money potentially represents has been co-opted for
gain, much to the undoing of human well-being and edification.
Those
gleaming towers were magnificent structures, but to many of the
impoverished masses around the world they seemed to mock their
desperate plight. In an address to the nation shortly after the
catastrophe our President, George W. Bush, asked rhetorically “Why
do they hate us?”, and then answered, “They hate our
freedoms.” I have no doubt that there are those who peer at
America with hateful, envious eyes, and covet the intention of doing
it violence, but we are a nation of providence, constituted to bring
something new to the world.
The American Revolution was a
three-legged stool. Two of the legs any schoolboy who does his
lessons is familiar with; i.e. (1) personal freedom within the
context of (2) democratically-determined law. But, what was the third
leg? It was the bringing of a new economic order founded on the ideal
that the people are sovereign, and endowed with the essential right
of the sovereign; ‘to coin our own money and regulate the value
thereof,’ and thereby possessed of the means to not fall under the
heel of the moneylender.
Our consciousness of that third
mandate has slipped, almost to nothing, until we are become the world
agent of the Bank-of-England (now Federal-Reserve) “debt-money”
system; the very foe that our colonial forebears defeated on the
battlefield, and the people have through episodes of our history
striven to eradicate.
I would suggest that “they”
(the resentful millions of the world, to the extent that that is the
case) do not hate us for our freedom, but for our failure to live up
to its promise. We have let our nation become the instrument for
exporting the private-debt-money tyranny that those who came before
us once had the inspiration and common sense to resist. Fortunately,
the dream does not die easily, as the people of the world still await
the awakening of America to its authentic calling.
The
world is now one world, and faces all-together a convergence to a
terrible ‘end-of-time’; or the opening up to a liberating new
dispensation. The providential moment of ultimate choosing is at
hand, and the 911 event was a throwing down of the gauntlet. This
assault was meant to take the world from us; let us resolve to take
it back, and this time rectified to a more perfect
truth.
Emphatically, none of this is to absolve the
heinous acts that were committed on that terrible September morning,
nor to say that those responsible need not be brought to justice.
Rather, it is a call to regain our destiny as individuals, as a
nation and as a world community.
In holy writ we are
admonished to “get wisdom; and with all thy getting get
understanding.” Horrific images of 9/11 and its fallout have
been burned into the hearts and minds of people in every niche of the
globe. It is necessary now that they be informed with new
understanding. Rather than seek vengeance out of a feeling of being
victimized, it is imperative that we the people of this nation, and
indeed the world, embrace the opportunity for maturation that this
crisis presents, and step up upon it to a new vision; one founded
upon true brotherhood in a just social order, and that made manifest
in a transformed economic life.
Column #42 THE WRONG ANSWER TO THE MORTGAGE CRISIS
(Week
7 – Saturday, Sept. 13)
Over that last year, the reading
and viewing public has been increasingly regaled with personal horror
stories about vulnerable people being lured by shady mortgage brokers
into signing contracts using deceptive practices and on falsified
terms. Such contracts typically were loaded with questionable
financial gimmicks such as “adjustable rate mortgages,”
“balloon payments” and “zero-principal mortgages,”
and had principal loan balances that were simply beyond the financial
reach of the borrower.
It is becoming evident that the
“sub-prime housing crisis” is only the tip of the
proverbial iceberg. Now it appears that the nation’s two largest
mortgage finance companies, Fannie Mae and Freddie Mac, will need a
massive injection of capital (some reports say as high as $300
billion dollars), or an outright takeover by the Federal government,
to keep them in business.
So, what has gone wrong? The
media is filled with finger-pointing and recrimination about how with
the “sub-prime,” and now the “prime,” mortgage
industries have been driven to the verge of collapse. There seems to
be a growing consensus that the politically ballyhooed deregulation
of the financial industry over the last three decades has allowed
unscrupulous financial entrepreneurs to run amok, and that this is
the prime cause of the crisis. If only, so the wistful thinking goes,
there had been sound financial management in the industry this crisis
would never have happened.
That unscrupulous financial
entrepreneurs have run amok is beyond doubt, but does it follow that
had more prudent financial stewardship been in place, then arriving
at a point of crisis would have been avoided? Let us examine the
question.
Suppose that the financial industry had not been
deregulated and/or had been more conservatively managed. Then
hundreds of thousands, if not millions, of these reckless loans would
presumably not have been made. This also means, it should be noted,
that many billions of dollars of new money would not have been
created by the banking system, and loaned into circulation.
When
a bank makes a loan for a mortgage, the new money this transaction
generates goes from the pocket of the buyer, to that of the seller,
and then continues to circulate as he spends it into the money
supply. Over the last several decades, the mortgage market has been
flogged by government policy and financial practice for all it is
worth as an engine of new money generation for the economy. If there
had not been all this bloated “prime” and “sub-prime”
borrowing, hundreds of billions of dollars that are circulating in
the economy right now would not exist. That means that much of the
money in the typical person’s wallet or bank account would not be
there. With a greatly diminished monetary pool, there would be much
less money in circulation to make payments on mortgages that had been
contracted before the latest wave of borrowing, and less circulating
to meet the needs of commerce.
This is a classic catch-22
situation. If we borrow more money from the banks, then we experience
a bubble of prosperity, followed by a crisis of excessive “debt”
when the payments come due. If we refrain from borrowing, then not
enough money enters into circulation to meet old “debts,”
plus maintain an adequate money supply to do our business. For the
last half-century we have chosen the path of rapidly increasing
borrowing. The more frugal option, then, is the road not taken, and
so we do not experience its effects. Nonetheless, there is a “debt”
crisis at the end of either scenario.
The answer to the
mortgage crisis is to stop borrowing our money supply at “interest”
from a private banking system, and start issuing it publicly through
the U.S. Treasury. This would take away the impetus to manipulate the
housing market towards higher prices decade-after-decade as the
primary engine for “debt”-money creation. Publicly-issued
money is the path, I suggest, to a stable market with prices that are
consistent with the actual physical cost and human effort required to
build and maintain the housing we live in.
None of this is
to say that the cavalier conduct of unscrupulous financial
entrepreneurs is in any way justified, or that it has not greatly
exacerbated the cost in personal suffering of the “debt”
crisis. The reality, though, is that a “debt” crisis was
sure to emerge, in one form or another, regardless of their conduct.
Fiscal stewardship is an administrative problem, but the mortgage
crisis is at root a consequence of faulty money creation.
Already
in the newspapers I see proposed various schemes to fix the mortgage
industry, virtually all of which involve borrowing ever more massive
quantities of money to finance so-called “bailouts,” and
giving yet more control to the people and institutions that have
presided over the present fiasco. This is the wrong answer.
Column #43 A PROPOSED BREATHER
(Week
8 – Monday, Sept. 15)
With six weeks worth of this column
having gone out, it is perhaps time to take a look at how it has been
received so far, and how it might proceed into the future. The
response has been gratifying; more so than I could have expected. I
say this with respect to numbers of people who have opted-in, and the
many thoughtful questions, comments and critiques received. This is
all greatly appreciated.
There are at least two places on
the net where these columns are posted (on the initiative of others)
as they come out, and a complete set maintained. These are listed at
the bottom of this page. Others have offered to do the same, set up a
dedicated website, or otherwise help to get these and other of my
writings out. There have been more offers than I have been able to
follow up on so far, but I am grateful for every one. I am moved by
the news that a number of people have indicated that they make hard
copies of the columns and give them to people they know who might be
interested.
The greatest challenge with the columns so
far, I am informed, is that some folks are having a difficult time
keeping up with the volume of reading. These articles are meant to be
short enough in length to read over the proverbial “morning cup
of coffee,” but people today often lead harried lives (got to
keep up with the monthly “interest” payments, after all),
and have a difficult time in finding place for even the smallest
tasks. Many are indeed keeping up with whatever they hope to get out
of the content, but others are not.
The content is
designed to be a tightly reasoned and integrally connected discourse
that can (supposedly) in a step-by-step manner help the reader awaken
to a wholly different perspective about money than is offered in the
conventional dialogue. I write each article in mindfulness that there
may well be readers who are joining in for the first time, or
rejoining after an absence. Consequently, each installment has to be
at least minimally decipherable to the uninitiated within the terms
and context presented in any given piece. That said, much groundwork
for understanding is laid as the series unfolds, and if parts are
missed something is inevitably lost. There are many readers who,
according to the feedback I am getting, feel the same way, and
experience frustration if they “fall behind.” There are
others who work to consolidate their understanding by going back over
past installments.
In light of these considerations, plus
other commitments coming up in the near future, I am contemplating
taking a two-week breather from October 5 through 19 during which no
new installments will come out. The series would pick up again
starting October 20, and presumably focus on the issues that have
gained public attention during the run-up to election day on November
4. I would welcome whatever thoughts anyone has about this.
There
is yet much that needs to be said about money and the economic times
that we live in. I don’t anticipate that subject will ever be
exhausted. Accordingly my commitment to getting this dialogue out,
through New View on Money and other channels, remains ongoing. Thank
you for your patience with this process and continuing interest.
I
close with a monetary thought for the day:
“I believe
that banking institutions are more dangerous to our liberties than
standing armies. If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by
deflation, the banks and corporations that will grow up around them
will deprive the people of all property until their children wake-up
homeless on the continent their fathers conquered. The issuing power
should be taken from the banks and restored to the people, to whom it
properly belongs.”
Thomas Jefferson, letter to the
Secretary of the Treasury Albert Gallatin (1802)
Column #44 “WHERE DID ALL THAT MONEY GO?”
(Week 8 – Tues. Sept. 16)
During
the recent Bear-Stearns (BS) meltdown, a stock trader friend told me
about the billions of dollars that had supposedly been lost, and
asked incredulously, “Where did all that money go???” The
answer I gave him was “It didn’t go anywhere. It wasn’t money.
It was the air in a speculative bubble.” Let me explain.
The
morning of the BS crash its stock was trading for $60 (before it fell
to two dollars later in the day). This represented a supposed “net
worth” for each share then of $60. The next question is “Where
was this $60?” The simple answer is that it was an abstract
number that was calculated from an anticipated “price-earnings
ratio” (i.e. the ratio between the price an “investor”
pays for a stock and the amount of money he expects to “earn”
from holding it), much as the “value” of bonds, bundled
mortgages, and other investment vehicles are reckoned respectively
from their “discount rate”, “interest rate” or
“rate of return”.
The concepts these financial
expressions refer to are not money. They are only promises (or
anticipations in the case of stocks) to pay a “return on
investment” at some point in the future. The “value”
of stocks expressed in dollars is a theoretical number based
primarily on calculations by traders of dividends expected to be paid
by the stock, and a subjective estimation of the “risk”
that such proceeds might not be realized.
Stocks may have
the illusion of being money because, while there is still life in the
stock-market game, one can redeem them for cash. This is to say that
the owner of a given stock may assume that there is someone out there
who will be willing to bet his own cash-in-hand against the prospects
that a given stock will pay dividends at a rate that is at least as
high as what other traders in the current market expect, and/or there
will be other “investors” coming along that will anticipate
an equivalent or higher dividend in the future, and thus be willing
to pay even more for the stock, thereby allowing the current
“investor” to “cash in” (sell his stock) at a
profit.
Within a market where participants imagine that
they can expect a “10% return on investment” (given the
range of financial opportunities available where the “investor”
could put his money), for a share stock of in BS to be “worth”
$60, there must exist momentarily in the trading culture an
anticipation that it will be paying out $6 at the end of its fiscal
year. This is affected by many factors, but in general anticipated
dividend and perceived risk govern what price traders are willing to
pay. Even the most optimistic “investor” realizes that
prices of stocks cannot increase exponentially forever, but they are
betting that they can buy into the market, and then sell their
holdings for a “profit” before the speculative psychology
that drives prices up in market goes bust. When it does pop the
expectations reverse, and there ensues a stampede to “cash in”
one’s stocks, such as the one the market experienced yesterday.
I
anticipate that there will be cries in the media about how many
billions of dollars are being “lost” through this latest
market contraction, but this would not be an accurate
characterization of what is transpiring. In previous columns we have
already seen how virtually every dollar in circulation is created and
issued through the process of someone going into a bank and
“borrowing” money which the banker creates on the spot with
the “writing of a check.” If tomorrow’s newspaper headlines
try to tell us that ‘billions of dollars have been lost to the
economy’ since the morning before, we should ask ourselves, “Does
that mean that millions of people were suddenly possessed to walked
into banks yesterday, where they took cash out of their pockets or
funds out of their accounts, and paid down the principal balances on
their loans, whereby the banker was obliged to extinguish (mark
“paid”) this money, thereby wiping it off of his books, and
leaving the nation with billions of dollars less in circulating
medium?”
Common sense would tell us that nothing of
the sort happened. It follows, then, that there are essentially the
same number of dollars in circulation as there were twenty-four hours
before. The only change in the money supply will be the net
differential between the quantity of dollars “borrowed from”
vs. “paid back to” the banking system, as is the case on
any given day. What has really happened is that “billions of
dollars” worth of speculative air has been let out of the bubble
of (unrealistic) expectations that the actual dollars in circulation
are expected to support.
Notwithstanding, as we arise to
this new day, the papers and morning shows will no doubt be filled
with hysteria about how the financial world is about to come undone.
A few minutes ago I turned on the radio just in time to hear a
financial “analyst” warn that we may be on the verge of
another “depression.” Such alarming talk carries with it
very real danger if it is not carefully considered in that it can
become self-fulfilling prophecy all too easily.
We the
people have a choice. We can either believe the catastrophic hype we
are being bombarded with, or we can look around and see that, as
ever, the sun beams down, the rains fall, the plants grow, the
infrastructure persists, and the hands, hearts and minds remain
willing and able to do the work. The whole “financial crisis”
that the world is experiencing right now is not some objective
reality that the universe is laying upon us. It is, rather, an
illusion that we as a human race have created, believed in, and
sacrificed our very life substance to.
This may seem to
many to be an extreme, even bizarre, assertion, but it is something
that we would do well to contemplate seriously now, as an antidote to
being overcome by fears about money. I do not hereby mean to dismiss
the very real suffering that people experience under the boot of the
monetary system (I suffer with it also), but we can be free of it if
we as a society can wake up what is happening. That is what the
discourse about money that is being put forth in these columns is
intended to be all about.
Column #45 DEFLATING THE “DEBT” BUBBLE VIA BANKRUPTCY
(Week
8 – Wednesday, Sept. 17)
One of the great secrets of the
capitalist system is that it depends on bankruptcy to survive. This
is how air is let out of the bubble of unsupportable “debt”
attached to our money supply due to the demand for ever greater
“interest” payments attached to the issuance of our
dollars. Otherwise pressures associated with “debt” would
become too high for the system to be sustained. Indeed, if one were
to check the historical record, this is how capitalism has achieved
longevity. The trick for those players who would survive, and even
prosper, is to make sure that the air expended is someone else’s
air.
Regular episodes of widespread financial failure
restore a sort of pseudo-confidence in the system because anyone
whose balloon doesn’t get popped experiences a sense of relief, is in
a positions to exercises relatively more control in the social order
for his “success,” can feel like a “winner” (one
of the “smart” ones), and may even wax righteous in their
faith in the system. After all, so the thinking goes, does not the
occurrence of such periodic convulsions to the economic order provide
a way to weed out its “less fit” players (for the good of
all or course), and correct “imbalances” in the system
(never mind that these “imbalances” are due to the
instability inherent in a system in which there is never enough money
in circulation for people to pay their debts)?
A prime
example of how the debt-bubble-deflation-through-bankruptcy process
operates has transpired in the Midwest Farm Belt over the century –
almost since the establishment of the Fed. At the time of the passage
of the Federal Reserve Act, a third of the people lived on the farm,
and at the start of WWII it was still a quarter of the populace. Now
less than two percent remain, and it is questionable as to how many
of these are “farmers” in the sense of being independent
entrepreneurs (as opposed to subcontractors for major food
cartels).
In the history of the world there has never been
a population that has been evicted off its land, much less from a
plain as fruited as the American Midwest, without wrenching trauma.
How then was this fiercely rooted rural society removed in little
over a generation? It was done by creating a context in which it was
not possible for the occupants as a whole to make the ends meet in
their financial lives (i.e. pay their expenses, earn a living, and
have enough to reinvest into another crop), and then let them work it
out in a desperate scramble to see who could hang on.
The
factor that made the farm situation untenable was not, as claimed,
“over-production” (in a world where tens of thousands of
children perish each day of starvation-related causes). It was,
rather, the so-called “debt” against a money supply that is
“borrowed” into existence from private banks on terms that
made it financially “impossible” for the producer (in this
case the farmer and supporting rural businessman) to receive enough
for his product in the marketplace to avoid the necessity of taking
on ever more “debt”.
For reasons that are
complex, the shortfall of buying power available to complete the
market cycle in any “debt-money” regime was directed first
in a concerted way against the rural sector (as historically it has
generally been). Meanwhile, there were policy papers put out by
corporate think tanks that, for example, called for “. . . a
program, such as we are recommending here, to induce excess resources
– primarily people – to move rapidly out of agriculture.”
(An Adaptive Program for Agriculture – by the Committee for
Economic Development (CED)). The practical way to do this was to
manipulate the monetary situation in such a way that farmers could
not receive for their product a “parity price” (one that
would allow them to make a living, and keep them in structural
balance with other participants in the economy).
Fundamentally,
the “farm problem” is in reality a monetary problem.
Historically, it almost always has been. The key to evicting the
rural population from the land was to hide its true nature with a
subterfuge (“farmers are being too productive”), and then
rig the markets so that their financial collapse played out over a
period of time.
Accordingly, farmers were obliged to go
broke at a rate of a percent or two per year. Those still struggling
to not be one of the losers typically saw no other course but to show
up at the auctions of their bankrupt neighbors and pick up the equity
in their capital supplies and equipment at pennies on the dollar. Old
“debts” (air in the bubble) were wiped out in part because
not enough could be salvaged, and the net “indebtedness” of
the countryside experienced some relief, but the growth of the bubble
resumed, and eventually almost everyone went down, except those who
had deep enough pockets, or a position of advantage within the system
(e.g. large corporate operations), sufficient to enable them to pick
up the pieces of their neighbors’ ruined lives. This process was
wrenching, both for the rural folk involved directly, and the country
as a whole.
The vital rural community is now virtually
gone, and what is left effectively are corporate farming contractors
(which often are now getting good prices and high subsidies),
“Wal-Mart” regional commercial strips (to which there
adhere increasingly satellite communities), and food imported from
“cheap-labor” plantations (where the Mexican farmer is
being economically driven off his land, and effectively compelled to
migrate across our southern border).
Of course, since the
demise of the rural areas, the “debt-bubble-deflation”
scheme has moved on to the manufacturing sector, as our industries
(e.g. the automotive complex in Flint) have been shipped overseas.
Now the “service industries” are being forced out (e.g. the
transfer of customer-service phone banks to India), followed closely
by the intellectual sector (e.g. hi-tech programming).
Naturally,
this has all been extremely traumatic, but these “adjustments,”
going back to the pre-WWII days, exist yet in the memory of our more
elderly fellow citizens who lived through them. Still, we as a nation
have not noticed the economic elephant in the room; i.e. the
debt-bubble-deflation-through-bankruptcy process.
The
“debt” bubble has to be deflated somewhere, and it was
inevitable that the game should move at last to the
banking-and-finance sector, which has been most instrumental in
bringing this distress to the rest of the economy. This is what is
happening at present.
Column #46 THE FRACTIONAL RESERVE OF THE GOLDSMITH BANKER
(Week
8 – Thursday, Sept. 18)
The mode of banking now in use is
commonly described as “fractional reserve banking.” The
expression “fractional reserve” is one that is carried
forward from an earlier form of the craft known as “goldsmith
banking.” As applied to modern practice, this expression is a
misnomer that effectively obscures any true understanding of how our
present monetary system operates, and why it is currently in such
distress. To get a clear picture of this, it is first necessary to
gain an understanding of what “fractional reserve”
originally meant, and then how the concept has been misapplied.
In
Europe of the 15th century there were many smiths that worked with
gold, and therefore required vaults to securely store this precious
material of their craft. Over time citizens and merchants that owned
their own gold and used it in trade found the metal to be
inconvenient and hazardous to keep in their personal possession.
Consequently goldsmiths engaged in the sideline business of storing
people’s gold in their vaults, and issuing a receipt for the
storage.
These receipts began to circulate as a currency
with tradable value, as if they were the gold itself, and so became a
form of paper money redeemable in gold. As payment the goldsmith
charged a percentage of the value of the gold stored.
The
goldsmith noticed that under normal circumstances only a very small
percentage of his customers at any given time would redeem their
receipts (i.e. take possession of their gold). For long periods the
great majority of their metal merely gathered dust in his vault. At
length it occurred to him that he could write more receipts and offer
to “loan” the gold he was entrusted to hold to others, with
an “interest” charge attached of course. In actuality he
had nothing to loan because the gold already belonged to another
customer, but who would know the difference. He could, in effect,
profit on gold that he had, in a figurative sense, “created out
of thin air.”
The key to making this scheme work is
that he would need to limit the amount of receipts issued such that
the gold that he had on hand would, in the normal course of business,
represent at least a certain “fraction” of the face value
of the outstanding paper claims against it. This gold on deposit,
then, would act as a “fractional reserve” that could be
dipped into in the event that he experienced an unusually high demand
for redemption at any given time.
The goal of the whole
arrangement to the goldsmith was to issue as much “interest-bearing”
paper as he dared against the stock of gold in his possession
(thereby maximizing his income), while guarding against the
possibility that the day might come when he would not be able to
redeem with gold a receipt that was presented to him.
At
first the scheme was a trade secret. As its workings became an open
secret, many people regarded it as simple fraud, but others deemed it
a necessary way to get the quantity of medium into circulation that a
growing commerce demanded. In any case, the populace was eventually
obliged to accept the goldsmiths’ methods as the accepted way of
doing business, or effectively forego much of its money supply.
By
this mechanism the goldsmiths effectively began to operate as
“banks-of-issue” (banks that create and issue money), and
“fractional reserve banking” was born. The scheme worked
well as long as there was not a “run on the bank”; that is,
a rush by depositors to redeem their receipts for the gold because
they had lost confidence in the institution.
As a sidebar
to the goldsmith-banker story, it bears mentioning that this group
has borne a great onus in the historical reckonings of many would-be
monetary reformers. It is easy to find good reason for that
assessment, but the whole story is not so simple. It could be argued
that they were in effect coming up with a money–creation mechanism
that did in fact put a great deal of currency into circulation in an
age when that was sorely needed for its own inherent reasons. They
operated in a time when the society itself did not have a sufficient
sense of the science of money to create an adequate system in the
public sphere where it rightly belongs (the same might be said of the
situation with respect to money and banking that we find ourselves in
today).
Were the goldsmiths simply a class of scam
artists, or were they people who saw an essential need of the society
around them and found an innovative way, however imperfect, to meet
it? The answer presumably is both, and all degrees in between. They
were, after all, people. Many deem the legacy they left behind as
threatening the demise of civilization. It could also be argued,
however, that had they not initiated such a practice, the evolution
of Western society would have been seriously hindered. I leave that
question to the reader’s judgment.
In tomorrow’s column we
will begin to examine how a pseudo version of the goldsmith’s method,
recreated in our time as the “fractional reserve system,”
has planted the seeds of the present collapse of the financial
sector.
Column #47 “FRACTIONAL RESERVE” IN MODERN BANKING
(Week 8 – Friday, Sept. 18)
In yesterday’s column I described how the 15th century goldsmith banker held a minimum quantity, “fractional reserve,” of gold in his vaults, relative to the much greater face value of the receipts or claims for that gold that he had issued, to serve as a hedge against not being able to redeem a receipt in a time of unusually high demand (which would signify his operation’s bankruptcy). I also asserted that a pseudo version of the goldsmith’s method, recreated in our time as the so-called “fractional reserve system,” has planted the seeds of the present collapse of the financial sector.
The “fractional reserve system” of the modern banking era operates according to a formula that defines two-levels of money creation, the second being constructed upon the foundation of the first.
Level 1: “High-powered money” is the bankers’ term for money created and put into circulation as a result of “borrowing” from the Federal Reserve itself by our Federal government.
Level 2: “Credit money” is money which is created and enters into circulation through the private-bank-loan transaction by which participants in the economy (except the Federal government) “borrow” money from private banks.
Creation of “High-Powered Money”:
When the Federal government determines that it needs to “borrow” money, the Treasury Secretary (or his agent) approaches the Fed, and asks for a loan. The Fed agrees to “loan” the money, but requires security (collateral) in the form of bonds offered by the Federal government and signed by the Secretary of the Treasury.
The government prints and delivers the bonds to the Fed in exchange for newly created dollars being credited to its account at the Federal Reserve. These bonds, then, act effectively as “loan contracts” between the government and the Fed. It is critical to note that the Fed created this money out of nothing (“thin air”) at the moment it credited the account. In addition, the face value of the bonds (the value printed on their face indicating the amount due the holder upon maturity) is much greater than the amount of money the government “borrowed.” This is due to the “interest” charges which accrue from the date the bond is issued to when it is redeemed (paid off).
As the Federal government spends these new funds they end up on-deposit in the bank accounts of those contractors, builders, suppliers, service providers, employees, etc. to whom the money was paid. For purposes of this illustration, let us ignore the relatively small amount that circulates as pocket cash, and assume that all of it winds up on deposit in the banking system.
This new money “borrowed from” (in actuality “created by”) the Fed and on-deposit in banks is referred to as “high-powered” money. The total quantity of high-powered money on deposit in the banking system, combined with a number known as the “fractional reserve ratio” mandated by the Federal Reserve Board of Governors, determines how much “credit money” the banking system can create through the bank-loan process. The formula that governs the procedure works basically as follows.
The “Fractional Reserve Ratio”:
Let us assume that the “fractional reserve ratio” has been set by the Fed at 1/10 (10%). In mathematical terms, this means that the banking system as a whole (The Fed and the private banks it oversees combined) have the potential of creating an amount of money that is the quantity of high-powered money on deposit, times the inverse of the “fractional reserve ratio.” If the ratio is 1/10th, this allows the banking system to create overall an amount of money which is a multiple of the inverse of that number (i.e. 1 ÷ 1/10), which equals 10.
Simply put, this means that if borrowing and spending by the Federal government causes a billion dollars of “high-powered money” to be created and put on deposit in the banking system, the private banks can use this billion dollars as a foundation (“fractional reserve”) to create another nine billion dollars of new “credit money.” The total amount of new money, “high-powered” and “credit,” that can be created through this process, is equal to what the Federal government “borrows” and spends into circulation, times ten (in this case, ten billion dollars).
Creation of “Credit Money”:
To show how the process unfolds, let us suppose that $10,000 dollars of high-powered money has wound up on deposit in a given bank. The banker at this institution has thereby gained $10,000 dollars in new “reserves” against which he can create new money to “loan” out. The question is, how much can he create?
Since the banker in our example has $10,000 dollars of “reserves” on deposit, he can create up to $9,000 dollars in new money to “loan.” Let us suppose that someone comes in and asks for a $9,000 loan, and his application is approved. The banker writes a check for (or electronically credits an account in the amount of) $9,000 dollars, and gives it to the “borrower.” According to the way bankers think about this process, the banker in our scenario has just “loaned out” $9,000 dollars, and has, as required, left $1,000 “in reserve” as a hedge against the bank becoming “insolvent” (i.e. going broke).
At first glance, the process described in the above paragraph looks very much like the method the goldsmith banker used to protect his bank from becoming insolvent. Common sense dictated that he keep in reserve in his vaults an amount of gold which represented a reasonable percentage (fractional reserve) of the face value of gold receipts he had issued that were circulating as money in the economy, as a hedge against an unusual level of demand for the redemption of those receipts by his clientele who, overall, had been “loaned” the same gold several times over. Similarly, the rule governing modern banking which requires banks to keep in “reserve” a certain “fraction” of their money when they create loans, would seem to be a common sense measure to provide a margin of insurance against the possibility that the banks might find themselves in the position of not being able to redeem their depositors’ accounts for cash at the teller window.
These two scenarios have, upon cursory look, a very similar appearance. If one examines more closely what is really happening, however, it will be found that these respective processes are very different, and have, not similar, but virtually opposite effects. The fractional reserve practice of the goldsmith banker lent a measure of stability to their system, but the so-called “fractional reserve” formula of modern banking is the very source of its chronic instability. In tomorrow’s column we will continue with the description of how the “fractional reserve formula” unfolds, and take up the thread of how it is at the root of the collapse in the financial markets at present.
Column #48 THE “FRACTIONAL RESERVE FORMULA”
(Week
8 – Saturday, Sept. 20)
Two columns ago I described how
the goldsmith banker of the 15th century initiated the practice of
keeping a quantity of gold in reserve in his vaults which represented
a fraction of the outstanding receipts that he had issued against
that gold (and which now effectively circulated as money). This
fraction was determined by the size of reserve he deemed necessary to
be reasonably certain that in the normal course of business (apart
from a “run on the bank”) he would have enough gold on hand
to redeem any receipt for it that was presented at the teller
window.
Yesterday I described the first steps of the
“fractional reserve” mode of money creation used in modern
banking, and asserted that it is superficially similar to the
fractional reserve method of the goldsmith banker in that it requires
the banker (in the language of the profession) to keep in “reserve”
a quantity of money that is at minimum a certain “fraction”
of what he is giving out as “loans,” as a hedge against the
bank becoming “insolvent” (going broke). Anything
“reserves” beyond that level are called “excess”
(i.e. “reserves” upon which new money could be created, but
has not yet been).
Note that in each of these processes
the banker is essentially creating new money; the goldsmith when he
is writing out multiple claims against a reserve supply of gold in
his vault, and the modern banker when he is writing out a check
against a “reserve” supply of paper or electronic deposits
of money in his bank.
Despite what may seem like close
parallels between these two processes, they are fundamentally
different, and have opposite effects.
The goldsmith banker
is in possession of an actual reserve supply of something (the
quantity of gold in his vault) that can be dipped into to stave off
catastrophe in a time of emergency (much like a reserve of grain can
stave off starvation during a drought). Catastrophe in this case
would be defined as the goldsmith running completely out of the
precious metal, with the result that he could no longer redeem at his
teller window a promissory note he had issued that said the bearer
was entitled to receive his (the note bearer’s) gold. In this event,
public confidence in his operation would collapse, notes still
outstanding would become worthless paper, and his business would be
declared “insolvent” or “bankrupt.” It should be
noted, however, that this would not have transpired until his reserve
of gold was completely exhausted.
The modern banker is not
in possession of any such reserve supply of something that he can dip
into to stave off catastrophe in a time of emergency. His “fractional
reserve” is a bookkeeping illusion. In yesterday’s column I
described how if a banker has $10,000 in “reserves” on
deposit in his bank reserves, he is allowed to create $9,000 in new
money to “loan” out.
In the idiom of the banking
profession, of this $10,000, the banker has loaned out $9,000, and
kept $1,000 “in reserve.” Note, however, that none of the
original $10,000 of “reserves” on deposit is actually
loaned out. It all remains on deposit. The status of the $10,000 has
changed only in the sense that this particular $10,000 has now been
spoken for as the baseline of money on deposit that the banker could
use to create $9,000 in new money. To speak as if $9,000 was loaned
(as if some money on deposit was lent to someone and left the bank),
and $1,000 kept “in reserve” (as if it were in any way
comparable to the tangible reserve of the goldsmith banker) is to
mutter nonsense.
According to the rules of “fractional
reserve” banking, if the person who had that $10,000 on deposit
came to the teller window and withdrew it, the $9,000 that had been
created using it as a baseline would now be unsupported. If the owner
of the $10,000 withdrew even a small part of it, say $100, that would
mean that 9/10 of $100 ($90) would be unsupported in their formula,
and a way would have to be found very quickly to either “call
in” (cause to be repaid) $90 of that loan, or find $100 dollars
in new “reserves” (money that was not yet designated as
supporting newly created money on top of it).
If a modern
bank dips into its “fractional reserve” for even a single
dollar, the formula by which it is governed is violated, and the
whole fragile structure by which it creates “credit money”
comes undone. This singular fact transforms what should be among the
social order’s most stable institutions (banking), into a game of
brinksmanship by which, in the pursuit of their mandate to maximize
profits, bankers are obliged to come as close to “needing”
to use their “fractional reserve” as possible, while
knowing that if they miscalculate and step over that line their bank
will instantly “fail” (be declared “insolvent”).
The banking system as a whole has been moving ever closer to the
“fractional reserve” tipping point, has gone past it, and
can no longer stop its own fall. That is why the Federal government
is, in people’s perceptions, being obliged to step in.
Column #49 THE “FRACTIONAL RESERVE” PYRAMID
(Week
9 – Monday, Sept. 22)
In yesterday’s column I gave a brief
description of how a banker who has $10,000 in “reserves”
on deposit in his bank can use them as a basis for creating $9,000 in
new money to “loan” out. When the borrower spends the
money, almost all of it winds up in the bank accounts of the people
he pays it to.
To keep the math simple for our
illustration let us assume that our borrower spends all the money in
one place, and the entire $9,000 ends up on deposit in one bank. From
the perspective of the banker at this institution this newly borrowed
and spent money is regarded as $9,000 dollars in “fresh
reserves.” In other words, he can use this $9,000 as a basis for
creating yet more money to “loan.”
Let us
suppose another person walks into the office of the banker in whose
bank the $9,000 in “fresh reserves” has been deposited, and
asks to borrow some money. Based on the $9,000 that has just been put
on deposit in his bank, he can now write a check for newly created
money to lend to this new borrower in an amount up to $8,100 ($9,000
times 9/10), leaving, as the banking system describes it, $900
($9,000 times 1/10) as a “fractional reserve.”
The
person with whom he spends this newly created $8,100 will presumably
deposit it in his bank account, and this deposit will be seen by his
bank as $8,100 in “fresh reserves,” upon which, in turn,
this banker will be able to create another $7290 ($8,100 times 9/10),
and leaving an additional $810 dollars ($8,100 times 1/10) “in
reserve.”
This process can continue for many
successive cycles as new money created and loaned out by one bank is
deposited in another, where it is seen as fresh reserves that can be
used as the basis for creating yet another round of money to loan.
For each cycle the amount of new money created and fresh reserves
deposited diminishes in proportion to the fractional reserve ratio.
In the long run it approaches “0”, but it never quite gets
there. The amount does, however, become so small that the procedure
does effectively provide a limit to how much “credit money”
can be created from the quantity of “high-powered money”
originally borrowed into existence from the Fed by the Federal
government, which ended up on deposit in the banking system, thereby
seeding the fractional reserve process.
It may be helpful
for the reader to visualize the monetary system as a pyramid. The
foundation stones of the pyramid are Federal bonds, which are
essentially the “loan” contracts by which the Federal
government borrows money from the Fed, and which winds up on deposit
(as “high-powered money”) as the initial “reserves”
in the banking system. The first cycle of “credit money”
created by a bank and then deposited in the banking system forms the
next course of blocks in our pyramid. From there, each cycle of new
money created through the loan process, and deposited in the banking
system is represented by successive courses of stones. Each course of
stone is shorter by the fraction represented in the fractional
reserve ratio (1/10 in our example), so the lengths of the courses
(the amount of new money that can be created and re-deposited as a
fresh reserve base) are never quite zero. This suggests the image of
a pyramidal-shaped wall with ends that slope towards each other, but
also curve in such a way(asymptotically) that they reach for the sky,
but the slopes never quite meet. The fundamental shape imparted by
the fractional reserve ratio gives this pyramid an appearance that is
relatively tall and slender, so much so perhaps that it is suggestive
of a degree of instability.
Still if the courses of stone
are sound, the structure might stand. The problem is that in monetary
terms, the courses are not sound; they are crumbling. This is because
they are being eaten away by “interest” charges against the
money supply.
If a person takes out a bank loan and spends
the money into circulation, the value of those dollars (the stones in
our monetary pyramidal wall) are, from the moment they are issued,
beginning to be eaten away by the interest charges on the loan. For
example, suppose a person borrowed and spent $100 from a bank. He has
thereby added $100 dollars to the money supply. There is, however, an
“interest” charge attached to that money that is accruing
as long as that $100 is in circulation. Because this “interest”
charge in practical terms constitutes a net subtraction from the net
value (amount of money) realized from that loan, it is effectively
eating into the principal proceeds of the loan that brought it into
being. Given enough time, the monetary value of the loan will be
fully consumed (e.g. $100 will still be owed, despite $100 or more
having already been paid in, as is typical in a revolving credit
scheme).
Looking at the face of the wall, one sees a shape
that resembles a pyramid, but one that is fundamentally unstable
because the courses of stone of which it is composed (the bundles of
dollars that are created and put into circulation via bank loans) are
crumbling (being eaten away by “interest” charges). The
present monetary system is the ultimate “pyramid scheme”
(new “debt” money attracted to the scheme by old “debt”
money). One can scramble to find new material to repair the growing
holes in the blocks (find new borrowed money to “bail out”
the financial interests whose bundles of money are “invested”
in the lower courses of the wall), and thereby attempt to save the
wall itself (keep the monetary system from collapsing), but patching
can be effective only for so long. Ultimate collapse is
inevitable.
For one with eyes to see, this is precisely
the image, I would suggest, of what is happening with our monetary
structure at present.
Column #50 BASE COURSES OF THE “FRACTIONAL RESERVE PYRAMID”
(Week
9 – Tuesday, Sept. 23)
In yesterday’s column I drew a
word picture to help the reader visualize the monetary system as a
wall made up of courses of stone (bundled “loans” of money
borrowed at “interest” from the banking system) that
resembles in shape a sort of tall slender pyramid, whose ends slope
towards each other, but also curve in such a way that they reach for
the sky, but never quite meet. The nature and shape of the wall is
determined by the “fractional reserve formula,” which
governs how banks create and loan out money.
The
foundation stones of the pyramid are Federal bonds, which are
essentially the loan contracts for money the Federal government
borrows directly from the Fed, that winds up on deposit as the
initial “reserves” in the banking system. The second course
or layer of stones in our pyramid is the first cycle of “credit
money” created by banks and then deposited back into the banking
system. From there, each cycle of new money created through the loan
process and deposited in the banking system is represented by
successive courses.
Each course of stone is theoretically
of the same nature in terms of the “debt-based-money” it
represents, but they occupy relatively different positions in the
structure of the wall. If one or more stones (bundles of loans) of an
upper stratum failed, that would not threaten the integrity of the
pyramidal wall as a whole, as there is little or nothing in the way
of newly created money that is being supported above it (i.e. that it
is designated as the “reserves” for). If, however, a stone
near or at the bottom were to crumble, it could threaten the
integrity of the wall as whole (as a significant portion of the loan
bundles above it would have been created using it as the original
“reserves”). If a few stones at or just above the
foundation course were to disintegrate it, would threaten the wall’s
very existence.
It is obvious that, structurally speaking,
the layer of government bonds supporting the dollar is the most
crucial. Accordingly, this “high-powered” base strata
cannot be allowed to fail without bringing the whole system down.
This is why (it is said) the “full faith and credit of the
Federal government”, “backed” by the full force of
same, stands ready to see that this does not happen. This, then,
makes the government bonds “backing” the dollar the logical
“investment of last resort” (the one that will fail only
after all the others have failed), regardless of whatever else is
going on in the financial order (which is why these bonds are selling
at a premium in the current crisis).
The next several
courses up are made of the “reserves” that are on deposit
at the major commercial and investment banks. These represent the
first levels of “credit money” created on the basis of the
“high-powered money” on deposit from loans to the Federal
government. They do not constitute the foundation per se, but are so
closely linked to it that for a major bank or banks to fail is deemed
to be tantamount to the failure of the system itself. If a big bank
fails, by the rules of the game a lot of other loans that piggy-back
off the “reserves” its money on deposit represents would,
by the rules of the banking system, not be supported. In the
prevailing view, monetary liabilities for which the large banks are
responsible must be honored so as not to precipitate a fatal
undermining of the system. When that possibility seemed to loom, the
Federal government has in the past intervened (as with FDR’s “banking
holiday” and “suspension of gold redemption”, the
Continental Illinois bailout, and the Mexican
“debt-restructuring”).
Closely linked to the
viability of these bottom courses are the fortunes of the banking
system’s biggest customers, including large corporations, major
public entities (states, cities, bonding districts, etc) and the
mega-wealthy. These are the “important players”, and
confidence in the system rests, it would seem, on the public
perception of their remaining able to pay their “debts.”
This imperative is commonly deemed to be significant enough,
depending upon circumstances and the vagaries of the political
process, to warrant, supposedly, government rescue from insolvency
(as for the Chrysler Corporation and New York City bailouts).
In
tomorrow’s column I will describe the upper courses of the fractional
reserve pyramid, and show how their relative positions in the
monetary structure accounts for the evidently scant regard the
regular hard-working, bill-paying citizen is receiving in the spate
of current proposals designed, supposedly, to save the financial
system.
Column #51 MIDDLE COURSES OF THE “FRACTIONAL RESERVE PYRAMID”
(Week
9 – Wednesday, Sept. 24)
Yesterday I described how the
lower courses of the image I am using to describe the fractional
reserve formula that governs how banks can create and issue new money
(a stone block wall which resembles a sort of tall pyramid) are
ostensibly closely linked to the fortunes of the banking system’s
biggest customers (large corporations, major public entities, and the
mega-wealthy). Thick portfolios of “debt”-paper instruments
(securities) which supposedly represent wealth (bonds, mortgages,
stocks, etc.) are used as collateral for borrowing massive amounts of
money into existence, which in turn constitute the base of “reserves”
upon which creation and issuance of the “credit money” that
constitutes the bulk of the money supply rests (or at least that is
how the world of high finance imagines it to be).
The
Middle Courses:
Above the base are the middle courses,
where we find the bank deposits of the hard-working, bill-paying,
family-raising wage earner, small businessman and consumer (i.e. the
“middle class”). In real physical and human terms, these
folk are the ones who perform the bulk of the wealth-creation work in
society. They make their living by growing food, making things and
servicing people’s needs. Their money in the bank is where the bulk
of the pyramid lies. Ultimately all production is meant for
consumption, and the “consumer” in this country is
effectively synonymous with “middle class”. It buys
virtually everything that is sold on the market, either directly or
indirectly. The personal credit of middle class has been the great
engine of monetary growth since WWII. We have truly established a
consumer society, and its real and dubious glories have become
synonymous with the “American Dream”.
The middle
courses can generally be thought of as occupying three zones. The
first one up (closest to the base) is where the biggest investments
in people’s lives are financed. The preponderant factor here is
home-loan mortgages. This has been seized upon by the banking system
as the great engine of “debt”-money creation in the private
economy (which is why it is in trouble now). A certain rate of
default can be tolerated in this stratum as long as there is enough
floating cash or willing credit worthiness in the housing market to
purchase homes that enter into default, thereby avoiding any serious
disturbance to the continuing escalation of “real estate
values.” The system itself is soulless, and does not care if a
person has a home (to be sure, people in the system may care). It is
effectively concerned that there exists enough solvency in the
peoples lives, however desperately obtained, to keep its tottering
credit pyramid from crumbling.
The next zone up is
maintained by purchases for big ticket items and durable goods. This
is the level of borrowing for education, high-end vehicles, luxury
lifestyles, small business investment, and personal financial
“investments.” Higher rates of default are tolerated here,
but it would have to be very high to pose any threat to the monetary
structure.
The top layer of the middle zone up consists of
small business and consumer loans for mid-to-minor capital items
(economical vehicles, appliances, furniture, vacations). The
consequences of loan default at this level with respect to the
economy are less severe simply because “credit money” at
this level is not supporting much of a credit structure above it.
Very high rates of default can be tolerated. Such a phenomenon
usually becomes a political problem before it becomes an economic
one, as far as the financial system is concerned. Lesser neighborhood
banks could find themselves in trouble, but that is not, relatively
speaking, a great threat to the monetary pyramid itself. There is
always, it seems, another buyer who can step in cover the equity in a
repossessed car.
Tomorrow we will talk about the economic
trauma increasing numbers of people are living in in the top zone of
the fractional reserve pyramid.
Column #52 TOP COURSES OF THE “FRACTIONAL RESERVE PYRAMID”
(Week
9 – Thursday, Sept. 25)
In the last two columns I have
described the lower and middle zones of the image I am using to
describe the fractional reserve formula that governs how banks can
create and issue new money (a stone block wall which resembles a sort
of tall pyramid). The lower zone consists of a foundation course of
money on deposit in the banking system which are the proceeds of
borrowing by the Federal government, and a number of layers stacked
on top of that which are composed of the money on deposit of the
banking system’s biggest customers (large corporations, major public
entities, the mega-wealthy).
Above the base layers are the
middle courses, where we find the bank deposits of the hard-working,
bill-paying, family-raising wage earner, small businessman and
consumer (i.e. the “middle class”) who perform the bulk of
the wealth-creation work in society.
The
Sub-Prime/Revolving-Credit Courses:
The top zone (upper
courses) of the fractional reserve pyramid is made up of the money on
deposit in the banking system of the people who are borrowing to
live. Any pretense of this being funds that are “invested”
is virtually gone. This is the level of “finance” where
people live from “paycheck-to-paycheck” (if they are
fortunate), and “loans” are taken out to buy groceries, put
gas in the car, and pay for uninsured medical care. These are the
folks who live in the financial purgatory of sub-prime mortgages,
credit card dependency and payday lenders.
Whether
consumers in the sub-prime/revolving-credit zone default on their
“debts” is of little consequence to the monetary system as
a whole. Business at this level is all gravy to the banking system,
with little cost, except printing and postage on the billions of “new
offers” they send out in the mail. That specifically is why
people in the midst of a major credit-card “debt” crisis
continue to have their mailboxes stuffed with new offerings, even
from the same companies they are in arrears to. If the consumer went
bankrupt the “debt” on these cards would lapse, but all the
money that could have been squeezed out of their beggared estates
would by that time have been collected anyway. Fresh “credit
money” created out of thin air could be safely issued again,
next time on even harsher terms.
For a system that depends
ostensibly on the ability of people to pay their “debts”,
the controlling factor in the pressure-relieving bankruptcy game is
not as simple as “loan repayment, or no”, but rather the
stratum in which any default occurs. In the base strata of the
monetary pyramid, institutional default will convulse and even
threaten the existence of the system itself (at least that is the
fear fed by the fractional reserve formula). As one moves up the
pyramid, this default-phobic reflex becomes progressively less
operative to the point where in the top zone the banking system does
not even want its customers to pay up. That is why privately credit
card companies refer derisively to their customers who do pay their
bills in a timely manner as “deadbeats”. Their business
practices result in keeping the consumer running ever faster on a
tread-wheel of revolving credit, at increasingly harsh terms, the end
of which is almost certain to be bankruptcy.
It should be
noted that the soundness of the financial blocks in the bottom row
still depend, however indirectly, on the performance of some of the
lesser grade courses on top. Their portfolios are ultimately
“debt”-based, and so depend on real people being able to
“perform” on their financial obligations. A certain amount
of rot can be tolerated, but let that be the problem of the middle
managers in the upper layers. Of late, however, these prime players
have had to reach further up into the realms of “sub-prime and
revolving debt” in an attempt to keep their own stones in the
“fractional reserve” wall patched up with enough money on
deposit.
The perverse logic of this whole scheme is that
if the common man goes bankrupt, even if millions do (especially in
the sub-prime/revolving-credit zone), it is treated in the world of
high-finance and the politics that attend it mainly with lip service,
because their “loan” proceeds are not strategic stones in
the wall (not the “reserves” for much “credit money”
creation), but if a major bank fails it threatens to bring down the
whole credit structure. The crazy upshot of this situation is that
there is a degree of reality to it; as long, that is, as we the
people accept the dubious “financial realities” of a
monetary order that is based on the “fractional reserve formula”
as propounded by powerful media, financial and political
interests.
And so the public may acquiesce (if history is
any guide) to these “bailout” schemes, albeit amidst
indignant demands for more “accountability” in the system
this time around. Those who labor to make mortgage payments,
sub-prime and prime, are losing their homes by the millions, while
Fannie Mae and Freddie Mac (the financial agents for those
“investors” who “own” their mortgages) are
getting hundreds of billions of dollars in “bailout” money.
The fortunes represented by the lower courses of the fractional
reserve pyramid scheme are thus secured, the banking system is
“saved”, and the system is made ready to go another round
of “debt”-money expansion.
Column #53 THE PRESIDENT’S ADDRESS TO THE NATION
(Week 9 – Friday, Sept. 26)
Following are selected excerpts from President Bush’s speech to the nation on Wednesday evening in which he addressed the current financial crisis, and urged the adoption of a proposed $700 billion dollar scheme to “rescue” banks and other major financial institutions. To his words quoted below, I have added my own commentary and explanatory (in my view) inserts in brackets:
“Financial assets related to home mortgages have lost value during the house decline, and the banks holding these assets have restricted credit.” [These “financial assets” are people’s mortgage contracts that “investors” have bought up with money borrowed from banks in order to be the recipients of their “interest” payments. (see Col. #5)]
“As a result, our entire economy is in danger.” [The condition of our “entire economy” is being linked to the interests of the financial speculators who are buying up our “debt” paper.]
“So I propose that the federal government reduce the risk posed by these troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” [It is being proposed that the federal government borrow money to replace what the banks lost through speculative lending. The phrase “avoid collapse and resume lending” is an indirect reference to the idea that the money lent to buy such “troubled assets” is on deposit in the lower courses of the fractional reserve pyramid, and constitute, therefore, much of the “reserves” that are supporting the consumer borrowing above it.]
“This rescue effort is not aimed at preserving any individual company or industry.” [It is aimed at preserving the gains of the speculative financial “industry”.]
“See, in today’s mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world… Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.” [Fannie Mae and Freddie Mac have been presented to the public as financial agencies dedicated to getting people into their own homes. Whatever good may have been done through them in this respect, the President’s words are a tacit admission that “when push comes to shove”, it is the “investments” of speculators in home mortgages who are getting “bailed out”, while the investment of the homeowners who pay them is not taken seriously into account.]
“The decline in the housing market set off a domino effect across our economy.” [This is another way of saying that the decline of the housing market has precipitated a collapse of the fractional reserve formula.]
“When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell.” [The phrase “incur serious losses” makes it seem (though not explicitly) as if banks and speculative “investors” were holding money that is now being lost. They were not holding money; only speculative paper that gave the appearance of being money because there was always someone else waiting in the wings, presumably, that had money in hand that they were ready to trade for that paper. There is virtually as much money in the economy as there was a month ago, except that now the holders of it are not so willing to play at the gaming tables in the casino that the monetary system has become.]
“I’m a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business.” [Then why do we not let the speculators go out of business, and leave the productive sector unburdened by their “enterprise”?]
“And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.” [The American people possess the key to their own credit, and that is to issue their own adequate supply of money directly out of their own public treasury, which is the sure antidote to “recession”.]
“But given the situation we are facing, not passing a bill now would cost these Americans much more later.” [I find this to be a misguided sense of urgency. It is as if we the people are being rushed to plunge back into the “debt”-money system before we have had a chance to think about what it has wrought. This is our perfect opportunity to see the workings and consequences of the private-bank-money system exposed and examined. If the enforcement of the fractional reserve formula were suspended, we could let the money in the banks just be money (not “reserves”), and that would allow us to take any time we needed to come to our senses.]
“First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.” [If one finds dead leaves clogging one’s gutters, the sensible thing to do is to flush them out, or at least allow the natural flows of water over time to do so. Why, then, do we not allow the “troubled assets (i.e. unsupportable “debt” contracts) that are clogging the financial system” to be flushed out?]
“The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.” [The President is acknowledging that the government is effectively the borrower of last resort (after the people lose confidence and/or are no longer willing or able to borrow more) for the private monetary system.]
“And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.” [This is wishful thinking. The proliferation of “debt”, public and private, will only continue.]
“The final question is, what does this mean for your economic future?” [This “bailout” would insure that our economic life in the future would be consumed by ever greater quantities of “debt.”]
“Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability.” [I fear that “modernize our financial regulations” is a euphemism for transferring even greater power to the institutions that have presided over the crisis that is now coming to pass.]
To be clear, I am not singling out our current President as the scapegoat. Truth be told, I don’t hear either of the “major” Presidential candidates say anything that gives an indication that they have distanced themselves from the mode of thought that got us into this mess (though some of the less regarded do, namely Ron Paul, Dennis Kucinich, Cynthia McKinney and Ralph Nader). Surely President Bush has had his part in this, but so have previous presidents, and virtually everyone who has in their own sphere helped to shape the economic life. This is not a time for haste, blame or recrimination. Rather, it is a pause for soul-searching, both as individuals and as a nation. I do not exclude myself. I think that there is a bright new future than can come out of this “financial crisis,” but it will not happen by making an ill-conceived and massive “bailout” of the failed ideas and practices of the past.
Column #54 MY SOLUTION TO THE “DEBT CRISIS”
(Week
Nine – Saturday, Sept. 27)
I would suggest that there is
an answer to the current “debt crisis” that is very
straightforward and consistent with common sense. This is the time to
pause, take stock of what has happened, and do some soul searching
before getting stampeded into any
multi-hundreds-of-billions-of-dollars “bailout” scheme that
only serves to compound the mistakes of the past. In my view, there
is a better way. I hereby propose the outlines of a genuine solution
based on three principles.
Principle #1:
As a
society we need more and more to see money, not as a means for
private gain, but as a channel for serving the needs of our fellow
man and taking care of the planet. This is not a mere truism or
sentiment. It is the only practical way forward. The current monetary
order grew out of the current monetary culture as naturally as a tree
grows from its own seed, and now we are seeing the fruit thereof.
If
the whole truth be told, it is not only the financiers who have
entertained a measure of avarice in their hearts when it comes to
money. Dare I say that virtually everyone has unduly coveted it to a
degree in their own respective spheres, and acted on that impulse, at
least in part, within the context of to their own opportunities? Who
has not accepted what has come to them through the system as their
due, while protesting against what is perceived to be the unwarranted
fortune of others? I mean no judgment or accusation by this. We all
have an inner conscience to which we must give an accounting, and I
have my own to face.
I believe that a society-wide change
of consciousness about money is possible, and would be reachable if
each person strove to cultivate a right inner attitude.
Principle
#2:
The “debt”-based private-bank-loan mode of
money creation and issuance must be abolished, and the people must
rouse themselves to reclaim their sovereign power to create and issue
their own money. I don’t mean to sound dogmatic on this point, but I
believe that if returning the monetary franchise to the people where
it rightfully belongs is not at the heart of a proposed solution,
then it is no solution at all. This is a principle that cannot be
compromised in any hybrid “rescue plan” without re-planting
the seeds of the monetary order’s, and thereby the social order’s,
undoing.
Public issuance of currency is not a scheme to
get “free” money out of the government. Rather, it is the
taking up of a responsibility that we as citizens have neglected for
too long. We have allowed our monetary affairs to be taken over by a
private agency, the so-called “Federal Reserve” (which is
neither “Federal”, nor a “Reserve”), and our own
currency to be doled out on terms favorable to the private interests
are represented by it. Now we will have to get serious about, not
only our prerogatives as a sovereign people, but also our duties as
stewards of an essential trust.
As a practical measure,
the first step politically would be to repeal the Federal Reserve
Act. This does not mean demolishing its buildings and telling its
employees to look elsewhere for work. Rather, the skills and
dedication of the workforce could be turned to good account in
helping to administer a new way of handling money.
Nor
does it mean abolishing private banking, or even the lending of money
by banks at interest. The banks would continue to perform their
necessary services, but the essential change is that they would cease
to be the agencies that issue our money supply. In their new
configuration they would operate more like savings-&-loans and
credit unions do now.
Principle #3:
There must
be established a world trading order in which the relative values of
currencies are allowed to find their equitable exchange ratios
through the normal processes of trade, much like water finds its own
level. This would tend to happen naturally now, except that the
“interest” charge that is attached to the issuance of
virtually all currencies is constantly draining them of their value,
thereby igniting “trade wars” by which nations feel obliged
to make up for that lost value through a “positive trade
balance”. It is not possible for every nation to have a
“positive trade balance” with every other nation. The
result is that no just and stable equilibrium can be achieved in the
global economy.
My proposed new world trading order would
be essentially the “level playing field” that the sincere
proponents of “free trade” aspire to, but cannot seem bring
about. I welcome any other thoughts.
Column #55 PRESIDENTIAL DEBATE – SEPTEMBER 26, PART 1 THE “FINANCIAL RECOVERY PLAN”
(Week
10 – Monday, Sept. 29)
On Friday evening the two
“major-party” candidates for President, John McCain and
Barack Obama, met for the first face-to-face debate of the
Presidential campaign. Overall the session was divided into two main
segments, their respective themes being the current financial crisis
in the economy, and the Iraq and Afghan wars in the Middle East. In
this installment, let us take a look at the first segment, the
current financial crisis.
Moderator Jim Lehrer opened with
the question – “Where do you stand on the financial recovery
plan?” (the “financial recovery plan” being,
presumably, the $700 billion dollar bailout of the financial industry
proposed in an address to the nation by President Bush earlier in the
week).
I found the responses of both candidates to be
evasive and non-substantive. They lapsed into the vague platitudes,
truisms and bromides that virtually always seem to attend economic
issues. For Senator Obama’s part, he talked about the need for “more
oversight”, measures “to make sure that we protect
taxpayers”, arrangements to “make sure that “none of
that money is going to pad CEO bank accounts”, and steps “to
make sure that we’re helping homeowners”. Senator McCain’s
replied by asserting the need for more “transparency”,
“accountability”, “oversight” and options that
don’t require the government taking over. These are all very fine
sentiments, but, borrowing from a Presidential debate in 1984 between
Walter Mondale and Gary Hart, “Where’s the beef?” That is,
where is the substantive thought in their respective responses?
I
would ask the reader, if the words and phrases attributed to each
candidate above were cut out and presented without identification as
to who uttered them on this particular occasion, could you tell which
belonged to whom? Or, rather, are they not in fact abstract vagaries
professed endlessly in the common political-speak by which
politicians attempt to garner credit for sincere intent, and create
an aura of being on top of the problem, but convey no substantive
thought on the matter at issue?
Both declined to be
responsive in the first go-round to the clearly stated intent of the
moderator’s question, so he felt obliged to re-ask it. The answers
were only slightly more responsive the second time around. Obama
deferred in part by saying that “we haven’t seen the language
yet”, and McCain related an inspiring in is own right, but
irrelevant in this case, anecdote about General Eisenhower to
reiterate his point about “accountability”.
In
yesterday’s column I stated that, “…if returning the monetary
franchise to the people where it rightfully belongs is not at the
heart of a proposed solution, then it is no solution at all.”
There was no mention whatsoever about the need to return the monetary
franchise to the American people, and so in my view there was no
effective dialogue about a solution. In fact, neither candidate even
mentioned the monetary system, let alone the private-bank-loan
transaction by which the nation’s money is created and issued, or the
collapsing fractional reserve formula which is creating the
perception of the supposed urgency to push through a “rescue
plan” immediately before the banking system shuts down.
This
is a far cry from when three-time Democratic Party nominee for the
Presidency, William Jennings Bryan, declared in his famous “Cross
of Gold” speech in 1896:
“If they ask us why we
do not embody in our platform all the things that we believe in, we
reply that when we have restored the money of the Constitution, all
other necessary reforms will be possible, but until this is done
there is no other reform that can be accomplished.”
Can
one imagine a “major party” Presidential candidate saying
such a thing today? Perhaps more importantly, can one imagine a
national audience understanding what he is talking about? This is a
point to keep well in mind before we blame McCain or Obama for their
failure to address the core issue at the heart of the financial
crisis. A culture-wide amnesia has descended on the populace related
to the monetary issue, and, of course, the “major candidates”
we get are a natural reflection of that.
To be fair, both
candidates made attempts at more substantive responses as they talked
about the need to “balance the budget”. What was missing,
however, was any awareness that the current financial crisis is not
in its nature a fiscal problem (i.e. related to balancing taxing and
spending), but a monetization problem (i.e. related to how and by
whom money is created and issued) [see Cols. #19 – 21]. Until they
gain such a realization, their “debates” on this critical
issue will continue to be almost completely unresponsive to the
wrenching financial turmoil that citizens, the nation and the world
are experiencing at present.
Column #56 PRESIDENTIAL DEBATE – SEPTEMBER 26, PART II THE REAL “COST” OF THE IRAQ & AFGHAN WARS
(Week
10 – Tuesday, Sept. 30)
In yesterday’s column I offered
commentary on the first half of the Friday evening debate between
John McCain and Barack Obama, which was directed towards the current
financial crisis in the economy, and President Bush’s proposed $700
billion dollar “rescue plan” to save the speculative
financial “industry” and the banking system. Much of the
discourse was about how the “debt” the Federal government
would inevitably take on in any such plan would ultimately have to be
made up in the future through ever more prudent priorities concerning
taxing and spending.
In my view, this is a hopelessly
off-target attempt to address the problem. The Federal “debt”
is not a fiscal phenomenon (i.e. an imbalance between taxing and
spending), but arises out of improper monetization (i.e. the process
by which money itself is created and issued) [see Cols. # 19 – 21].
We can gain a dramatic insight into the difference between these two
perspectives by examining the real “cost” of the Iraq and
Afghan wars, which preoccupied much of the last half of the
debate.
It can hardly be disputed that the wars in the
Middle East are costing our country dearly in materiel, blood and
lives. Many also argue that it is costing us the love, trust and
admiration of our fellow human beings in the community of nations,
and some even say that it is costing us our sacred honor for the
supposedly devious reasons for which it was entered into (to be sure
many feel otherwise). One would find little disagreement that the
conflicts are imposing costs in carnage and suffering on the Iraqi
and Afghan people that are difficult to even imagine, not to mention
the toll that it is taking on their infrastructure and lands.
All
this said, the question remains, what is the “cost” of
these war sin terms of money? Each of the candidates lamented the
vast sums that are being spent on these conflagrations. I understand
where they are coming from, but I would suggest that there is another
way of looking at the matter.
From the beginning of this
series of columns I have examined and frequently referred to the
private-bank-loan transaction by which our money supply is created
and issued. I have also tried to show that it sets up a monetary
dynamic whereby ever greater amounts of money need to be borrowed
from the banking system and spent into circulation in order for
people to be able to make the principal payments on old loans, plus
the “interest” payments on those loans, while maintaining a
necessarily growing money supply.
If this fails to occur,
then the money supply will begin to contract, bankruptcies will
multiply, and the economy will spiral down into recession or
depression. Somebody has to keep going deeper into “debt”.
It does not matter to the banking system whether it is the people in
the private or the public sector that feel compelled to make the
plunge. At present, the confidence of the borrowing public is at low
ebb, and their ability and willingness to take on vast quantities of
new “debt” is largely exhausted. This means that if the
economy is to not go into the tank the Federal government has no
choice, seemingly, except to step in as the “borrower of last
resort”.
The key to making this work is to find a way
to generate the political will to take on a vast public “debt”.
Spending on universal medical care, freely available education,
public infrastructure, cleaning up the environment, and a dignified
basis of support for all its citizens has been so discredited in the
eyes of the public as “wasteful spending” (which is not to
say that some things proposed are not indeed foolish and wasteful),
that a political will sufficient to allow the government to borrow
the huge sums necessary to stave off economic collapse under the
current “debt” load cannot, as a practical matter, be
attained. What can succeed in creating such a mandate is to start a
war against a feared and hated enemy. Then no amount of “financial
sacrifice” (i.e. government borrowing) is too much, and almost
any politician who says otherwise runs a grave risk of being turned
out at the next election cycle.
Far from being a net
“cost” to the economy, the Iraq and Afghan wars have been
the great engines of money creation that have kept the economy from
imploding. I would hasten to add here that I am not saying that our
national leaders have consciously gotten this nation embroiled in the
Middle East morass for the purpose of going into “debt”. On
the contrary, on the whole they sincerely believe that the war is
“costing” money that will have to be, in some vague and
unspecified way, made up for by fiscal frugality after the
conflict(which is an illogical notion given the virtual imperative
imposed on the people by the private-bank-loan transaction to go even
deeper into “debt” whenever new money is created)
When
money is created and spent into circulation, it does not stop with
the procurement for which it was originally issued, even if that is
for weaponry. It goes into the paychecks of whoever produces the
products and the profits of the company they work for, and thereafter
becomes blended into the monetary pool. I would urge the reader to
contemplate the thought that, of the dollars in his or her wallet or
bank account right now, a large portion have entered into circulation
as a result of government borrowing to pay the “costs” of
the Iraq and Afghan wars. Monetarily speaking, if it were not for
these wars, those dollars would very likely not be in existence, and
the economy would be proportionally contracted, arguably to the point
of recession or depression.
To be absolutely clear, this
is not a rationale to start a war (or go into “debt” even
for more benign domestic reasons). It is, rather, an absolutely
compelling reason to change the basis of the monetary system away
from one in which the madness of having to borrow the nation’s money
at “interest” from a private banking system becomes an
effective economic imperative at whatever ruinous cost.
What
I am saying here is nothing new. The fact that war, in its many
guises, has been the great engine of money creation when the public
could not be aroused to the task of taking on vast quantities of
“debt” for any other purpose has been long discussed in
classic economic writings, but has virtually disappeared from the
more “sophisticated” canon of modern texts.
The
real monetary “cost”, then, of the wars in the Middle East
is not the vast sums of money “borrowed” to finance them
(which, unlike lives, can be created in any amount by the “flick
of a pen”), but the ever deepening penetration of public
consciousness with the flawed basic premise of the
“private-debt-money” system itself (i.e. that the numbers
associated with money creation at “interest” are the “hard
realities” that must be accounted for, and everything else is a
“cost”). It is a lesson that we as a modern civilization
will have to relearn. In my view, this is what McCain and Obama need
to be talking about if they are serious (and I can only imagine they
are) about stopping these wars.
Column #57 MONETARY CRISIS – THE RECENT HISTORY OF
(Week
10 – Wednesday, Oct. 1)
If one understands the imperative
imposed by the private-bank-loan transaction by which our money is
created and issued (for participants in the economy in the aggregate
to go continuously deeper into “debt”), then the run up to
the current financial crisis by can be readily discerned by tracking
the major economic swings of the last three decades.
The
early stages of the dismantling of the manufacturing base, the
Vietnam War, the OPEC oil embargo, the prohibitively high “interest”
rates of Paul Volker’s tenure as Fed chairman, the “stagflation”
of the ’70’s, and feelings of impotence engendered by the Iranian
hostage crisis left the nation with a crisis of confidence that
inhibited the people’s ability and willingness to borrow money from
the banking system.
In the 1980 election, the nation
turned to a “conservative” President in the person of
Ronald Reagan to reign in the “reckless liberal spending”
supposedly at cause for the economic “malaise” of the
Carter years, and get the Federal budget back in balance. The Reagan
administration responded by racking up record deficits, in the name
of a war of course (albeit a “cold war”). Whatever the
ideological contradictions, the Reagan era deficits caused massive
amounts of new money to be injected into circulation. In the short
term this stimulus did work, as the infusion of “debt”-money
into the economy (along with Reagan’s personable, upbeat demeanor)
restored “confidence” in the future, and the citizenry
themselves started to make the trek to the bank.
This mood
of national self-assurance continued to swell as the U.S. “won”
the Cold War, and the Iron Curtain came down. Moreover, with our main
enemy no longer on the scene the nation could anticipate an economic
“peace dividend”. Moderate “economic growth” in
the private sector was augmented by another shot of government
borrowing as the country was roused to finance the Persian Gulf War
during the first Bush administration. As a result, the people of the
nation felt relatively flush with cash, and optimistic about the
future. This encouraged even higher levels of private borrowing that
effectively allowed the government to step down as the engine of
“debt”-money creation at the beginning of the Clinton
years.
The corporate-inspired economic impetus of the
’90’s was the development of financial vehicles and training of the
public mindset to encourage consumers to go into perpetual “debt”.
The monetary culture shifted, and hardly anyone paid for anything
anymore. The new byword was “cash flow”. If one could make
the payments on something, one could have it. “Innovative”
financial vehicles, from credit cards, to student loans, to financial
derivatives, to stock and bond portfolios, to easy credit over the
Internet were aggressively promoted. More and more, people leased
their cars and other durable goods, or financed them over greatly
extended periods. Home mortgages were artificially inflated by the
lending practices of Fannie Mae and Freddie Mac against their
speculative prospects for being cashed in later at higher prices, as
opposed to being paid for in proportion to their utility as dwellings
at prevailing wages.
The net result was that for the
decade of the ’90’s, the private sector took on so much new “debt”
that it was able to service the overall principal and “interest”
payments attached to the money supply, and the government could step
down from its roll as the principle bank-money borrower for the
economy. This made for a period of “economic growth” (i.e.
private “debt” expansion) when most government agencies
(Federal, state and local) did not have to resort to “deficit
spending” to balance their budgets.
Politicians of
the Clinton years boasted about how good the economy was on their
watch, and how the “deficit” was finally being brought
under control. They made every effort to take credit for the supposed
good news, but in actuality they were merely riding a wave they did
not understand. Meanwhile, the economy when considered as a whole,
public and private combined, continued to slip into “debt”
at an undiminished pace.
Alas, the period of reduced
“Federal deficits” could not last. The ability and
willingness of people in the private sector to take on ever greater
quantities of “debt” was largely exhausted. By the time the
second Bush Presidency came along another major impetus for “debt”
creation had to be found. This appeared in the form of the political
will that coalesced around the “war-on-terror” that
followed 9/11, and the renewed round of government borrowing that
tragic event has initiated.
With the number of “debt”
dollars circulating on which “interest” payments needed to
be made increasing at an ever faster pace, and even government
borrowing for a domestic “war on terror” and foreign wars
in the Middle East was not proving to be sufficient to keep the
“debt” bubble pumped up, especially given the economic
slowdown of the last few years in the private sector.
Then
came the housing collapse, first in the sub-prime arena, and now the
prime. This has sent shock waves out to other areas of the economy,
which are now entering into their own precipitous declines as
well.
It became evident that the monetary system could be
kept from collapsing only by the government borrowing yet more money
and effectively passing it out, with the hope that any political
backlash against such bald-faced “debt” creation would be
muted by the calming effect of people receiving checks in the mail
(which, evidently, was a correct assessment); hence the recent
“rebates” sent out to all taxpayers.
It was
still not enough. Public confidence is waning quickly, and the “debt”
numbers are piling up. So, what is the answer to this crisis that the
leadership in Washington has come up with? What else could it be but
to borrow at “interest” yet more money from the banking
system to redeposit in the banking system, thereby shoring up the
collapsing fractional reserve formula? Now they are proposing a $700
billion dollar “bailout” scheme for the speculative
financial industry.
Where will this end? The answer is
that it won’t; not so long, that is, as the private-debt-money system
remains in place. There are myriad possible scenarios as to how this
crisis could play out, but none that might occur within the context
of the present system are, in my view, anything less than
catastrophic.
This is doubly tragic because a return to a
public monetary system could allow the situation to turn around
quickly, and the economy be put on a sound and understandable basis
in relatively short order.
Column #58 MONETARY CRISIS – TAKING STOCK OF WHERE WE ARE NOW
(Week
10 – Thursday, Oct. 2)
With respect to the “debt”-based
monetary system, we have reached a tipping point, and which way the
situation will fall is uncertain. While the productive capacity of
the physical economy has virtually ceased to grow (or declined), the
economic expansion it has heretofore generated is slowing, and
financial ledgers burgeoning with new “debt” can no longer
be balanced with new money secured by actual production. That is why,
for example, state budgets across the nation have gone from being
balanced, or even flush with extra money a decade ago (in my state,
Minnesota, they even sent out a rebate to taxpayers), to huge-cash
flow deficits now, with little visible sea change in physical reality
to account for it.
The stock market is in precipitous
decline. Housing prices are no longer supportable in real terms, and
are falling. Good paying jobs have been systematically shipped abroad
or replaced with minimum wage positions. The newest crop of college
graduates, already saddled with student loans and credit card debt,
face a declining job market, and will not be able to provide the
economy with the upwardly mobile spending impetus that has
traditionally driven its growth. People’s ability and willingness to
go into new debt has in the aggregate been maxed out. Old debts,
obligations and entitlements (both private and public) made under
expectations of ad-infinitum exponential economic growth are coming
due. The environment is being depleted. The infrastructure is
crumbling. The baby-boomers are entering retirement.
The
net effect of all these factors is that the “debt” load can
no longer be serviced adequately with new borrowing within the
constraints of the domestic market. Federal Reserve banker John Exter
warned, “the Fed is locked into this continuing credit
expansion. It can’t stop. If ever bank lending slows . . . the game
is up, and the scramble for liquidity starts.” and “The Fed
will be powerless to stop a deflationary collapse once it
starts.”
Judging by the strident stories in the
newspapers, it would seem that the “deflationary collapse”
has begun. Clearly there is a danger of such a thing happening, but
as a nation and a world, we are entering an unprecedented time and it
is difficult to say what scenario might play out.
The
proponents of the “rescue plan” may indeed get their $700
billion dollars, and “save the financial system”. What that
means is that the obligation will be added to the “national
debt”. This “debt” is a ruse in the sense that it is
never paid down anyway, but it does cause a further escalating of
“interest” charges to be taken out of tax revenues to
“service the national debt”; until, that is, these charges
grow large enough to eat up the whole budget, and the government has
to borrow every dollar it needs to fund its operations. This is a
theoretical extreme, of course, and it is hard to imagine the
situation getting to that point before the system breaks down
completely.
If the rescue plan, as conceived, were
implemented, it would, in the short run, inject a huge fresh stream
of cash into circulation. When combined with the fact that a lot of
“debt” that the money supply had been supporting will have
been wiped out through bankruptcies (mostly in the productive
sector), the freed-up “liquidity” (cash flow) may allow the
economy to revive for a time. Politicians who voted for the scheme
will boast about how it “worked”, and the country will be
setup for a round of “debt”-money expansion that is more
crushing to its citizens than before.
It would certainly
not be long, however, before the economy is back at the same impasse.
By this time even more massive “interest payments on the debt”
will consume public revenues. The productive capacity of the economy
would almost certainly have deteriorated due to the supposed need to
pour ever greater portions of its financial capital into “servicing
debt”, more and more buying power would have been lost to
snowballing consumer “debt”, and we would have become a
nation that is even more dependent on living off borrowed money,
while those abroad work for inadequate compensation to supply our
material needs.
What is more, much greater control will
have been invested in a small click of power brokers who would
increasingly run our society in exchange for keeping the monetary
spigot turned on. Already there are widespread reports in the media
of proposals to “reform” or “streamline” the
system by concentrating ever more power and authority in the Fed. It
will become an unaccountable de facto government to an even greater
extent than it is now.
Inevitably, at some point the
journey down this path of “compounding-debt” will not be
sustainable. The economy will “collapse” anyway. Are we
there now, or can the reckoning be put off again until some time in
the future? I don’t know. Civilization has never been in this
position before. In a world in which subsistence skills have been
largely sacrificed to the mixed benefits of technology, and mutual
global dependency has become the norm, one can only imagine what a
“collapse” of the monetary system might look like. I will
offer some sobering, as well as hopeful, thoughts on this in
tomorrow’s column.
Column #59 WHY WE CANNOT HAVE ANOTHER DEPRESSION
(Week
10 – Friday, Oct. 2)
In these last three weeks I have
heard from voices in the media and people I have conversed with much
speculative talk about whether the current financial emergency
indicates that we are entering into another “Great Depression”
of a nature similar to what the world endured in the 1930’s. That
such a comparison would arise is natural, given that many of the same
factors that attended that crisis seem to be present in this one
also. Many elders still living among us have a vivid memory of that
time.
People are free, of course, to engage in any musings
they feel moved to express, but I would suggest that, absent critical
thinking, such speculations are effectively loose talk that pose a
danger of becoming self-fulfilling prophecies. The depression of the
30’s was a real historical occurrence for which a relatively good
picture can be formed. The term “depression”, as it is
somewhat uncritically used now, is, in my view, an abstraction that
can distract our thinking from a real perception of what is happening
now, and what needs to be done.
Since the 1930’s the world
has changed so fundamentally that, I would suggest, the litany of
events of that period offers only minimal potential for guidance as
to how the current crisis might unfold. To be sure, there are lessons
from that episode that need to be learned, but the present crisis is
happening in a world that is in many respects so changed as to be
almost unrecognizable. The nation was able to survive the Depression
of the 30’s relatively intact (albeit with great hardship), and
emerge stronger than ever on the world scene. In my estimation, such
an outcome would not be certain if such a catastrophic monetary
contraction were to occur today. Why do I say that?
In the
decade of the 30’s a quarter of the population still lived on the
land, and a farm still, typically, had chickens and hogs for meat, a
garden which was augmented by extended storage capabilities (canning
& root cellaring), a woodlot for heat, a diverse mix of “organic”
crops, simple equipment, and a limited need for cash flow. Farms were
still embraced by a network of small rural towns, and communities
where people knew and supported each other on a personal basis. This
was true also of the town banker.
Now less than two
percent of the populace remains on the farm, and the average age of
the farmer is about sixty. Increasingly he is no longer an
independent operator, but a manager who produces on contract to a
corporation. The farmstead chickens, hogs, gardens, woodlots, crop
diversity, and simple equipment are virtually gone. The limited need
for cash flow has been supplanted by a huge appetite for money to buy
seed, fertilizers, fuel, equipment, and other inputs.
The
upshot is that if the monetary economy ceases to function to the
degree that it did in the 30’s, even the few farmer’s who remain will
for the most part be in the food line almost as quickly as the urban
dweller. Where would our food come from? One can easily imagine the
implications of such a situation for the cities.
In the
manufacturing sector most products have gone hi-tech, and the
capacity to produce real sustaining goods has been dismantled and
shipped abroad. In the transition a wide range of practical manual
and mental skills have not been passed on to the next generation.
During the depression of the last century the skills most in demand,
even in downtown office towers, were relatively basic. They depended
largely on manual and mental dexterities that are rarely practiced
anymore. They have been supplanted by highly specialized computer
software routines that would be useless as survival skills if the
money to finance their capital-intensive workstations stopped
flowing.
The big growth area of the last few decades, it
seems, has been in the service sector, but many of these jobs are
essentially “doing the paperwork” on each other’s lives
(albeit in a software mode). Now many of these “service”
jobs have disappeared to other shores in the endless search for
“cheap labor”. In any case, the service sector cannot be
materially sustaining. We have to produce something. We can survive
only so long by selling each other insurance, while borrowing more
money to have foreigners make our products and do our work.
My
purpose here is not to recite a litany of how much better life was in
the good old days, as opposed to how untenable it has become now.
Truth be told, many of these changes represent the impelling forces
of human evolution, and embody in themselves their own virtues. My
point here is simply to say that the times have changed. The economy
is now high-tech, high-cash-flow, and global. Hardly anyone survives
on their own efforts anymore, or even on the labors of their local,
regional or national communities.
The division (or should
I say atomization) of labor has become virtually utter, and globally
dispersed. Like it or not, in this new socio/economic order people do
not work for themselves anymore. They work to do their bit in
supplying the needs of others who live often half-a-world away, and
whose language they do not speak. The transformed conditions since
the time of the last great global economic upheaval I am describing
here is, of course, relative, but in essential ways it is effectively
a “world turned upside down”.
The web of
relationships that holds all this together works through the monetary
system. If that goes down, unlike in the last depression, we do not
have the subsistence capabilities by which a modern civilized society
can survive, save at unthinkable human trauma (if even then).
We
as a nation, and as a global community, have no good option except to
redeem the monetary system by transforming it, if it is not to
implode, taking us and our civilization with it. There is an argument
that can be made for going for the $700 billion “bailout”
in the hope that we can buy some time before the final reckoning, but
it is the same self-delusional reasoning that courses through the
being of an addict who wants to stave off the inevitable by indulging
in his weakness just one more time. The “bailout” may (or
may not) keep the system going for a time, but there is no doubt that
in the end the price we will pay will be more certain and ruinous for
our having put off coming to terms with our addiction to “debt”
money.
But, life is a leaf; turn it over. Unless we will
it so, this crisis is not the end of the world. On the contrary, it
may be our opportunity to step up and emerge into a bright new
morning. There has been a lot of tragedy and suffering that has
transpired in the course of getting to this juncture, but we can
choose how events will unfold from here. Indeed we must.
There
is a silver lining of grace in the dark cloud that looms over the
financial world right now. The present crisis is not our grim
chastiser (unless we refuse to understand it otherwise), but our
teacher. If only we could behold the lesson it has to reveal (the
necessity of returning, in the spirit of service (not gain), the
monetary franchise to the public domain), a breathtaking vision of a
new world would open up on the other side.
Column #60 KINDLING A FLAME
(Week
10 – Saturday, Oct. 4)
This is the last of the first sixty
columns before I, and those readers that have accompanied me on this
journey, take a two-week hiatus. I plan to resume the series on
October 20. It is time, not only for a chance to catch our breath,
but also for inner reflection on what has been said.
The
writing has had its satisfactions, but it is a poor substitute for
meeting in person. If it were possible I would have each of you in
front of me for a face-to-face conversation. That goal is not
attainable realistically, but it can be realized in part through
voice-to-voice conversation over the phone. Accordingly, I am herein
listing my phone number: 218-828-1366 (many of those on my
distribution list have it already). I invite critiques, questions and
commentaries. I also welcome the many written responses I have been
receiving, but often I can see in them subtle, but important, issues
of understanding that can only be addressed in voice-to-voice
conversation.
The tenor of these articles might, if one is
not fully attentive, seem to be a broadside against bankers and
banking. Let me be clear; the enemy is not bankers or banking.
Rather, it a powerfully perverse principle that has gotten a hold on
the human heart and mind. To be sure, bankers have often played their
unfortunate part, and the institution of banking has to a great
extent been the agent for the devil’s work, but they are by no means
unique in that status. In this modern age we are virtually all
economic players, and have in our own particular niches contributed
to the difficult circumstances that are unfolding in our financial
life at present. I had intended to speak to greater depth upon this
subject, but that idea was overtaken by events in the financial world
that had to be addressed.
I have worked at this monetary
“obsession” for going-on three decades, and have
encountered a receptiveness, and even hunger, that has grown over the
years for the conversation about money. There is a palpable impulse
for change emerging in the people I meet. Many times the discussion
is animated and the demeanor eager. Often, there is a reluctance to
let the epiphany of the encounter come to an end. The next time we
meet the personal warmth and enthusiasm is still there, but that
special moment of recognition of the fatally flawed nature of the
present monetary system, and the way out, has not taken root.
I
have seen the flame of awakening on the subject of money kindled many
times, but it has been, for the most part, a kindling of green wood.
It will burn as long as the flame of my or other’s speaking in person
to the matter is held to it, and perhaps a while after, but the
awareness needed for it to sustain itself is not yet arrived, and so
it goes out. Still, something remains. A glowing ember from the
moment of recognition when the hearer could peer through the veil of
the present malaise and see that there is indeed an answer remains
deep in the hearer’s memory, but is not sufficient to re-kindle the
flame on its own.
The time approaches in the progression
of human evolution where a living consciousness about money can, and
indeed must, be sustained on its own. It has been the conscious
purpose of this series of treatises to expedite that transformation.
The idea has been to break down a subject that is bewilderingly vast,
complex and immersive into daily digestible bites that can be taken
in as an antidote to what is, in my view, misguided, misleading and
depressing media fare. My hope is that whatever merit is contained in
these tomes will serve as lessons that will, over time, season the
inner timber of mindfulness on the subject of money.
The
success or failure of this initiative will be measured by how much it
encourages and inspires people to take up spontaneously the seeking
of truth about money in the context of their own life experiences,
and their own original thoughts. Only then can the flame of
understanding be said to have been lit. From there it can be shared
with others until it kindles a mighty conflagration of realization
that no force on earth can hold back.
At least that is my
idea. If it is my delusion, let it be so, but I can’t spend the day
worrying about what others think. There is too much to do. The
headlines, of late, have sewn a seed of urgency in many I have met or
who have contacted me. Humankind has come a long way without coming
to a deep realization of “what is money”, the sophisticated
world-encompassing financial structures we have built up
notwithstanding. But the question can no longer be put by. It demands
an answer, or fearful forces out of our control will impose one on
us.
In my perception, all the signs of the times converge
in a worldly sense upon the same reckoning, and that is what to do
about money. If we would see it, the very occurrence of the present
world financial chaos is a priceless opportunity. Whether we seize
upon it for good or ill will make all the difference. I suggest that
this is something to contemplate until we resume.
Thank
you all for your interest.
Column #61 AMERICAN MODE OF CREATING & ISSUING MONEY
(Week
11 – Monday, Oct. 20)
We the People of the United States
need a public money supply with which to conduct our commerce. Under
the current Federal Reserve System, our money is issued via loans
from a private banking system.
When a private person,
corporate entity or government body borrows money from a bank, the
banker creates the money he is loaning when he writes the check for
the loan or credits the account of the borrower. That is the rule
upon which the Federal Reserve System is founded. In a booklet
published by the Fed, “Everyday Economics”, the section
titled “How Banks Create Money” states as its opening
sentence -“Banks actually create money when they lend it.”
The
borrower then goes out and spends that money for whatever purpose he
took out the loan to fulfill. The money from the loan (principal
proceeds) thereby enters into general circulation.
Over
time, the borrower will be required to pay back the loan. The terms
of the loan contract, however, will state that he will be required,
not only to pay back the money he borrowed, but also pay a
compounding fee described as “interest on the loan”. A
problem arises because the money from the loan entered into
circulation and is therefore available to be paid back, but the money
to make the interest payments was never created and issued. It can
only be obtained by taking it out of the money from other loans that
are still in circulation.
This means that there will not
be enough money in circulation for others to pay their loans. The
only way this shortfall can be coped with in practice is for people
to borrow more-and-more money into circulation on a continuously
increasing basis, both to service the principal and interest payments
on old loans, plus bring enough newly borrowed money into circulation
to maintain an adequate money supply. People almost certainly will
not think of what they are doing as being motivated by maintaining an
adequate money supply, but as the amount of money in circulation
drops, people are progressively less able to pay their bills, and so
will tend to resort to borrowing from banks to make their financial
ends meet, which, in turn, has the effect of filling up the monetary
pool.
Eventually, the amount of outstanding indebtedness
becomes so great that people are simply not able to pay it, and a
wave of financial defaults results. This temporarily relieves
pressure on the money supply relative to the amount of “debt”
it is being called upon to service, but at great cost in personal
trauma to those who are obliged to bear the resultant
bankruptcies.
As a domino-like default phenomenon gains
momentum, a psychological state takes over whereby people become more
prone to consolidate their financial position by paying off old
“debts” (as opposed to taking on new “debts”),
and even banks become reluctant to create and lend more money. The
net effect is that the money supply goes into a contraction, which,
if not arrested, can lead to economic depression.
One
further effect is that the “investments” (bonds, mortgages
and other “debt” contracts) bought up by financial
speculators are in jeopardy of becoming worthless paper. Technically
this is not really a danger to the economy, as the collapse of such
paper would relieve pressure on the existing money supply to service
“debt”, but it does create a great disorder and confusion
of interests because many ordinary people also are significantly
invested in “debt” paper (as held in money-market accounts,
retirement portfolios and the like). In any case there will be voices
from the academic, political and financial arenas that will try to
convince the public that their distress can only be relieved by
rescuing the “investments” of the “speculative
industry”.
Complicating the whole picture is the fact
that the “fractional reserve formula” that governs the
banking system will start to break down, sending the banks themselves
into technical “bankruptcy”.
The upshot of all
this financial mayhem is that there arises a general fear in the
populace that the monetary system is in danger of “collapsing”
if it is not “rescued” with a massive injection of
freshly-borrow private-bank money. In truth there is such a danger,
but mainly because widespread belief in such a scenario makes it
self-fulfilling. This fear, plus the lack of realization concerning
what to do about the situation, is precisely what is driving the
headlines announcing a general monetary meltdown at present, and the
promulgation of a $700 billion “bailout” plan.
Such
a plan may (or may not, if a degree of confidence and order cannot be
restored) stave off near total disruption of the economy in the short
run, but it will inevitably result in the citizenry taking on an ever
greater amount of “debt”, in this case indirectly through
government borrowing. An increasing portion of tax receipts will be
diverted into making more hundreds-of-billions of dollars of
“interest” payments on a ballooning “national debt”,
until even the Federal government will not be able to borrow enough
new money into circulation to meet its operating expenses.
The
churning of the monetary system will continue amidst increasingly
unbearable complications. We live in unprecedented times, and where
this all may lead is difficult to envision, but the end thereof, and
the rough ride getting there, can only be catastrophic in the
extreme.
Turning the leaf over, the remedy to the crisis
is simple, straightforward and quintessentially American; that is to
restore the authority to create our money to the public sector (as
stipulated in Art. 1, Sec. 8, Par. 5 of the U.S. Constitution). Money
is created “out of thin air”, whether this function is
performed by a public body that serves the people as a whole (the
U.S. Treasury), or a corporation that serves the interests of private
gain at the expense of the whole (the Federal Reserve).
If
the public’s money is borrowed at “interest” from a private
corporation, the social order as a whole cannot help but fall
increasingly into “debt” to the financial interests that
that corporate entity serves.
If, on the other hand, our
money supply is issued publicly out of the U.S. Treasury, We the
People issue it to ourselves, and no “debt” of the economy
as a whole to private financial interests can result.
This
was the very monetary principle the Founding Fathers incorporated
into the U.S. Constitution, which would, if reinstated, resolve the
crisis of crushing “debt” that is today plaguing
individuals, the nation, and the world.
Column #62 THE CONCORD RESOLUTION REVISITED
(Week
11 – Tuesday, Oct. 21)
In Col. #9 (Wednesday, August 6) I
reported about an initiative being undertaken by citizens of Concord,
Massachusetts that seeks, in a form suited to our time and
circumstances, to recreate the momentous step taken by the Colonial
Assembly of Massachusetts in 1690, by which the political body that
represented their social order as a whole began to issue the colony’s
own money supply.
I can imagine that, for the most part,
the deed was not contemplated by these loyal British subjects as an
act of revolution with respect the England and the Crown,
notwithstanding that in time it did indeed lead to a train of events
that took on that character. It was more likely conceived of as a
straightforward measure that was meant to address a pressing problem
of immediate import in a simpler time; the need for a circulating
medium. Surely these colonists had little or no sense of the
world-changing developments that would unfold from what must have
seemed to them to be an audacious, but seemingly limited, act.
We
live in a vastly different era, and whatever problems were manifest
then are redoubled many times over. That said, we are now, like they
were, faced with a stark choice. That is, should we as a society
submit to borrowing our money supply from the modern equivalent of
the Bank of England (Federal Reserve System) backed by the power of
the state, or should it be issued publicly (out of the U.S. Treasury)
backed by the sovereign political prerogative of We the People.
The
primary advantage we have over our colonial forebears is being able
to see the implications of this act as it played out in almost three
hundred and twenty years of history. America has been a veritable
laboratory for monetary development, and its lessons can now be drawn
upon in the interests of serving human evolution, with transformative
benefit to the individual, the nation and the world.
The
Concord Resolution was originally contemplated as a grassroots
educational and political initiative aimed at formulating and
bringing to the Concord town meeting a Warrant Article (“resolution”
in more common language) to petition the town’s Congressional
representatives to introduce a bill which would set up a procedure
whereby counties and municipalities across the nation could, in an
orderly way, apply for interest-free loans issued directly out of the
U.S. Treasury to pay for essential public works. This would be in
lieu of their feeling obliged to sell bonds on the private bond
market to raise needed funds, which typically causes the cost of a
project to double or triple due to the “interest” payments
associated with the bonds. Presumably, if the idea behind the
Resolution caught on across the country, that would open the door for
the eventual transformation of the monetary system itself, perhaps
within a few years.
What has changed since then is that
there is a newly palpable sense of urgency about the condition of our
economic life due to the unfolding worldwide financial crisis. I was
reminded of this again today as I heard reports in the media that our
representatives in Congress are considering a proposal for yet
another “financial stimulus” package. This is political
speak for having the Federal government borrow even more money, and
passing out the proceeds as a way to mollify a citizenry that is
smarting over feeling obliged to foot the bill for the $700 billion
“bailout” of the “speculative financial industry.”
All this is after the massive monetary expansion facilitated by
borrowing to fund the Iraq and Afghan wars, and the “tax
rebates” sent out earlier this year.
The “debt-money
system is essentially a confidence game, and confidence on the part
of the public, and even the bankers, is hemorrhaging. It seems that
there is no amount of new “debt”-money transfusion that can
stabilize the situation. I sense that there has occurred amongst the
populace a virtual acquiescence to the idea of letting the government
and the Fed have their way in taking any they like to patch the
system, while being in denial of the terrible price that will have to
be paid in the long run for this relinquishing of our responsibility
as a citizenry for our own economic life.
Urgency does not
mean panic. Our monetary house is indeed burning, but there is still
time and opportunity to put out the fire and save the structure
essentially intact. The moment is now, however, when we must be about
facing what needs to be reckoned with, or the whole question will
become catastrophically moot.
Over the last two months
what seemed like the revolutionary scope of the Concord Resolution is
now shown to be inadequate in the context the financial tsunami that
has swept over the global financial order. A more direct and
transformative approach is called for. Accordingly, the focus of the
Concord Resolution has moved from funding infrastructure, to changing
principle by which the monetary system operates; i.e. restoring the
monetary franchise to the public sector.
Truth be told,
the Massachusetts colonists who in 1690 initiated the first publicly
issued paper money in the Western world founded on the free
enterprise and backed by the sovereignty of We the People did
(whatever may have been their conscious thoughts on the matter)
nothing less, and that has made all the difference.
Column #63 “WHAT CAN I DO ABOUT MONEY?”
(Week
11 – Wednesday, Oct. 22)
The most common question I hear
is “What can I do about money?” This is commonly meant in
one of two ways, one inward looking, the other outward.
The
inward looking is focused on what the inquirer can do to preserve,
expedite or otherwise conduct his or her personal financial situation
in a way consistent with the greater realities in the world today.
The outward is aimed at determining how he or she can act in a way
beneficial to the larger economic concerns of the world from his or
her own unique position in it.
What I find encouraging at
present is that people are asking ever more earnest questions about
the nature and realities of money itself. Heretofore, it has been
treated more as a given, and the main concern has been to about how
to catch one’s share of its currents as it passes through from
wherever it came, to wherever it goes. Now people are waking up to
the more fundamental questions of “What is money?”, “Where
does it come from?”, “What is its effect?” and “What
can I do about it?”
I am not a financial advisor,
political pundit or ideological proponent, and have no specific
answers or moral judgments to render. My inclination is to offer a
conversation out of my own experience that can perhaps help others to
clarify their own thoughts and feelings related to matters of money,
and thereby come to a determination of what in their life is to be
done with it.
This is not to say that matters of
substantive personal relevance can’t be talked about; only that it is
incumbent upon each of us to come to our own final determination of
what is to be done.
One thing that can be offered of which
I have a sense of certainty is that, whatever our disposition with
respect to money, any contemplation needs to begin with ourselves. In
a phrase, what is called for is “soul searching”. My
observation is that the human race has a most disorderly and
disharmonious relationship to money at present, and virtually every
one of us has contributed to, and indeed continues to participate in,
the problem. There is no criticism or judgment in this, in that it is
a natural stage in the evolution of a soul from innocence to
adulthood.
But now we are adults, and are called upon by
the demands of maturity to put away childish things.
Like
children looking for whom to blame, the public dialogue on our
current monetary straits is filled with expressions of accusation,
recrimination and denial. If only, so the thinking goes, we could
find out who is responsible for this mess, then we could hold them
responsible and somehow clean it up. The culprits may include
bankers, the Fed, Wall Street financiers, politicians, the
“conservative right”, the “liberal left”,
communists, the media, the corporations, the mega-rich, a coddled
middle class, the destitute poor, welfare moms, the Chinese, Islamic
terrorists . . . The list goes on ad infinitum.
To be
sure, people in each of these spheres have played a role, but the
realities they live with are never simple. It would serve the
situation well to hold the attitude of removing the beam from one’s
own eye before attempting to extract the mote from the other.
In
the modern world we are all economic creatures, and the actions we
take, both by commission and omission, have an economic dimension.
Even to move to the woods and live like a hermit is a profound
economic act. This is a condition of our age, and it cannot be
avoided.
The attitude that we are all responsible, then,
becomes the starting point for an intrepid introspection that will
lead ultimately to a unique answer for each to the question, “What
can I do about money?” I will have more specific thoughts to
offer on this in the next few columns.
Column #64 TO BORROW, OR NOT TO BORROW: THAT IS THE QUESTION
(Week
11 – Thursday, Oct. 23)
During a workshop I conducted in
Wisconsin, one participant posed a question about a personal
financial dilemma in which she felt morally torn between the
possibility of borrowing money to purchase a 20 acre parcel of land
that was contiguous to a like-sized parcel she was living on, or
foregoing the opportunity and thereby obviating the need to go to the
bank. She had what she felt were a number of moral reasons for
wanting to make the deal, but wasn’t sure that such factors
adequately justified taking on more “debt”. Clearly in this
case, to borrow and buy would not be a justification-by-necessity
act, but she felt that it could be a humanly creative choice. She
wanted my advice on whether she should borrow the money and make the
purchase, or not. It was a question for which I could not give a
direct answer, but could instead offer conversation that might help
her in her determination of what course to take.
I
suggested that in making her decision, it might be wisest to ignore
the monetary implications with respect to whether or not it would
cause more “debt” to come into existence. This seemed to
her like a strange response, given that I had just delivered a long
dissertation about how borrowing money from a bank causes more
compounding “debt” to enter the system, which winds up
being carried by the society as a whole on a never-ending basis into
the future even after one’s loan from the bank is technically paid
off. This happens because the proceeds from the “interest”
payments are typically converted into more “debt” by
“investors” who have purchased the right to be the
recipients of these payments. They “recycle” these funds
back into circulation by loaning them out at “interest”,
this time without even the benefit of newly created bank money
entering the money supply (see Col. #5, “Where Does Our Money
Go?”).
How, then, does ignoring the monetary
implications of whichever course is taken make sense? It is because,
monetarily speaking, the “to borrow, or not to borrow”
dilemma is really a Hobson’s choice (one with two equally problematic
alternatives).
On the one hand, if one goes ahead and
borrows the money, whatever benefit flows from the purchase that is
financed by the loan is compromised by the burden to the individual
and society of the “debt” thereby taken on. It should be
noted that if the borrowing was done through a bank, the additional
money created does continue to circulate through the money supply
after the initial outlay, and this, in turn, does provide to the
economy always-needed (but never enough) additional circulating
medium.
On the other hand, if one does not take out the
loan the “debt” burden is averted, but so is the benefit
that might have transpired through whatever the money would have paid
for. It should be noted that not borrowing also does not cause
additional circulating medium to enter the money supply, and so in
effect occasions a contraction of the economy relative to the level
of activity it could have supported had the loan been made.
There
are other nuances to this choice that could be traced out at length,
but the upshot is, I believe, that considered as merely a monetary
question, the decision “to borrow, or not to borrow” is, as
an economist might say, a “wash” (a choice which has
diametrically different, but equally offsetting, outcomes). The
reasonable course, then, is to make the decision on the basis of the
human merits of the case, and let whether or not the trip to the bank
is made follow.
In the case of the lady at the workshop
who wanted to know whether she should borrow more money to buy the
adjacent land, the decision would presumably be based on a
comprehensive consideration of the actual physical and human factors
involved. To be sure, such deliberations can run deep, and may even
extend in the minds of many to spiritual considerations which are
wholly out of the domain of calculation, but whatever the case the
question is by its nature uniquely personal, and precisely fitted to
the actual people, circumstances and unit of time in which it takes
place.
This is not to say that the human cost of carrying
a resultant “debt” burden is necessarily not a factor that
should be weighed in, but the decision in principle about whether to
borrow, or not, is another matter.
The long and short of
my advice (if I might presume to offer such) is, when making any
economic decision, to follow as much as possible the best option
available with respect to benefiting life, and let the finances take
their course. Ultimately, the monetary system in its current
configuration is not sustainable whether people borrow at a high or
low rate. The important point is to not let life suffer anymore than
it has to due to the pernicious workings of the system in the
knowledge that any determination concerning whether or not to take on
“debt” arrived at truly will in the short run avail life,
and in the long run buy time for people to come to their senses and
remedy the flawed foundation upon which the system is founded. That,
in my view, is an optimum course of action, however it might play out
in detail in any particular case.
The example we have
examined here pertains to the finances of one particular person, but
how does that relate to the to-borrow-or-not-to-borrow question for
society as a whole? That is a question I will take up in tomorrow’s
column.
Column #65 TO BORROW, OR NOT TO BORROW: THAT IS THE $700 BILLION QUESTION
(Week
11 – Friday, Oct. 24)
I reported in yesterday’s column
about someone who sought my advice concerning whether she should
borrow money from a bank for what she deemed to be a creative, but
not strictly necessary, purchase; and thereby take on more “debt”
that she, and ultimately the larger society, would have to bear. I
recommended that she follow as much as possible the best option
available with respect to benefiting life, and let whether that meant
borrowing money, or not, take its course.
Our nation has
recently passed through a similar point of choice, though on a vastly
greater scale. This was in reference to the decision about whether
Congress should pass and the President sign legislation by which the
Federal government would borrow $700 billion from the Federal Reserve
in an attempt to “rescue”, supposedly, the failing
financial system. Within the context of the present monetary system
one could make a case for either course of action.
For
purposes of this discussion, I would first make an argument in favor
of the measure. There is a chance that such an injection of funds
will succeed in restoring a measure of order and confidence in the
financial system that, in a nation which has largely lost its local
subsistence capabilities, we all depend on literally for survival.
Standing by while it implodes is not an option. In addition, the bill
will put into play billions of dollars of circulating medium that are
sorely needed to expedite essential economic activities that people
in many areas of life are looking for funds to accomplish. This runs
the gamut from paying mortgages, to financing business activity, to
investing in alternative energy, to repairing infrastructure, to
hiring school teachers, to providing health care, to getting the
homeless off the street, to feeding the hungry, to (fill in the
blank). It is inevitable that some of the money will reward
speculation and end up financing otherwise unproductive and unethical
enterprise, but is that any reason to let economic activity that is
in this moment needed for pressing human needs to go
unrealized?
Next I would make an argument against the
bill. Sure it might restore a measure of order and confidence in the
system, but only temporarily, and at what price? Taking on yet
another round of “debt” will come down as an additional
burden on the already buckling shoulders of the productive
participants in the economy, and will in the long run only serve to
compound the problem and put it off to a more terrible day of
reckoning? Admittedly it will provide a useful injection of currency
into the economy, but in the larger picture is it not really cruel to
allow a society that is addicted to “debt” one more fix of
the very substance that is bringing it down? In any case, much of
this supposedly needed economic activity is not “needed” at
all. A large share of the money will go to reward usury (using money
to make money at the expense of one’s brother or sister, instead of
acting as a financial partner to expedite genuinely beneficial
enterprise), and it is doubtful whether the added level of economic
activity financed will be worth the damage done.
Whatever
one’s view of the choice that was presented, the bill has been
passed. My purpose in revisiting the decision is not to second-guess
the road taken, but to use it as an example for how we might approach
such dilemmas. The nation could not have avoided selecting on outward
course of action, but inwardly we must explore what we are evidently
doing wrong that causes such mutually problematic choices to be
seemingly our only options.
We need to step up out of the
to-borrow-or-not-to-borrow catch-22 into a new way of thinking for
the future. Right now financiers, pundits, academicians, politicians
and other “leaders of public opinion” are for the most part
not offering much of a conversation to help We the People do
that.
Too often in the political realm, for example, the
options are presented as ideological arguments. We can hear this
reflected in the debate between the Presidential candidates at
present where the rhetoric of one is designed to sound plausible to a
“conservative” base, and the other a “liberal.”
It
is interesting to note that history has shown that once a President
is in office, or a party in power, the demands of their new duties
dictate that they act a lot less differently with respect to each
other than their ideological pronouncements would have one believe.
Witness in this case how Senators McCain and Obama strain to
highlight supposed differences in their respective approaches to the
present financial crisis, but in the end support the essentially the
same course of action. This is a tacit recognition that, when it
comes to coping with real-life situations, ideologies don’t matter.
Acting out of one’s highest consciousness of what is needed in the
moment matters.
What, then, is needed in this moment? It
is not recriminations about whether the $700 billion deed should have
been done. The real question is what have we gained from this
experience that can help up us move into the future? Cleary, the
monetary problem has not been solved, but if the “bailout”
is “successful” some time has been bought. This time of
“crisis” is truly a gift if we know what to do with it. I
say this, not in the spirit of taking lightly the suffering that
people have experienced through its travail, but in the fervent hope
that such sacrifice can be redeemed to good account, and its lessons
contribute ultimately to their economic liberation.
This
hope will be in vain if we cannot lift ourselves up into a higher
plane than the one on which the
to-borrow-or-not-to-borrow-$700-billion issue was debated. To be
sure, we need to make the best of whatever options present themselves
in the exigencies of the moment, but it is imperative to leave
dogmatic biases about whether, or not, to take on more “debt”
out of the question. A primary lesson of this whole “debt
crisis” episode, I would suggest, is that ultimately we have no
choice but to get serious about the matter of restoring the monetary
franchise to the public domain.
Column #66 WHY DON’T THE CANDIDATES TALK SENSE ABOUT THE “DEBT”? – Part 1
(Week
11 – Saturday, Oct. 25)
As I listen to the rhetoric of the
Presidential candidates, the “big two” in particular,
concerning the current “debt” crisis, I hear essentially
only one proposed response. There are variations of detail that are
put forward with great emphasis to be sure, and buttressed by their
supposedly contrasting ideological dispositions, but I find them to
be distinctions with hardly any difference. Their common answer goes
something like this:
“We
as a nation have failed to exercise ethical fiscal discipline, both
with respect to the private financial sector, and to government
taxing-and-spending. Now we have run up this enormous debt that will
have to be paid down by instituting the proper constraints and
oversight provisions in the private sector, and reigning in
out-of-control government spending. Hopefully, we can avoid the
abuses of the past, and ultimately pay this deficit down so our
children will not have to.”
This
response is, in my view, hopelessly unrealistic. If the private
sector and/or the government for any reason steps down in their
ability and/or willingness to borrow, that means that less money will
enter into circulation. Private participants in the economy will find
themselves increasingly in the position of being unable to pay their
bills as the money supply shrinks. That will put greater pressure on
the public sector to do the borrowing needed.
Government
will at first experience this pressure in the form of having to cover
social needs that are no longer being met in the private sector when
people are losing their jobs, health insurance, pensions, homes
through foreclosure, ability to meet business payroll, and so forth.
The levels of government below the Federal will increasingly look to
Washington to help out with their mounting budgetary shortfalls
caused by increasing social need and falling tax revenues. The
Federal government itself will be saddled with the additional problem
of keeping the monetary system going by seeing that the monetary pool
on which all phases of the economy depend does not run dry. Like it
or not, under the present system that means more borrowing.
Faced
with these imperatives, I would ask the Presidential candidates how
they expect that this mounting national “debt” crisis is
going to be redeemed by reigning in “out-of-control spending.”
Any attempts to “balance the budget” will be futile given
the “debt”-based principle on which the monetary system is
founded, and under present circumstances could only result in a
catastrophic contraction of the money supply, thereby sending the
economy into an imploding spiral.
Politicians have for
decades virtually always asserted that the “debt” crisis of
the moment can only be brought under control through fiscal
restraint, but they have virtually always in the exigencies of the
moment felt the need to act in a precisely opposite way.
The
“conservative” Reagan and Bush I administrations lifted the
economy out of the doldrums of the Carter era by running up record
deficits, thereby pumping enough money into the economy to restore
“confidence”.
This allowed President Clinton to
claim credit for bringing down the deficit as the ample supply of
circulating medium induced private persons to borrow record amounts
of money themselves in a euphoria of “economic expansion”,
and the government could for a time step down as the borrower of last
resort; notwithstanding that the country as a whole, public and
private combined, continued to slip into “debt” at an
undiminished rate.
By the time the second Bush presidency
came along, the ability and willingness of private parties to go into
still more “debt” was running out, and another source of
credit had to be found. The great engine of “debt-money”
creation since then has been the Iraq and Afghan wars.
With
the decline of the housing market, the biggest source of private
“debt” creation (home mortgages) has contracted to the
point where even borrowing to finance the current wars is not
sufficient as a generator of new money creation, so earlier this year
the government felt obliged to borrow even more money and simply pass
it out in the form of “tax rebate” checks (as if there were
a surfeit of Federal tax receipts).
Confidence in the
system has continued to plummet anyway, and now even bankers are so
shaken that they are reluctant to lend. Consequently, our national
leaders have been at a loss concerning to how to arrest the collapse
of the whole monetary order, except to mount a hurry-up effort to
borrow the staggering sum of $700 billion and inject it into the
speculative financial industry on the basis of vague assurances from
the experts (who guided the ship of finance into this storm) that
this desperate measure will somehow redeem the situation for the sake
of all the people.
The ink has hardly had time to dry on
that bill, and already our representatives in Washington are talking
about borrowing yet more money to fund a new “stimulus package”.
Through all of this the public is assured that the abuses will be
stopped because there will be some unspecified details written into
these “financial packages” that will assure greater
scrutiny and control, plus the taxpayers will get their money back
out of the “future profits” of these already failed
“investments” that the government will buying up. I don’t
know what is in the minds of the current Presidential candidates, but
surely, given their years of experience in government in which they
have seen from the inside the futility of trying to wrestle the
“debt” dragon into submission through budgetary variables,
they cannot possibly have confidence in what they are saying. What is
going on here? I will pick up on that question in the next column.
Column #67 WHY DON’T THE CANDIDATES TALK SENSE ABOUT THE “DEBT”? – Part 2
(Week
12 – Monday, Oct. 27)
In the last column I posed the
question of why the current candidates for President, like almost
every candidate for national office in
election-cycle-after-election-cycle going back decades, repeats the
same mantra about their intention to reduce the Federal deficit by at
last reducing “out-of-control spending”, in spite of the
fact that the Federal “debt” arises from the very process
by which money is created and issued in our system (via borrowing
money at “interest” from a private banking system), and
cannot be effectively addressed within the context of taxing and
spending parameters.
In September I had a conversation
with Ralph Nader that may shed some light on the riddle. He, of all
candidates, has been a strident and knowledgeable critic of the
abuses wrought by corporations. I asked him if he realized that a
private corporation has been granted a charter (via the Federal
Reserve Act of 1913) to issue the nation’s money supply, and that it
does so by creating and “lending” it out on such terms that
our nation as a whole cannot service the “debt” so incurred
(due to the attachment of a compounding “interest” fee)
without borrowing ever greater quantities of money, and thereby
slipping ever further into “debt.” I also suggested to him
that this private-money-creation franchise was the linchpin of the
whole globalist corporate order of which he offers such an
impassioned critique, and that the abuses he documents cannot not be
effectively resolved until the monetary power is returned to the
public sector.
He said that he understood this to be the
case. Why, then, I asked him, does he never mention the corporate
control of the issuance of the public’s money supply in his public
pronouncements? He replied that he does indeed mention it in very
small gatherings, but he has not found a way to talk about it to the
larger public.
From my decades in trying to address the
matter in public, I can understand his dilemma. The public’s
consciousness about money has deteriorated greatly since William
Jennings Bryan won Presidential nomination of the Democratic Party
for three election cycles after declaring in his famous Cross-of-Gold
speech in 1896 that he did not put all the issues he believes in into
his platform because: “. . . when we have restored the money of
the Constitution, all other necessary reforms will be possible, but
until this is done there is no other reform that can be
accomplished.”
The lesson of this story is that
clearly the monetary awareness of the Presidential candidates of the
modern era has changed; but so has that of the public. Do the
candidates not talk sense on the issue of “debt” because
they do not know what is happening, because they are in denial about
the facts, or because they cannot find an opportunity in the public
discourse to talk about their true thoughts? Is it possible that
McCain and Obama have an understanding on this matter that runs
deeper than what they are letting on, but feel constrained because,
in the current cultural and political climate, any mental processes
they might express that fall outside the bounds of the dominant
socio/economic/political paradigm (and this would certainly be that)
would be interpreted by the pundits and public alike as
unintelligible gaffs that would quickly destroy their candidacy? I
don’t know the answer to that question, but I do know that we need to
lay aside the talking points and partisan bombast, and start talking
sense with each other on matters of money.
There is an
element of cynicism in the country that is convinced that the major
candidates are bought-and-paid-for shills of the system, and as such
are lying outright to the electorate. I can’t prove that that is not
so, but the assertion seems to me to be simplistic at best;
dangerously irresponsible at worst. I observe that great mass of the
electorate, as well as the media pundits that would presume to pose
the burning questions of the day in our stead, are themselves
virtually universally ready to accept the bromide that it is
out-of-control-spending that is causing the “debt”, and
would likely dismiss any candidate that would dare to suggest
otherwise. How, then, could we summarily blame any candidate for not
committing political suicide by speaking out?
A more
productive course of action, I would suggest, is for each of us to
think carefully and self-reflectively through the subject of money
for ourselves; always seeking the truth, and leaving aside our pet
ideologies, idiosyncratic prejudices and personal interests. From
there we can cultivate a dialogue that would bring people together to
discuss the subject on a fresh basis. Such an approach would
naturally include an invitation for the candidates to join in. This
may seem like a futile gesture given the shortness of time before the
day of decision and the scope of the issues involved, but it behooves
us to look beyond the election. We have to start somewhere.
It
has become axiomatic to say that this is a pivotal election cycle,
but pivotal around what? If We the People, candidates and voters
alike, cannot break out of our habitual unproductive thought patterns
concerning the “debt” crisis, I see only precious time
lost, and a turn for the worse in our prospects for coming to grips
with its monetary cause. But, if we can use the period of heightened
public consciousness in the run-up to election day to plant the seed
of an authentic dialogue, even if there is not time and opportunity
for it to come to fruition by November 4, then truly we can hope to
turn the situation for the better. Events are telling us that the
monetary matter is urgent, and we have already put it off for too
long.
Column #68 WHY OUR CHILDREN WILL NOT INHERIT THE “NATIONAL DEBT” – PART 1
(Week 12 – Tuesday, Oct. 28)
Debates about the “national debt” (especially as concerns the Federal “debt”) are frequently accompanied by admonitions that we need to deal with our “debt” now so our children will not inherit it. Politicians have been professing a sense of urgency about the matter for decades, and the public has come to expect the familiar rhetoric from them. Their proposals are invariably vague and couched in ideological terms, and, it seems, once whoever is elected assumes office the net indebtedness of the nation continues to snowball, except at an accelerated pace.
The “national debt,” both public and private, has continued to mount for decades, across the generations, until now it is simply galloping out of control. We are being subjected to the same promises in this election cycle, but the numbers have gotten so immense that it makes one wonder how anyone can have the temerity to utter such claims anymore. It is as if they can’t think of anything else to say.
This situation begs a few questions. What is happening here? What is it about debt that we don’t get? What are we doing wrong? Is there no way to turn the fiscal corner and finally start paying this thing down? Are we helpless to arrest the mortgaging of our own children’s future?
In my view the concern often expressed by politicians and citizens alike about not wanting to burden our progeny’s future with our irresponsible financial profligacy is for the most part authentic. The problem is that our most heartfelt efforts are bringing about the very opposite effect. The irony is that the more we resolve to fix the problem, the more we make certain that this downward spiral into “debt” continues. This is a case of unintended consequences run amok.
We are counseled in holy writ, “Wisdom is the principal thing; therefore get wisdom: and with all thy getting get understanding.” (Proverbs 4:7). In not wanting our children to fall into indentured servitude to the moneylenders we have indeed embraced “the principal thing,” but as a culture we lack the understanding of how to accomplish it.
To get this understanding, I propose that we start by revisiting the private-bank-loan transaction by which virtually every dollar in circulation comes into being. I ask the reader’s patience in that this will require an explanation that will unfold over the length of several columns, but understanding its implications is absolutely crucial to seeing how our children’s future can be rescued from the irredeemable “debt” that seemingly threatens to foreclose on it now.
When a person borrows from a bank, the banker does not get the money he is “loaning” from funds on deposit in his vault. Rather, he creates the money with the “writing of a check” (or the electronic equivalent of creating deposits in the borrowers account with a few keystrokes on a computer). In other words, the money did not exist the instant before he “made the loan”, but it does now. This is the very moment in which new dollars come into existence within the Federal Reserve System.
Already we can see that the banker is not making a “loan” in the dictionary or common sense meaning of the term. That is, he is not handing over something tangible that he is in possession of, and therefore must now do without until the “borrower” returns it. Instead, he is bringing an abstract value into existence that is essentially conjured “out of thin air.” It would be more proper to describe this, not as a “lending”, but a “monetization” process. Monetization is the creation and issuance of money as an extension of a commodity that exists and has worth so that it, or goods of equivalent value, can be bought and sold.
The existence of this more accurate terminology notwithstanding, the common practice in the world of banking is to call the issuance from this money-creation process a “loan”, which by implication results in a supposed “debt”.
(to be continued)
Column #69 WHY OUR CHILDREN WILL NOT INHERIT THE “NATIONAL DEBT” – PART 2
(Week
12 – Wednesday, Oct. 29)
In yesterday’s column I offered
a description of how the private-bank-loan transaction by which money
in the present system is created and issued is not a “loan”
in the dictionary or common sense meaning of the term, but is
actually a creation-and-issuance procedure by which new money is
created when the banker writes the check (or electronically credits
the account), and enters into circulation when the “borrower”
spends it. The banker is not handing over funds that were on deposit
in his bank, but, rather, is bringing an intangible value into
existence that is essentially conjured “out of thin air” in
a process that could more properly be called “monetization”
(the assignment of monetary value to already existent wealth (i.e.
collateral)).
By the terms of the contract that the
“borrower” is required to sign to get the money, he agrees
to take on a “debt” to the bank in spite of the fact that
the money could not be properly said to have been a “loan”,
but rather an assignment of monetary value to the property
(collateral) of the “borrower”.
It must be
asked, where did the bank get the privilege to effectively write the
money that created a “debt” which the citizen who applied
for the “loan” is obliged to bear? It proceeds from the
exclusive franchise to create money granted to a private corporation
by the Federal Reserve Act of 1913. The granting to a private
corporation of the franchise to create the nation’s money supply is
unconstitutional because such authority is a legislative power, as
stipulated in the Art 1, Sec 8, Para 5 of the United States
Constitution (Congress shall have the power to . . . coin Money (and)
regulate the Value thereof).
Notwithstanding that they
have done so, it is no more justified for the Congress to abdicate
this Constitutional mandate than it would be for the President to
contract out his executive duties, or the Supreme Court its
decision-making trust to a private contractor. President Andrew
Jackson stated the matter succinctly in his message to Congress on
the occasion in 1832 of vetoing the charter of the Second Bank of the
United States (an institution much like the Federal Reserve):
“But
if they (the Congress) have . . . power to regulate the currency, it
was conferred to be exercised by themselves, and not to be
transferred to a corporation. If the bank be established for that
purpose . . . Congress have parted with their power for a term of
years, during which the Constitution is a dead letter.”
In
assuming the authority to create money, the private banking system
(under the direction of the Federal Reserve) has usurped a power that
properly belongs to the citizenry as a whole. That it then “loans”
the money so created back to them is an act of civic effrontery that
We the People cannot accede to without becoming as a body citizenry
accomplices to the act, and at length indentured serfs to the private
interests that have been vested with this misplaced prerogative.
The
resulting “debt”, then, is not a common-sense debt any more
than the “loan” that supposedly created it is a
common-sense loan. Indeed, the very legitimacy of both concepts must
be called into question. There is one more factor in this line of
reasoning that needs to be established before it can be stated
definitively (in my view) why our children will not inherit the
“national debt”. That will be the topic of tomorrow’s
column.
Column #70 WHY OUR CHILDREN WILL NOT INHERIT THE “NATIONAL DEBT” – PART 3
(Week
12 – Thursday, Oct. 30)
In the previous two columns I
suggested that nether the “loan” from a private bank by
which money is created and issued, nor the “debt” that
results, are what the words would purport to mean by the dictionary
or common sense meaning of the terms. Moreover, I questioned the very
legitimacy of both concepts as they are used in this particular
transaction.
Attached to the “debt” is a fee,
commonly called “interest”, that compounds over time until
the “loan” is “paid back”. The charging of this
“interest” fee is commonly attributed to “the cost of
money”, but the phrase is not justified. The “cost” in
real terms is essentially the small effort it takes to lift the pen
and write the check.
If a private person had a checkbook
out of which he was able to write checks for any amount with no
requirement that there be funds somewhere to draw upon, and, further,
he chose to “loan” the money so conjured to people who
simply did not have that privilege, would it be proper to say that a
compounding fee attached to the use of such funds constitutes a “cost
of money” to the person writing the check? While a modest
incidental levy might be justified, an “interest” charge
can assume such proportions that it can total more than the principal
amount of the “loan” itself; often a multiple thereof. It
can even result in a revolving-door payment on the “debt”,
with the principal of the “loan” not being retired at all.
Can the fact that a particular group has been awarded control of the
spigot that dispenses the economic life’s blood of society as a whole
be attributable to anything but a disparity of privilege?
Money
is the most vital element of the commons. How can it be justified for
a private corporation to possess the franchise to create it, while
everyone else is obliged to pay a heavy tribute for its use?
But,
I hear it said, banks are businesses, and like other businesses they
are obliged to pay their expenses and earn a profit. This is true,
but most of the expenses of banking are covered by the many fees they
charge for their services that are not related to “interest”.
Why, then, are they justified in tacking on an additional compounding
surcharge that requires that the money they create out of essentially
nothing be “paid back” in quantities that are often
multiples of the amount “loaned”?
Others will
say that if banks did not charge “interest”, what would be
the incentive for them to loan out “their money”? They are
not loaning out their money; they are “loaning” ours (i.e.
the public’s). We should be turning the question around and asking,
what is the incentive for We the People to “borrow” at
“interest” money that is already ours to create? I would
add, why are we not asking this question in sufficient numbers to put
the monetary issue on the political agenda?
To be
complete, I would note that there are banks that do indeed loan out
money on deposit. They are generally referred to by specialized
names, such as “savings banks”, “savings-&-loans”
or “credit unions”. What are commonly identified as a
“banks” within the Federal Reserve System create new money
using funds on deposit (called “reserves”) as a baseline
from which, within the rules of a mathematical (fractional reserve)
formula, they are permitted to create new money to “lend”.
The
Federal government (i.e. We the People through the Federal
government) is supposedly in “debt” to the Federal Reserve
for a sum that is currently in excess of $10 trillion dollars. Over a
period of time, it will cost the government that much and more in
“debt” service payments just to avoid defaulting on the
“loan” (without ever reducing the “debt”). Will
the Fed really have incurred a “cost” of $10 trillion
dollars (as measured by what was needed to cover material expenses
and employee wages) in servicing the paperwork on the amount
“loaned”?
In the private sector a “loan”
of $500,000 might well be sufficient to compensate the architect,
suppliers, tradesmen and other necessary contributors to the building
of a large house, but does it really cost another $1,000,000 dollars
(“interest” and fees) over the period of the “loan”
(mortgage) merely to manage the paperwork?
Clearly, there
is a grossly disproportionate charge for actual services rendered at
the very least. In reality a virtually culture-wide denial is
happening in matters of money that is effectively camouflaged by
euphemistic language and dubious patterns of thought, which, in turn,
have become the words and phrases that we as individuals and as a
civilization have available to think with.
What needs
ultimately to reckoned with is that, due to the compounding
“interest” fee attached to bank “loans”, the
“debt” of society to the banking system can never be “paid
off”. Again, to be complete, it is technically possible for the
“debt” to be satisfied if the “investors” who
bought up the “debt” contracts generated by the banks all
forego retaining the “interest” payments collected, and
return the money as gifts to the social order. In fact, there is some
of this that goes on, mainly in the name of philanthropy, but it is
hardly the reason that motivates the majority of the gamblers in the
monetary casino. Practically speaking, the “debt” that is
attached to the public money supply is unpayable.
How then
can our children ever “pay” it? More on that tomorrow.
Column #71 – WHY OUR CHILDREN WILL NOT INHERIT THE “NATIONAL DEBT” – PART 4
(Week
12 – Friday, Oct. 31)
In the previous three columns I have
attempted to establish a three-part premise to establish a basis for
understanding why our children will not inherit the “national
debt”. It can be enumerated as follows:
#1 – The
so-called “loan” from a private bank by which money is
created and issued is not a loan in the dictionary or common sense
meaning of the term, but is, rather, a process by which money is
created “out of thin air”.
#2 – Since no money
has been loaned, how can there be a resulting “debt”? In
truth what is called a “debt” to the banks within the
present monetary system results from the creation and issuance of
money by a private corporation out of a power that rightfully and
constitutionally belongs to the body of citizenry to whom the money
is being “loaned”. How can We the People be in “debt”
to ourselves?
#3 – The compounding fee called “interest”
attached to the supposed “debt” created via bank “loans”
makes it impossible, even by the rules of the Feds own system, to
“satisfy” the obligation so created in a final sense,
because when the principal sum of the loan is issued, the money to
pay the “interest” is not. The aggregate of “debt”
that created the money supply can only be rolled over by continually
“borrowing” ever more money into circulation.
Given
that the “national debt” is the aggregate of the principal
balances of all outstanding bank “loans” (public and
private), that such “loans” are not real loans, that the
resulting “debt” is not a legitimate debt, and that this
“debt” cannot be satisfied in any case due to the
compounding “interest” fees attached, how can our children
ever pay it?
The straightforward answer is that they
cannot, simply because the very idea of a “national debt”
makes no sense. It is an abstraction that has no basis in reality. In
truth, it is a belief system that the adult world pays tribute to
because we think it is real.
The real burden we place on
our progeny, therefore, is not in any objective sense some “debt”
that they will inherit, but a belief in such. From the time they
emerge from the womb, virtually every adult voice in their world is
in effective (though not conscious) conspiracy to convince them that
their future is already mortgaged away.
If the economic
pundits have it right, when a newborn innocent draws first breath he
will already “owe” some quarter-million dollars to a
supposedly compassionate world that has gone so mad that this abject
absurdity is deemed to be hardnosed, bottom-line “reality”
from which to reckon his economic future.
But they have a
secret; one which even they don’t know. It is that the child is not
in “debt”. His future is not “mortgaged” (i.e.
“death pledged”) after all. In the economic aggregate there
is no such thing as fiscal “debt”. Its smoke-&-mirrors
“substance” is the usurious bubble attached as a rider at
the birth of money itself into the social flow, as alluded to in the
private-bank-loan transaction.
All voices in the child’s
universe – teacher, politician, financier, scientist, psychologist,
clergyman, TV personality, parent – conspire to insure that he will
be inoculated against the secret; they being not cognizant of it
themselves. If the spell is not broken, it will settle upon the youth
a yoke of phantom “debt” which in hypnotic stagger he will
bear to his grave. Let us resolve now that we disabuse his tender
mind of this spirit-crushing bugbear.
Column #72 – PRIVATE BANK MONEY: THE STRANGE SUPERSTITION OF OUR AGE
(Week
12 – Saturday, Nov. 1)
Christopher Hollis, British
economist and guest professor at Notre Dame University,
observed:
“Indeed the
historian has to record that in almost every age there was some
superstition or other of utter unreason which strangely occupied the
minds of men, otherwise of activity and vigor . . . We are sometimes
ready to congratulate ourselves that our age has outgrown all
superstitions. But the historian of the future will, I fancy, reckon
in the same class . . . the strange superstition that, whenever money
is invented, a percentage must be paid forever afterwards as a
propitiation to a banker. It is on that superstition that the whole
empire of Mammon is built.”
Private
bank money is the “strange superstition” of our time. It
behooves we modern scientific sophisticates to ask ourselves if we as
a civilization have fallen for an assumption that is as unscientific
as the flat-earthery of an earlier time. Frederick Soddy, a British
scientist and Nobel Laureate in Chemistry, was appalled by the
anomalies caused by the usury-based monetary system. He wrote,
“The
sensationalism of the scientific prophet could hardly imagine
anything so sensational as this. A nation dowered with every
necessary requisite for an abundant life is too poor to distribute
its wealth, and is idle and deteriorates not because it does not need
it, but because it cannot buy it.”
Such
thoughts precipitated an inquiry on his part which resulted in what
many consider to be a classic volume, Wealth, Virtual Wealth and
Debt. This treatise compares economics with physical science. The
creation of real wealth, he reasoned, always involves the expenditure
of energy, and must conform to the laws of thermodynamics, whereas to
set up “debt” paper as the source of wealth turns reality
on its head. Among his many insights was the conclusion that,
“If
we reasoned similarly in physics, we should probably discover that
weight possessed the property of levitation.”
My
observation is that in our “enlightened” era, denial,
especially when related to money, is perhaps the strongest human
failing. I can imagine a time in the future when our descendents (for
whom we are so ostentatious about not wanting to pass on our “debt”),
will come to their senses and dispel the bank-money bogeyman back to
the irrationality from which he came, and wonder in amazement how an
age of “science” could ever have believed in him. They will
regard with horror the terrible price we were willing to pay, rather
than relinquish our attachment to this pernicious notion.
In
my view, the so-called “national debt” is a phantom. By
taking it at face value, and arguing within an arena circumscribed by
its own ostensible terms (“loan”, “debt”,
“interest”, “pay back”, etc) , howbeit even
“against” it, we effectively legitimize its chicanery and
cement it as a fixture of our intellectual landscape. Our reflexive
hand-wringing on this “issue” needlessly traumatizes our
children into believing this abstraction is real, and unintentionally
programs them into an acquiescence to a dead-end future. We do untold
violence to their prospects, their psyches and their hopes, however
unintentionally, because we are reluctant to break our denial on
this.
If We-the-People were to wake up to the reality that
the “national debt” is a made-up construct, and that it
could be de-constructed, there would be a new world in the morning.
What is more, the sky would not fall, and the whole financial mess
the nation finds itself in could begin to be resolved directly,
systematically, transparently and without default to
anyone.
Monetarily speaking the way forward is
straightforward. It begins with the restoration of the money creation
franchise to the public sector. It continues with the deflation of
the “debt” bubble (not a paying of the “debt”) by
the redemption as they come due of already outstanding U.S. bonds
with real money (United States Notes; as per the “Greenback”).
It is completed with the scrapping of the fractional reserve formula,
and the redefining of all “credit money” already issued as
legal money.
The playing out of the transition is bigger
and more complex than this of course, but eminently doable. This may
sound like a preposterous vision, but, I would suggest, it is not. It
only seems so because our minds have been trained out of the ability
to even entertain such fits of common sense by the cumulative force
of our “debt-money” rooted acculturation.
Next
week the citizens of the nation will enter the voting booth in what
is widely billed as a “pivotal election that will determine the
future of our children’s future.” In spite of what has come to
be years of strenuous campaigning at a cost of hundreds of millions
of dollars, the issue of money is not even represented by anyone on
the ballot in any definitive way. Whatever the turnout, and whoever
the victors, this is a great tragedy for our nation. It was not
always so. Let us resolve that it never be again.
Column #73 – ELECTION DAY: DAY OF DECISION, OR RATIFICATION?
(Week
13 – Monday, Nov. 3)
Tomorrow is “election day”.
Ostensibly, this is the long-anticipated pivotal day of decision on
which we set a bold new direction for the future of ourselves and our
children. After observing the pattern set in previous election
cycles, it might be fairly asked if it is not instead an empty civic
ritual whereby, amidst much expensive political hoopla, we
participate in the ratification of the same old system, with no
realistic chance of making a choice for the positive? In the persons
presented on the ballot (as per John McCain and Barack Obama, for
example; not meaning to overlook the fact that there are others
also), is there presented a bona fide choice between two divergent
roads forward, or is it essentially a non-choice, between “Tweedle
Dee and Tweedle Dum”. Is the only real alternative to “waste”
one’s vote on a protest third-party candidate?
Taking the
question a bit deeper, is it a constructive act to cast one’s vote at
all? This, to be sure, may appear to be out of synch with the civic
tenor of this special day, but in my travels the question is
presented to me frequently by serious-minded souls who are seeking an
affirmative way to act, but are torn between hoping that they can
make a difference, and feeling that their precious time and energy
are being co-opted to add political bunting to the same old corrupted
civic structure.
For my part I am encouraged that the
level of interest and participation among the electorate, even after
what seems like an interminable four-year grind since the last
Presidential election. In a peculiar sort or way the vast quantities
of cash that have been pouring into campaign coffers is an indication
that there is a vast reservoir of hope that is being drawn upon, even
to the extent that people are electing to vote with their financial
substance through a difficult time. For all that, however, the issue
of monetary transformation, is nowhere represented on the ballot,
except in the guise of the tired old rhetoric of
getting-spending-under-control-and-balancing-the-budget-so-our-children-won’t-have-to-pay-our-“debt”.
What could be more discouraging?
This begs the question,
is there a reason for hope? I believe that there is.
Permit
me to offer an analogy. In the field of chemistry there is a
phenomenon known as a “super-saturated solution.” By way of
explanation, if one were to take a liter of water and then begin to
add small quantities of a salt, the salt would dissolve into the
water forming a solution; until, that is, the water held in solution
all the salt that it could hold. At that point the solution would be
“saturated”, and any additional salt added would fall
undissolved to the bottom of the container.
Now suppose
that one started with a solution that was already saturated (with no
extra salt at the bottom), and began to let water evaporate out of
the container. As the water evaporated the salt would be left behind,
but the measure of salt that was supposedly dissolved by that amount
of water would stay dissolved, and not precipitate to the bottom. The
solution in the container would have entered a state of being a
“super-saturated solution”; that is, it would be holding in
suspension more salt than it could supposedly hold. The reason that
it would stay in suspension is that there is nothing identifiable in
the solution that represented truly the pattern the excess salt would
precipitate into if it had the chance. If one were to introduce into
the solution a seed crystal, however tiny (it need only be at least
one molecular replication of the true pattern), then the excess salt
in the solution would precipitate out (this is in fact how crystals
are grown).
The state of the macro-political climate at
present is analogous. The energy in the hopes, fears, debates,
activism, anxieties, seeking and prayers of the people around the
world about the present state of affairs constitutes a mighty
socio/economic/political super-saturated immersion. There is a great
deal of angst-ridden argument out there about having to find a new
and better way. Many issues are raised, some which venture
tantalizingly close to the core truth, but we remain yet at a
collective loss as to what precisely the problem is, and what exactly
can be done about it. If, however, the seed crystal of a true
alternative can be sown into the public consciousness, what would
precipitate out would be breathtaking. That is what this column,
hopefully, is all about. If in fact it can be constituted so as to
form a seed crystal of what is yet unmanifest, but striving to be
born. This is no mere metaphor, but a principle of real power and
change.
Seen in this light, the tremendous energies that
have been poured into this election cycle, without, in the view of
many, evident fruit need not be lost. They do indeed come from a deep
font of human hope in the future that can be precipitated out into a
bright new vision for the future. The seed crystal that is yet
lacking, I would suggest, is a true dialogue about the nature,
realities and practice of money.
Column #74 A POETIC THOUGHT FOR ELECTION DAY
(Week
13 – Tuesday, Nov. 5)
The campaigning is done, and each
office seeker has made his or her case. This poem is offered from the
heart as something to reflect upon as each reader casts his or her
vote. If one cannot find clear expression for the thought and
sentiment it raises on the current ballot, then may it at least plant
a seed of resolve for the next time around (which starts
tomorrow).
“Why?”
Hark
the entreaties of the broken
Souls who have borne usury’s curse,
Debt-money’s train of death and woes.
The
huddled betimes scarce awoken
Soon to find wit and will aburst,
The hour, impending, no one knows.
The
meek get ready to inherit the earth,
The
earth prepares to receive the sky,
The
youth anon will discover a future,
The
wise, in love, smile – and now you know “Why?”
May
we all walk in wisdom on this day of decision.
Thank you
for listening.
Column #75 ELECTION NIGHT MUSINGS
(Week
13 – Wednesday, Nov. 6)
I have spent the evening in the
company of good friends with whom I watched the election returns on
the television. At this late hour I am more in the mood to be
personal than analytical. Election days are singular in their effect
upon me. They are a unique hiatus between one rhythm of life and
another. The campaigns are over, and now we go back to work.
I
am a quintessential baby-boomer and child of my time. I grew up in
what I experienced as the halcyon 50’s, and came of age in the
turbulent 60’s. The thought that kept coming to me tonight is, “what
a difference forty years can make”. I was born and raised in
Chicago, and grew up with familiarity with Grant Park, site of
Obama’s acceptance speech. Forty years ago it was the location of the
massive disorder (“police riot” some called it) that
swirled around the ’68 Democratic Convention. How different that was
compared to the virtual love fest that reigned there tonight.
I
did not experience the mayhem in Grant Park in ’68 because I was in
the midst of another chaotic scene in Vietnam. From there it seemed
that “the World” (what we called the states from “the
Nam”) was coming apart. Over a hundred cities, we were told,
were beset by rioting and on fire. Martin Luther King had been
murdered in the spring. Bobby Kennedy, who’s last public utterance
was “And now on to Chicago”, met the same fate shortly
after. This finished off, it seemed, the innocence of a generation,
coming as it did less than five years after the assassination of his
brother.
I experienced a particular feeling of sadness
upon hearing McCain’s most gracious concession speech. I realized
that no veteran of Vietnam had served in the office of President, and
that McCain was perhaps the last best hope of that happening. It
still isn’t too late, or course, but I had the feeling that with the
public taking a pass on his candidacy, perhaps the torch was being
handed off already to a new generation. It seemed that the experience
of the souls who had served in the war that marked our generation,
but were still keeping it all inside, was somehow being passed over
also.
Obama’s dignified acceptance address aroused in me
feelings of hope. More so did the looks on the faces of his crowd.
Much has been said about the shallowness, mendacity and venality of
modern political campaigns (not without reason), but I did not see
evidence of that in the countenances of this celebratory, but
serious, throng. How long will such comportment last? I do not know,
but it is reassuring to know that it is there and can be called forth
if the moment can be made right.
As I reflect upon the
differences between the times now and forty years ago, it strikes me
that, culturally and politically speaking, much has changed, except
perhaps the one thing that needs most to change. That is, we still
cannot have an authentic public dialogue about money. To be sure,
there are many partisan ideological arguments about taxes being too
high, spending being out of control, having to pay the “debt”
so our children won’t have to, and the like, but those are not sober
soul-searching conversations about what money is, how it is created
and controlled, and who it serves.
McCain and Obama both
talked in a heartfelt way about the need to come together. Money is
one topic that is common to us all. Notwithstanding that it is
typically invoked in a divisive manner, my experience is that it is
the one subject around which it is most possible to have a unifying
transcendent dialogue. I have tried to demonstrate something of that
potential through these columns. It is my hope that in the relative
political calm between now and inauguration day, the seed of a
productive discourse on money can be planted, before the looks on
those faces fade again into the disunity of political business as
usual.
Column #76 WHAT NOW?
(Week
13 – Thursday, Nov. 6)
This nation has from time-to-time
passed through periods of incredible euphoria for the heights of
achievement and sacrifice it has achieve. I sensed such a moment in
the aftermath of Obama’s victory amidst the throng in Grant Park in
Chicago. The People basked briefly in the sublime light of
fulfillment in their realization that this nation’s very soul, though
sullied by its passage through chattel slavery, Jim Crow and racial
bigotry, had traversed the length of human mendacity in at last
coming to elect as its leader the first African American
President.
Few believe that being black, or of any other
particular description, is a qualification for high office, but the
identity of the candidate in this case cannot be separated from the
momentousness of the attainment. Obama had endured the vicissitudes
of the process, and that few seemed inclined to question that he had
fairly “won” (whatever that means in politics) was somehow
cathartic to the nation. Even John McCain could not help but dedicate
the first words of his concession remarks to that historic
achievement, and President Bush issued his own declaration
commemorating the event. We have long been a people that prides
itself on the belief that any new soul born into its fold could
aspire to any position in the land. Until last night this promise was
in some measure hypothetical, but the question is now laid to
rest.
Had the election tipped the other way, an historic
precedent would have been set in another direction; i.e. the first
woman to attain to the office of the Vice-Presidency. There was a
time when for even one party to entertain the idea of having a
Catholic on the ticket was pushing the bounds of thinkable thought
(as for JFK), but now it seems the breaking of the
Protestant-white-males-only-need-apply rule was done it stride.
Surely as a nation we have grown up.
What now?
The
events of yesterday were in part a culmination of the American
Revolution, but something crucial remains undone. After a heroic War
of Independence announced with a noble Declaration and guided by
“founding fathers” of high principles, one might think that
the establishment of the right of the nation to create, issue and
control its own money would be a foregone conclusion, but if history
teaches anything it is to not underestimate the money power (the
amorphous principality that the power of money, as co-opted by forces
inimical to the commonweal, represents; it is not any particular
persons, but persons of every class or description can, and do, fall
under its spell). While the People have on occasion arisen to great
heights of purpose and sacrifice, afterwards they understandably tend
to turn back to their private lives. The money power, on the other
hand, never rests, leading monetary historian Alexander Del Mar to
observe ruefully:
“Never
was a great historical event (the American Revolution) followed by a
more feeble sequel. A nation arises to claim for itself liberty and
sovereignty. It gains both of these ends by an immense sacrifice of
blood and treasure. Then, when the victory is gained and secured, it
hands the national credit (the authority to create money) over to
private individuals, to do as they please with it.”
This
is the unfinished business of the American Revolution. It is what we
will have to reckon with if the promise of the nation, so clearly
reflected in the yearning faces seen last night in Chicago, is to be
fully realized. None of this is to take away from the momentous
import of what has already been achieved, but if We the People merely
turn back to our private lives after the great mobilization of
energy, resources and willingness to get involved represented by this
election cycle, then our hope will have been allowed to expire in yet
another “feeble sequel”, and America’s promise will in the
end ring hollow.
Column #77 PLANTING TIME
(Week
13 – Friday, Nov. 7)
The only time one can affect what
type of tree will grow is when one selects and plants the seedling.
So it is in the political process.
A critical lesson I
learned from my years of political activism is that once the
campaigning starts, even in its pre-public stages, the chance for
fundamentally affecting its direction has effectively passed. By then
the decision about why a candidate is running is set, the early money
attached to expectations has started to flow, and the themes and
aspirations of the candidacy have been virtually cast in cement. The
only things left to work out are how they will be reflected in the
talking points and campaign strategies.
Once a candidate
has made the plunge into the frenzied pace of running for office, he
or she will have precious little time for input or reflection. To
expect that any major change in direction can be effected is
unrealistic. The deliberative pretense of the electoral process, with
its glad-handing photo-ops and staged “town meetings”, is a
charade. If one would be so uncouth as to pose a question, however
cogent, that is not within acceptable bounds, he or she will be made
to feel as the intruder who released flatulence into the room.
Candidates on the trail are not interested in going out into the
public to discover what the people think. Rather, they have already
determined what the public ought to think, and the formidable
machinery of campaigning is geared to effecting that end.
The
problem is not so much the venality of the candidates themselves. How
could they do otherwise given the ordeal we put them through so that
they might demonstrate their mettle to our satisfaction? This is not
a process that supports earnest exchange or conversation, so it is
futile to expect it.
If there is any real deliberative
process that does go on, it happens well before the campaigning
starts. At that point politicians contemplating a run for the prize
may well be involved in a discovery process. They may even be seeking
inspiration. At the very least they are looking for those initial
elements of support that can start the “momentum” ball
rolling in their favor. In my experience it is at this very nascent
stage that they are accessible, and looking for ideas. This
phenomenon varies, of course, and career pols tend to be in a
more-or-less campaigning mode virtually all of the time, but if there
is any openness and flexibility possible in the situation, it will be
in the formative pre-campaign stages.
If one would hope to
plant the seeds of a monetary dialogue in particular, this early
open-endedness is crucial. If the candidate is indeed a seeker of
truth (I believe that there are a few, but we tend not to recognize
them because we treat them badly) there will at best be a narrow
window of opportunity to gain a deep hearing. If it is not seized
upon, then virtually every word, thought and position that comes
after will be rooted in a socio/political/economic culture that
springs from the private-bank-loan transaction upon which the social
order is founded. The usual, but spurious, intellectual cornerstones
related to “balancing the budget”, “running the
government like a business”, “paying down the ‘debt’ so our
children won’t have to”, creating “economic growth” (a
euphemism under the current system for “borrowing” more
money), the “un-affordability” of human services, and so
forth, will be immediately set, and the argumentative structure of
the candidates’ appeal will be built on top of them. After that, they
are almost helpless to fundamentally change their direction even if
they “see the light” and reach a different conviction in
some greater or lesser degree.
This immediate
post-election period, then, is the season for planting the seed of
the tree. After such a long and tedious election cycle, the People
will almost universally be inclined to turn to the more personal
business of celebrating the upcoming holiday season. Who could blame
them?
But, the power of money never sleeps, the demand for
“interest” payments is unrelenting, and whatever potential
the age of Obama represents is being undermined even now. Despite our
undeniably momentous achievement, we can be sure that we as a nation
are being set up by the seductive allure of lucre (as after the War
of Independence) for yet another “feeble sequel”. If we
cannot stay conscious, determined and vigilant throughout this
transition, then it has, in critical ways, all been for naught.
Column #78 REGAINING CONTROL OF OUR DESTINY
(Week
13 – Saturday, Nov. 8)
In “Religion
and the Rise of Capitalism“,
historian R. H. Tawney observed:
“Few
who consider dispassionately the facts of social history will be
disposed to deny that the exploitation of the weak by the powerful,
organized for purposes of economic gain, buttressed by imposing
systems of law, and screened by decorous draperies of virtuous
sentiment and resounding rhetoric, has been a permanent feature in
the life of most communities that the world has yet seen.”
It
is time to arrest this tragic litany. Throughout history there have
been many struggles to win the rights, protect the dignity, and
insure the welfare of mankind. Unfailingly, these demands have been
resisted by a reactionary establishment whose power is rooted in the
economic order of their day. It at first denies, then stonewalls,
then grudgingly accommodates the demands. Eventually it preempts and
incorporates the changes for its own devices, as part of the
“imposing systems of law” and “decorous draperies of
virtuous sentiment and resounding rhetoric” with which the
system props itself up.
Chattel slavery is abolished,
universal suffrage is won, the rights of labor are established, a
social safety net is laid out, environmental protections are enacted,
and a multitude of other reforms are accomplished. A black man is
elected as President of the nation (alternately a woman nearly
elected Vice-President), and the euphoria of the moment transcends
party lines. Our society indeed moves ahead by quantum leaps.
Still,
there is something crucial we are not getting at. That is that the
energy of our civilization, and in turn its social, political and
economic structure, is still controlled from the top for the benefit
of the few, rather than percolating up from the bottom for the
welfare of the People. Indeed, it may be argued that the economic
polarization is getting ever more extreme. What is more, one could
make a case that we, as a species, are lurching dangerously close to
self-annihilation on many fronts, from resource exhaustion, to
disease pandemics, to species extinction, to loss of genetic
diversity, to environmental poisoning, to nuclear holocaust, to
climate change, to moral degradation, to (fill in the blank).
The
reason for this, I believe, is that we have not properly recognized
the bedrock importance of the nature and control of the monetary
system. Money is an abstraction. It is weightless, colorless,
odorless, ephemeral and intangible in every physical way; yet is
seems to control everything. It is the essential energy, the life
force, the prana, the chi of the system.
To draw a medical
analogy, if a pathogen attacks a body, it does so through the blood,
the fluids, the nerve synapses, and other processes by which it
circulates energy to live and grow. If a pathological agenda attacks
a socio/political/economic body, it does so through the monetary
system for the same reason. This is not just another issue, but a
little recognized reality that underlies all issues. We have come to
an unprecedented point in history where it can no longer await its
turn for attention. Humankind has reached the stage where we have the
power to threaten our very existence through many avenues. We must at
last gain control of our own energy processes.
Expanding
the medical analogy, in a material sense a dead body may contain
every element it had when it was alive, down to the most
infinitesimal cell structure. What has changed is that the connection
with the intangible energy that animated every fiber of its being has
dropped below viability and ceased to function.
An economy
is much like that. The physical part abides. The sun beams down, the
rains fall, the plants grow, the infrastructure persists, and the
hands, hearts and minds remain willing and able to do the work. This
is equally true in times of boom and bust alike. What changes is this
ephemeral abstraction which seems to control everything: the monetary
system.
Money is a paradox. It is nothing, yet it is
everything. We must finally transcend that paradox if the human race
is to gain control of its own destiny. In doing so, we will at once
transform the debate on all issues, from an impasse in which we
appear to be checkmated by lack of funds, to an open-ended march to
the future with all the physical and human resources we can mobilize.
Money will cease to be a bludgeon that hinders or drives the social
order. It will instead become a superconductor that transfers energy
efficiently and equitably though it.
When we get fully
into this process we will be dealing with, not just finances, but the
transformation of our whole civilization. It is the economic
dimension of a larger key to crack the whole mess we are in wide
open. We would at last break out of the “debt-money”
straightjacket, and dispel the Federal-deficit sword of Damocles.
Then we will start to get a handle on our other seemingly intractable
problems; social, political, ecological, agricultural, urban, rural,
education, health care, or whatever. Living morality will merge with
common-sense practicality as we begin to reclaim the creativity,
civility and humaneness of our civilization.
For those
with the vision to see this represents, not merely a solution for an
economic problem, but also the opening of a new horizon; one which
could light up the imagination of a whole new generation. To be sure,
the audacity of the prospect is intimidating, but if we approach it
with grace, determination and aplomb, it may turn out to be our
nation’s greatest adventure yet.
I saw in the youthful
faces of those gathered in Chicago Tuesday evening a deep yearning
for what might be. Let us not foreclose on their hope for the future
by failing to act.
Column #79 A NEW ROTATION
(Week
14 – Monday, Nov. 10)
Everything evolves, and so does this
column. The initial concept was to put out a daily message of four to
five hundred words that could be read over “morning coffee”
as a daily antidote to the standard media fare. In practice I have
found that these offerings tend to take on their own natural length,
which turns out to be roughly twice what was originally contemplated.
It has required a major exercise in discipline to keep them within
even those bounds, as anything that touches upon the topic of money
tends to swell in the enumeration. Truncating or dividing the topic
arbitrarily tends to cut the heart out of it, and so I let whatever
is wanting to be written have its way. The upshot is that I have
produced twice the amount of verbiage that I intended, and keeping up
that pace is not sustainable.
Most of the feedback I get
indicates that while much, if not most, of the readership has kept up
with the reading, they too sometimes fall behind, and the unread
email mounts up. There seems to be on their part a determination to
keep up, as the columns as a series represent a systematic and
carefully measured development of thought. If a link is missed,
something is lost.
Taking this all into account, I have
decided to reduce the frequency of the installments to three per
week; those coming on Monday, Wednesday and Friday. This column is
the first of the new rotation. I anticipate that the length of the
typical column will be approximately the same, but the less frantic
pace will leave me more time to devote to producing each one, plus
attending the correspondences and dialogues which the columns have
been a seed for starting. I have tried to be responsive to
communications that have been sent to me, but have fallen far behind
in spite of strenuous efforts. I apologize for that. I look forward
to catching up on my backlog and being more responsive in the
future.
All this said, this effort is not about writing
columns. It is about precipitating change. We are at a juncture in
the life of our nation where the portent of that sentiment has never
been more acute that now. The providential turn represented by the
latest election has released a breadth and depth of hope into the
world that, if harnessed in the right way, could provide the boost to
at last overcome the opposition to permanently transformative change
in the realm of money. This would be truly the culmination of a
battle of the ages.
It is not mere coincidence that our
new President will take office at the height of the greatest
financial crisis the nation, and the world, has yet faced. Indeed,
the urgency of the matter will not even wait for him to take his
oath, as it is pressing down upon him even now. It is a foreboding
sign that already he is being hedged about by a coterie of
heavy-hitting financial advisors that will surely impress upon him
the importance of going even deeper into “debt” as a way of
resolving the “debt” crisis. I do not say that such voices
should not be heard, but truly liberating virtues of public money
need at last have their hearing.
If the promise of the
moment bounces back unrequited in the unfolding of events, then the
present euphoric mood will turn upon the People as it metamorphoses
into the bitterness of cynicism, and our state will be at the last
incalculably worse than at the first.
What is more,
nothing will be changed by reading; only by acting. We Americans are
doers. That is what we bring to the world. What then to do? That is
for each to determine out of his or her own inspiration.
As
a thought, there are practical initiatives that can be pursued in
concert with others. One is the Concord Resolution, which is an
effort to recreate in our time essentially what was done by the
colonial government of Massachusetts in 1690; that is, to issue
public money in service to the commonweal of the People, as the
alternative to relying on private money, which would make of the
colony a debtor to the moneylenders. This Resolution has been
reworked of late to make it more focused on the transference of the
money-creation franchise itself from the private banking system to
the U.S. Treasury. It has also been presented in such a way as to
encourage others around the nation to introduce parallel resolutions
in their communities. It is our hope that this could become a
movement.
It is incumbent upon me to address the matter of
resources. I have, and will continue, to offer up the column, and the
fruits of all other initiatives that I am engaged in, free of charge,
and remain true to that commitment regardless of whatever personal
sacrifices it entails. That said, the effort cannot move forward
without resources. To date that burden has fallen upon a very limited
circle of people who have effectively emptied themselves out to
insure that the work, at least on a minimal level, continues to move
forward. The level of critical work that needs to be done with
respect to the monetary sphere far exceeds the resources available to
perform it. It may not be too much to say that this is a tragedy of
our time.
Help is needed in researching specific topics on
money, and I would be willing to speak to anyone who is willing to
lend a hand.
Basic material help of many kinds is sorely
needed. This, of course, includes financial assistance. Funds
contributed to the effort become in effect monies that are
consecrated to the liberation of the whole of humanity from the
ravages of a bogus “debt”. This is not simply a worthy
sentiment, but a spiritual principle that works through money itself.
I will have more to say on that subject in future columns.
Finally
I would express my appreciation for all who have taken an interest in
these discourses. I have received hundreds of communications posing
questions, offering critiques, or lending encouragement. I am
grateful for every one. In the future it is my hope that I can be
more responsive, and tighten up the time lag in the dialogue.
The
time for action on the transformation of the way our society creates,
issues and controls money is now. I encourage each to find their own
path of commitment according to their own authentic calling. For
those with ears to hear.
Thank you for your patient and
considerate attention.
Column #80 – THE AIG “BAILOUT PACKAGE”
(Week
14 – Wednesday, Nov. 12)
The lead article in Monday’s Wall
Street Journal announced that the Federal government has agreed to
offer AIG (American International Group), the nation’s largest
insurance company, a “bailout package” worth $150 billion.
This raises the question, has there occurred somewhere recently
massive losses of life, injury and property that have made such a
financial rescue plan a necessity? Clearly there has not. If we
follow this line of inquiry through to its logical conclusion, we
will discover that “insurance companies” are no longer
primarily insurance companies. Rather, they have become more-and-more
a means to create pools of capital to be used for financial
speculation.
Theoretically an insurance company is a
business that has been granted a corporate charter by the society it
supposedly serves to gather and manage a pool of money for the
purpose of providing people with protection against catastrophic
financial expenses brought on by loss of life, health or property.
The idea is that each person that subscribes to the service
contributes money to a common pool of funds through the payment of
premiums, and those relatively few people who experience a loss are
then compensated out of it. The premium rates, then, would presumably
be set at such a level that the amount of money in the pool would be
adequate to compensate expected claims, plus provide enough left over
to cover the actual expenses of the company, and allow for a modest
profit. This is all so straightforward that it hardly warrants
explanation, but increasingly it is not what happens.
Instead,
insurance companies use the premiums they collect to create
“investment” funds, which they then use for speculation in
financial markets. While it is true that they do in fact pay claims
out of premiums collected, their unstated financial speculation
agenda causes them to have to charge higher premiums than they would
otherwise have to merely to cover claims. They justify their
“investments” by saying that they are merely acting
responsibly with their customer’s money. After all, so the rationale
goes, since there always needs to be a substantial pool of capital
maintained to insure that there are adequate funds available for when
their customers experience a loss, they may as well “invest”
these funds so that the income they produce in the meantime can be
used to defray part of the cost of the premiums. On the surface this
sounds reasonable. On a deeper level it is very deceptive.
To
begin with, excess funds that are bound up in such “investments”
are not, relatively speaking, very “liquid”. That is, they
are not readily available to cover ordinary day-to-day claims made
against the capital pool. Therefore, the “investment” pool
is essentially extra capital that must be maintained over and above
the actuarial requirements of the insurance function itself.
It
could be claimed that the nature of a given company’s business is
such that it insures against losses that occur infrequently and on a
large scale, as might be the case, for example, for one whose primary
business is to cover losses incurred from natural disasters. It would
make good business sense, supposedly, to earn “interest”
from these idyll funds while they are lying for long periods of time
at the ready, so to speak. This argument too breaks down. Such a
monies may need to be paid out on short notice, and therefore the
essential financial quality that is called for is liquidity. A large
capital pool that is bound up in a portfolio is almost by definition
not very liquid, and the necessity to make it so quickly may result
in having to dump its speculative-paper contents on the market in
what is essentially a fire-sale circumstance, thereby driving down
the its redeemable value. That would tend to defeat the argument that
the purpose of “investing” their customers’ premiums is a
way to defray their cost. As a hedge against this, the tendency will
be again to maintain a fund that is larger than is necessary for the
purposes of insurance alone.
Looking deeper into the
problem, when an insurance company collects a premium, it is taking
money out of the money supply for which the consumer receives no
immediate value in return. Essentially the buying power it represents
is held in abeyance until a claim is made and the money paid back
out. To the extent that this is necessary it can be justified as a
business practice. To the extent that premiums are “invested”,
however, it cannot.
With respect to the market cycle in
the economy, the “investment” of insurance premiums has a
net affect that is similar to that created when “interest”
payments are made on private bank loans, whereby the payments go to
“investors” who have bought the “debt” contracts
by which the loans were created so that they might be the recipients
of those payments. The consumer in the aggregate is shortchanged of
the earned income required to pay the cost of the goods and services
equivalent to what he produces. This money is effectively withheld
from circulation until someone comes along who is willing to “borrow”
such funds from the “investor”, thereby returning it to the
money supply, but now with an increased “debt” obligation
attached.
The money that is paid in as premium payments to
an insurance company that is excess to the amount required to cover
claims, plus the actual material costs of and a reasonable profit to
the company, acts in much the same way as those “interest”
payments made on bank loans. These net over-payments represent a net
subtraction from the money supply, which, in turn, creates a need for
someone to “borrow” this money back into circulation so
that the market cycle can be completed.
This practice,
then, of insurance companies maintaining capital pools that are
“invested” in financial instruments, supposedly for the
benefit of their customers, is revealed to be a wealth transference
scheme that is carried out at the expense of their customers, and of
the society at large. Increasingly, the insurance industry has become
a cash-cow for the speculative financial industry, and AIG is the
prime example. If that is not so, then where are the actual losses in
life, limb and property that the citizenry is being called upon to
pay? With this AIG “bailout” package, We the People,
through our government, are being asked to take on an enormous “debt”
to cover the losses of financial speculators. It has absolutely
nothing to do with the legitimate functions of the insurance
business.
Column #81 THE MONETARY ASPECTS OF INSURANCE
(Week
14 – Friday, Nov. 14)
The essence of insurance agency is
the formation of a pool of money into which people make a
contribution, and from which they can expect to receive compensation
to cover the financial cost of a potentially catastrophic loss of
life, limb or property. These funds are generally managed by
corporations. This means, supposedly, that such businesses have been
issued a corporate charter by the society they supposedly serve to
perform this specific function for the benefit of that society. As
long as what transpires stays within these bounds, everything is very
upfront, straightforward and transparent. The function for which the
agency was formed is perfectly legitimate, and the social order that
chartered it is well served.
Over time, this has been
less-and-less the case. The premium payments which people make have
been dedicated less to protecting them from loss, and more to forming
pools of capital out of which financial speculators gamble with their
money. This is done in the name of “investing” their
premiums to help defray their cost, but in reality it is a
withholding of policyholders money under deceptive pretenses, which
is then used to buy up the increased quantity of “debt”
paper that the public (including the company’s clientele) is obliged
to take on due to the decreased consumer buying power that is caused
by the very withholding of that money.
Understood in this
way, this widespread mode of doing business by the insurance industry
can be seen, not only as a matter of questionable business ethics,
but also as a practice with monetary implications. To put it
succinctly, insurance companies have become financial purveyors on
behalf of their stockholders at the expense of their policyholders
and the public at large.
The question then becomes, what
can be done about it? The obvious answer may seem to be more
regulation, but this does not get at the root of the problem, which
is that within a monetary system in which money is borrowed into
circulation at “interest” from private banks, there exists
a virtual financial imperative for that “money” itself to
earn “interest” to cover the “interest” cost of
maintaining it in circulation. It is very difficult for a person in a
position of fiduciary trust to justify doing otherwise.
If
regulations governing the insurance industry were put into effect
which mandated that they maintain the monies collected through
premiums as idle (non-invested) pools of capital, then that in itself
would constitute a diminishing of the money supply which would have
to be made up for with more borrowing by the nation as a whole,
whether privately or through government. This is a catch-22 that
executives of the insurance industry are not realistically in a
position to do anything about by themselves (whether they realize the
nature of their dilemma, and would be inclined to do anything about
it is another matter). For the most part they are playing the game
the only way they can see to play it.
The solution for the
problem needs to come from society as a whole through its political
process. The key is for the People to direct their government to
reclaim their rightful money creation franchise from the private
banking system. The initial steps in that process would be to repeal
the Federal Reserve Act of 1913, purchase the outstanding stock of
the Fed from the member banks who are holding it, and convert its
resources and employees to the task of facilitating issuance of
public money under the direction of the U.S. Treasury.
The
Treasury would thereby gain the ability to maintain a quantity of
currency in circulation that is calculated with precision to meet the
needs of commerce for the nation. If one of those needs is to
maintain an extra margin of money in circulation so that a certain
amount is available to lie “un-invested” in pools of
capital required to underwrite insurance policies, that is not a
problem, as the increment of funds so designated can be issued at
virtually no cost simply by adjusting the level of money supply.
The
amount of capital needed to underwrite insurance policies is in the
national aggregate considerable, even under the strictest
interpretation of the requirements of the business. As such, it
represents a great sum of money upon which, within the current
system, someone is obliged to make “interest” payments just
to keep it available for that purpose. To “invest” such
funds, then, can seem to be the responsible option, the fact that
this is in the larger picture monetarily self-defeating
notwithstanding.
The very existence of such an
“investment” opportunity attracts financial players who are
not necessarily concerned about the ethics or logic of the way
insurance companies do business, but are simply looking for a way to
make money with money. Through the ownership of insurance company
stock, they can make their demands and reap their reward. Whatever
the case, insurance executives are effectively pressed into being
agents for “investors” seeking a “profit” through
the control of their policyholders’ excess premium payments.
With
the establishment of a system in which money is issued publicly, this
seeming fiscal imperative (in the case of good-faith insurance
agency), or opportunity (to the financial speculator) is effectively
removed. This is because whatever amount of money was needed to be
tied up in pools of insurance capital could be made up for quite
readily by letting the level of the money supply rise as a matter of
public policy.
Insurance companies could then be limited
to being compensation pool managers by restrictions written into
their corporate charters. As businesses, this need not be experienced
as an arbitrary limitation, because it would allow them to focus on
the crux of their task; or as a competitive hardship, because other
companies working in the field would be obliged to observe the same
boundaries. Their operations would be simplified, their costs
lowered, and, I can imagine, the burdens of management greatly
relieved. The net contributions through premium payments, and payouts
for claim satisfaction could be tracked through a transparent public
accounting. The company’s customers and the public at large would be
well served, and, I suggest, there would never have arisen a need for
any massive “bailout”. I wonder if the executives at AIG
would agree.
Column #82 THE SUPPOSED “RAIDING” OF THE SOCIAL SECURITY TRUST FUND
(Week
15 – Monday, Nov. 17)
The virtually universal view of
pensions or retirement accounts is that they are monies that are put
away in dedicated funds that are held in trust until the day they can
be drawn upon when the beneficiary reaches an eligible age. This is
not, in my view, an accurate description of how these accounts are
presently constituted within the current monetary system, and the
widespread misunderstanding about that has led to expectations that
cannot possibly be fulfilled. The result is that, while we as a
society have enacted social contracts designed to insure the
financial wellbeing of those who have attained an advanced age, they
have been formulated in such a way that millions of people who are
counting on the solvency of such arrangements are in the current
financial crisis seeing their value decline precipitously, or are
losing them altogether.
Retirement accounts can take on
many forms. Let us look first at the one we citizens of the nation
hold most in common, and perhaps take most for granted; i.e. the
Social Security Trust Fund.
Let us imagine a situation in
which money is deducted from the wages of a worker early in his
productive years and “put away” in this fund. Now
fast-forward to, say, three decades later when this person retires
and draws his first Social Security check. Let us suppose that he
spends the first of those dollars on eggs for his morning breakfast.
I would ask the question, were those eggs really purchased with
dollars that were earned thirty years before? If one answered “yes”,
one would also have to answer the question, “Where, then, have
these dollars been held for all that time?”
For some
strange reason we in this “financially sophisticated”
society seem to think that when retirement money is deducted from a
paycheck it must be put into some vault where it is kept for
safekeeping until the day that we need it. I would point out that if
that were indeed the case, then the money so sequestered would
constitute a net withholding of money from circulation that would
have to made up for by someone “borrowing” an equivalent
amount into circulation from the private banking system. To “fully
fund” the Social Security Trust Fund, therefore, the social
order would be obliged to take on an immense amount of new “debt”
on which compounding “interest” payments would need to be
made. What is more, these idle funds held in trust would themselves
represent a vast quantity of money that had been borrowed into
circulation, and upon which “interest” payments would need
to be paid in an ongoing manner. Essentially we the people would be
paying double “interest” charges for the use of the sum of
money held in the trust fund. Monetarily speaking, this is a
prohibitively expensive arrangement.
Nonetheless, in our
political dialogue we as a society seem to lack a basic understanding
of this fact. If that were not so, why then in the political arena is
there an almost universal chorus of protest raised about the supposed
raiding of the Social Security Trust Fund to finance general expenses
of the Federal government? Do we really expect that these hundreds of
billions of dollars should be left to languish in a vault unused
until the workers from whose checks they were deducted retire and
start to draw them out? The “interest” payment on such a
sum would of itself typically offset the whole value of the fund, or
more.
This professed platform plank is so contrary to the
realities they are obliged to deal with in their budget-making
processes that it makes me wonder what they could be thinking of when
they say such things. Assuming that they are for the most part
sincere, then the passion and tenacity with which they cling to this
dubious idea can only be a telling example of the great disconnect
between their understanding of the monetary realities they are called
upon to deal with, and the economic notions that they hold. Truth be
told, I don’t think that our leaders are alone in this confusion, as
I almost never hear anyone challenge them on this view in the public
domain. On the contrary, almost invariably there comes an echoing
demand from the public to “get spending under control” and
stop the supposed “raid on their money”.
The
economic activity required to produce the first eggs of
post-workforce life occurred within a few short days prior to their
being consumed, and the money that financed that activity had to have
come from cash flow that was concomitant with the productive process
that was responsible for the material manifestation of the product
itself. In other words, material wealth that is coming into existence
today is financed by dollars flowing today. Whatever dollars were
deducted from a worker’s paycheck years ago had to have long since
flowed into other economic activities. The notion that this could be
otherwise within the current “debt”-based monetary system
is a bookkeeping fantasy. Our failure to understand the actualities
of our financial lives and deal with them in a clear and positive way
is at the core of why we have become so anxious about the certainly
of these so-called dedicated funds being there when we reach
retirement age.
In truth the Social Security “Trust
Fund” is not a trust fund. It is not money that has been put
away. It is, rather, a system for the tallying of credits that
determine the eligibility of each citizen for access to the money
that is flowing through its operating budget in any given month after
one has reached the age of eligibility. The monies that are is paid
out through Social Security do not come out of a pool of capital that
has been put away for that use, but are taken out of revenues flowing
through government coffers in present time.
The problem
with thinking of it as a fund that is being raided is that it
distracts our minds away from the true nature of the threat to the
national economy which underwrites this social welfare program, which
in turn is the source of the perception that it is being raided it in
the first place; that is, the unrelenting demands placed upon the
economy in general, and government budgets in particular, by the
“interest” payments required to maintain the money supply.
Such misunderstanding leads to the misguided proposal to insure the
purported fund’s solvency into the future by opening it up for
“investment” in the financial markets. The ultimate irony
is that if such a proposal is carried out, it truly will become a
fund that has been raided. I will continue with this analysis in the
next column.
Column #83 THE COUNTER-PRODUCTIVE ASPECT OF RETIREMENT ACCOUNTS FUNDED WITH “DEBT”-BASED MONEY
(Week
15 – Wednesday, Nov. 19)
In yesterday’s column I talked
about how the Social Security Trust Fund is not a pool of money
deducted from paychecks and held in trust, as is commonly assumed,
and that the political recriminations over the supposed “raiding”
of this fund to cover the general expenses of government are
misguided in that there is no way that these funds realistically
could be withheld from the general revenue flow without creating an
effective need to borrow an additional sum into circulation at
“interest” from the private banking system to replace the
monies so sequestered. Thinking of it as a fund that is being
“raided” distracts our minds away from the fact that the
remedy for the “trust fund” issue is dependent on making
the transformation from a “debt”-based private monetary
system, to one in which our money supply is issued directly out of
the U.S. Treasury.
The problem with private retirement
funds, including 401k’s, Keoghs, company pensions and other
private-nest-egg accounts, is similar, though it manifests in a
somewhat different way. Rather than being used to make up for
deficits in other sectors of the Federal budget, private retirement
accounts are effectively capital funds for monetary speculation in
the financial markets (government accounts other than Social Security
can be a mix of the two). Within the context of an economy whose
money supply is borrowed at “interest” from private banks,
this could hardly be otherwise.
Most people realize their
nest-egg money is being “invested”, and generally approve
of the idea. After all, the earnings are being applied towards
growing the balances of their accounts. To be sure, this is one way
their money can be managed, but I would suggest that if people
thought through fully the implications such an arrangement, they
would see the high cost that they, and the social order in general,
are paying for the widespread practice of providing for retirement
accounts via private “investing” of “debt”-based
money.
To understand this, we need to take a look at the
basic dynamics of the free-enterprise market cycle. Goods are
produced, and then they are sold in the marketplace. The cost of
bringing goods to market is accounted for exactly by the wages,
salaries and profits paid to those who are responsible for producing
them. In the aggregate, the number of dollars paid to those
responsible for producing goods (i.e. the cost of production) always
matches, to the dollar, the income they take receive as they
transition to the role of consumers (i.e. gross income). This is a
mathematical identity, and its balance cannot be upset any more that
a drop of fluid circulating in a closed system can avoid coming back
to the place where it started, unless, that is, there is a leak in
system.
In a market cycle within which the circulating
medium is “debt”-based dollars there is indeed a leak in
the system; specifically the leakage cause by the obligation to pay
“interest” for the use of the currency. The way that works
out is this:
Let us say that a worker gets paid $2000 for
whatever value he is responsible for producing. He takes home his
paycheck and pays his bills. Let suppose that he makes a mortgage
payment of $600, of which $200 is applied to the retirement of the
loan, and $400 is credited towards the “interest”
payment.
In his role as producer, our consumer accounted
for $2000 dollars worth of goods, but on the consumer side of the
equation he has less than that to spend. The $200 dollars applied to
the retirement of the loan is actually accounted for as purchasing
power, because it is part of the sum of money he borrowed to
compensate other people for building his house. For the $400 paid
towards the “interest”, however, he receives no goods of
tangible value. This means that by the time he has spent his paycheck
he will be able to purchase only $1600 dollars worth of goods, and an
equivalent of $400 worth of unsold goods will pile up in some
producer’s inventory.
If money paid out as the cost of
production does not show up fully as disposable income, goods go
unsold, orders for new goods decline, workers are laid off, less
goods are produced, and the market cycle goes into a spiraling
contraction. The only way this tendency can be prevented is for
someone to keep borrowing more money into circulation to buy up
otherwise un-sellable goods.
Just as “interest”
charges attached to the creation of money cause a shortfall in
purchasing power, so does the subtraction of money from the income of
a working person to fund a retirement account. Rather than being used
to buy up goods produced in present time, purchasing power deferred
until retirement is “loaned” back to workers in the economy
indirectly through “investments”. These will include buying
up the “debt” contracts that people will increasingly be
obliged to take on in their lives by the very fact that the deferring
of purchasing power represented by these retirement accounts will rob
the economy of the ability to complete its own market cycle, and so
make such borrowing necessary.
Thus, a pernicious cycle is
set up whereby income earned becomes purchasing power deferred, which
is compensated for by its transformation into “money loaned”.
The irony is that the very funding of retirement accounts with
“debt”-based money eats away at and eventually destroys the
economic base that retirees will depend upon. The cumulative burden
of this snowballing “debt” and speculative expectation is
precisely what is causing millions of retirement accounts at present
to lose much of their value, or go belly-up altogether.
None
of this is to say that the material wellbeing of the elderly portion
of our population cannot be provided for. On the contrary, to do so
is both a moral and an economic imperative. We will be exploring ways
to make it happen on a sound and consistent basis as these columns
continue.
Column #84 MONETIZING SOCIAL SECURITY
(Week
15 – Friday, Nov. 21)
In the last two columns I have
described the problematic financial nature of how retirement accounts
are currently conceived and set up. In the case of Social Security it
is not realistic to expect that deductions from paychecks would be
monies put away on behalf of retirees until the day when they can
begin to draw them out. In actuality they constitute a tax that
finances current revenue flows, out of which benefits are paid. As
for private retirement accounts, money put away, whether by
involuntary payroll deductions or voluntary contributions, are
effectively transformed from being purchasing power earned in present
time, into funds that are used to make financial “investments”.
These “investments” will, most commonly, be in the form of
“debt” contracts that people are obliged to take on in
their lives by the very fact that the deferring of purchasing power
represented by these retirement accounts will deprive the economy of
the ability to complete its own market cycle, and so make such
borrowing necessary.
In both of these scenarios the
benefit sought through the putting away of money for retirement is
ultimately not realized. Such arrangements may have seemed to have
worked for the last two or three generations, but that is because the
shortchanging of purchasing power could be covered by the taking on
of more “debt” to cover current financial flows, and their
workings obscured by deceptive concepts and language. Now that cost
is coming due, as indicated by the massive losses in the supposed
value of retirement funds, or their going bankrupt altogether. The
mounting indebtedness of the economy is now reaching the point where
even the basis for Social Security appears threatened.
The
prerequisite to resolving this crisis is to take back the
money-creation franchise from the private banking system, and return
it to the public sector. This can be done through a legislative act
that would repeal the corporate charter of the Fed, purchase its
outstanding stock from member banks, and bring its capabilities under
the direction of the U.S. Treasury. From that point, money would be
either spent or loaned into existence directly out of the
Treasury.
With respect to Social Security, beneficiaries
would, as now, receive checks from the Treasury, but the difference
is that the Treasury would not itself have to “borrow” the
money to cover them, and thereby add to the Federal “debt”.
It would instead create the money “out of thin air” with
the writing of the checks (as banks do now for the money they lend to
the government). Monetarily speaking, their ability to do this is
unlimited, so the mental ruse of thinking that there must exist some
fund out of which the money is being drawn would be less tenable. The
only real limit to what can be funded is determined by the physical
actualities of the resources available to the society as a whole to
provide for the needs of the elderly. An assessment would be made
(much in the manner that any budgetary process is conducted now) that
would determine what part of the national income would need to accrue
to seniors, and then legislated into law. That sum, apportioned
between eligible recipients by whatever formula is used, would be
what each would receive.
Alternately, within a public
monetary system, it would also be possible for the Treasury to
maintain enough money in circulation so that deductions could be made
from paychecks and put away in a Social Security Trust Fund against
the day when it would be drawn upon. This would work in this case
simply because money issued publicly would not be obliged to “earn
interest”. There would be no cost associated with letting such
funds lie idle, for decades even, because the additional money that
would be needed to compensate for their withdrawal from general
circulation could be issued by the Treasury and spent into
existence.
That said, I recommend that it not be done this
way. This is because to do so would effectively begin to put
conditions on the allocation of resources that wound be available
when these monies are eventually paid out, which, in turn, could
create issues of equity and adequacy that could not be anticipated.
As a compromise solution, it would be possible to assign social
credits to money earned (instead of subtracting money to be put
away), the value of which would be determined at the time of
retirement, but this would create additional paperwork and also
introduce possible complications with respect to the equities of
distribution.
In any case, if we went to a public monetary
system all of these options, or combinations thereof, could be made
to work on a sound and consistent monetary basis. We as a society
would have opened up the possibility of working out provision for the
elderly that was reliable, understandable and based upon the physical
ability of the economy at the time to provide it.
A
question naturally arises concerning whether this inflow of “cost
free” money into the economy would balloon the money supply, and
thereby cause inflation. If it were managed well it would not, simply
because any excess buildup could be removed from circulation through
taxation, and retired. Thus would the quantity of money in
circulation be maintained at the level required to monetize (lend a
monetary dimension to) any activity in the economy that needed to be
accounted for, including putting away funds to cover Social Security,
if that were what is called for.
In the next column I will
describe how a return of the monetary franchise to public control
could open the door to resolving the problems associated with private
retirement accounts.
Column #85 MAKING SENSE OF PRIVATE RETIREMENT FUNDS
(Week
16 – Monday, Nov. 24)
I would pose a question. Let us
imagine that a young worker, say twenty-five years of age, wanted to
find a prudent way to insure that he would have enough money when he
retired forty years hence. Let’s suppose further that he subtracted
money out of his paycheck to provide for that eventuality, which
would, of course, amount to a foregoing of the benefit of already
earned purchasing power for those intervening decades. Would it be
reasonable for this worker to hand this money over to a casino
gambler based on the assurance that he could be trusted to gamble
with it “prudently” and return these funds in due time,
with interest, out of his winnings?
Would we not say that
this worker was naïve at best, foolhardy at worst, to accept such
terms for the supposed safekeeping and management of his heard-earned
money? Yet, that is essentially the arrangement people agree to when
they allow their money to be given over to retirement portfolio
managers to hold in trust and, hopefully, grow the value of their
accounts.
I am not saying that retirement portfolio
managers are in their own minds willful gamblers with other people’s
funds, or necessarily dishonest. On the contrary, they may very well
be honest brokers who take seriously their fiduciary responsibility
to hold in trust and manage wisely their clients funds. The problem
is that such pools of deferred earned income act essentially as slush
funds out of which “investors” (financial interests looking
for ways to earn money with money, as opposed to investing in actual
economic enterprise) draw capital to use in speculative financial
activity.
We have been through a period of some decades
when this scheme seemed to work. After all, have there not been
millions of people who have had money deducted from their paychecks
or made voluntary contributions to retirement accounts and pension
funds who have in due time drawn out the benefits promised? Indeed,
this has happened (though not nearly in all cases, to be sure). It
should be noted, however, that we have in recent decades lived
through an unprecedented era in which real economic output has for
many reasons multiplied many-fold. This is true especially since the
1930’s, which saw the advent of Social Security and the beginning of
the proliferation of privately funded retirement accounts, in large
part due to the successes of organized labor at the bargaining table.
This burgeoning economic activity has made it possible to keep up
with paying benefits promised out of current cash flows. This could
not have been done otherwise since, within a “debt”-based
monetary system, there is no way that monies supposedly sequestered
for decades could actually have been held out of the flows of the
money supply without causing catastrophic economic contraction.
The
possibilities for continuing in the pretense that income withheld
decades ago is somehow the source of funds being drawn upon to
maintain current retirees can no longer be maintained. The actual
physical economy can no longer double and redouble on a regular basis
to keep up with continually compounding promissory paper. That is why
retirement accounts are presently losing massive amounts of supposed
value, or going broke altogether.
The prerequisite for a
solution to the retirement account crisis is to return the
money-creation-and-issuance franchise to the public sector, after
which it would be possible to maintain the quantity of money in
circulation at any level desired as a matter of public policy.
The
size of the monetary pool could be set such that a large portion of
it could indeed be put away in retirement accounts without creating
the need to borrow money into circulation at “interest” to
make up for the amount so sequestered. Some of it could even be
invested in bonafide economic activity. With the existence of an
adequate money supply assured, opportunities for making “investments”
that are essentially schemes to “earn” money with money
would be greatly reduced, and those who would be inclined to invest
their retirement savings would be obliged to seek their opportunities
in the role of financial partners to productive enterprise. Thus the
genuine activity that current “investment” strategies
purport to be would become a reality.
This said, I would
recommend that the putting away of monies for funding our “golden
years” be deemphasized. Even if this arrangement is supportable
within the context of a publicly-issued money supply, it is a bit of
a ruse. This is because material wealth generation that is dedicated
to supporting needs in any given period of time is actually financed
by money flowing in that same time. Injecting funds that have been
inactive for decades into that flow would introduce monetary
distortions that would have to be compensated for with a great deal
of extra “paperwork”, both to manage payouts in present
time, and to maintain such funds over the years. To be sure, the
numbers could be made to work, but why accomplish the same end by a
more laborious route?
A better way to handle the
situation, I would suggest, is by the establishment of social
contracts to manage the distribution of resources to meet real needs
in real time. In effect, that is what we are doing anyway, the extra
mental gymnastics required to maintain the illusions of
money-put-away notwithstanding. A hybrid of the money-put-away and
social-contract techniques would be to set up arrangements whereby
abstract credits could accrue to work history, the ultimate value of
which would be determined at the time benefits were drawn upon.
As
a further evolution in our thinking, I would suggest a relatively
lesser dependence on financial arrangements, and a greater emphasis
on investments in the material and human realities, to provide for
our later years. The idea of the myriad members and sectors of
society mutually supporting each other across every stage of life, as
opposed to each of us competing to have our needs covered
individually through financial nest eggs, needs to be explored. One
factor that would expedite this evolution would be the removal of the
threat to the family homestead caused by property taxes. In my view,
property taxes are unwarranted, illegal and anti-ethical liens
against already paid-for personal property. Their elimination would
be a major factor in enabling people to secure their personal estate
in old age.
Finally, I would suggest that we think of the
provision for those of advanced years, not so much in terms of
special “retirement” benefits, but as an integral part of
the securing of the material adequacy and personal dignity of every
person. Such a social ethic would contribute to the regarding of our
“retirement” years as a period ripe with life and the
possibilities of elderhood, rather than a social institution for the
presumed idleness and “pensioning off” of those no longer
deemed “economically useful” in the labor force.
Column #86 PLAYING POKER, FEDERAL RESERVE STYLE
(Week
16 – Wednesday, Nov. 26)
The U.S. economy itself is
essentially a gambling house managed by a financial corporation
(Federal Reserve) that manages the game according to “house
rules” that assure that those who own the House get their
“return on investment”, while those who labor in the
productive sector and are responsible for all wealth creation are
expected put up their hard-earned money for the game, and to cover
all losses. We could picture the way it operates as follows:
Suppose
that a gambling house offered to host a group of poker players, and
that their game would be subject to only one house rule; that is,
that the House would collect five percent of every pot. As the game
commenced the fortunes of the players relative to each other would
rise and fall however they might. The single outcome of which we
could be certain, however, is that due to the one governing house
rule, the money that the players brought to the game would disappear
at an inexorable five-percent-per-pot rate into the bank accounts of
the owners of the House.
Eventually the players who fared
relatively poorly would begin to run out of funds, but no matter. The
House would “graciously” offer to lend them money so they
could stay in the game. The House would of course need more than the
word of a gambler as security for such a loan. It could perhaps
demand a contract signed by the gambler that promised that if he
failed to pay back the money, the House could collect its “debt”
in the form of some item of value held by the player, like say the
title to his car or the deed to his house. If a player were foolish
enough to continue his participation on such terms, this money would
eventually go back to the House also, and his only option for
continuing would be to borrow still more. It would not be long before
he, and indeed all his fellow players, would lose virtually all their
wealth and become indentured servants to the House.
This
poker game analogy is an accurate image of the U.S. economy at
present. The players are the workers in the economy who produce all
wealth. The dollars they bring to the game are like the poker chips
that serve as its currency. The playing table is the marketplace
where they risk their money. The “pots” are represented by
the monetary wealth subject to changing hands in the course of a
fiscal year. The percentage of the action due the House is reflected
in the yearly “interest” charge that accrues to the use of
the dollars. The House itself is the Federal Reserve System.
Let
us suppose that the banks of the Federal Reserve System attached, on
average, a five percent yearly “interest” charge to the use
of their Federal Reserve Notes. That means that at the end of one
year, for every one thousand dollars in the game, the banking system
will have drawn out $50, and the players as a whole would still be
holding $950. After two years the House’s cumulative take would be
$97.50 ($50 + [$950 x 5%]), and the players would be left with
$902.50. After three years the split would be $143.63 and $857.37,
respectively. In subsequent years the distribution (rounded to the
nearest dollar) would be as follows:
Fourth – $185 vs.
$815
Fifth – $226 vs. $774
Sixth – $265 vs. $735
Seventh
– $302 vs. $698
Eight – $337 vs. $663
Ninth – $370 vs.
$630
Tenth – $401 vs. $599
* * * * * * *
Fifteenth –
$537 vs. $463
* * * * * * *
Twentieth – $642 vs. $358
*
* * * * * *
Twenty-fifth – $723 vs. $277
We can see
that after twenty-five years (one generation) the amount of money
still in play is only about a quarter of the original total. If we
continued to follow this progression we would see that the take of
the House would approach 100 percent.
Often, when I
outline this poker-game analogy, people immediately recognize that
anyone who submits to playing under such terms is being very foolish
indeed. Is it not obvious, they wonder, that however well one might
fare in the short run, the prospect of coming out a winner diminishes
inexorably with each play of the game? Of course, there are many
people who do play in casinos under house rules while imagining they
will “beat the odds” and become rich, but if they are
compelled to do such under a spell of addiction and denial (as
opposed to accepting their losses as a cost of entertainment, and,
some would argue, even then) we say that they are deluded.
This
begs the question, why do we as a civilization that imagines itself
to be sophisticated in matters of finance continue to submit our
lives and fortunes to just such a game in the casino that the Federal
Reserve economy has effectively become? Why is the affect of the
“house rule” represented by the “interest”
payment on our money supply hardly even mentioned in the public
dialogue about the current “debt” crisis? Why have I
virtually never heard it spoken about directly by the politicians and
experts who have been paraded before us in the media as the ones, it
is presumed, who are going to lead us out of the “debt”
wilderness?
The answer, I believe, is that we also, as
individuals and as a social order, are acting out of an addiction to
the illusions of the “debt”-money game, and are in a denial
of that condition. This is something that we, individually and
collectively, need to come to grips with. I mean no blame or
criticism by this assertion, as a lack of consciousness about money
is a condition of culture at this juncture of human evolution. I
continue to struggle with it in my own life. The providential task
before us is to wake up to what we are doing, and at long last walk
away from this rigged game.
Column #87 “NOT WORTH A CONTINENTAL”?
(Week
16 – Friday, Nov. 28)
On June 22, 1775, the Second
Continental Congress meeting in Philadelphia assumed the power of
sovereignty by issuing the first currency that was common to all the
Colonies, the “Continental Currency”. This act could be
deemed to be the effective break with England, though it preceded the
Declaration of Independence by slightly over a year. This was a
publicly-issued currency, not tied to precious metals, commodities,
land banks, or other forms of “backing”.
There
is a common “wisdom” that assumes that the eventual failure
of the Continental Currency proves that the issuance of money should
be left to private banks. In fact, the oft-repeated phrase “not
worth a Continental” arises from this period. This phrase is, in
turn, routinely picked up and repeated by those who argue against the
public issuance of currency. The historical record, however,
indicates quite a different story. The Continental Congress
authorized and printed $241 million, but after accounting for the
redemption of worn bills, there were never more than about $200
million in circulation at any one time. The British spared no efforts
at trying to render the currency worthless by counterfeiting and
distributing this amount many times over (estimated at one to two
billion).
It has long been recognized that to debauch
their currency is an effective way to undermine the power and will of
an adversary, and the Revolutionary War period was not the only time
that this principle was used by the British to further its interests.
In the 1790’s they engaged in a counterfeiting campaign to destroy
the Assignats, a publicly-issued currency of the French Revolutionary
period. When contesting the Dutch over New Amsterdam (New York) they
even flooded the colony with Indian wampum (beaded sea shells used
for ceremonial purposes), which the Dutch had adopted as
currency.
The British counterfeiting campaign was massive
and sophisticated. Benjamin Franklin, an advocate of paper money,
noted:
“The artists
they employed performed so well that immense quantities of these
counterfeits which issued from the British Government in New York,
were circulated among the inhabitants of all the states, before the
fraud was detected. This operated significantly in depreciating the
whole mass.”
They
ran an ad in a British-occupied New York paper which read:
“Persons
going into other Colonies may be supplied with any Number of
counterfeit Congress-Notes, for the Price of the Paper per Ream. They
are so neatly and exactly executed that there is no Risque in getting
them off, it being almost impossible to discover, that they are not
genuine.”
This
“unparalleled piece” prompted George Washington to comment,
“… no Artifices are left untried by the Enemy to injure us.”
In spite of this, Continental Currency continued to function
reasonably well. After three years of war it was still exchanged at
$1.75 against $1.00 of coinage. This led and exasperated General
Clinton to complain to Lord Germaine (cabinet secretary in charge of
war in the American colonies), “The experiments suggested by
your lordships have been tried, no assistance that could be drawn
from the power of gold or the arts of counterfeiting have been left
untried, but still the currency . . . has not failed.” The
currency did finally collapse, but not before seeing the new nation
through its birth pangs, prompting Thomas Paine to write, “Every
stone in the bridge that has carried us over, seems to have a claim
upon our esteem. But this (Continental Currency) was a cornerstone,
and its usefulness cannot be forgotten.”
Evidently
its usefulness has largely been forgotten, and what remains in the
culture to commemorate its critical importance is the phase “not
worth a Continental”. The eventual collapse of the Continental
Currency is very frequently cited as evidence that the issuance of
money cannot be trusted to the government, and should instead be left
to private banks, but these sources virtually never mention the
massive counterfeiting of the currency by the British (as well as
private counterfeiters encouraged and protected by the British). How
often this is a willful omission is hard to say, but I have many
times heard it repeated reflexively even by those whose intention of
the moment was evidently not to make a monetary argument. This is an
example of how our culture and founding national mythology has been
co-opted into an effective, though largely unconscious, conspiracy to
cause us to forget our true monetary heritage.
Column #88 THE ECONOMIC IMPERATIVE OF CHRISTMAS SHOPPING
(Week
17 – Monday, Dec. 1)
Every year about this time, it seems,
the mavens of economic prognostication hold their collective breath
until the returns begin to come in on how willing and able people are
to show up at retailers, money in hand, ready to engage in Christmas
shopping. This year in particular, they are waiting with bated
breath. Will the people flock to the stores, and thereby demonstrate
a “show of confidence” in the economy (despite losing jobs,
savings and home equity), or will their malaise and beggared
circumstances be too great for the usually festive air (or patriotic
spirit of shopping) to overcome?
This year the early
returns are, it seems, “encouraging.” A few minutes ago I
heard a newscaster on Public Radio report that retail sales on Black
Friday (the shopping day after Thanksgiving) were reportedly up three
percent from last year. The next benchmark will be “cyber-Monday”
when the initial wave of shopping over the Internet is expected to
take place.
That this is good news for the retailers and
suppliers who produce the profusion of gift items is obvious, but
holiday shopping is also billed as a bellwether for the overall
economy. If sales are up, so the thinking goes, then the economy is
sound; if they are down, it is an indication of “structural
weakness.” If the grim economic indicators that we have been
hearing in the news belie any notion of soundness in the economy, the
willingness to shop, especially for non-essential items, is taken as
a barometer of “consumer confidence,” which in the end,
supposedly, is the key to turning the overall economic situation
around. Within the context of the present monetary system and
culture, there is perceived to be an effective economic imperative
for Holiday shopping.
This raises the question, how does
this seeming need for shopping reflect upon real economic health? Is
it a sign of a genuinely robust economy, or the reckless indulgence
of a narcissistic consumerism?
The question needs to be
answered in the context of the monetary realities that influence
overall consumer behavior. In a “debt-money” based economy
there is a constantly felt need for “economic growth” (i.e.
borrowing more money into circulation) to expand the economic base
against which more money can be borrowed. Without it, an imploding
monetary spiral can indeed set in, and present a threat to the
economy as whole. The perception of such a need, therefore, is not
entirely without cause. If not enough merchandise is sold during the
annual shopping binge, the effect will be to cause a net contraction
of the economy, and the unpleasant effects of that will indeed ripple
out, in whatever relative measure, through all sectors.
Monetarily
speaking, the system does not care who does the borrowing, or for
what purpose. It could just as well be for the citizenry taking out a
Holiday Season loan or laying their credit cards on the store counter
for Christmas gifts, as for municipalities building schools, the
Federal government requisitioning tanks or the well-healed consumers
purchasing luxury vehicles. Holiday shopping is a major factor in the
Gross Domestic Product (GDP), and if it is down the economy as a
whole does indeed take a hit, the fact that much of the shopping does
not make sense in terms of human welfare, or even true giving,
notwithstanding.
The question arises, “What sense
does this all make in terms of genuine economic life?” I would
answer, “None!” As in virtually all other areas of economic
life, the imperatives imposed by “debt”-based money have
turned genuine economics on its head. From a common sense
perspective, it is most advantageous in terms of human life to
accomplish the most with the least expenditure of resources. Within a
system where money is created and borrowed into existence from
private banks, that logic is reversed; i.e. the economy is deemed the
healthiest when it does the least with the greatest expenditure of
resources.
To illustrate, common sense would say that an
automotive vehicle is most economical when it goes the greatest
distance on the least fuel. The “problem” is that this is
also the condition that contributes the least to the GDP. If a given
vehicle burned twice as much gas to go the same distance, that
activity would produce, monetarily speaking, twice the economic
activity, and therefore contribute twice the amount to the GDP, and
therefore cause economic indicators to rise. The net effect of our
society’s dependence on “debt-money” is to encourage a
wasteful use of resources. Indeed, as the amount of “debt”
increases the “health” of our economy comes to rely in a
peculiar way on gratuitous consumption. That is why, for example, the
proliferation of vehicles that cover people’s transportation needs
via a maximum consumption of resources has been encouraged by the
financial order.
Of all patterns of spending, holiday
shopping tends (arguably) to be among the most frivolous, and yet it
is widely touted as a great engine of consumption that is counted
upon to give the economy a yearly boost. This has nothing to do with
real human welfare, or even genuine gift-giving, but everything to do
with the monetary “need” to borrow more money into
circulation so that “interest” payments required to
maintain the money supply and keep it growing can be satisfied.
My
purpose here is not to be a Scrooge. Indeed, much seasonal shopping
is conducted mindfully in the spirit of true gift-giving and
satisfying each other’s needs. Many people, if not most, would likely
agree that this laudable intent has given way to a rampant
materialism that has overtaken the original spirit of the seasonal
observance. This is a complex issue, and it can be looked at from
many perspectives, but I would suggest that the monetary imperative
for people to continuously take on more “debt” is major
factor that has driven it in the “rampant materialism”
direction.
If we were to adopt a public monetary system,
the “debt-imperative” fuel would be removed from the
holiday-shopping fire. To be sure, merchants and suppliers would
still be interested in peddling their wares, but even for them lower
overall levels of “debt,” much of which they now account
for as a cost of doing business, would reduce the urgency of their
situation. This would open the door to seasonal celebrations that
were sane and not nearly as driven by the need to sell superfluous
goods.
Concerning the monetary soundness of the economy as
a whole, the yearly holiday-shopping boost itself would become a
non-issue. With adjustments in the quantity of money in circulation,
the society’s buying and selling could be allowed to expand or
contract according to real human needs and desires, including
whatever level of holiday shopping and gift-giving people might deem
to be good and natural for its own intrinsic reasons.
Column #89 MONEY – THE PARADOX OF OUR TIME
(Week
17 – Wednesday, Dec. 3)
Charles Dickens opened his classic
novel A Tale of Two Cities with perhaps the most famous of all
literary curtain risers (after “In the beginning . . .”
that is); i.e. “It was the best of times, it was the worst of
times . . .” He was referring specifically to the
nascent-industrial England of the late 18th century, but the same can
be said of the present epoch. Indeed, contemporary global
civilization has stretched this dichotomy to the most extreme
polarity possible.
It can be said that a large portion of
humankind at present lives in a cornucopia of unfolding progress,
possibilities and richness that fairly beggars the imagination. In
the historically-brief last century or two it has plumbed the depths,
spanned the heavens, opened the floodgates of material abundance,
developed vast technological capabilities, shrunk the world into a
global village, exploded the boundaries of artistic expression,
enacted sweeping social and political reforms, unlocked the atom,
mastered incredible techniques for healing, and approached the
mysteries of the creation of life itself.
Yet, in spite of
all of that, it may be fairly asked if we are not approaching the
brink of the incomprehensible suicide of civilization, or even the
destruction of earth itself, through any number of possible avenues;
be it the spontaneous unraveling of the ecosystem; the overwhelming
of the last barriers to infectious pandemics; the revitalization of
class, ethnic, racial or religious intolerance; the grinding
realities of agricultural, industrial and service labor; snowballing
monetary indebtedness; the ever more maddening pace and
dehumanization of modern life; the exhaustion of material resources;
the collateral consequences of an imperialist New-World-Order
hegemony; nuclear holocaust; or the wrath of an angry creator.
What
are we to think of this impossibly contradictory state of affairs?
The juxtaposed “best” and “worst” of times is in
actuality not a contradiction, but rather an expression of the poles
of the overarching paradox. What, then, is the paradox? This may be
expressed many ways, but in an outward sense it surely is reflected
in the reality that humankind, in this era of vastly expanded
financial activity, has not mastered money. In what life does money
not exist as the most polarized of love/hate, embraced/condemned, or
sought/feared elements? It is indeed the essential riddle of our
time.
The fact that the subject is money dictates that the
discipline of banking be brought most particularly under the green
shade of scrutiny. The problem, though, is by no means limited to
those involved overtly in the banking or financial professions. In
this modern era, we are all economic creatures, and do in fact mould
the form of the economic life with our thoughts, feelings and
actions. If the economic cake were sliced along a different cross
section, any number of other walks or categories of life could be
held up for similar treatment.
If there is a ‘bottom line’
to this story it is that, while different “classes” (a
divisive word, to be sure) of society may indeed have their
respective economic issues, there is ultimately no us-vs.-them factor
in their resolution. This premise is held forth adamantly in the
fullness of the narrative represented by the unfoldment of these
columns. As fellow sojourners in the earth we are all in this
together; both as agents for the problem, and as hopes for the cure.
If there is any distinction to be said for people of finance it is
that theirs is a special calling in an age when the full blossoming
of the economic life is coming providentially to the fore.
In
the course of performing any economic activity within the present
system I suspect that we virtually all experience on some level an
existential split, and stand in our respective ways in the need of
liberation and healing. In this time of great historical reckoning
and economic unfoldment, the chasm occasioned by matters of money,
both between people and within them, can no longer be accommodated.
It behooves each of us to engage in soul-searching as to our truest
and deepest relationship to money. The space for a free dialogue
between people of finance and the body of the social order must be
opened up for a bracing, but empathetic discourse. Clearly, the truth
cannot be spared, but in our quest there can be no place for
attitudes of condescension or recrimination.
Rather, it is
our task in this time to seek in brotherhood the transformation of
the economic order from one premised on scarcity (i.e. there is only
so much money because someone has to borrow it into circulation, and
pay the “interest” on the loan), to one of abundance (i.e.
we as a people and a civilization can do as much as we in freedom
elect, and the money to finance it is available in whatever quantity
needed out of our sovereign power to issue it). This will change
everything.
Column #90 WHAT DO THE BIG-THREE AUTOMAKERS REALLY NEED?
(Week
17 – Friday, Dec. 5)
The “Big-Three” American
automakers have come to Washington as the latest applicants for
financial “bailouts,” these in the form of loan guaranties
in the aggregated amount of some $34 billion dollars. Much has been
said about the supposed mismanagement of these corporations, the
unrealistic demands of organized labor, and the effects of foreign
competition as being contributing factors in the seeming inability of
these companies to continue on their present course. Relatively
speaking, I find merit in almost all of what has been said, but have
heard virtually no dialogue (except to a minimum extent in the
non-mainstream media, mostly on the internet) that goes to the heart
of what has caused the financial position of such a huge industry and
virtual American institution to become untenable.
The
myriad issues of manufacturing efficiency, new technologies as they
relate to environmental realities, model-development decisions,
arriving at Senate hearings via corporate jets, executive
compensation, workforce benefits, and the increasing ambivalence
about automobiles in the culture as a whole, are, to be sure, all
worthy topics for discussion, but there is one aspect of the
automotive question that, in my view, is conspicuously missing from
the discourse. That is, how is the industry’s financial crisis
affected by the very nature of the money that is the life’s blood of
its financial life?
The fundamental problem at the heart
of the apparent insolvency of the automotive industry is the fact
that the money that finances its operations is issued in the form of
loans from a private banking system, to which is attached a
compounding “interest” charge. This means that the
executives and workforce who are responsible for bringing the wares
of industry as a whole (of which the automotive industry is a major
part) to market are losing buying power out of their profits and
paychecks before they can spend them, to “interest”
payments on bank loans, for which they receive no value. This means
that the “cost of production” for goods brought to market,
which consists entirely of money paid to people responsible (directly
and indirectly) for bringing those goods to market, is not matched in
the marketplace by consumer buying power.
This sets up a
chain of cause and effect whereby goods will pile up as unsold
inventory, orders for new goods will be reduced, and workers will be
laid off. Fewer goods will be produced in the next round, but even
this reduced level of production will not be able to be sold because
the paychecks of those fewer workers also will have their purchasing
power depleted by interest payments before they can spend them, and
so will not be able to purchase even the reduced equivalent of what
they produce. This causes a further reduction in orders for new
goods, creating more layoffs, and so forth. The tendency for the
economy, then, is to sink into a spiraling economic contraction.
The
way this can be counteracted is for the economic players in society
(whether private individuals, corporations, or civic bodies) to take
on ever increasing amounts of “debt.” Until recently the
citizenry has been, for the most part, able and willing to do that,
but the numbers associated with that “debt” have become
astronomical, their ability to take on more has been tapped out, and
their confidence in being able to pay off even what they owe now (let
alone after taking on more) has declined precipitously.
For
the automotive industry this has had a particularly devastating
affect because cars are what economists call “durable (long
term) goods” that are for the most part not in immediate need of
replacement (one can almost always get a few more miles out of the
car one already has), and replacement for most people requires the
taking on of major new “debt.” Their reluctance to do this
has been exacerbated by other factors, such as the sudden
disinclination of the public to buy the large fuel-thirsty vehicles
the industry is offering in this time of ballooning gas prices. It is
true that gas prices have plummeted recently, but confidence that
they won’t come back in the long term has been shaken.
Added
to this is that the almost utter dependence upon the automobile that
we have effectively cultivated has come into question. This society
has now lived through the effects of a century of automotive
proliferation, and many people are asking fundamental practical and
moral questions about that dependency.
The upshot of these
and other converging factors is that the Big Three of the American
automotive industry are experiencing great difficulty in selling
their wares. This has become, not only a business problem of unsold
automotive inventory, but also a financial crisis that threatens to
draw the larger economy into an imploding monetary vortex. Financing
for new vehicles is one of the great mechanisms for “debt-money”
generation, and when people decide for a time to make do with their
old vehicles and concentrate on paying off their loans at the bank,
this causes a net contraction of the money supply, which in turn
fuels a deepening crisis of confidence.
The question is,
what can be done to halt this vicious spiral? Much of the discourse
that is going on related to efficiency, new technologies, model
choices, executive compensation, workforce benefits, and the reliance
of our society on automobiles is healthy and will lead to new answers
in many respects, but the monetary question needs to be brought into
the dialogue. In my view, there is no resolution without it. If all
the other factors are addressed effectively, but the monetary
question is not, then the industry will be back again asking for more
money. The syndrome of
inadequate-purchasing-power-available-to-cover-the-cost-of-production-caused-by-“interest”-payments-on-the-money-supply
will not be broken.
What the Big Three automakers really
need, I suggest, is precisely what all segments of the economy need
(including the auto executives, the automotive workforce, and the
customers they serve); that is, a return of the money-creation
franchise to the public sector so that the pool of money upon which
we all rely will not be drained of value by “interest”
payments, with the result that we as a community of participants in
the economy cannot buy what we produce. With a publicly-issued money
supply, an adequacy of funds to cover the aggregate cost of producing
goods will be guaranteed, and the more specific problems of the
automotive industry raised in the public dialogue at present can be
addressed in a truly effective manner.
Column #91 THE SEVENTH-GENERATION LAW
(Week
18 – Monday, Dec. 8)
The Great Law of the Iroquois
Confederacy states, “In our every deliberation, we must consider
the impact of our decisions on the next seven generations.” This
passage is often quoted and widely admired in our culture for its
farseeing wisdom, especially among those who are concerned with the
human and environmental “cost of doing business,” but I
find it dismaying that it is rarely invoked with respect to the
monetary question.
Those who “invest” with the
idea of making money with money (i.e. look for opportunities to buy
up the contracts that secure “debt”) will naturally expect
to “earn a return.” Otherwise, why would they “invest”?
The factors that determine the “yield” (increase) will
vary, but let us assume that the “market expectation” is
that one should be able to double one’s money (adjusted for
inflation) at least once per generation to make the process
worthwhile (a very modest expectation by historic standards). For
simplicity of discussion let us assume that one generation is
twenty-four years, which is the period of time it would require for
an “investor’s” money to double at a compounded
three-percent rate of return.
Let us suppose that someone
took out a loan of $1000 from a bank that was repayable as a “balloon
payment” (principal and “interest” due all at once) of
$2000 dollars in twenty-four years. The borrower brought $1000 into
circulation with his loan, but he will have to gather up $2000 at
that time, and remit the money to the bank. This scenario will be
replicated throughout the economy with millions of
loan-and-payback-with-“interest” transactions. Each will
require that there be more money than was borrowed available for
payments as they come due. If we assume that on-average the money
supply is maintained through loans taken out at three-percent
“interest,” the quantity of currency in circulation must
also grow at a three-percent annual rate to maintain a constant ratio
between funds available and money owed. This is what is required to
keep old loans from going into default, and maintain an adequate
supply of circulating medium.
Banks do not lend out
significant sums of money without collateral, and so the financial
requirement that there be twice the money in circulation at the end
of each twenty-four-year generation must be matched by twice the
amount of wealth or economic activity in existence against which
money can be borrowed.
We as a society have reached the
point where our entire capital wealth, as measured in dollars, is
roughly equivalent to the amount we “owe” to private
“investors” through the banking system for the privilege of
having a money supply. This means that if the “fractional
reserve formula” pyramid scheme by which the monetary structure
is governed is not to collapse over the next generation, the level of
economic activity at the end of the next twenty-four years must be
such that for every car manufactured and sold this year, there must
be two in that year, for every gallon of gas burned this year there
must be two burned then, for every unit of human service performed
now there must be two, and so forth. It is not strictly necessary
that such doubling be accomplished on a product-for-product basis,
but the Gross Domestic Product (GDP) must in some way be multiplied
by a factor of two.
The more germane question is, what are
the implications of this monetary “necessity” for human
life and the earth itself? Much human need may indeed be taken care
of in the course for pursuing the satisfaction of this monetary
imperative (there may even be a great deal of “green”
enterprise that is included), but at what human and physical cost? It
should be noted that the GDP, like bank collateral, is essentially a
quantitative measure of economic activity, not a qualitative index.
Ambulance rides, pollution cleanup, building prisons, and war
materiel do wonders for the numbers, and that may explain, at least
in part, why such “enterprise” has become a larger part of
our economic picture.
So far we have looked at only the
first generation. To make it to the second while avoiding monetary
collapse, the size of the physical economy must be doubled again, to
four times the original level. Nor does it stop there. Taken to the
seventh generation the physical economy would have to grow by a
factor of 128 (2 raised to the 7th power). Is there any way one can
look at the world today and imagine an economy on the earth that is,
materially speaking, 128 times its present size?
I think
it safe to say that this is not going to happen. Admittedly, the
analysis I am running through here is in itself an abstract numbers
game that correlates very imperfectly with life, but it is the game
that we as a financial order are still trying to make work. The
reliance on “economic growth” (i.e. the creation of
collateral to borrow more money into existence) to keep the monetary
system pumped up with “debt-money” is reaching its
practical limits. The tragedy is that it has made “necessary”
such dubious modes of “enterprise” as wasteful consumer
consumption, sub-prime lending schemes, and borrowing for war as
engines of money creation to keep what is essentially a pyramid
scheme in the guise of a monetary system from collapsing. We have
reached the point where even that is not enough; hence the spate of
“bailouts.”
By our society’s failure to examine
the monetary underpinnings of the current financial crisis, are we
not by default effectively making a decision that is utterly
untenable within the seventh-generation principle? Clearly, to
persist on our present course will overwhelm human and environmental
capacities. This is not to say that life does not still hold the
possibilities for manifold growth in a multitude of directions, but
to yoke that potential to the doctrine of the compounding material
exploitation requisite to supporting “debt-money” expansion
is, in my view, to effectively negate the possibilities for any
future world we would care to contemplate.
Column #92 SEVEN GENERATIONS AFTER THE AMERICAN REVOLUTION: A HISTORICAL PERSPECTIVE
(Week
18 – Wednesday, Dec. 10)
In yesterday’s column I talked
about the Great Law of the Iroquois Confederacy which states, “In
our every deliberation, we must consider the impact of our decisions
on the next seven generations,” and suggested that, by our
society’s failure to examine the monetary underpinnings of the
current financial crisis, we are by default effectively making a
decision that is untenable within the seventh-generation principle.
If we were to step back for a broader historical look at the
situation, the case could be made that we as a nation turned our
collective backs on our own monetary heritage, and in effect already
made the decision, some seven generations ago.
In earlier
columns (#10 – 12) I described briefly how the American Revolution
arose mainly out of the determination of the Colonies to exercise
their own sovereignty and set their own course, starting in 1690 when
the Colonial Assembly of Massachusetts became the first government in
the Western world to issue its own paper money with the intention of
providing a pool of circulating currency to serve the productive
enterprise of the People. The other British North American Colonies
adopted the practice, which, in turn, precipitated a protracted
struggle between them and the Crown over who had the right to issue
the Colonies’ money. This led to the Declaration of Independence, the
first two itemized grievances of which are references to the
stonewalling of Colonial monetary initiatives for which ratification
by the Crown and Parliament was required.
The Colonies
ultimately prevailed in the military phase of the struggle, but not
in the monetary. This is what prompted Alexander del Mar, the great
monetary historian of the 19th century, to write:
“Never
was a great historical event (the American Revolution) followed by a
more feeble sequel. A nation arises to claim for itself liberty and
sovereignty. It gains both of these ends by an immense sacrifice of
blood and treasure. Then, when the victory is gained and secured, it
hands the national credit (the authority to create money) over to
private individuals, to do as they please with it.”
The
result was that, led by Alexander Hamilton, the first Bank of the
United States (effectively a private central bank, much like the
Federal Reserve) was established through a corporate charter issued
by the first Congress in 1791. The history of our nation since then
has been a litany of the protracted struggle between the proponents
of the two principles (public vs. private) for creating, issuing and
controlling the nation’s money. Judging by the form of our monetary
system, the private-bank-money contingent has clearly prevailed, at
least for now.
Sincere arguments have been put forward
over the decades by both sides, but whatever their relative merits I
think it fair to say that our evolution as a nation over the “seven
generations” since the Revolution (assuming a generation is
about 30 years) has provided a historical baseline from which the
result of having turned away from our commitment to public money in
favor of a gradual acquiescence to private bank money can be judged.
Today’s headlines would seem to indicate that the outcome has been
much less than satisfactory.
To be sure, this column is
for the most part a recap of thoughts that have been enumerated in
previous installments, but I think it important at this critical
historical juncture, especially given the current financial crisis
and the changing of American political administrations, to slow down,
take stock of where we are, and try to gain a fresh perspective on
what is happening. The seventh-generation rule is a quintessentially
American artifact of cultural/spiritual life. It is perhaps not
entirely surprising to discover that it has a reflection in our own
experience.
In my view, American capitalism has played out
its seven-generation providence and is now making a turn towards
another form; one that has immense implications for this nation and
the world. With yesterday and today’s installments as a basis for
understanding, I will endeavor to describe what precisely I mean by
that in the next column.
Column #93 BEYOND THE SEVENTH GENERATION
(Week
18 – Friday, Dec. 12)
It has been a full seven generations
(at about a third of a century per generation) since the American
Colonies declared their independence from the mother country,
inspired in large part by the determination to exercise the sovereign
power of their society to create their own money supply, and thereby
take responsibility for the development of their own potential; as
opposed to submitting to having their money lent to them by a private
banking system, backed by the British state, on such terms that they
would remain forever indebted and subject to “the moneylender.”
Understood fully, this was not so much a contest of state vs.
rebellious colony, as it was between two great ideas about how money
should be created, issued and controlled, that had fought for
centuries for dominion over the minds of men. The battle had been
intensifying for many decades within Britain itself, but came to a
head in the North American Colonial experience.
The
Colonies having prevailed in the military conflict, the new nation
failed to maintain vigilance on the monetary front, with the result
that its subsequent history has been a protracted struggle between
the proponents of public vs. private money, with the
private-bank-money partisans having emerged (for now) victorious. The
“seven generations” period since the Revolution has
provided a historical baseline from which the result of having turned
away from our commitment to public money in favor of a gradual
acquiescence to private bank money can be judged. Today’s headlines
would seem to indicate that such an assessment is urgently needed.
I
stated in Monday’s column that the need for the participants in the
economy to take on in the aggregate ever greater amounts of “debt”
to make “interest” payments on old “debt,” while
maintaining an adequate money supply, has created a situation whereby
virtually all significant physical wealth in the society is
eventually brought into the banking system to serve as collateral for
the borrowing of more money into circulation. This has progressed to
a point where virtually the entire combined worth of all physical
assets in the country is matched approximately by the amount of
“debt” written against it.
What is more, the
need for compounding amounts of money to be borrowed into circulation
has not only consumed the worth of the country, but has of itself
become a major driver for economic activity. The participants in the
economy are obliged to seek out ever greater fields of economic
exploitation to be able to make the ends meet in their financial cash
flows. While it is true that much human need has been met in the
course of such activity, and our society has in many ways achieved a
measure of economic prosperity, the financial need for “economic
growth” (“debt-money expansion) has come to supercede
genuine human need, and now dominates the imperatives and forms of
economic enterprise, whether such are in the true interest of human
welfare, or not. Increasingly, they are not.
The endless
“debt”-driven urgency for expansion makes the “growth”
of such questionable areas of human benefit as wasteful consumption,
sub-prime lending schemes, borrowing for war and many others,
virtually inevitable. As the game gets stretched out, the true worth
of the “collateral” generated by such enterprise becomes of
dubious worth. It does, in a sense, induce economic activity that can
be borrowed against, but consumer trash in the landfill, deflated
real estate bubbles, expended military ordinance, and the like, leave
behind little, if any, cumulative capital base for further
“debt-money” expansion. Eventually the bubbles of imagined
wealth begin to pop, and the monetary system is left without a source
of new tangible wealth with which to “secure” its “debt”
contracts.
This is the point that American capitalism has
reached, and it is this inability of the human and physical economy,
even in its most wasteful, illusive and speculative terms, to keep up
with the mounting “debt” paper that is behind the collapse
of the monetary system. Nor is the situation likely to improve any
time soon, especially with such economic bulwarks as the auto
industry beginning to implode. The question then becomes, what do we
do now?
In my view, we as a society have already answered
the question. That is, we have decided to keep borrowing more money
into circulation anyway. This is not at this point a conscious
decision, but rather the reflex of a culture that has almost
completely lost touch with any basic understanding about money. This
may sound like a strange statement to make in an era of extreme
financial sophistication, but I would make the case that it is a
presumed “financial sophistication” and a losing touch with
common sense that has landed us in our present straights. This is
something to contemplate for everyone, not only people of
finance.
The productive participants in the economy have
lost the ability and confidence in the system that would allow them
to them to continue to take on new “debt” at a pace
sufficient to keep the financial (fractional reserve) formula that
governs the banking system from collapsing. This has become true even
for public borrowing within the context of normal “emergency”
imperatives. The collapse of the credit structure is now so
precipitous that we have little choice, it seems, except to throw all
but a thin pretence of deliberation to the wind, and let those who
have “guided” the macro-economic ship into this
predicament, open the floodgates of yet more “debt-money”
in the wistful hope that they can float it again.
I would
raise the question, what is the collateral for all this new “debt”?
The spokespersons for the rescue “assure” us that it is the
“troubled assets” (i.e. already unsupportable “debt”
contracts and failed enterprises) that the government is taking over.
I find that explanation to be untenable. When the Federal government
takes on new “debt,” its collateral is the “full faith
and credit of the United States.” Supposedly, this is another
way of saying “future tax proceeds.” The problem is that
the Federal “debt” is a monetary phenomenon, not a fiscal
one, and there is no way that future tax proceeds can close the
gap.
This brings us back to the question, what in reality
is the collateral for such loans? It is the very assets, enterprise
and life’s blood of the whole nation. It is our land, our lives and
our children; nobody in the end excepted. Our future is being signed
away for a “debt” that is not payable. I find it peculiar
that the same Secretary of the Treasury that we as a body-politic
cannot seem to find the good-will to trust to use his signature to
endorse the People’s own money is allowed to sign our future away to
this gargantuan “debt.”
It has become a hallmark
of personal success in the current financial culture to be able to
get into an investment, make one’s money, and then get out, debt
free. We should be mindful, however, that when the Treasury Secretary
puts his name to a “debt” contract on behalf of the
government, he is actually signing it on behalf of all the People,
both those nominally in “debt,” and those who imagine
themselves to be out of “debt.” He has obligated the
government to make good on that contract, even if (many fear) it
influences its leaders to feel compelled to insure the continuing
value of our currency by sending an army of our sons and daughters
(of those in “debt,” and those not) half-a-world away to
enforce the “rule” that the trade for oil in the world
remain exclusively in the domain of dollars. The questions raised by
this matter of “national debt” can become very heavy.
Column #94 BEYOND CAPITALISM
(Week
19 – Monday, Dec. 15)
With the current “debt”
crisis, the economy is turning towards a new mode of operation. If we
define whatever form it has taken on heretofore as “capitalism,”
then we can say that it is moving beyond capitalism. “Capitalism”
has become a term that is used in myriad ways by different people,
depending on their point of view. For many it is an emotionally
and/or ideologically charged expression. I don’t wish to take any
part in those arguments. For purposes of this discussion I will
define capitalism as the economic practice of linking physical
capital with monetary capital in a symbiotic relationship that allows
trade to be conducted and the enterprise pursued without undue resort
to barter. The choice between the public or private creation and
issuance of money, therefore, is essentially about which mode more
truly serves this relationship.
In the last few columns I
have described how, within the present system, money is created and
issued when a borrower brings something of value into a bank and puts
it up as security (collateral) for a loan. The only practical way
this can be made to work over time is for people to bring ever
greater amounts of collateral into the banking system against which
new money can be issued, thereby expanding the monetary pool so that
“interest” payments on old “debt” can be made and
an adequate money supply maintained in circulation.
Proponents
of the current system will say that there is no problem with this
arrangement because an expansion of economic enterprise financed by
new loans will create more wealth out of which interest payments can
be made. They picture the loan proceeds as seed money, which will in
due time beget more seed, much like the plantings of a farmer.
Furthermore, supposedly, the necessity of having to cover the
interest payments spurs the economy on to greater heights of economic
activity, while also serving as a needed discipline to insure that
such money is borrowed only for enterprise that is truly productive.
They point to the fact with the private-bank-money system in place,
the nation has lived through almost a century of what has been on the
whole a period of explosive economic growth in real terms.
Critics
of the system may say that while the contribution of modern banking
practice has indeed made money available in unprecedented amounts,
and has therefore played an important role in modern economic
development, a high cost in human and financial trauma has been
extracted because of the “debt”-based nature of the
process. Furthermore, they say, there is no practical mechanism built
into the system for limiting the compounding of “debt”
paper (save a partial deflation of the “debt” bubble
attached to the currency occasioned by bankruptcies), and the real
physical and human economy cannot be expected to keep pace with the
need to service compounding “debt” forever.
What
this current financial crisis is telling us, evidently, is that the
“debt”-expansion process has reached its limits. In fact,
it may have reached its natural limits some years ago, as indicated
by the expansion of borrowing to finance the daily necessities of
living (e.g. groceries and gas) via revolving consumer “debt”
(particularly credit cards), and the proliferation sub-prime lending
schemes. Investment in new production is in precipitous decline, and
so monetary increase based on a symbiotic expansion of real
enterprise (the defining characteristic of capitalism as given above)
is no longer possible.
This leaves it up to the government
to be the borrower of last resort to keep the economy from
collapsing, a role which it has evidently taken on. I suggested in
the previous column that the effective collateral for this huge
“debt” expansion is the very land, lives and progeny of the
People, and that this raises troubling questions as to what a future
government might feel compelled to do to keep the monetary system
from collapsing.
As the “debt” bubble against
the economy continues to compound, however, even this concept of
“collateral” becomes more than a bit abstract. The numbers
have become so huge that correlation with any physical and human
reality is becoming difficult to picture. It is at this juncture that
what is commonly called “capitalism” is moving beyond
itself into a new form. I will call it “debt-ism.” By this
I mean the “debt”-based monetary system has effectively
left the real economy behind. It has embarked on a new course where
any pretense of seeding productive economic enterprise has been all
but forgotten.
As a case in point, how much of the $700
billion “rescue plan” is contemplated as seed money for new
productive activity? As far as I can see, virtually none. President
Bush has indicated that perhaps a small portion of these funds should
be dedicated to rescuing the auto industry, but even in that case it
is questionable as to whether the money would be used to create any
new product, or merely to shore up the industry’s tottering financial
structure. Similarly, I find it difficult to identify much new
productive capacity that was seeded by the “tax rebate”
program earlier in the year, or the proposed “stimulus package”
that seems to be gathering political support.
This raises
the question, if this immense amount of new borrowing is not secured
by economic collateral that is substantive, how can it be supported?
The answer is that it no longer needs to be. The “debt”-based
financial infrastructure itself has taken on a life of its own to
such an extent that it has effectively broken away from the real
physical and human economy, and in a certain sense no longer needs
it. Money, in effect, has come to do business of its own account. The
“debt”-based workings of the money-creation machine have
become so complex and inexorable that they have effectively escaped
human control. “The system” is leaving behind, not only the
laborer, but also the banker. This is why both “”Main
Street” and “Wall Street” are being decimated, with no
one coming forward that seems to know quite what to do about it.
To
be sure, this is a relative, not an absolute, statement, but the
extent to which it is true is sobering to contemplate. It is in the
vital interests of both the worker and the financier to open up a
conversation on this matter. What we are witnessing in the economy is
a movement beyond the partnership of wealth creation and money
creation (i.e. capitalism) from whatever perspective one might be
inclined to think about it. I will begin to describe what I see as
the basis and workings of this transformation in the next column.
Column #95 THE DEGRADING OF COLLATERALIZATION
(Week
19 – Wednesday, Dec. 17)
With the current “debt”
crisis we are witnessing the economy move beyond the partnership of
wealth creation and money creation (i.e. beyond “capitalism”).
Let us trace out how this has come about.
The premise of
the “debt-money” system is that if participants in the
economy need money, they can borrow it by putting up some form of
“collateral” (already acquired tangible wealth) that the
banker can hold as “security” (saleable item from which he
can recover the monetary value) in case the borrower fails to pay
back the loan. The banker obtains the funds to “lend” out
of his privilege to create money “out of thin air” granted
by the Federal government to the Federal Reserve System via a
legislated corporate charter.
This has resulted in a
peculiar situation in that the money to repay the principal proceeds
of a loan is thereby issued, but the money required to “pay
back” the “interest” is not. The proponents of the
system do not deem this to be a problem because they assume that the
“economic growth” financed by new loans will be the basis
out of which interest payments can be made. Supposedly, the necessity
of having to cover interest payments of itself spurs the economy on
to greater heights of activity, and also serves as a needed
discipline to insure that such money is borrowed only for enterprise
that is truly productive.
This method has worked for the
almost-a-century since the passage of the Federal Reserve Act, but,
according to critics, not without terrible human and environmental
cost. Whatever the merits of the current system, it is clear that a
physical economy cannot forever keep up with the demands of
exponentially expanding “debt” paper. A limit will
eventually be reached, and it appears that that may be what is
happening now.
To be sure, it has not been experienced as
the crossing of a bright white line, but rather as a stretching out
of the substantive quality of collateral. This has manifest in many
ways, including the increasing issuance of money based on revolving
consumer “debt” taken on to obtain the necessities of life
(e.g. groceries, gas, etc.), the proliferation of loans against
inflated housing values, and the effective reliance on war (hot and
cold, overt and covert) as engines of “debt-money”
creation. Currency issued for such purposes becomes less of a seed
for further enterprise out of which “interest” payments can
be made, and more of a net drain on the already existent productive
capacity of the economy.
The relentless imperative for new
money creation within a “debt-money” system makes it
inevitable that a resort to ever-less-substantive forms of
“collateral” will take place. This unfolds in a natural
progression that could be described as follows:
Commensurate
collateralization – The principal amount of a loan is within the
bounds of a realistic valuation of the property put up as collateral
considering the cost to create or replace it. An example is a home
mortgage for which the amount of money borrowed is reasonably
affordable within the parameters of prevailing wages.
Inflated
collateralization – The principal amount of a loan is beyond the
bounds of a realistic valuation of the property put up as collateral
considering the cost to create or replace it. An example is a
“sub-prime” home mortgage for which the amount of money
borrowed is not affordable within the parameters of prevailing
wages.
Paper collateralization – The loan is not secured
by already acquired tangible wealth, but by the liens or “debt”
paper written against such. An example is money issued to finance the
widespread practice of bundling home mortgages as “investment
packages” or “structured investment vehicles” in the
international financial markets. Borrowing “on margin” to
finance stock market speculation is a similar sort of
activity.
Phantasmic collateralization – The loan is no
longer secured by even the pretense of existent wealth or wealth
creation, but rather by the illusions of the
socio/political/financial culture that invariably emerges to obscure
the speculative nature and stubborn anomalies of a “debt”-based
monetary system. Examples of this are supported by mindsets that can
see as justified monies raised or issued to finance hostile corporate
takeovers, default credit swaps, commodity speculation, currency
manipulation, all manner of derivatives, social contracts that can’t
be met (e.g. unrealistically structured pensions), and the promises
of politicians (albeit well-meaning) who assure us that they will
make certain that the $700 billion in “bailout” money will
be paid back.
As an illustration of how disconnected from
substantive wealth the monetary system has become, Bernard Lietaer
(former Belgian central banker, and widely regarded authority on
money) reports in his book “The Future of Money” that the
world trading order has become a “…global casino where 98% of
the transactions are based on speculation.” This means that of
the money that crosses international boundaries, only 2% of it can be
accounted for as financing trade in goods and services (food,
pharmaceuticals, cars, electronics, media, tourism, oil, weapons, and
anything else tangible). The rest is essentially non-productive
gambling in speculative financial instruments.
As extreme
as the situation has gotten, the degrading of collateralization has
gone a critical step further. I will describe that in the next
column.
Column #96 MONEY AS VIDEO GAME
(Week
19 – Friday, Dec. 19)
The operating premise of the
“debt-money” system is that money is created when a banker
“writes a check” against no funds (i.e. “out of thin
air”) to a “borrower” (i.e. private individual,
corporate entity or civic body) when they bring into the bank some
form of collateral (already possessed tangible property) as
“security” for the “loan.”
The need to
continuously borrow more money into circulation creates an ongoing
necessity to put up ever greater amounts of collateral. This leads to
resorting to less substantive forms of collateral, until its
realizable cash value becomes more uncertain. Eventually it is
perceived as fictitious, at which point confidence in its value
collapses. Then people stop borrowing, banks stop lending, and the
economy enters a precipitous contraction (as it has at present). In
the last column I describe the stages of this degradation of
collateralization as follows:
Commensurate
collateralization – The loan is within the bounds of a realistic
valuation of the property put up as collateral.
Inflated
collateralization – The loan is beyond the bounds of a realistic
valuation of the property put up as collateral.
Paper
collateralization – The loan is not secured by tangible wealth, but
by the liens or “debt” paper written against
such.
Phantasmic collateralization – The loan is no longer
secured by even the pretense of existent wealth or wealth creation,
but rather by the illusions of the socio/political/financial culture
that invariably emerges to justify a “debt”-based monetary
regime.
To this list enumerated in the last column I would
add:
“Debt”-creation collateralization – The
loan is no longer secured by anything, except the ability to create
more “debt-money” in the future.
In a certain
sense, this has been the effective logic behind the “debt-based”
system all along. There is, for all practical purposes, never enough
money in circulation for people to clear their “debts.”
This is true whether the grade of collateralization generally offered
is commensurate, inflated, paper, phantasmic or simply
“debt”-creation collateralization. In fact, regardless of
the quality of collateralization, the “debt” numbers
compound-on in essentially the same mathematical progression.
Strictly speaking, the continuation of the monetary game does not
depend upon there being real goods behind it (no one ever stuffs
goods into an envelope and sends them off to the bank when a payment
is due), but only that there are registered somewhere (these days
usually in cyberspace) in someone’s name, sufficient monetary credits
to satisfy the “loan” account. This process is by nature
less about managing wealth than “keeping score.” The
reality is that the economy has come to resemble less-and-less a
partnership between production and finance, and more-and-more a video
game in which the enterprises are little more than names and
logos.
Recently I spent a day with a stock market “day
trader” (freelancer). He works in a room surrounded by an
impressive wrap-around array of computer screens that alerts him to
fast-moving trends amongst thousands of stocks being traded, and
displays virtually every parameter of interest in real time. What the
software is looking for is movement in the market (up or down),
because that is where a trader makes his money. I can only describe
what I witnessed as lightening-fast, high-stakes video gambling.
It
is hard to imagine that it is humanly impossible for anyone to know
enough about any more than a tiny fraction of these firms being
traded to make considered decisions based on their actual physical
and human realities. Essentially, they are just names, names and more
names. It is hard to tell from most of them even the nature of the
enterprise they are engaged in. After what has happened with GM, Ford
and Chrysler, it might be fairly asked whether it would make much
difference even if one did.
For a sense of this, I would
invite the reader to spend some time watching the major stock market
shows on TV (I find CNBC to be the best example). The screen is
filled continuously with a multitude of rapidly-moving names, numbers
and graphics that I cannot imagine a viewer (even a stock broker)
relating to meaningfully in a real-world way.
Nonetheless,
the video game goes on, and hundreds of billions of new dollars are
being rapidly pumped into it. Essentially, it has taken off on its
own, and left the real economy behind. The monetary system has
demonstrated an astounding ability to continue on its dizzying way
literally as a game (as can a good game of Monopoly, whether Board
Walk and Park Place even exist or not). This is not an absolute
statement, of course, but it conveys too much truth to call it a
metaphor.
This raises some fundamental questions. How long
can the monetary economy persist and grow as a numbers game, while
leaving real people behind to survive any way they can? What are the
implications of an economic order where essential correlation between
productive enterprise and finance is lost? How long can this “debt”
continue to compound? What kind of new socio/political/economic order
is this leading to? Will civilization continue? It would be easy to
write a lengthy analysis exploring each of these and many other
conundrums, but I believe that they would not arrive at any
definitive answers. We live in an unprecedented time, and there are
no models from the past that will tell us how this will all work out.
I fear, though, that the end will not be well if we let ourselves
drift without coming to a conscious mastery over money.
Column #97 NOW IT’S TOYOTA
(Week
20 – Wednesday, Dec. 24)
A headline on the front page of
the Monday, December 22 edition of the New York Times proclaimed,
“Car Slump Jolts Toyota, Halting 70 Years of Gain,”
elaborated in the subtitle with “Huge Decline In Sales.”
Does not this announcement have the effect of casting the troubles of
the American automakers in a new light? What does it say about the
conditions under which the auto industry is laboring if even Toyota,
widely regarded as its most successful venture, is expecting to
report “…that it will lose money this fiscal year on its
vehicle business for the first time in seven decades”?
Much
has been written about how the “big three” American
carmakers have declined supposedly due to astronomical executive
compensation, bloated union contracts and inferior or
out-of-tune-with-the-times products. Such criticisms do indeed have
merit (and to be fair there are many positive things that could be
said about the American auto industry), but the fact that Toyota is
being sucked into the red-ink vortex also is telling evidence that on
some level the problems of the automotive industry are universal.
This is not to say that issues of executive compensation, labor costs
and product quality don’t matter. On the contrary, they do matter,
vitally, and Detroit could indeed be criticized for undermining its
own position in many ways.
That said, the crux of the
problem the industry is faced with now is not primarily business in
nature, but monetary. In fact, this is a factor that undermines the
prospects for all sectors of the economy to endure in the long run.
Stated simply, the productive part of the economy in the aggregate
cannot attract enough money to pay its cost of production due to the
buying power that is lost to “interest” charges attached to
the bank loans by which money is created and issued into circulation.
The result is that a portion of its product must go unsold, unless,
that is, people are able and willing to go to the bank and take on
more “debt” in large numbers. The effect of this is hitting
the auto industry especially hard right now because people are
reluctant to borrow large sums of money under current financial
conditions, and the banks are reluctant to lend in any case.
This
can only be remedied when the buying power of the consumer sector
lost to “interest” charges is restored, and when the
confidence of the car-buying public can be restored because people
can see how this is so. Government borrowing of ever greater sums of
“debt-money” into circulation willy-nilly via the “bailout”
packages currently being enacted may, or more likely may not, get the
economy moving again in the short run, but at best it will only put
off to a more terrible reckoning the day when this simply does not
work anymore.
The measure that will be effective, in my
view, is to restore the money-creation franchise to the public
sector; that is to have the US Treasury issue the nation’s money
supply for the public good, and not a private banking system for
private profit. This is common cause for all segments of the economy,
including the banking system itself (are not banks presently going
bankrupt without government intervention at a fearful rate?).
The
issue of money has long been used to divide the different segments of
society, one from the other. We can readily see in the media how the
interests of management, labor and the consumer have been pitted
against each other over who will get the cash. This is happening
because we are trying to carve up an economic pie that inevitably
does not have sufficient funds to satisfy the need to make the
financial ends meet for all three sectors without someone having to
take on more “debt.” If, on the other hand, the discussion
were to turn to the idea of returning society’s own money-creation
power to the public sector, the availability of enough aggregate
buying power to fully purchase the fruits of production would be
assured. Business factors aside, this is the basis for the auto
industry’s (and all industry’s) salvation.
Under such a
condition, it is possible that the monetary issue could be
transformed from one that is divisive with respect to any social
fissure that could be exploited, to one in which everyone, from the
highest banker to the most destitute street-person, could engage in a
unifying transcendent dialogue. I have spent two-plus decades
pursuing such a dialogue, and have seen much on this path to give me
reason to think that it is perfectly possible, and indeed natural, to
be able to speak to matters of money with an assortment of folks of
whatever mix or stripe, in such a way that the conversation resonates
positively with all parties. To be sure, this is not automatic, and
it remains an elusive goal in some cases, but in my experience the
potential and/or reality is palpably there.
This is a
conversation that we as a society urgently need to have, or our
civilization is going to continue to degrade and fly apart over the
very issue of money. The key to transcending matters of money is to
break free of our habitual “debt-money” acculturation long
enough to let new ideas enter in. There is no leap of faith involved,
only a moving forward with an open mind, spirit of brotherhood and
genuine communication. The alternative is to keep floundering in our
present ineffectual way until the economy deteriorates to the point
where even the most innovative, savvy and successful enterprises in
the business world (i.e. the Toyotas) cannot make it.
Column #98 MONEY, ECONOMIC LIFE & THE GARDEN
(Week
20 – Friday, Dec. 26)
The lead-up to the winter solstice,
the darkest time of the year, has come to be illuminated by a
fantastic profusion of bright lights heralding holiday festivities.
This is ostensibly to celebrate the advent of the brightest spiritual
light ever to incarnate in the earth over two millennia ago. What
follows for many is a season of “Holy Nights” (Christmas to
Epiphany) that is marked by a turning inward to meditate upon the
outer events and inner experiences of the preceding year, and a
prayerful contemplation of the new year to come.
There is
understandably a tendency to shy away from devoting further attention
to the subject of money in this soul-searching, especially given the
fit of holiday shopping and material consumption that has come to
precede Christmas, but, I would suggest, this is precisely the time
when it would be well to meditate upon money in its deepest and most
spiritual sense.
To seed the process, I have offered below
a fresh perspective on the Garden of Eden story common to
Christianity, Judaism and Islam. The late Joseph Campbell, renowned
American mythologist, observed that in creation myths from all around
the world mankind began his earthly sojourn in a Garden-like setting
from which by virtue of his own rebellion he became estranged. My
feeling is that there is a foundational universality to this story
that speaks to people whether they are of the Christian, Judaic or
Islamic faiths, or not. I leave it to the reader to judge whether
this is so. In any case I would offer, to be taken howsoever one
would, the following thought:
* * * * * * * * * * * * * **
* * * * * * * * *
In the primordial Garden Man was charged
with the responsibility to “Be fruitful, and multiply, and
replenish the earth, and subdue it.” The state of Man was
destined to unfold from a purity of innocence, into a full
consciousness of knowledge of the dark and the light, under the
harmonious guidance of an all–wise, all–knowing spirit. His
purity, however, was fatally sullied as he failed to wait upon God,
but willfully reached for powers he was not yet fit to receive. As
the wages of this rebellion he was ejected from the Garden, and
henceforth obliged to labor by the sweat of his brow to earn his
comfort and keep.
The travail of subsequent effort took on
a coordinated form which replicated roughly the divinely symbiotic
material and energy flows of the Garden. The evolving matrix of
relationships thereby established became an aspect of the social body
known as the “Economic Life,” while the vitalizing spirit
of that body took on the guise of “Money.” Money, then, is
a proxy for the spirit that imparted a burgeoning harmonic order to
the Garden, while the Economic Life became the vehicle in the
material world by which Man would seek, upon requisite redemption of
personal goodness and completion of social evolution, to return home
to the unspoiled state of the Garden; this time in the full
consciousness of the dark and the light, but also with a purity of
spirit that partakes of the innocence of Man’s original state.
In
the interim, though, the spirit of Money, and in turn the Economic
Life, has been hijacked by forces that would seek to derail human
evolution. Humankind has descended into abject materiality; estranged
from one another and seduced by the shadow forces of false dominion;
all orchestrated by the spirit of opposition that has co–opted
Money. The woes thereby unleashed are legion. Brother has been pitted
against brother in a false competition for livelihood. Mankind’s
Mother, the earth, is counted as a body to be ravaged and consumed.
Tyrannies of number haunt Man’s sleep. Clearly the redemption of
Economic Life in the material world is called for.
The
path to economic rectification is threefold:
(1) – To
strive for redemption in oneself and others from the spiritual
dissonance that was the cause of Man’s alienation from a harmonious
relationship with God in the earth,
(2) – From which it
becomes possible to transform Money and rectify the Economic Order to
a condition which reflects truly the state of providence in human
evolution at present,
(3) – Which would, finally, redeem
the Economic Life as a fit vehicle for the reassertion of Man’s
fruitful, replenishing and faithful dominion over the creation.
Thus would the Kingdom of God materially in the earth be
at last established.
Column #99 TWO ECONOMIES – MICRO (PRIVATE) & MACRO (NATIONAL)
(Week
21 – Monday, Dec. 29)
It is timely and apropos in this
landmark 100th column that the basis for understanding be taken to a
bit higher level. To accomplish that, two concepts new to this
discussion need to be introduced. These are already commonly referred
to in the realm of economic theory, but not observed in a consistent
way in the world of finance and banking.
As a beginning
student aspiring to enter the realm of economics one is required
almost invariably to take a course titled “Economics 101.”
From there the coursework divides into two streams, those being
“micro-economics” and “macro-economics” (Econ.
102 & 103). Almost anyone who has found his life’s work in
dealing with money in a central way, whether as economists, fund
managers, stock brokers, bankers or whoever, was introduced into the
theoretical world of economics through this regimen of courses.
I
took the Econ-101 course when I was 48 years old with the attitude of
seeking answers to the dilemmas about money I had already encountered
in my life. My life experience provided a basis for questioning, and
not simply accepting, the premises of the course (an advantaged
position few students experience). In the text out of which I was
taught (“Economics”, Case & Fair, 1989 ed.) the two
streams of the economic discipline were defined as
follows:
“Microeconomics – The branch of economics
that examines the functioning of individual industries and the
behavior of individual decision-making units, that is, business firms
and households.”
“Macroeconomics – The branch
of economics that examines the economic behavior of aggregates –
income, employment, output, and so on – on a national scale.”
I
would offer my own definition of these respective terms as
follows:
Micro-economics is the science of how people
provide for each other’s needs in the context of the various
influences they are subject to from without, and impulses that arise
from within. Ideally such activity is an expression of cultural,
spiritual and entrepreneurial freedom. Participants include
individuals, businesses, corporations and governmental bodies, except
for the Federal government.
Macro-economics is the science
of how a society organizes itself to create an equitable context in
which its citizens can conduct their micro-economic affairs.
Resolving issues of societal equity are a natural function of the
political realm, and for the way our society is constituted at
present (around the nation-state), this means that the central arena
of macro-economic life is the national government.
To lend
a picture to these somewhat dry definitions, a micro-economy (the
object of which micro-economics is the study) is related to the
macro-economy in much the same way that the trees are related to the
forest.
To offer a sports analogy, a micro-economy is
related to the macro-economy in much the same way that the sports
teams are related to the league they play in. Ideally, the league
does not make any of the plays, accrue any of the points, or take a
partisan position with respect to any team. Its function, rather, is
to set up a matrix of rules, resources and arbitration whereby the
teams can strive to make plays, earn points and be confident that it
will be done on a “level playing field.” It is alike in the
interests of all teams that the league perform this service in a
consistent manner, as it will provide a setting for the optimum
expression of the talents of the players, and the maximum enjoyment
of the games spectators.
If the distinction between the
micro and macro aspects of the game were lost sight of, and one of
the league’s teams assumed the functions of the league itself, then
trust in the integrity of the game would be lost. Indeed the business
of the league would tend to be conducted in such a way that it was
favorable to whatever team was given control.
The root
problem with our economy is that the distinction between its micro
and macro dimensions has been lost, and one of the teams (the banking
industry) has been put in control. Consequently, the rules by which
points in the economic game are allotted (via money) have become
skewed in favor of the team in control (the private banking system).
Now the micro-players in the economy (individuals, businesses and
governmental bodies other than Federal) labor not only to work out
the allotment of financial credits vis-à-vis each other, but also
pay tribute to the league for the very playing of the game. It is as
if there were a third posting on the scoreboard where for every
“touchdown” scored by one of the teams, one of its points
had to be donated to the league. In any individual contest the points
tallied to the league would be less than the total points earned by
the teams, but the league would accept its tribute on every
scoreboard, and so come out with the dominant total with respect to
everyone else.
This is a pretty silly situation, of
course, and it is hard to imagine any sporting league that could live
with such a nonsensical arrangement, but the question has to be
asked, “Why do we arrange our monetary affairs in such a
manner?” There is one team, the banking team, that has been
given control of the game. The argument has been made that this is
the way to keep politics out of money. It might also be suggested
that this is the way to ensconce the fox in the henhouse.
I
would add that what I am saying here is not an indictment of banking
per se. After all, bankers have been put in the impossible position
of having to serve two masters to even do their job; i.e. both the
commonweal, and the private interests that would profit at the
expense of the nation as a whole. This is a wholly inappropriate
mixing of the private (micro) and public (macro) spheres.
The
creation and issuance of money is a macro-economic function, and
should be returned to the national government. Mixing money issuance
and private enterprise in the way currently configured is in itself a
corruption, and the system survives at all simply because the people
involved in it (including bankers) have not allowed themselves to be
wholly given over to corrupt influences on a personal level. That
said, it is unrealistic to expect them to overcome the inherent
inconsistencies involved in discharging their fiduciary
responsibilities in ways that are in keeping with both their private
for-profit, as well as public for-the-common-good missions. Can we
expect, then, that these micro-economic players (bankers), who have
been placed and continue to be maintained in this untenable position,
to provide the macro-economic leadership that will lead this nation,
and the world, out of the “debt”-crisis wilderness? Some
may indeed emerge, but they will need help.
Column #100 MONEY AT TWO LEVELS: MICRO (PRIVATE) & MACRO (NATIONAL)
(Week
21 – Wednesday, Dec. 31)
There is a tendency in our
culture to treat “money” as a commodity of a single nature
that moves about in the matrix of economic relations, conveying value
from one hand to the next. Is that not what we mean when we call it a
“medium of exchange,” “store of value,” “unit
of measure” or “common currency”? “A dollar is a
dollar”, so we are accustomed to saying, and if we want a stable
economy the thing to be done is to pin down what exactly that means
in terms of some representative “market basket” of goods.
The orthodox view would say that a unit of currency may for the
moment pass from this hand to that, play a roll in certain public or
private cash flows, or facilitate trade in either the world of real
goods or “investments” in the financial sector, but it
remains a “dollar” nonetheless. It is, in a sense, presumed
to be the common denominator of the whole economic order.
Outwardly
this may seem obvious, but it is a narrow material assessment that
produces only numbers and misses the many levels, essences and
meanings that attend this all-pervasive social element. Money is a
multifaceted manifestation, and to even begin to master it we must
come to a living consciousness of that reality.
This is a
huge topic, and there is not room to do it justice within the context
of this short article. Indeed, it may seem too daunting to even
approach the matter. It need not be so, as the topic may be opened up
and developed on a digestible-bite-at-a-time basis from thoughts and
observations that are perfectly within the reach of any thinking
person. We, individually and as a race, simply have not done the
work. That said, it is a consciousness that must be cultivated if we
are to have any hope whatsoever of attaining a healthy social order,
or perhaps for civilization to even survive. The question is, where
to begin?
In the column previous to this I introduced the
idea that the economic order has both a micro-economic and a
macro-economic domain. This is a foundational concept upon which we
can begin to build a new monetary/economic understanding.
Micro-economics relates to the values, fortunes and acts of the
“players” in the economy, while macro-economics relates to
the structure, control and aggregates of the economy as a whole. The
relationship of micro-to-macro is much like the trees to the forest,
or sports teams to their league. The relevant question here is, “What
is money with respect to the micro-economic, as differentiated from
the macro-economic, domain?” Can money be described as dollars
moving around within and between spheres, or does what we call a
“dollar” have a different meaning and essence in each?
In
my Econ. 101 course, I was taught (correctly I believe) that the
micro and macro-economic aspects were indeed different realms with
their own respective rules, functions and dynamics. The problem I
experienced is that once that premise was established it was
seriously violated to the point where orthodox economic thought has
become a mish-mash of confused thinking caused in large part by
failing to follow though on the rigor required to keep the micro and
macro dimensions properly distinguished from each other, and in their
rightful places. One manifestation of this is that a macro-economic
function (the creation and issuance of money) has been vested in a
micro-economic entity (the private banking system). The result is
that the United States as a whole (a macro-economic entity) has
become a business (micro-economic entity) in the portfolio of a
private corporation, the Federal Reserve (See Col. #38 – The United
States as a Business). What is more, a whole culture of inconsistent
financial thought has grown up around that anomaly to obscure the
inconsistencies thereby generated.
What, then, is money
with respect to the micro-vs.-macro-economic domains?
In
micro-economics money can indeed be described as a “medium of
exchange”, “store of value”, “unit of measure”
or “common currency.” It is the very life’s blood that
circulates in the economic social body, and fits in a general way
many of the descriptions commonly associated with money.
In
macro-economics, on the other hand, money is a structured matrix of
relationships established in the law which governs how currency is
created, issued and controlled. Whereas money on the micro level
manifests as the blood that circulates in the economic social body,
on the macro level it is the economic social body itself. It does not
conform to the micro-economic processes by which it is presumed to
operate, but in fact the opposite.
One place where the
confusion between the micro and macro aspects of money can be clearly
seen is in the current debate concerning what to do about the
enormous “debt” that is mounting in the current financial
crisis. The remedy that is commonly put forth is that we have to get
our taxing-&-spending priorities under control. For a
governmental body that is below the Federal (e.g. state government,
which operates on a micro level), this makes sense. For them money is
a stream that flows into and out of their operations. Public bodies
that do not issue money must, like any business, find sources of
revenue to balance spending.
In actuality the phrase
“balanced budget” has no meaning on the Federal level, as
it is a micro-economic expression that pertains to micro-economic
phenomena. It would be more proper to describe the creation and
issuance of money at the Federal level as a “monetization”
process, which is kept in balance by the collection of “taxes.”
“Taxes” on the macro level are not a way to fund Federal
programs, but a mechanism to remove overflow currency from the
monetary pool. The issue of money, then, on the Federal level is a
matter of structuring macro-monetary body in such a way that its
life’s blood (currency) can ebb and flow naturally through its
micro-economic organs.
The failure to differentiate
between the functions of money at the micro vs. macro-economic levels
is at the very heart of the current financial crisis. I would venture
to say that if these two levels of money were fully understood (and
presumably acted upon), there would be no “national debt”
crisis. Indeed, there would be no “national debt.”
In
the next several columns my thought is to show how this confusion
plays out through some of the major issues besetting our nation, and
how a simple comprehension of the distinction between the character
of money on the micro and macro levels of the economy could serve as
a catalyst for the resolution of the current crisis.
Column #101 THE “COST” OF HEALTH CARE: MICRO VS. MACRO
(Week
21 – Friday, Jan. 2 / 2009)
A debate has been raging for
years as to how to make health care available to all the people of
the nation, including the tens-of-millions of uninsured. Virtually
everyone agrees that this is a need that should not go unmet for any
human being, but finding a way to get it done seems to have eluded
us. At one pole of the argument there are those who say that health
care is an individual responsibility, the obtaining of medical
services should be left up to personal initiative and the workings of
the marketplace. Others assert that it is a human right that ought to
be written into the Constitution.
Whatever view of a
solution one might hold, it will invariably be centered around the
question of how and by whom the spiraling “cost” of health
care will be paid. Increasingly doubts are expressed as to whether
health care for all is ultimately “affordable.”
The
existence of such doubts indicates a lack of awareness on the part of
the citizenry that there is both a micro and macro-economic dimension
of money, and of the respective characteristics and virtues of
each.
From a micro-economic perspective, there is indeed a
financial cost associated with health care because a source of
revenue for employing medical resources must be found.
From
a macro-economic perspective, however, there is not a financial cost
associated with health care; only a question about much money to
create and issue to assure that there is enough in circulation to pay
for it.
Stated more succinctly, from a micro perspective
health care must be paid for, but from the macro health care is
monetized. The way this would ideally play out in practice is as that
at the macro-economic level, the social order (through the Federal
government) would look out over the society and discern what material
resources are available to meet the health care needs of its members,
and then formulate a picture as to how ideally they might be
utilized. The Congress would then pass legislation that instructed
the Treasury to issue money in sufficient quantity that this
monetization picture could be realized in actuality.
The
ability of our society to fully fund health care to whatever extent
it decides is optimal within context of the material and human
resources available is thus assured. The notion that the citizens of
this country cannot “afford” medical services to the limit
of the actual means available to provide them is economic
nonsense.
In a micro-economic sense, health care carries
with it a financial cost. In contrast, on a macro-economic level the
activities associated with health care constitute the very basis or
“backing” of the money required to fund them. Stated
another way, on the micro level, medical care costs, but on the macro
it pays for itself. The key, then, is to cover the micro costs from
money issued at the macro level.
For example, to whoever
is managing a hospital’s budget, a doctor seeing a patient appears as
a financial cost for which funds must be found. From the national
perspective, however, that same doctor and patient coming together
appears to the government, not as a “cost” to be paid for,
but as economic activity for which money can be issued. Indeed, any
bringing together of human need with the resources to meet it is the
very basis for issuing money. It need only be done in an amount that
is commensurate with the level of activity to be monetized.
In
the light of this understanding, the way out of the nation’s health
care crisis is this: The Congress would authorize the issuance of
money on the macro-economic level according to its Constitutional
power to “…coin Money (and) regulate the Value thereof”
in such quantity that the extent of enterprise that would naturally
emerge in the health-care field if money were not a limiting concern
could go forward. This could be accomplished in either of two
ways.
One is that medical services could be paid for
directly by the Federal government out of funds created for that
purpose. This would resemble in appearance the mode of funding
commonly referred to as “single payer,” as often advocated
by the liberal perspective in current political discourse.
The
other is that an adequacy of funds to pay for health care could be
assured indirectly through the Treasury maintaining sufficient money
in circulation to finance whatever level of commerce would naturally
occur in the economy, health care included. This would put a larger
responsibility on people to manage their own medical-related
finances, as is favored by the more conservative side of the
political spectrum.
In reality elements of both approaches
would almost certainly be employed. Regardless of the details of how
that might be worked out, the important thing to know is that the
availability of enough circulating medium to fully finance heath care
at whatever level was deemed by our society to be optimally desirable
and materially doable would be assured.
Column #102 FURTHER THOUGHTS ON THE “COST” OF HEALTH CARE
(Week
22 – Monday, Jan. 5 / 2009)
In the last column I talked
about how, from a national (macro-economic) perspective, universal
health care could be readily monetized (“paid for”) to any
extent deemed desirable within the limits of material and human
resources available to provide it, by the issuance of money directly
out of the US Treasury. The very notion that there is a national
health care crisis because of a shortage of money is contrary to any
real economic logic. That this idea even exists, and has moreover
gained an iron grip over our culture’s economic mindset, is largely
attributable to the fact that our thoughts have been so taken over by
the notion that our money supply must be borrowed into existence at
“interest” from a private banking system that we have lost
the ability to think in any other terms.
Let me state this
emphatically so there can be no confusion. THE VERY IDEA THAT THE
NATION IS LIMITED IN PROVIDING HEALTH CARE TO ALL ITS CITIZENS DUE TO
A LACK OF MONEY IS AN ABSURDITY. This country possesses the
macro-economic ability to issue its own money and thereby provide the
circulating media necessary to finance its own health care to
whatever extent is deemed appropriate. The task that remains, then,
is to issue such funds in a quantity and mode that is optimal to make
them accessible in the micro-economy to the people who need health
care and the people that can provide it. This is essentially a matter
of good monetary management.
The real limit to health
care, then, is the availability of the material and human resources
to meet the need. Such resources do entail a material and human cost
in their development, but from a macro-economic (national)
perspective the work to develop and employ them is something to be
monetized (money issued on the basis of such activity). It is never a
monetary “cost.” That we are suffering as a society over a
supposed lack of funds to take care of people is tragic and
unnecessary. We will not, I suggest, resolve the cost-of-heath-care
crisis until we wake up to that.
All this said, a caveat
is in order. The assurance that health care services can be offered
readily to all members of the society without any serious monetary
impediment has the potential to be an immense blessing, but also
carries with it a danger. The conscious taking hold by our society of
our monetary prerogative unleashes a power into human affairs that
has not been fully present heretofore. That is, the very ability for
society to “monetize at will,” so to speak, anything it
decides to do up to limits of its material and human capabilities
means, among other things, that we could created a “medical
monster” that would have a virtually limitless powers for good,
or oppression. A medical establishment could be conjured that would
assume vast control over people’s body’s and minds, and, in a manner
of speaking, “put everyone on meds.” Increasingly,
misgivings are voiced concerning the supposed intrusiveness, abuses
and inappropriate influence of the medical system we already have,
even by professionals within the system.
That said, I
think one would find it difficult to deny that the medical discipline
has provided many benefits, including extraordinary life-saving
services. Regardless of how corrupted one might think the medical
system has become, it is hard to imagine any but the most fanatical
detractor (or perhaps most extraordinary person) turning down
critical intervention at their own point of crisis.
My
purpose in bringing this up is not to join the debate over the vices
or virtues of this or that medical regime, but to suggest that such
matters ought to be decided on their actual merits, free of being
influenced unduly by the imperative to grow the medical economy to
service the “interest” payments on bank-issued
money.
Within a society that fully recognized its own
power to provide the funds for any type and degree of health services
it so chose, whether directly (as in a government paid system), or
indirectly (as in insuring through public policy that there is enough
money in circulation to enable people to manage their own medical
finances), the possibility of developing diverse health regimens that
are taken on their true merits and available to everyone who could
benefit from them would at last be realizable.
Column #103 WHY PUBLIC MONEY IS NOT INFLATIONARY
(Week
22 – Wednesday, Jan. 7 / 2009)
Perhaps the most common
question I hear when the idea of direct public funding (as opposed to
the issuance of money via private bank loans) comes up is, “What
is to prevent all this currency being issued out of the US Treasury
from flooding the economy with too much money and causing
inflation?”
Public funding, assuming it is done with
a minimal level of integrity, is by nature not inflationary. Indeed,
it is the practical answer to inflation. It is amenable to being
issued in a manner that is direct and proportionate to the actual
economic activity monetized.
As with almost any other mode
of disbursement, public money is, presumably, not passed out
willy-nilly. It is, rather, issued as part of a transparent and
orderly monetization process that is coupled with the production of
real wealth (e.g. public infrastructure), or the provision of
tangible human benefits (e.g. health care). Another way of saying
this is that money is emitted as a complement to genuine human
enterprise, which is indeed its “backing.”
This
process could still be abused, of course, but it is hard to imagine
it ever becoming as disconnected from economic accountability as with
the hundreds of billions of dollars that are being passed out
currently to purchase “troubled assets” (e.g. the
“securities” attached to already failed ventures) in the
present financial crisis. This out-of-control issuance is caused by
the supposed need to “keep the banking system from collapsing,”
which is another way of saying the need to make the “interest”
payments on old loans required to maintain money in circulation. The
resultant “need” to constantly expand the pool of
circulating medium with ever more sums of borrowed money would not
exist within a public system, and that, in turn, would remove the
essential fuel from the “inflationary” fire.
Much
has been made of the supposed tendency for uncontrolled spending by
politicians when they get their hands on the public purse strings.
Well, for better or worse, they have “their hands on the public
purse strings” now.
Furthermore, even if we were to
assume the worst concerning the character of our elected
representatives, would it be better if they were spending money that
had a compounding “interest” charge payable to private
interests attached, or funds emitted essentially at no cost directly
out of the Treasury?
I seem to recall scandalous reports
in the news some years ago about how the space agency NASA had paid
$900 dollars for a hammer, and other such outrages. I would ask,
would it be better if that hammer were purchased with money issued
directly out of the US Treasury, or with funds borrowed at “interest”
from the Fed? If it were paid for with money borrowed at “interest”
out of the Fed, the $900 dollar price tag would be only the beginning
of the cost. The “interest” charge would be added to the
Federal “debt,” and more money would have to be borrowed by
the government to make up for that charge, which would, in turn,
cause over time a further compounding of the “debt.” In
practice, the “cost” of the hammer would always be with us
and never cease to mount.
If, on the other hand, the
hammer were paid for with money issued out of the Treasury, the
“cost” would be $900, and no more. The unjustifiably high
price (if indeed it is that) is not a function of the monetary
system. It is the result of poor bureaucratic management and lax
political control. However inflated the price of an item might be,
nothing is gained, and indeed much is lost by purchasing it with
money borrowed at “interest.”
The problem with
the current private system is that it has virtually no transparency.
Indeed, the bank-money financial system is a knot of complexity that
even the experts cannot seem to effectively penetrate. Instead the
public is subjected to endless political promises, partisan
ideologies and economic bromides within an intellectual atmosphere
that is basically confused. If the public cannot understand how money
is being created, issued and controlled, how then can there be
accountability? The direct public issuance of money would cut through
the lack of transparency, control and accountability, which, in the
end, is the key to controlling “inflation.”
In
the next column I will describe more specifically the root mechanism
that currently drives “inflation.”
Column #104 THE ROOT CAUSE OF “INFLATION”
(Week
22 – Friday, Jan. 9 / 2009)
The root cause of inflation
within the present system is the “interest” charge attached
to the private bank loans by which our money supply is created and
loaned into circulation. It is really, I suggest, about as simple as
that. To be sure, there are secondary factors that exacerbate
inflationary tendencies, but these are mainly psychological, and
derive from the inexorable effects of charging “interest”
on money at the point of issuance. This may seem strange to the
modern ear, given the profusion of arcane economic analysis in the
media and academia that portrays “inflation” as if it were
some insoluble economic phenomenon that we can only hope to keep
under control through sound “business” management.
The
truth is, in my view, that “inflation” is not some
phantasmal monetary lion roaming about seeking what economic chaos it
can cause and whosever’s wealth it may devour, but rather the
straightforward result of something that We the People permit to be
done with our money; that is, we permit it to be created and loaned
into circulation from a private corporate entity (the Federal Reserve
and private banking system) at “interest.” When we stop
that practice, the fuel will be withdrawn from the “inflationary”
fire.
It is true that “inflation” would still be
possible under the auspices of a public monetary system if too much
money were issued, but that would be an unlikely outcome within a
system that was transparently amenable to control. As it is now,
“inflation” has plagued this society, and indeed most of
the world, as a mysterious specter for the almost-century since
“debt-money” was firmly established as the basis of the
monetary system, and hardly anyone with significant influence or
control within the system seems to know what to do about it.
To
understand the root cause of “inflation” we need only look
at how a typical bank loan plays out over time. Suppose that an
entrepreneur were to borrow money from a bank to build a small
factory. The banker would create the money when he writes the check,
and the entrepreneur would spend it into circulation when he paid
whatever contractors were hired to build his factory.
Let
us suppose further that the term of that loan was ten years. That
means that over ten years time, the manufacturing firm that was set
up in that factory would have to charge enough for its products to
earn back the money to satisfy the contract which spelled out the
terms by which the loan would be repaid.
If,
hypothetically, there were no “interest” charges on the
loan, then the amount to be repaid would be only the original
principle balance. Under current practices, however, there would be
an “interest” charge which would, typically, more-or-less
double the amount of money required to be “paid back” over
ten years. It is obvious that this doubled “cost” would
have to be covered in higher prices charged by the factory for
whatever goods it produced. What is more, this increased “cost”
is in no way associated with an enhanced material input into the
product. Clearly, then, the price of the product will be “inflated”
by the “interest” charge.
But the matter does
not end there. The money paid to cover the “interest” goes
to financial speculators who have purchased “debt”-based
financial instruments (loan contracts, bundled mortgages, bonds,
etc.) for the very purpose of receiving those remittances. Assuming
that they are not going to spend that money themselves, or gift it
back to society through philanthropic efforts, they will effectively
withhold those funds from circulation until someone borrows them back
into circulation. When that happens we say in the current financial
culture that these funds were “reinvested,” but the overall
burden of “debt” borne by the money supply will have been
increased without, even, the injection of newly-created money to help
bear it. New money will eventually have to borrowed into existence
from private banks to help roll over the growing “interest”
charge, and this in turn will have to be factored into the “cost”
of producing more goods, thus driving up prices.
It should
be noted here that under a public monetary system, a given private
enterprise may or may not be eligible to borrow money directly,
not-at-interest, from the public sector. That would be a matter of
public policy. However that is worked out, it is still a fact that
the aggregate “interest” burden borne by the participants
in the micro-economy would be reduced by whatever payments would have
been required to maintain a money supply borrowed from a private
banking system in circulation.
In any case, the vicious
spiral I have described here has been the very engine of “inflation”
in our economy for almost a century. The expectation that prices will
continue to rise is, in itself, a factor that insures that
“inflation” will continue to roll. This becomes manifest in
price structures, wage labor contracts, budgetary expectations and
other hedges in the behaviors of participants in the micro-economy as
they try to hold their own against what they anticipate as an
inflationary tide.
This can go on only so long before
confidence in the monetary scheme collapses, and indeed in the
current financial crisis the tide is beginning to turn as we enter a
deflationary period. This “deflation,” is not an orderly
reversing of the inflationary process, but rather a traumatic popping
of the inflationary bubble. If the present “debt”-based
system can be stabilized for another round of “economic growth”
(by no means a sure prospect at this juncture), then the “inflation”
dragon will rise again.
Originally the Federal Reserve
System was proposed to the public as a means of creating a stable
circulating currency of constant buying power. What has the
ninety-six years of its existence shown? In 1913, the value of the
dollar was approximately the same as it had been a century earlier.
Immediately after the establishment of the Fed, prices began to
inflate on a more-or-less continuous basis until the dollar today is
worth only about 1/20 of its original value. This is because the
monetary scheme implemented by the Fed is based on issuing money
through loans to which a compounding “interest” charge is
attached, and these compounding charges for the use of money must be
covered as a cost of doing business; ergo “inflation.”
In
my view, though we as a nation did not adequately realize it at the
time, the mode by which money would be created and issued under the
Fed made this outcome a virtually forgone conclusion.
Column #105 MICRO-TAXATION & MACRO-TAXATION
(Week
23 – Monday, Jan. 12 / 2009)
There are, in my view, two
types of taxation:
One is “micro-taxation,”
which is taxation by a governmental body that is not issuing the
currency in which payments for the taxes are made. Ideally, this
would include taxation by states, cities, counties, townships,
transportation districts; essentially any level of government below
the Federal.
The other is “macro-taxation,”
which is taxation by a governmental body that is issuing the currency
in which payments for the taxes are made. In the American system as
currently configured, all taxes being paid are actually micro in
nature because the body that creates our money is no longer the US
Treasury under the auspices of the Federal government, but rather the
private banking system under the auspices of the Federal Reserve. If
the franchise for the creation and issuance of our nation’s money
were restored to the public sector, then the Federal government would
by definition be practicing macro-taxation.
Despite their
being virtually identical in outward appearance, micro and
macro-taxation are very different processes with very different
purposes:
The purpose of micro-taxation is to raise
revenue for a governmental body that needs a source of money to meet
its expenses. In this respect, such bodies are much like other
entities that operate in the micro-economic realm (i.e. individuals,
businesses and corporations).
The purpose of
macro-taxation is to return money that is in excess of the
requirements of commerce to the governmental body that created and
issued it into circulation via direct spending. Such a body does not
need a source of revenue to meet its expenses because it has the
power to create money. Currently within the American economic system
the only body with the power to create money is the Federal Reserve,
but this is a private corporation, not an agency of the government
(in spite of what its name might lead one to think). This is why,
specifically, the Federal government operates at a “deficit,”
and can even be said to “run up a debt.” Monetarily
speaking, it is operating, effectively, as a “business” in
the micro-economic realm (see Col. #38 – “The United States as
a Business”).
I cannot recall ever hearing the terms
“micro-taxation” and “macro-taxation” used and/or
contrasted explicitly, especially not in a way that that makes clear
the respective distinctions between them. I can hardly imagine that
they do not exist in the dictionary of economic expressions in some
form. After all the major division in the study of economics in
academia from the outset is between micro and macro-economics, but
even in the many macro-economic analyses and pronouncements I have
encountered, taxation has been referred to only in a micro-economic
sense (i.e. as a way to raise revenue to pay government
expenses).
How, then, can we describe how macro-taxation
works? If we had a monetary system whereby currency was issued
directly out of the US Treasury, much, most or all of it (depending
on legislated public policy) would enter circulation via “government
spending” (“public monetization” would be a more
accurate expression). This would create a continuous flow of funds
into the money supply, or as it is sometimes called, the “monetary
pool.” If such a buildup were allowed to continue unchecked the
amount of money in the monetary pool would, after a time, exceed what
was required to facilitate commerce at current price levels, and this
would, in turn, cause an unchecked escalation of prices; what is
commonly called “inflation.” The way to regulate this
process is through macro-taxation.
Assuming that the
public creation and issuance of money were re-implemented,
macro-taxation would serve two main functions:
One is to
act as an overflow device for the monetary pool. When money is
injected into circulation via Federal spending, the amount of
currency in the monetary pool would be allowed to build up to an
optimum level. Any excess that enters after that is essentially
monetary overflow, and would be drained out of the pool via
macro-taxation. The amount of money in circulation, then, can be
controlled easily and transparently by adjusting the rate of
macro-taxation (essentially the height of the overflow
spillway).
The other main function is to provide a way to
“renew” the money in circulation. As overflow currency is
removed from circulation, it can then be extinguished and reissued
afresh as the Federal government needs money. The very idea of
extinguishing currency can be experienced as somewhat disheartening,
especially given that one has sent in one’s “hard-earned money”
to pay the tax, but there is actually nothing lost in the process,
since it amounts essentially to the entry and deletion of numbers in
an electronic ledger.
At length, a balance will emerge
within the macro-economy (i.e. the national economy as a whole)
between the amount of actual economic activity performed or paid for
by the Federal government (the macro-economic entity), as opposed to
that performed or paid for by the aggregate of individuals,
businesses, corporations and governmental-bodies-below-Federal (the
aggregate of micro-economic participants). The percentage of the
total attributable to the Federal government essentially determines
the macro-taxing rate (percentage of economic activity to be paid as
taxes).
This discussion of micro and macro-taxation will
be continued in the next column.
Column #106 FURTHER THOUGHTS ON MICRO & MACRO-TAXATION
(Week
23 – Wednesday, Jan. 14 / 2009)
In the last column I
introduced into the discussion the concepts of micro-taxation and
macro-taxation, respectively. “Micro-taxation” is the
process by which a governmental body that does not issue the currency
in which payment for the taxes are accepted obtains revenue to meet
its expenses, while “macro-taxation” is the process by
which a governmental body that does issue the currency in which
payment for the taxes are accepted removes from circulation the
excess of currency that builds up in the monetary pool as it spends
into circulation the money it creates.
Within the current
American system, all taxes collected currently are micro in nature
simply because the governmental body (Federal) that would issue the
national currency has abdicated that responsibility to a private
corporation. For purposes of discussion, I will assume the return of
the franchise to create, issue and control the money supply to the
national government, unless otherwise indicated.
This
represents a radical departure from the way we commonly think about
“taxes,” especially at the Federal level. It is unfortunate
that we use the same term (taxes) to cover both instances. I would
suggest that it might be better to call the revenue collected by any
level of government that does not issue the money collected as
“taxes”, and the money being retired from circulation by
the Federal government as something else; say, “retirements”
or “overflows.” To be sure, such a change would take a bit
of getting used to, but in my view it is imperative that we reclaim
the consistency of our language if we are going establish clear
thinking on monetary matters. Establishing unambiguous and
descriptive terminology is one way to do it. I would invite anyone
out there to see if they can come up with a better term.
In
response to the last column, which introduced the concepts of
micro-vs.-macro-taxation into the discussion, a reader asks, “What
is it that keeps lower government micro-economic units (state,
county, municipal) from being just extensions of the Federal macro
system? That is, why aren’t the micro-level government expenses
covered by the issuance of monies from the Federal Treasury? Should
this be done? Why not make all government (regardless of level)
expenses the macro-economic responsibility? What would be the
consequences? Why would we, or wouldn’t we want to do this?”
These
are excellent questions. The key to understanding the answers is to
keep in mind the nature of the micro-vs.-macro-economic functions
themselves. The task of the macro-economy is to set up, by law, a
matrix of rules, definitions and relationships whose purpose is to
create conditions that allow the participants in the micro-economy to
exercise “life, liberty and the pursuit of happiness”
within the fullest possible expression of personal freedom, social
equity, and the commonweal.
That said, let us return to
the question, “What is it that keeps lower government
micro-economic units (state, county, municipal) from being just
extensions of the Federal macro system?” I would say that
micro-units of government have largely become extensions of the
Federal government now, simply because the Federal part of the system
is no longer a macro-economic entity, but has become another
“business” among businesses.
If there is a
distinction to be made, it is that this “Federal business”
retains the greatest ability to borrow money, and has therefore come
to resemble a huge predatory corporation that swallows up the smaller
corporations in an ongoing process of economically forced takeovers
(notwithstanding that our government leaders, I have to believe, do
not intend such an end). This tendency has accelerated with the
current “bailout” process, whereby the Federal government
borrows hundreds of billions of dollars to “rescue” (i.e.,
take control over) smaller corporations. The take-over aspects of the
process tend to be obscured by euphemistic language about requiring
more “control” and “accountability” in return for
the money.
If the monetary franchise were returned to the
Federal government, that in itself would distinguish it as a true
macro-economic functionary, that by its very nature and operations
would preclude its micro-economic participants from being perceived
as being “just extensions” of the same thing.
As
to the question, “Why aren’t the micro-level government expenses
covered by the issuance of monies from the Federal Treasury?”,
if micro-level government expenses were covered by the issuance of
monies out of the Federal Treasury, it would cease effectively to be
micro-level government. Without the power over their own purse
strings, state and local governments would lose their independence
and be relegated, in effect, to being budgetary departments of the
macro-government. Political appearances notwithstanding, the
operating distinction between levels has indeed become blurred due to
the Federal government being obliged to provide the money to keep
lesser government in operation out of the Federal’s greater power to
borrow money, which is then disbursed with “mandates”
attached.
“Should this be done?” That is a
political decision. I suggest that preserving the distinctions
between micro and macro levels of government is an indispensable
expression of the types of sovereignty (state, municipal, township,
library district, etc.) that will organically arise in any society.
It is, to put it another way, the critical means for the unfoldment
of a free and diverse social order.
“Why not make all
government (regardless of level) expenses the macro-economic
responsibility?” We could have a national government, and
nothing else. That would be the effect of having the Federal
government pay for everything, but is that what we as a society
want?
“What would be the consequences?” It would
mean the hegemony over the entire social order through a single nexus
of power.
“Why would we, or wouldn’t we want to do
this?” Ultimately, it is up to We the People as to whether we
would want this or not. The key to answering the question is to
become mindful of who we want, or allow, to exercise the money
creation, issuance and control power.
We, as a society,
have been making the choice for increasing social hegemony exercised
out of an ever-constricting circle of control simply because we are
letting the monetary question be answered by default out of our own
(dare I say negligent) unconsciousness about money.
Column #107 VALUE-ADDED
(Week
23 – Friday, Jan. 16 / 2009)
In the last two columns I
have introduced to this discussion the concepts of “micro-taxation”
and “macro-taxation” (taxation, respectively, by
governmental bodies who do not, and who do, issue the money being
collected). Questions arise as to how rates of micro and
macro-taxation might be determined, how forms of taxation we are
familiar with (income, property, sales, estate, etc.) fit into the
picture, how might issues of equity be addressed, and many others. To
create a basis for answering these it is necessary to introduce
another fundamental concept into the discussion,
“value-added”.
“Value-added” is a term
that is already common in economics, and is relatively familiar to
the public in much of the world as a mode for taxation. This is
especially true in Europe where the “value-added tax” (VAT)
is the basis of the taxing regime. The idea is expressed by other
names in various locales, as for example in Canada and New Zealand,
where it is known as the “goods-&-services tax” (GST).
The term is relatively less known (but not entirely unknown) in the
United States due to the unique way our taxing structure has evolved,
but is reflected in a very limited sense in how we think of the
“sales tax”, as well as the oft proposed “flat tax”.
All this notwithstanding, these and other expressions have been
co-opted in a way that is not wholly consistent with economic reality
by the “debt-money” financial culture, so our understanding
of the term “value-added”, and its derivative expressions
could benefit by reconstructing them “from the ground up”,
so to speak.
Defining “Value-Added” and some
Derivative Expressions:
The most fundamental rule of
economics, in my view, is that one should think first in images of
the actual material and human realities of economic enterprise, and
only then add in the factor of money. As an exercise, let us track in
our imagination the progress of a product as it emerges from the
untapped resources of the earth through to final use.
Before
its extraction, an untapped resource has no economic value as it
merely lies there in the ground. Presently someone comes along to
mine it, pick it, hunt it, fish it, pump it, cut it down, bulldoze it
into a heap, or otherwise perform the task necessary to wrest it from
the earth. When this raw material is gathered up into a form that can
be offered on the market, it has become a “commodity”.
Someone with a use for it in mind then will buy it as a
commodity.
Let us imagine wood that has been given value
by a logger in the sense that he has put work into transforming it
from standing trees, to logs ready to be picked up for other uses at
the landing. This net increase of value is “value-added”.
It
may happen that the party who shows up to haul away the logs wants
them for personal firewood, the additional processing for which he
will do himself. This buyer then is the final “consumer”.
In this case there was only one value-added increment between
unrealized potential in the earth (standing trees) and end product
(firewood).
More commonly the party who shows up to
purchase the logs does not want them for final consumption, but
intends to process them into an intermediate product; a more refined
commodity, if you will. He may, for example, be a lumberman looking
to buy saw logs. He will pay a railroad to transport them to his
mill, where he intends to saw them into lumber. From there a
lumberyard will buy the lumber, hire a trucker to transport it to
their location, and place it on racks where it is more accessible to
those who need lumber for their enterprise. Let us further suppose
that a contractor buys the lumber and makes it into a house, which is
then sold to a consumer who wants to live in it.
If we
track the wood from
earth-to-log-to-train-to-sawmill-to-truck-to-yard-to-contractor-to-consumer
we can easily see that an increment of value has been added to it at
each stage of the process. In economic terms, each of these quantum
increases are said to be “net value-added”, and the sum of
all these steps is the “total value-added” of the
product.
Note that we have talked through this example so
far without any reference to money. We have referred to value-added
with respect only to the worth of the product in physical terms.
Ideally, money enters the picture as a medium of convenience to
facilitate the exchanges required to move the increasingly valuable
product along. Each tradesman who performs his necessary task must be
compensated according to his net “cost of production” (i.e.
expenses incidental to performing his step in the process), plus
receive a “profit” to cover his living expenses, plus have
something left over for continuing his business.
For
practical reasons these value-added increments must be expressed in
monetary units. It follows, then, that these successive price
increments (net value-added) accruing proportionally to each step in
the process determine ultimately the price a consumer would need to
pay (total value-added) in order to maintain overall economic equity
for everyone who participated in bringing the wood from raw material
to final product. I call this process “value-added
monetization”.
In the next column I will describe
more specifically how this “value-added monetization”
occurs.
Column #108 VALUE-ADDED MONETIZATION
(Week
24 – Monday, Jan. 19 / 2009)
In the last column I
introduced to this discussion the concept of “value-added”,
which is an expression used to describe the actual value that accrues
to a resource from the earth as it is transformed, at first into a
commodity (some would say “raw material”), and thence in
successive steps to a finished product that is finally consumed. The
value-added process has two parallel streams.
The first is
a material stream, which is the series of incremental increases in
the material worth of a product-in-the-making that results from the
physical and intellectual contribution of each worker in the
production chain as it evolves. The second is a monetary stream
whereby each worker is compensated according to his net cost of
production (i.e. expenses incidental to performing his step in the
process), plus receives a profit to cover his living expenses, plus
has enough left over monetarily to seed his next round of
production.
“Value-added monetization” is the
process by which the material and monetary streams of value-added are
coordinated. Ideally, the result should be that monetary value
accrues proportionally to material value at every step in the
production process, and in such a way that it is equitable with
respect to the efforts and needs of those who perform the work. The
key to making the value-added monetization process work, then, is to
maintain this equitable proportionality from raw-material inception
to final-product consumption. The key to making this happen is to
understand the concept of value-added from both private
(micro-economic) and national (macro-economic)
perspectives.
“Value-added monetization” in the
Private (micro) Economy:
“Value-added monetization”
in the private (micro) economy is the process by which the prices of
different products relative to each other evolve through the exchange
process in the marketplace, given the amount of money in circulation.
The price for any given product will tend towards an equilibrium
which determines essentially the monetary value-added of each step in
the production chain.
To illustrate, if there was a high
level of money in circulation relative to economic activity at
current prices, then prices would trend upward until a new
equilibrium is reached. Economists would describe this upward
readjustment of prices to fit the money supply as
“inflation”.
Conversely, if there a low level of
money in circulation relative to economic activity at current prices,
then prices would trend downward until a new equilibrium is reached.
Economists would describe this downward readjustment of prices to fit
the money supply as “deflation”.
Ideally, this
tendency in the marketplace to seek a new equilibrium has the effect
of each product arriving at a price that truly expresses a balance
between the material value-added involved in its production, and the
monetary value-added that would reflect it. The principle is
analogous to the water on two sides of a porous dam seeking its own
level. According to whether the amount of currency in the monetary
pool is high or low, the material worth vs. the monetary prices of
all products will readjust until a new equilibrium is
reached.
“Value-added monetization” in the
National (macro) Economy:
“Value-added monetization”
in the national (macro) economy is the process by which a
determination is made of the amount of money to be issued into or
withdrawn from circulation that would promote stable prices, given
the total activity participants in the economy would be inclined to
undertake. The object is to adjust the amount of currency in the
monetary pool such that overall prices remain essentially stable. If
a good balance between money supply and economic activity is struck,
the price that each producer receives for his value-added
contribution to the material worth of whatever product he is working
with will tend to be predictable, equitable and sufficient.
This
description of how the respective value-added monetization processes
would correlate with each other from the private (micro) and national
(macro) perspectives is, of course, ideal, but in my view the
principle is understandable, sound, and practical. Correlation with
this principle in the real world can be observed, but it has been
very approximate at best. Indeed, it has broken down many times for
individual sectors of the economy, and in the current financial
crisis, the breakdown has become general. The reason for this is that
the national (macro) economic function of creating, issuing and
controlling money has been unwisely transferred to a private (micro)
corporation. This is an unnatural economic order that breaks the
correlation between the micro and macro monetization streams (due to
the loss of monetary value-added through the “interest”
charge on bank loans), that cannot help but result in the financial
troubles the nation, and the world, are experiencing at present.
Column #109 LINCOLN’S LESSON FOR OBAMA
(Week
24 – Wednesday, Jan. 21 / 2009)
It takes the events,
sacrifices and spent lives of many years to make a day like today.
How many years? It depends on how one reckons.
One could
say that it took forty years since the murder of Dr. Martin Luther
King to finally see a black man rise to America’s highest civil
office, an Exodus-length time of wandering in a political wilderness
towards a civil-rights promised land.
One could say that
it has been a century-and-a-half from Lincoln, the “Great
Emancipator”, to Obama, the “Great Emancipation”.
One
could say that it was well over two centuries from the penning in our
founding document of the words “All men are created equal”,
to the day when they could resound with an undampened ring.
We
could go on with this exercise (get carried away with it, some might
say) of casting the net of history ever wider to gather it in as the
prologue to what culminated today in the inauguration of our new
President. None of this is to say that what transpired in Washington
was in a mundane sense anything more than the ensconcing in office of
yet another administration, that it might not succeed or fail in the
manner of all such political tenures, or even that the right guy won
the election (clearly not everyone agrees that that was the
case).
Whatever the truth, all that, it seems, was set
aside as the feeling of momentousness of this day was allowed to play
out. I experienced it in a crowd of approximately three-hundred
people who came together to share in the experience in a neighborhood
community center, and this sort of event was reportedly repeated in
many thousands of gatherings across the nation, and around the
world.
I was born and raised in Illinois, the home state
of both Lincoln and Obama. I can imagine that there was a sense of
historic euphoria that attended Lincoln’s day of ascension to the
office also, but the nation then, as now, was in a state of deepening
crisis, and there were daunting realities to be faced when the
festivities were over.
My purpose here is not to in any
way make a personal comparison between Abraham Lincoln and Barack
Obama, as to do so would be to commit an injustice to both men. Each
is his own person in his own unique time, and the achievements and
failures of the first say nothing about what might be achieved or
failed by the second. Lincoln’s record as President has been written;
Obama’s has yet hardly a mark.
Yet, I find that the
feeling of a providential connection between the two men cannot be
avoided. Lincoln took office at the leading edge of a crisis that was
unprecedented in intensity and scope, and indeed threatened the very
existence of the nation. Obama is faced (arguably) with problems
every bit as dire and intractable, and this time on a worldwide
scale. The outward manifestations of the irrespective challenges are
very different, but a common thread runs through them; that is, at
their core is the fundamental question of how we as a nation create
and issue our money. This indeed has been the quintessentially
American question since early Colonial times.
The outbreak
of the Civil War demanded that some way of financing it be found.
Though under great pressure to borrow the funds from the private
banking system, Abraham Lincoln instead had the Treasury issue $450
million dollars in “United States Notes”, popularly known
as “Greenbacks”. The monetary policies of Lincoln are a
generally overlooked, but pivotal part of our history. Indeed, they
may have been, as much as his better-known proclamations, a crucial
factor that allowed the Union to prevail. Reportedly, Lincoln had
much to say regarding the public-vs.-private issuance of money which
we would do well to contemplate today:
“Money is
the creature of law and the creation of the original issue of money
should be maintained as an exclusive monopoly of National
Government.”
“Government possessing the
power to create and issue currency . . . need not and should not
borrow capital at interest as the means of financing governmental
work and public enterprise. The Government should create, issue and
circulate all the currency and credit needed to satisfy the spending
power of the Government and the buying power of consumers. The
privilege of creating and issuing money is not only the supreme
prerogative of Government, but it is the Government’s greatest
creative opportunity.”
“The taxpayers
will be saved immense sums in interest . . . Money will cease to be
master and become the servant of humanity. Democracy will rise
superior to the money power.”
Congressman Wright
Patman, former chairman of the House Committee on Banking and
Currency, commented a century later:
“If instead
of issuing ‘greenbacks,’ the Lincoln administration had issued the
interest-bearing bonds, as urged, naturally, these bonds would still
be a part of the Federal debt today.”
At
compounded “interest”, the amount would be many times
greater. The significance of Lincoln’s monetary policy did not escape
notice in certain European quarters, although from an entirely
different perspective. There appeared in The London Times during the
Civil War the following from Otto Von Bismarck:
“If
that mischievous financial policy, which had its origin in the North
American Republic (the public issue of usury-free currency) should
become indurated down to a fixture, then that Government will furnish
its own money without cost. It will pay off debts and without a debt.
It will have all the money necessary to carry on its commerce. It
will become prosperous beyond precedent in the history of the
civilized governments of the world. The brains and wealth of all
countries will go to North America. That government must be destroyed
or it will destroy every monarchy on the globe.”
In
1876, Bismarck explained further:
“The division of
the United States into federations of equal force was decided long
before the Civil War by the high financial powers of Europe. These
bankers were afraid that the United States, if they remained in one
block and as one nation, would attain economic and financial
independence which would upset their financial dominance over the
world. The voice of the Rothschilds prevailed. They saw tremendous
booty if they could substitute two feeble democracies, indebted to
the financiers, for the vigorous Republic which was practically
self-providing. Therefore, they started their emissaries in order to
exploit the question of slavery . . . Lincoln’s personality surprised
them. His being a candidate had not troubled them; they thought to
easily dupe a woodcutter. But Lincoln read their plots and understood
that the South was not the worst foe, but the financiers.”
Lincoln
agreed:
“I have two great enemies, the southern
army in front of me and the financial institutions in the rear. Of
the two, the one in the rear is the greatest enemy.”
There
is, I believe, a lesson from Lincoln’s experience for our new
President. It concerns the necessity of returning the function of
creating and issuing of our nation’s money to the public sector. This
is the essential key (as I have touched upon repeatedly) to redeeming
the financial crisis the nation currently faces. I am disheartened in
the sense that I see few signs of the awareness of any need for this
in our new President, but then Lincoln was not an early supporter of
the idea either. It grew in him as he became more conscious of the
real nature of the monetary problem due to input from others. Surely
President Obama has the ability to grow in this way also.
I
would add that, in my view, Obama needs not only to finish the
monetary revolution that Lincoln started, but to take it to a higher
level. That is, he must resolve the fundamental monetary question
that has plagued this nation in a way that does not lead to an
outward conflict that rends it. I would suggest that this is where We
the People can help him, by picking up on the essential conversation
that this nation needs to have about money.
Ultimately,
the enemy “in the rear” is not the banks and bankers, but a
pernicious idea that has been internalized at all levels of our
society and culture (the idea that “money is debt”). What
is needed is to open up a good-faith, truth-seeking dialogue about
money between all segments of society; people of finance included.
Only then will we resolve the monetary problem that festers
unresolved below consciousness at the heart of our social order. That
dialogue is what this New View On Money series of columns seeks to
precipitate.
Column #110 RECALLING AMERICA’S MONETARY ROOTS
(Week
24 – Friday, Jan. 23 / 2009)
History has a rhythm. In the
past one can find the prologue of what is coming to pass now.
The
early American colonists found themselves economically in a desperate
condition. They were essentially stranded on the eastern edge of a
vast new land, with bounteous resources, but little money to carry on
the commerce required to develop them and provide a new life. Trade
with the mother country proved to be a one-sided affair. The raw
materials the colonies had to offer were sold cheaply, but imported
finished goods were expensive. Without a domestic source of coinage,
what few coins the colonies earned in trade quickly disappeared back
to England, and they were obliged to sink ever further into debt to
keep their economy going.
The colonial assembly of
Massachusetts was inspired to come up with a simple, but effective
solution to the chronic shortage of circulating medium. In 1690, it
began to issue the first government-authorized paper currency in the
Western world. It was not based on precious metals, debt paper, land
banks, promises to pay interest, or other “backing”
schemes, but issued instead to facilitate the commerce of the People.
These “bills of credit”, as they were called, were simply
printed and spent into circulation.
The experiment proved
to be successful and was copied by all the other colonies.
Eventually, their respective monies began to be recognized and
accepted by each other. As trade up and down the Atlantic seaboard
increased, these isolated and indentured resource enclaves began to
be transformed into a fledgling new nation. When asked about how he
could explain the prosperous condition of the colonies, Ben Franklin
replied:
“That
is simple. It is only because in the Colonies we issue our own money.
It is called colonial scrip, and we issue it in proper proportion to
the demand of trade and industry.”
The
Crown set itself in continuous opposition to these unapproved issues
and Parliament passed laws in an attempt to curb them. The Currency
Act of 1764 banned the extension of legal tender status beyond
certain dates, and England assumed the authority to approve or
disapprove any laws the Colonies might pass related to new issues.
Its foot dragging on such measures effectively deprived the Colonies
of their money, and led to the first two now-uncomprehended
justifications for going to war as set forth in the Declaration of
Independence, specifically:
(1) – He has refused his
Assent to Laws, the most wholesome and necessary for the public
good.
(2) – He has forbidden his Governors to pass laws of
immediate and pressing importance unless suspended in their Operation
till his assent should be obtained; and when so suspended he has
utterly neglected to attend them.
Senator Robert Owen,
prominent banker and the first chairman of the Senate Committee on
Banking and Currency, explained that when the Rothschild-controlled
Bank of England heard of the situation in the Colonies:
“They
saw that here was a nation that was ready to be exploited; here was a
nation that had been setting up an example that they could issue
their own money in place of the money coming through the banks. So
the Rothschild Bank caused a bill to be introduced in the English
Parliament which provided that no colony of England could issue their
own money. They had to use English money. Consequently the Colonies
were compelled to discard their script and mortgage themselves to the
Bank of England in order to get money. For the first time in the
history of the United States our money began to be based on debt.”
“Benjamin
Franklin stated that in 1 year from that date the streets of the
Colonies were filled with unemployed.”
Faced
with a deteriorating economic situation, and what they felt was
British neglect, the colonists called a Continental Congress, and
issued the Continental Currency. This differed from earlier colonial
monies in that it was an emission of the Colonies as a whole. This
act was, essentially, the assumption by the people of American
nationhood. According to monetary historian Steve Zarlenga:
“The
skirmishes at Lexington and Concord are considered the start of the
Revolt, but the point of no return was probably May 10, 1775 when the
Continental Congress assumed the power of sovereignty by issuing its
own money.”
Americans
are commonly aware that the establishment of the United States
brought to the world a new type of democratic order; i.e. personal
freedom under the rule of democratically determined law. What is not
nearly as widely realized is that it also represented the
establishment of a new economic order. It sought to secure not only
freedom and law, but also the means to same; i.e. the control of its
own money. This is the all-but-forgotten “rest of the American
Revolution”.
This was elaborated eloquently in
“Harmony of Interests”, by Henry C. Cary, who was Abraham
Lincoln’s economic advisor and the son of Matthew Cary, a close
collaborator of Franklin and LaFayette. He stated that there are “Two
systems before the world”, and proceeds into a lengthy
delineation which concludes:
“One
looks to pauperism, ignorance, depopulation and barbarism; the other
to increasing wealth, comfort, intelligence, combination of action,
and civilization. One looks towards universal war; the other towards
peace. One is the English system; the other we may be proud to call
the American system, for it is the only one ever devised the tendency
of which was that of elevating while equalizing the condition of man
throughout the world.”
And
what is this “American system” compared to the “English
system”? I describe the former as an economic order based on the
sovereign power of a nation to issue its own money, and the latter as
the subjugation of society to unpayable “debt” to private
interests. It is one of the great ironies of history that, through
its privately-issued “debt”-based dollar, we as a nation
have become effectively the champion worldwide of the “English
system”, the very economic order we purport to have triumphed
over more that two centuries ago. It seems now that with the advent
of the current financial crisis, the final reckoning of which
principle we will serve has come upon us in a way that cannot be
evaded.
Our forbearers were mindful of what is at stake.
Thomas Jefferson had this to say:
“I
believe that banking institutions are more dangerous to our liberties
than standing armies. Already they have raised up a monied
aristocracy that has set the Government at defiance. The issuing
power should be taken from the banks and restored to the people to
whom it properly belongs.”
“If
the American people ever allow the banks to control the issuance of
their currency, first by inflation and then by deflation, the banks
and corporations that will grow up around them will deprive the
people of all property until their children will wake up homeless on
the continent their fathers occupied.”
John
Adams wrote in a letter to Jefferson:
“All
the perplexities, confusion, and distress in America arise, not from
defects in the Constitution or confederation, not from want of honor
and virtue, so much as from downright ignorance of the nature of
coin, credit and circulation.”
Might
this be something for our new President contemplate? How else “Hope”?
Column #111 THE MONETARY PROVIDENCE OF AMERICAN HISTORY
(Week
25 – Monday, Jan. 26 / 2009)
History, it might be said, is
not merely a chain of happenstance, but can be thought of as a
meaningful weaving of times, people and events that reveal the
workings of providence in worldly affairs. Such is strongly suggested
by the American experience. What lesson does it have for us does at
this paradoxically auspicious moment of crisis?
Time and
again this nation has arrived at a juncture where it was threatened
outwardly by affairs seemingly beyond its control. At each such
reckoning, I would suggest, it has saved itself by a return to the
monetary inspiration that gave it birth.
In 1690, when the
seed of what we call the United States was a thin line of struggling
settlements along the eastern seaboard, one colony, Massachusetts,
became the first government in the Western world to issue paper
money. These “bills of credit” were a public scrip whose
purpose was to facilitate, not the designs of private interests, but
the commonweal of the People. The colony prospered, the practice was
adopted by its neighbors, and the beginnings of a new nation
germinated.
In 1775, the Crown and Parliament of England
had effectively forbidden the Colonies to issue their own money, save
with the approval of the Crown and Parliament. This resulted in
widespread economic distress, and threatened the undoing of the
nascent social order the colonists had painstaking constructed. In
response they called a Continental Congress, which then issued a
“Continental Currency”. This exercise of the monetary power
was effectively the assumption of national sovereignty, and the first
defining act of a new nation. The political separation heralded by
the Declaration of Independence in 1776 followed as a matter of
course.
In 1836, the charter for the Second Bank of the
United States (modeled after the Bank of England) came up for renewal
in the Congress in a bid to become a permanent American institution.
It was vetoed by President Jackson whose campaign slogan was, “Bank
and no Jackson, or no bank and Jackson”. He had asserted:
“The
bold effort the present bank had made to control the government, the
distress it had wantonly produced . . . are but premonitions of the
fate that awaits the American people should they be deluded into a
perpetuation of this institution or the establishment of another like
it.”
Jackson’s veto had the effect of putting off
for almost eight decades the day when the country would have “another
like it”.
In 1860, the United States faced the
challenge of whether the “. . . new nation, conceived in
Liberty, and dedicated to the proposition that all men are created
equal . . . can long endure”. Outwardly it was a military
conflict between the Union and the Confederate States. On a deeper
level, it was a battle over how and by whom money would be created
and issued. Financial interests had worked to divide the states
between North and South, thereby undermining the American example of
a nation made strong and independent through the power to issue its
own money. President Lincoln was pressured to borrow the funds to
fight the war, but responded instead by creating $450 million in
“Greenbacks”, a public currency issued directly by the
government, much like the Continental Currency. Had he succumbed,
this sum would still theoretically be part of the “national
debt”, but compounded to an amount many times the original. In
practical terms it would likely have caused the financial ruination
of the nation that was supposedly saved on the battlefield.
In
1896, at the Democratic nominating convention in Chicago, dark-horse
Presidential candidate Williams Jennings Bryan declared in his famous
Cross-of-Gold speech:
“The gold standard has slain
its tens of thousands. If they ask us why we do not embody in our
platform all the things that we believe in, we reply that when we
have restored the money of the Constitution, all other necessary
reforms will be possible, but until this is done there is no other
reform that can be accomplished.”
The assembled
gathering thundered its approval, and on the strength of this
position, Bryan went on to win the Democratic nomination three times.
This was the high point of the widespread Populist movement that had
formed up following the Civil War virtually around the issue of
preserving the Greenback as a national institution, and resisting the
imposition of a gold standard on money by the banking
establishment.
In 1942, the nation was still struggling to
emerge from the Great Depression, a collapse brought on, many
believe, by the establishment of a monetary system based on “debt”
through the Federal Reserve Act of 1913. With the images of
battleships burning at Pearl Harbor still fresh in mind, Congress was
persuaded to pass the Steagall Amendment to the Stabilization Act of
1942, which established a parity price (one that would cover the cost
of production, living expenses and seed for another round) for 45
basic raw materials, including the 25 most basic storable
agricultural commodities. The domestic gold standard having collapsed
in 1933, the value of the dollar was thus effectively reestablished
on the basis of the actual economic worth of real commodities fairly
monetized. The result was that the economy roared to life, and
continued to prosper even during demobilization, post-war
reconstruction, and the Korean War emergency. President Truman even
balanced half of his budgets.
Now it is 2009. The
legislation that established the “parity dollar” was undone
in the early fifties, and the long slide into our present crushing
“debt” began in earnest. The current financial crisis is
not the first time that we as a nation have faced a threat to our
essential well-being, or even very existence. In response to such
crises in the past – 1690, 1775, 1836, 1860, 1896, 1942 – the
nation saved itself by harkening back to its original monetary
inspiration, each time taking the application of the principle a bit
higher.
The providential import of this time is being felt
across the land, as evidenced by the impulse on the part of millions
of people to come together in thousands of gatherings, large and
small, in Washington DC and across the nation (not to mention around
the world). They are it seems, regardless of partisan feelings,
intent on sharing in the momentousness of this week’s Presidential
inauguration. That being so, a question yet hangs heavy over the land
– “What do we do now?”
At this auspicious
juncture the nation more than ever needs to return, as it has always
done, to its monetary roots for the answer, but, incredibly, we seem
to have largely forgotten our own authentic heritage. It needs to be
rediscovered, and taken to new heights of realization very soon.
Column #112 FINAL THOUGHTS BEFORE TAKING A HIATUS
(January
30, 2009)
Other commitments bid that this be the last
column before I take a two-week hiatus. I plan to resume the series
on February 20 (though I reserve the option to send out commentary in
the meantime if emerging events call for it). Much has transpired in
the world between the last break in October and now. This is perhaps
a good introspective winter’s time to take what has been said into
our contemplations and meditations.
Last fall the economic
dispensation of the world changed. Now we are informed in the media
daily of the mounting national, and now worldwide, “debt”
crisis, the further loss of homes and businesses, and the latest
waves of job losses. There have been enough paychecks and other
financial resources still in the pipeline to maintain a sense of
normalcy through the holiday season, and through the Presidential
inauguration. Our attention now turns naturally to the
question,
“What will the year ahead bring?” To be sure, the signs are
by most reckonings far from positive, but a time of maximum crisis is
also a time of greatest opportunity.
I would leave you for
now, dear friends, with a note of perspective. In the course of the
columns many strong statements have been made. This is not surprising
given the vital nature of the subject. I would emphasize, however,
(as I have done before) that there are no enemies in the monetary
story; only a perverse principle that we, virtually all, have in our
own lives and niches become subject to: that is, the idea that life
is limited and controlled by money, rather than money being an
extension of life. Its effects range from overt thievery, to the most
subtle deceptions of the soul. There are none, as far as I know, who
have not to some extent at least lived in a glass house on this
matter. Who then can cast a stone of judgement? It is altogether
fitting then that we move forward with the attitude of removing the
beam from our own eye, before attempting to pluck the mote from our
brother’s or sister’s.
Throughout this series of columns I
have interjected the American story about money. This is particularly
so in the last three installments, where I have drawn out the
monetary thread in a manner that reads somewhat like a heroic tale.
Indeed, there is heroism in this litany of historical events, but, of
course, life is not that simple. There would have been many nuances,
contrary weavings and instances of human mendacity along the way, if
the truth were fully
told.
My intention is in part to
precipitate a new American mythology, which is the story that we tell
our children, each other, and the world about who we are and how we
got to be this way. I would not, however, that it be a new American
jingoism. We as a nation have our unique tale to tell and our
contribution to make. Indeed, the case may be made that a new way of
doing money is a particular gift that this nation has to offer the
world, as part of our “manifest destiny”, if you will.
But
even in this area, that is not the whole of the story. The evolution
of money can be traced back to other times and lands. Some of the
thoughts and practices “pioneered” by Americans had
significant antecedents of various forms in, for example, ancient
China, early classical Greece, the pre-empire Roman Republic and the
Islamic civilization of the Middle Ages. The argument over the
creation, issuance and control of money in colonial America was in
essential ways the coming to a head of a contention that had already
taken place in England and France for several centuries, and many of
its ideas can be traced from there.
What is more, the
American Revolution was not a battle pitting, simplistically, the
good guys against the bad. It was, rather, a struggle between heroic
people on both sides. This was a soul-wrenching time, and some of the
most venerated of our “Founding Fathers” felt rent within
by opposing viewpoints, sympathies and loyalties. From a larger
perspective, even King George could make a reasoned and passionate
argument for his case.
The tenor of these articles might,
if one is not fully attentive, be taken to be a screed against
bankers and banking. Let me be clear: the enemy is not bankers or
banking. In the current monetary crisis is it not true that many
banks also are going bankrupt? If I have an attitude regarding the
institution of banking, it is not to tear it down, but to see it
redeemed for the sake of the People, including the bankers
themselves. If we do not engage the financial world constructively,
but opt instead for the gratification of comeuppance, we will pull
the monetary temple down on our own heads.
In this modern
age we are essentially all economic players, and have in our own
particular ways and niches contributed to the distressed
circumstances that are unfolding in our financial lives at present.
Even withdrawing to the woods to live a hermit’s life is a profound
economic act. Certainly the simple use of a credit card has
significant implications, of which we need to become fully conscious
if the current “debt” crisis is to be addressed. Let us
resolve, then, to take responsibility for our own role in the
economic order, and to not blame the other.
In my
perception, all the major dilemmas of today converge upon the same
question, and that is: “What can we do about money?” Could
it be that the outbreak of the present world financial chaos, in
conjunction with the belief in new possibilities that seems, for
whatever providential reason, to attend the latest change in
government in Washington, constitutes a priceless opportunity? I
don’t know. That question remains for us to answer. I have a feeling,
though, that whether we seize upon it in a constructive, as opposed
to blame-saying, manner will make all the difference. To be sure, we
need to remain discerning and not withhold a critique when it is due,
but cynicism holds no power for good. It behooves us always to be
mindful of the distinction. There is no reason, in my view, to think
that this time of crisis could not be redeemed, and become known to
future generations as the year the world finally turned around. I
offer this as something to think about, until we reconvene.
Thank
you all for your continued interest. Looking forward to resuming the
conversation,
Richard Kotlarz
Column #113 RECLAIMING AMERICA’S ECONOMIC PROVIDENCE – April 20, 2009
We
the People:
In Response to President Obama’s Request for
Economic Solutions from the Citizenry
RECLAIMING AMERICA’S
ECONOMIC PROVIDENCE
“The
government [not private banks] should create, issue, and circulate
all the currency and credit needed to satisfy the spending power of
the government and the buying power of the consumers. The privilege
of creating and issuing money is not only the supreme prerogative of
government, but it is the government’s greatest creative opportunity.
By the adoption of these principles, the long-felt want for a uniform
medium [of exchange] will be satisfied. The taxpayers will be saved
immense sums of interest. The financing of all public enterprises,
and the conduct of the Treasury will become matters of practical
administration. Money will cease to be master and become the servant
of humanity.”
– Abraham Lincoln, as attributed in Senate Doc. 23, 76th Congress
In the providence of Nations, each brings to humankind a gift. It is the destiny of America to establish in the earth a threefold social order to bring, first, a new birth of freedom, second, the rule of democratically determined law, and third, an economic life that nurtures individual liberty and provides for the common good. It is the neglect of this third dimension of the American experience via the abdication by Congress of its Constitutional power to create and issue the public’s own money that is at the root of unprecedented distress in the economic life of the nation, and, by extension, the world.
Accordingly, We the People of these United States, mindful of the hopes and prayers of millions around the world, do resolve to restore the economic providence of the American nation.
In 1690 the colonial assembly of Massachusetts became the first government in the Western world to issue its own paper money. It was based, not on precious metals, debt bonds, land parcels, or other privately controlled “backing” schemes, but on the need for a stable currency issued in proportion to commerce, the general welfare and human dignity. Massachusetts prospered, and its example was copied by its sister colonies. A protracted contention ensued between the American Colonies and the Mother Country to determine who would exercise the sovereign right to create and control the “coin of the realm”, and for whose benefit that power would be exercised.
Representatives of the Colonies gathered at the Second Continental Congress in Philadelphia in June of 1775 and claimed the prerogative of the sovereign by issuing a new currency by fiat of the public will, the “Continental Currency”. A nation was effectively born, and the famed Declaration of July 4, 1776 followed.
Benjamin Franklin stated the root of the matter succinctly: “The Colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the Colonies (the right to issue) their money, which created unemployment and dissatisfaction.”
The struggle over the control of money was revisited time and again as the new nation evolved. Fateful events transpired around the chartering and eventual rejection of the First and Second Banks of the United States, financing of the Civil War, emergence of the Populist Movement, passage of the Federal Reserve Act in 1913, the money and banking legislation of the Depression era, the “farm parity” monetary reform of the WWII and demobilization period, and the slide into an unbearable burden of private and public indebtedness, which has culminated in the monetary crisis we face today.
Furthermore, there are specific passages established already in the law by which the current monetary distress, can, and indeed is called to be relieved:
On June 4, 1963, President John F. Kennedy signed Executive Order 11110, which invoked “The authority vested in the President by paragraph (b) of section 43 of the [Agricultural Adjustment] Act of May 12, 1933,” passed under Franklin Delano Roosevelt.
This Agricultural Adjustment Act specifically directs the President to take whatever measures he deems necessary to protect the value of the currency of the United States, and states further in Sec. 43, Par. (b) that if he is unable to secure the cooperation of the Federal Reserve Board, or for any other reason determines that additional measures are required, he is specifically authorized:
“To direct the Secretary of the Treasury to cause to be issued in such amount or amounts as he may from time to time order, United States notes, as provided in the Act entitled ‘An Act to authorize the issue of United States notes and for the redemption of funding thereof and for funding the floating debt [bonds against the debt] of the United States,’ approved February 25, 1862. . . but notes issued under this subsection shall be issued only for the purpose of meeting maturing Federal obligation to repay sums borrowed by the United States and for purchasing United States bonds and other interest-bearing obligations of the United States: Provided, That when any such notes are used for such purpose the bond or other obligation so acquired or taken up shall be retired and canceled.”
Taken to its logical end, the effect of this act is to specifically authorize, and indeed direct, the President to redeem Federal bonds with United States Notes as they come due if a stable currency is not achieved under the auspices of the Federal Reserve. It outlines a process whereby the debt of the Federal government can be retired in an orderly manner, and debt-bearing Federal Reserve Notes replaced in the money supply with lawful US currency.
Kennedy’s executive order caused to be issued directly out of the US Treasury over $4 billion in non-interest-bearing United States Notes, in this case Silver Certificates. Further issues were halted shortly after his death.
Significantly, the ‘Act of February 25, 1862’ cited in this 1933 legislation is Lincoln’s original “Greenback Act”, by which he declined to borrow the money to finance the Civil War, and instead issued $450 million in United States Notes. Had he acted otherwise, the debt from that war would remain as a burden of the Federal Government to this day, compounded by interest charges to many times its original amount. Lincoln’s leadership may well have redeemed the Union, on the battlefield, and in the financial arena as well.
The Acts referred to above cite as their authority the power delegated to Congress to “coin Money (and) regulate the Value thereof . . .”, as stipulated in the United States Constitution. They remain the law of the land. Why then, it is fair to ask, are they not being implemented in this time of crisis?
We the People uphold the Constitution of the United States and the intent of the laws derived therefrom. Further, we support President Obama in his promise, stated during his February 24th, 2009 address to the Joint Session of Congress, to do “whatever it takes” to address our current economic crisis.
In the practical spirit of “whatever it takes”, immediate steps can be duly taken (the issuance of United States Notes to redeem outstanding Federal debt) as an emergency measure under the Agricultural Adjustment Act, until a more permanent solution can be effected by repealing the Federal Reserve Act, and returning the creation and issuance of the people’s own money to the public domain through the US Treasury.
Furthermore, the people and physical assets of the Federal Reserve can be incorporated into the Department of the Treasury, where they would continue to assist with administering our nation’s monetary policy, but now subject to the People’s will through our duly constituted system of checks and balances. It is this form of monetary system, we believe, that our most far-sighted and public-spirited Founding Fathers envisioned.
In the spirit of “With malice towards none”, this statement represents, not a condemnation of any segment of society, including bankers (whose due services will continue to be needed). Rather, it seeks to fulfill the American providence to establish a new economic principle on the earth whereby “government of the people, by the people, for the people, shall not perish” from falling under the control of the “moneylender”. It is alike in the best interests of all citizens of our nation, and in these times the world, that such a new economic order be at last established.
“The weight of this crisis”, President Obama stated in his February 25, 2009 address to the Joint Session of Congress, “will not determine the destiny of this nation. The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth. Those qualities that have made America the greatest force of progress and prosperity in human history we still possess in ample measure. What is required now is for this country to pull together, confront boldly the challenges we face, and take responsibility for our future once more . . . , that day of reckoning has arrived, and the time to take charge of our future is here . . . .
So I ask this Congress to join me in doing whatever proves necessary. Because we cannot consign our nation to an open-ended recession . . . . As we stand at this crossroads of history, the eyes of all people in all nations are once again upon us – watching to see what we do with this moment; waiting for us to lead . . . , in our hands lies the ability to shape our world for good or for ill.”
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End Note: These columns ended due to health and time constraints. Richard continues his work and has a current book forthcoming. Contact information is provided online at richardkotlarz.com