Why Is It So Bad??
For our present discussion we will start with this definition of what a MONEY (or MONETARY) SYSTEM is.
''An arrangement of closely related functions, authorities and responsibilities within a country which regulate the creation, flow and extinguishment of money for the purpose of making possible the orderly creation and distribution of goods and services." (from Thoren and Warner's )
The present monetary system accomplishes many of these functions quite well. The problem is one of simple math: eventually the system will implode from an overload of debt (both public AND PRIVATE) and a corresponding shortage of money with which to pay off that debt. This is accomplished through the fractional reserve deposit expansion system, and it produces a phenomenon that was clearly described in mathematical detail by Thomas Jefferson and John Taylor. In his famous "Earth Belongs to the Living" letter written to James Madison in 1789, Jefferson also connects debt based economies with extractive land use practices which, by "eating up the usufruct", impairs the right of succeeding generations to share equitably in earth's natural resources.
Essentially, the boom-and-bust cycles necessary to maintain the system will continue until there is no longer sufficient, believable collateral to support new debt and/or it becomes patently clear that there is a COLLECTIVE inability to repay debt arising from some combination of unsustainable private debt, prohibitive levels of taxes and fees and lost or unsustainably low wages. This is all due to the fact that in order to keep the monetary system functioning, new debt must be constantly created in order to sustain (or contribute to) the money supply - and there must be some means of paying that debt.
Put another way, banks must be induced to provide credit and the public must be willing AND ABLE to make use of credit so as to sustain sufficient economic activity. Serious problems arise during economic "downturns" such as what we have today because banks are less willing to lend and the public is less willing and/or able to borrow. The Real economy contracts because outstanding (private) debt remains but the money (as credit) supply that is available to the REAL economy contracts (even if the financial economy has plenty of "cash" sloshing around). This all-too-familiar process widens, temporarily at least, the systemically-created, one-way river of wealth that is always flowing toward the top through loan defaults and fire sales on defaulting or declining assets. This aspect was noted by John Taylor of Caroline and others of the period.
Although our monetary system is managed through the Federal Reserve, Congress does have the power to stimulate economic activity through borrowing - at the expense of taxpayers - and conversely to contract economic activity through "austerity" - at the expense of workers, small businesses and local governments. Of the two budgetary measures available to Congress, austerity is by far and away the most dangerous option, because it will send the country into a deflationary spiral that may end in catastrophe. As the above lecture on Modern Money explains, such federal austerity programs are completely unnecessary due to the way that "sovereign" money works. (However, and because of the way the system operates it will actually be private, rather than public, or federal, debt which will be the proverbial straw that breaks the public's back.)
Austerity will only fast-forward the process of economic contraction, as the Great Depression proved, bringing with that contraction potentially catastophic global side effects. At the same time we must be willing to face up to the fact that the current debt crisis (public, private AND international) simply cannot be solved by raising taxes, cutting spending or any combination thereof.
Ultimately, the current debt crisis can only be solved by installing the kind of monetary system advocated most vociferously by the Jeffersonians, which is today expressed so beautifully in the NEED Act, designed as it is for the smoothest of all possible transitions. Lack of knowledge about the manner in which our monetary system works is an unhappy fact which allows policy makers and shapers to ignore the heart of the problem and make potentially catastrophic recommendations about reducing the public debt, without even considering the necessary and long overdue structural changes to the monetary system.
Filling in some more of the details as to just how the present system works we can examine this short introduction, excerpted from an article called "Short Course on Money and Banking"
''A fractional reserve banking system has two kinds of money, base money and bank money. The Fed creates base money when it purchases Treasury securities from the public. It pays by simply crediting the seller's bank with a deposit at the Fed, while the bank credits the seller with a deposit in his own account.
''Base money is the definitive money of the nation, which means the government has no obligation to convert it into another form of asset. It comprises the cash held by the private sector and bank deposits at the Fed. All payments to and from the government require the transfer of base money. For example, when one writes a check to pay his taxes, his bank must surrender that much in reserves of base money to the Treasury for the check to clear.
''Bank money refers to deposits in banks, all of which are claims on base money. The viability of bank money depends on the promise that it can be converted on demand into base money at par. Bank money is created when a bank issues a loan. It does so by simply crediting the borrower's account with a deposit. The bank must hold enough reserves of base money to meet the reserve ratio requirement on its demand deposits.
''Bank money is the credit side of a balance sheet relation. Every dollar of credit in the form of bank money is matched by an equal amount of debt. For the borrower, a bank loan creates a credit (the deposit) and a matching debt (the obligation to repay the loan). For the bank, the loan creates an interest-earning asset (the loan contract) and an equal liability (the borrower’s deposit).
Mr. William f. Hummel, creator of the above website, is one example of the manner in which citizens work to educate themselves and others about the all-important subject of money. Another outstanding example of one ordinary citizen who dedicated a major portion of his life to the subject of money creation is the late Dick Distelhorst of the American Monetary Institute. Mr Distelhorst ran his debt "free" money group out of Burlington, Iowa with regular meetings held at the Public Library - and he wrote an excellent newsletter to boot.
Mr. Distelhorst, and others like him, serve as an inspiration and example for the rest of us to start our own "real" money groups in our own town halls, churches, schools, and libraries. The present author and a friend had the privilege of making Mr.Distlehorst's acquaintance at a free, pre-conference meeting of the American Monetary Institute where Mr. Distlehorst served as one of the featured speakers. So impressed were we by his presentation that we signed up on the spot for his informative newsletters, which we still have on file.
An excerpt below of Newsletter #55 will give you an idea not only of the content of his newsletters, but also the crucial importance of the subject of money creation and why the current system is so bad for our country.
''Wayne Angell, a former Federal Reserve Board governor, explained it on the C-Span network. Here is a key question he was asked, and his answer.
''"Question: In simple terms, explain how the Federal Reserve creates money and controls the money supply."
''"Answer: The Federal Reserve creates money anytime it acquires some ownership in some asset, primarily U.S. Treasury Bills. Every morning the Federal Reserve decides how many Treasury bills to buy. If the Federal Reserve buys a Treasury Bill, it gives credit to the seller and it also gives the selling bank a credit, or a reserve, at its local federal reserve bank. So the Federal Reserve creates these reserves "out of thin air" by purchasing Treasury Bills. The Federal Reserve doesn't have to pay for it with currency, the Federal Reserve can create the balance sheet reserve account to pay for whatever it buys."
''THIS IS NOT DOUBLE ENTRY BOOKKEEPING - THIS IS TRIPLE ENTRY BOOKKEEPING.
''It is important to notice that, in this transaction, the new money created was credited to not one, but two places. First to the seller of the Treasury bill in return for its value. But the bank that cashed the check was also credited with the same amount of new bank reserves, which they can then expand, in the form of new interest-bearing loans (debt-money) by a factor of about 16, thus putting us even deeper in debt.
''To recap, the Federal Reserve obtained an asset, the security purchased, on its books with no offsetting liability, because the Fed simply creates the money to buy the security "out of thin air" and no Federal Reserve asset account is depleted to make the purchase, so it's books don't balance - so it balances them by crediting the bank that received the deposit from the dealer with the same amount of new reserves at the Fed - a new liability to offset the asset the Fed just bought with "money created out of thin air. This entry of new reserves for the bank that cashed the check balanced the Fed's books. At the bank, the dealer's checking account was increased by the same amount, as were the bank's liability to pay the amount in his checking account. Three bookkeeping entries, not two. No wonder this all sounds confusing - it is. Dishonest bookkeeping to protect a dishonest system.
''What has just been described is what the late Congressman Wright Patman called "HIGHWAY ROBBERY IN BROAD DAYLIGHT." He was referring to the Federal Reserve and the Fractional Reserve Banking System. I have decided to call it "THE BIGGEST CON GAME IN THE HISTORY OF THE WORLD." And this con game is still going on today.
''THE BIGGEST BANKS GET THE BIGGEST BENEFITS OF NEW MONEY CREATION.
''It must also be noted that when the Fed buys Government Securities on the so-called open market in order to create new bank reserves, these new reserves always benefit the biggest banks first, because those big banks are where the sellers of the securities always deposit their electronic checks from the Fed. Then the creation of additional debt-money starts with these big banks and eventually "trickles down" to smaller banks throughout the country. It is a fair statement to say that most local bankers do not even realize that, under the Fed's fractional reserve system, they are creating new money when they make loans on the basis of these "new reserves" that have trickled down to their community.
''WHY IS THE FRACTIONAL RESERVE SYSTEM SO BAD FOR OUR COUNTRY?
''Because it requires all our money to be in the form of interest-bearing debt. The creation of new money should take the form of a tax-free, interest-free dividend for the people. Under the 100% reserve system (which requires that money deposited in checking accounts be held in trust, not loaned out) that would be the case. It is important to understand that new money added to our economy as our population and our production of goods and services grows, should always have been a dividend for the people, not additional debt imposed upon the people.
''The interest on the unpayable debt created by the few who now enjoy the government's own power to create money "out of thin air" grows larger every year. The total money supply of this country is now estimated to be about $15 trillion. This is all "debt that should never have been debt" - it should have been a $15 trillion dividend, spent into circulation by the Government to build and create a better country for us all - and that will still happen when we take back control of our own money, as was explained in last month's newsletter #54.
''Yes, every dollar of that $15 trillion total money supply represents debt that should not be debt - that should have been instead a $15 trillion dividend to the people of the United States. Our debt-based fractional reserve system is the primary underlying reason for extreme income inequality and for widespread unnecessary poverty.
''We have the capacity to produce enough food, clothing, shelter and other goods and services to provide a decent standard of living for everyone, but the money to do this has been drained off and channeled to the very wealthy few who use the government's own power to create money out of thin air. Instead of receiving dividends from creating, issuing and regulating our own money as the American Monetary Act requires, we continue to let privately owned corporations create and issue our own money in the form of interest-bearing, unpayable, exponentially growing debt. The time has certainly come to take back control of our money and our country by passing the American Monetary Act.