Bob Blain, Progressive Review, 1994 – From 1790 to 1993, taxpayers were charged $3.2 trillion in interest on federal debt. . . . The original debt at 5.53 percent interest compounded for 204 years equals $4.4 trillion. The present federal debt is arguably the original debt enlarged by 204 years of compounding interest.

According to the Federal Reserve Bulletin, the total money supply (currency, travelers checks, demand deposits, and savings accounts) in the U.S. economy in March 1993 was $4 trillion. The total debt of the federal government, state and local governments, corporations, farmers, home buyers, and consumers was in excess of $15 trillion. If the total money supply is $4 trillion, where is the other $11 trillion of borrowed money?

Here is another curious fact. We have been told for years that government borrowing to cover hundreds of billions of dollars of deficits would drive interest rates through the roof. Instead, interest rates have fallen dramatically. In March, 1993 they were between 4.9 and 2.2 percent, far below what they were in the early 1980s when federal debt was a small fraction of what it is now.

The explanation for these anomalies is that the missing money never existed. We never borrowed it, in the normal sense that it was turned over to us and spent. Most debt is not the result of people borrowing money; it is the result of people not being able to repay what they owed at some earlier time. Instead of declaring them bankrupt, creditors just add more to their debt.

The federal government has been adding interest to its debt for 204 years. James Jackson, Congressman from Georgia, predicted that this would happen in a speech he made to the First Congress on February 9, 1790. Jackson warned that passing Alexander Hamilton’s plan to base the country’s money supply on the existing federal debt of $75 million would “settle upon our posterity a burden which they can neither bear nor relieve themselves from.” He predicted: “In the course of a single century it would be multiplied to an extent we dare not think of,” He clearly saw that Hamilton’s plan would put in place an exponential process of debt growth. To support his warning he cited the experience of Florence, Genoa, Venice, Spain, France, and England.

Hamilton’s plan was for Congress to commit the country to pay interest on the debt until the debt was paid. In the meantime the debt certificates would circulate as money. He argued that this would turn a $75 million debt into a $75 million money supply. The problem was that interest payments would have come out of the money supply. This would reduce the quantity of money that remained in circulation — and cause recession — until new loans returned the interest money back into circulation. The history of federal government finance shows such periodic swings between debt reduction and recession to debt increase and recovery.

The power to deal with this problem that Congress has neglected all these years is the power “to coin money and regulate the value thereof.” It has overused its power “to borrow money on the credit of the United States.” According to the Federal Reserve, 98 percent of the U.S. money supply is borrowed. Only 2 percent is coined.

The First Congress set the wrong precedent. It should have created $75 million in money and paid off the debt. With a population of 4 million people and an economy starved for a medium of exchange, that would have increased the money supply by $18.75 per person.

Why did the First Congress borrow instead of coin money? Newspapers at the time accused members of Congress of acting to serve their own interests. They sent agents into the countryside to buy up debt certificates that the general public thought were worthless. They then passed the Funding Act knowing that it would give themselves and their heirs a source of income that would grow exponentially with the debt. For every debtor there is a creditor. What is a $4 trillion debt for debtors is $4 trillion in claims for creditors.

To get out of this trap Congress has a range of options:

First, it could stop paying interest on the debt. Interest is the fuel that is exploding the debt. Cut off the fuel; stop the explosion. Since 1790 over $3 trillion in interest has been added to the original $75 million. Cutting interest would immediately cut the annual deficit by about $300 billion. Experience shows that all other conventional actions, no matter how painful, do no more than slow slightly the rate of debt growth. Then Congress could begin the process of paying off the debt.

A political problem with stopping the payment of interest is that people with money control politics. And many of them would have their interest income stopped. Insurance companies and pension funds are invested in federal debt and foreign holders would also be upset. Economically, however, we cannot continue to add compounding interest to existing debt. The biggest debtor is not the federal government. It is business corporations. It is impossible for them to increase the physical production of goods and services in order to keep up with exponential debt growth that is limited by nothing but arithmetic. Unlike the debt, the physical economy has limits.

The question holders of federal debt must ask themselves is this: Do we want to insist on more interest that will add debt to existing debt until the only option is debt repudiation and we lose everything? Or are we willing to stop where we are while we may still be able to recover our original investment plus a reasonable profit?

A second option is for Congress to create the money necessary to fund public works. As a sovereign government, Congress’ power is unique. It can create money debt-free and interest-free. Congress needs to stop thinking of itself as the same as other organizations that must take money in before they can spend it. Money does not grow on trees. It must be created. The only choice is whether to have it created as loans at interest from private banks or to have it created by Congress debt-free and interest-free.

How can Congress create money without causing inflation? Congress must regulate its value. The power to create money includes this regulatory power.

A good way for Congress to regulate the value of money is by funding projects at the current national price level. The current national price level can be calculated by dividing the most recent gross domestic product by the number of hours of work that produced it. For example, in 1991 the total gross domestic product was $5.6 trillion. The employed labor force produced it with 237 billion hours of work. So the GDP was produced at the rate of $23.95 per hour of work. By now the price level per hour is probably $25.00. So let Congress fund projects at $25 per hour. How this amount is allocated among labor, land, and capital can be negotiated.

How much money should Congress create? How about enough to reach full employment? We have about 9.5 million people actively looking for work. That includes a million managers and professionals; two and a quarter million technical, sales, and clerical people; a million and a quarter precision production, craft and repair people; over two million operators, fabricators and laborers; and 305,000 framers, foresters and fishermen. That’s a skilled labor force as big as many nations — all now idle. Employed at an average $25 per hour, ($50,000 per year), they would add $475 billion to the nation’s gross domestic product and reduce spending for unemployment compensation. The pie would grow as unemployment went down. Congress could start by creating, say, $50 billion, or $200 per person, in debt-free interest-free money, then fund $50 billion worth of works projects, monitor the results, and make adjustments as needed. Meanwhile the Fed could raise bank reserve rates, not interest rates, to make checking accounts more secure.

A third more conservative option is being proposed by an organization called Sovereignty, which believes that a country that borrows money loses its sovereignty to its creditors. Their proposal is intended to restore U.S. sovereignty by reducing our dependence on borrowed money.

The Guernsey experience. . .

Guernsey is an island state located among the British Channel Islands about 75 miles south of Great Britain. In 1816 its sea walls were crumbling, its roads were muddy and only 4 1/2 feet wide. Guernsey’s debt was 19,000 pounds. The island’s annual income was 3,000 pounds of which 2,400 had to be used to pay interest on its debt. Not surprisingly, people were leaving Guernsey and there was little employment.

Then the government created and loaned new, interest-free state notes worth 6,000 pounds. Some 4,000 pounds were used to start the repairs of the sea walls. In 1820, another 4,500 pounds was issued, again interest-free. In 1821, another 10,000; 1824, 5,000; 1826, 20,000. By 1837, 50,000 pounds had been issued interest free for the primary use of projects like sea walls, roads, the marketplace, churches, and colleges. This sum more than doubled the island’s money supply during this thirteen year period, but there was no inflation. In the year 1914, as the British restricted the expansion of their money supply due to World War I, the people of Guernsey commenced to issue another 142,000 pounds over the next four years and never looked back. By 1958, over 542,000 pounds had been issued, all without inflation.

In 1990 there was $13 million in interest-free state issued notes. A visitor to the island that year later wrote:

“I returned from Guernsey last weekend. It is a fascinating little island. There are about 60,000 permanent residents on the island. The average family owns 3.3 cars, their unemployment rate is zero and their standard of living is very high. There is no public debt. There is a surplus of public funds which earn interest. The Guernsey Treasury increased the Ml of the island by 40 percent in the last three-year period, and this increase did not do anything to inflation. The price for a gallon of gasoline in England translates to about $5US whereas, the price in Guernsey is about $2US. Contrary to the teachings of current economics in all higher institutions, inflation is not related to the volume of money but rather to the size of the commercial debt.”

Sovereignty proposes that Congress create money and lend it interest-free on a per capita formula to tax-supported bodies for capital projects and to convert existing debt to non-interest-bearing debt. Since first proposed in January 1989, the Sovereignty loan plan has been endorsed by over 1,814 city, town, and county governments and school boards, as well as by the U.S. conference of Mayors, the Michigan state legislature and the Community Bankers Association of Illinois, which represents 515 banks.

As loans, the money would be repaid, so money injected into communities would fund projects, then be removed. Of the three methods for putting money into circulation available to Congress, giving, paying, and lending, lending is the most cautious.

Benjamin Franklin attributed the economic success of the colonies to their creation of all the money they needed. He said that the root cause of the Revolution was the act of Parliament that prohibited the colonies from continuing to issue their own money. The moneylenders of England thought it more profitable that the colonies borrow their money.

We hear from Washington that we need to sacrifice to bring the deficits under control — cut consumption, save, and invest. When that slows the economy, we will be told to spend more to stimulate the economy. We have heard it all before. Neither method works. We need debt-free interest-free money to fund the work that needs to be done. It’s not sacrifice we need; it’s productive employment. Let Congress use its unique power to coin money and regulate its value to fund that employment.

Money is no more than an accounting device, a system of notes certifying that the bearer has done a share of the work and deserves a share of the wealth. Money’s backing is the goods and services produced by the labor force. By creating money Congress can activate the idle productive power of our people. And what they produce will add real wealth to the U.S. Treasury and add nothing to the federal debt.

Sam Smith’s Great American Political Repair Manual (WW Norton), 1997 – A report of Guernsey’s States Office in June 1946 notes that island leaders frequently commented that these public works could not have been carried out without the issues, that they had been accomplished without interest costs, and that as a result “the influx of visitors was increased, commerce was stimulated, and the prosperity of the Island vastly improved.” By 1943, nearly a half million pounds worth of notes belonged to the public and was so valued that much of it was being hoarded in people’s homes, awaiting the island’s liberation from the Germans. About the same time that Guernsey started to fix its sea walls the town of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market. The Guernsey sea walls were repaid in ten years, the fruit market loan took 139. In the first part of the the 20th century, Glasgow paid over a quarter million pounds in interest alone on this ancient project.

How did Guernsey avoid the fiscal disaster that conventional economics prescribed for it? First and foremost by understanding that when you build roads or sea walls or colleges or houses, you are not reducing your society’s wealth. In fact, if you do it right, you are creating something that will add to its wealth. The money that was created was simply backed by public works rather than gold or “full faith and credit.” It was, in fact, based on something more solid than the dollar bills in our wallets today. In contrast, tacking on an interest charge to public works — as we do in the US — creates no new wealth, but merely transfers claims on existing wealth from debtors to creditors.

…… this is a long but very informative article by Sam Smith that is an important read.

The privilege of creating and issuing money is not only the supreme prerogative of government, but is the government’s greatest creative opportunity. By the adoption of these principles, the taxpayers will be saved immense sums of interest. — Abraham Lincoln

This special edition of Undernews is unusual, but we felt, given the current economic situation, that the information is so important and yet so little known that, despite its length, it would be extremely valuable to our readers and something they may wish to pass on to other activists, organizations, politicians and media contacts. It is amazing that at a time of such crisis, this matter is not being widely discussed and is essentially excised from media coverage.

Most of what follows is the work of the extraordinary and admirable Stephen Zarlenga of the American Monetary Institute. We have taken excerpts from various of his writings – including a 2003 speech to US Treasury staff – and blended it into one piece. Also included is an article we ran 1994 by Bob Blain and an excerpt from Sam Smith’s Great American Political Repair Manual, published by WW Norton in 1997.

It is lengthy, so take your time, but do read it. You won’t likely read it any place else and could be one of the most important things you have ever read.

A permanent copy of this report will be posted at http://prorev.com/moneyreform.htm

Some history

Stephen Zarlenga, American Monetary Institute – The money system is society’s greatest dispenser of justice or injustice. A good one functions fairly, helping create values for life. A bad, unjust one obstructs the creation of values; gives special privileges to some and disadvantage to others causing unfair concentrations of wealth and power; leading to social strife and eventually warfare and a thousand unforeseen bad consequences – physical and spiritual. . .

One reason economists have failed mankind so badly is their poor methodology – an over-reliance on theoretical reasoning. Alexander Del Mar the world’s greatest monetary historian noted: “As a rule economists. . . don’t take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge.”. . .

In England the struggle became the goldsmiths vs the monarchy representing society. Later it was the Bank of England vs. society. Until then England’s money power was in the monarch’s hands. But from that point, Bank of England credits would be substituted in place of public money. This promoted a confusion between credit and money to this day. But they are different things. Credit depends on the creditor remaining solvent. Real money does not promise to pay something else. Money is on a higher order than credit.

Those behind the Bank of England obscured the real source of the bank’s power – its legal privilege. Its notes were accepted in payments to the government. Recovering the science of money for the private profit of a small group produced harmful results: 120 years of continuous warfare spawned an unpayable national debt leading to excessive taxation leading to horrors like the Irish potato famine.

Before then, when a nation’s money system was used for taxation, the revenue generally aided the society. But the Bank of England concentrated society’s resources in the wrong hands, crippling the possibility for government to function properly, leading to a growing contempt of government.

Today it’s still the bankers versus the society. At base, the battle remains private money vs. public money. The outcome determines whether the money system operates to serve the few in control, or the whole society. . .

Mankind can live under various forms of government from dictatorship to republic, but the best systems are those in harmony with human nature. Likewise many things can be made into money, but the best will be the ones in harmony with the nature of money.

Remember: don’t confuse money with tangible wealth. Yes, commodities can be improperly monetized by law. The result will make the money system hostage to the commodities situation; hostage to the people, companies, countries that control the commodity. Ultimately it removes the monetary power from society and places it into the hands of the wealthy.

And don’t confuse money with credit – either private or public credit. Yes private credits can be improperly monetized by law. But that gives great privilege to those whose credits have been monetized, to the detriment of the whole society. The money system then becomes an engine of injustice – as it is now. . .

How private central banking started in America

First Step: Our Constitutional Convention, considered two grand themes on humanity: First whether mankind could be self-governing. This American experiment is still in doubt because the Convention mishandled the other grand theme over the nature of money.

They met from May to September 1787 but the money subject didn’t came up til August 16. Jefferson and Paine weren’t there. Franklin was too old to speak.

A curious book on money appeared, written anonymously by Calvinist clergyman John Witherspoon. The book attacked government money and promoted Adam Smith’s primitive view that only gold and silver are money. . . .

The power for government to create money, long considered a necessary part of sovereignty was already in the articles of Confederation, but the Federalists fought to exclude this crucial power from the new government, arguing that it could not be trusted with it. Some of them intended to get hold of the power privately as had been done in England.

The supreme importance of understanding the nature of money now becomes evident: For if money obtains its value from “intrinsic” qualities, it could be viewed more as a creature of merchants and bankers than of governments.

But if money’s essence is an abstract social institution obtaining value through law, then its a creature of government and the Constitution had better deal with it adequately. Describing how a uniform currency is to be provided, controlled and kept reasonably stable, in a just manner. The Constitutional Convention faltered on this crucial question.

The delegates accepted Smith’s primitive concept of money and didn’t firmly place the money power into government’s hands, leaving it ambiguous.

But the power would still exist. What I’m suggesting is that human affairs require government to have four branches, not three; the fourth branch to administer the money power.

The Constitution left the money power up for grabs. Alexander Hamilton wasted no time in grabbing.

Second Step: The Constitution went into effect in late 1789. Hamilton’s first move as Secretary of the Treasury, was to assume $15 million of the state debts. . . an extremely unpopular act. Why?

The worthless debt was held by the revolutionary soldiers, farmers, manufacturers and merchants who furnished its supplies. As Congress secretly passed the bill behind closed doors, the country was overrun by speculators, buying up the certificates for pennies on the dollar.

Third step: Next Hamilton and associates, having kept the monetary power out of government, moved to assume it themselves. . .

Hamilton’s Federalists quickly put through legislation chartering the First Bank of The United States, as a privately owned central bank on the Bank of England model. The Bank would be issuing paper notes not really backed by metal, but pretending to be redeemable in coinage, on the one condition that not a lot of people asked for redemption. They never had enough coinage.

Thus the real question was whether it would be private banks or the government that would issue paper money. Will the immense power and profit of issuing currency go to the benefit of the whole nation, or to the private bankers? That’s always been the real monetary question in America.

Gold and silver served as a smoke-screen. What the bankers counted on were the legal considerations of the money. They knew that all that was needed to give their paper notes value, was for the government to accept them in payment for taxes. That, and not issuing too excessive a quantity. Under those conditions, the paper notes they printed out of thin air, would be a claim on any wealth existing in the society.

Just where did the money for first bank of the U.S. came from? . . . The $10 million subscription for the banks’ shares, was oversubscribed within two hours. Only 1/10 of it was ever paid in gold. The rest was accepted in the form of bonds – the government bonds that Hamilton had turned from pennies on the dollar to full value. The money for the private bank actually came from the American people.

Thanks to Jefferson’s efforts, the bank was liquidated in 1811. Three quarters of it was found to be owned by English and Dutch.

AMI’s proposed reforms

– Nationalize the Federal Reserve System. Reconstitute it in the US Treasury, to evolve into a fourth branch of government. Only the government would create money.

– Remove the privilege which banks presently have to create money. This is done through an elegant and gentle process which automatically turns all the previously issued bank credit into real American money. 100% reserves are reached not by calling in loans but by increasing reserves. This would be neither inflationary or deflationary.

– Institute programs for automatic, constitutionally determined government money creation, starting with the $2 trillion which the civil engineers need to bring our infrastructure up to acceptable levels. From there we go forward carefully determining how to best run the monetary system. . .

What difference would reconstituting the money power in government make? Government money goes into infrastructure; better life; better jobs; education, safer roads, cleaner water; better health care; social security, etc. Society is empowered by being able to direct the money power to solve pressing problems rather than into useless speculation. We no longer have to say we can’t afford it, when so many people and resources are unemployed!.

These three reforms can be closer than we think; and in a crisis situation if only 5% of the citizenry has an awareness of the societal/legal nature of money, they could be enacted.

The need for monetary reform

The power to create money is an awesome power – at times stronger than the executive, legislative or judicial powers combined. It’s like having a “magic checkbook,” where checks can’t bounce. When controlled privately it can be used to gain riches, but more importantly it determines the direction of our society by deciding where the money goes – what gets funded and what does not. Will it be used to build and repair vital infrastructure such as levees to protect major cities? Or will it go into warfare or real estate loans, creating asset price inflation – the real estate bubble.

Thus the money issuing power should never be alienated from democratically elected government and placed ambiguously into private hands as it is in America in the Federal Reserve system today.

Indeed most people would be surprised to learn that the bulk of our money supply is not created by our government, but by private banks when they make loans. Most of our money is issued as interest-bearing debt.

We are borrowing this money system from private banks when instead we should own the system, not rent it. Our government has the sovereign power to issue money (Art.1, Sect.8) and spend it into circulation to promote the general welfare through the creation and repair of infrastructure, including human infrastructure – health and education – rather than misusing the money system for speculation as banking has historically done. Our lawmakers must now reclaim that power. . .

Unhappily, mankind’s experience with private money creation has undeniably been a long history of fraud, mismanagement and even villainy. Banking abuses are pervasive and self-evident. Major companies focus on misusing the money system instead of production. For example, in June 2005, Citibank and Merrill Lynch paid over $1.2 Billion to Enron pensioners to settle fraud charges.

Private money creation through fractional reserve banking fosters an unprecedented concentration of wealth which destroys the democratic process and ultimately promotes imperialism. Less than 1% of the population claims ownership of almost 50% of the wealth, but vital infrastructure is ignored. The American Society of Civil Engineers gives a D grade to our infrastructure and estimates that $1.6 trillion is needed to bring it to acceptable levels.

That fact alone shows the world’s dominant money system to be a major failure crying for reform.

Infrastructure repair would provide quality employment throughout the nation. There is a pretense that government must either borrow or tax to get the money for such projects. But the government can directly create the money needed and spend it into circulation for such projects, without inflationary results.

The false specter of inflation is usually raised against suggestions that our government fulfill its responsibility to furnish the nation’s money supply. But that is a knee jerk reaction – the result of decades, even centuries of propaganda against government. When one actually examines the monetary record, it becomes clear that government has a superior record issuing and controlling money than the private issuers have. Inflation is avoided because real material wealth has been created in the process.

From Stephen Zarlenga’s 2003 speech at the U.S. Treasury

Perhaps the chief failure of economics is its inability, from Adam Smith to the present, to define or discover a concept of money consistent with logic and history. Economists rarely define money, assuming an understanding of it. It’s still being argued whether the nature of money is a concrete power, embodied in a commodity like gold; or whether it’s a credit/debit issued by private banks. Does its value come from the material of which it’s made? Or is it, as we have concluded, an abstract social power – an institution of the law, having value because its accepted in exchanges due to the sponsorship of government? The correct answer leads to conclusions on the proper monetary role of government; whether the power to create and control money should be lodged, as at present in a somewhat ambiguous private issuer – the Federal Reserve System and its member banks – or should be wholly reconstituted within government. An accurate concept of money will light the way to solving the present fiscal crisis.

We have two basic approaches to understanding money: A theoretical method based on logic; and an empirical approach based on experience or history. Practitioners of the two methods arrive at very different conclusions. Theoreticians usually support private commodity money and private credit money. Historians normally want a much larger role for government.

Let’s start with Aristotle who gave the culmination of Greek thought and experiment on money around 330 BC: “All goods must therefore be measured by some one thing. . . now this unit is in truth, demand, which holds all things together. . . but money has become by convention a sort of representative of demand; and this is why it has the name nomisma – because it exists not by nature, but by law (which in Greek was nomos) and it is in our power to change it and make it useless.” So Aristotle calls money a creature of the law. Not a commodity from nature but an abstract social institution. Its essence is not tangible wealth in itself, but a power to obtain wealth.

Plato agreed with Aristotle and advocated fiat money for his Republic: “The law enjoins that no private individual shall possess or hoard gold or silver bullion, but have money only fit for domestic use. . . . wherefore our citizens should have a money current among themselves but not acceptable to the rest of mankind. . . ” And: “Then they will need a market place, and a money-token for purposes of exchange.”

So both Aristotle and Plato noted the paramount principle – that the nature of money is a fiat of the law, an invention or creation of mankind. This principle, part of a lost science of money, must now be relearned in the Third Millennium in order to achieve the monetary reforms needed to move back from the brink of nuclear disaster, to move away from a future dominated by fraud and ugliness, toward a world of justice and beauty.

This “private vs. public” battle for the control of the money power is part of a great ongoing social battle recurring throughout history to this day. This factor shapes the most important outcomes determining how well a money system works. A good system functions fairly; helping the society create values for living. A bad one obstructs the creation of values; places special privileges in the hands of some to the disadvantage of others, and promotes unfair concentrations of wealth and power, and disharmony and social strife.

Now it may be surprising, but the historical record actually shows that publicly controlled systems function much better than private ones. Furthermore, it shows that the concept of money – how money is defined – usually determines whether the system will be publicly or privately controlled. . .

Our American experience contains many of the best case studies for understanding money. We have been a great monetary laboratory – every conceivable solution was tried at some time, and we’ve been a paper money nation from colonial days. Our development was inseparable from it – without it there’d be no United States.

English and Dutch laws forbade sending coinage to the colonies, placing them in continual distress. The intent was to extract raw materials, not for the colonists to trade with each other. An early form of globalization. The colonies had to devise monetary innovations.

In the period 1632 – 92, seventeen different commodities were monetized by law at specified prices. It didn’t work – everyone wanted to pay with the least desirable commodity, in the worst condition. . .

Private land banks were set up but were shunned by the colonists, who considered money a prerogative of government, as it was in England until 1694.

Then in 1690, four years before the Bank of England, Massachusetts embarked on a radical course and issued paper bills of credit, spending them into circulation. Rather than a promise to pay anything, they were a promise to receive them back for all payments to the commonwealth. The colony thrived. Other colonies copied them and infrastructure arose.

In 1723 Pennsylvania’s system loaned the bills into circulation, charging interest on them and using it to pay colonial expenses. Ben Franklin wrote:

“Experience, more prevalent than all the logic in the World, has fully convinced us all, that paper money has been, and is now of the greatest advantages to the country.” . . .

Some long lost principles of the science of money quickly resurfaced:

– Money need not have intrinsic value; its nature is more of an abstract legal power than a commodity.

– Accepting the government paper back in taxes was the key feature needed to give it circulating value.

– The quantity of money in circulation had to be regulated to maintain its value.

– They observed that paper money helped build real infrastructure.

– Most importantly, the colonies did not issue more money than their legislatures authorized. They have an outstanding record issuing currency. Of over a hundred colonial issues I found only one case of fraud. In Virginia, a Mr. Robertson who was supposed to be burning the old notes as new ones were printed, was giving them to friends instead.

But in the battle for monetary dominance, the colonial monetary experience has been miscast as irresponsible inflation money. This was the result of 18th century Boston’s medical Dr. William Douglas’ inaccurate writings. The error was corrected by Alexander Del Mar in 1900 in The History of Money in America, but was ignored. It was authoritatively cleared up again by Professor Leslie Brock in 1976 and again ignored. Many economists, and especially the libertarians, still haven’t got the message that colonial government paper money was crucial in building the colonies.

In 1764, England’s Lords of Trade and Plantations prohibited all colonial legal tender issues, and that became the underlying cause of the American Revolution, not some tax on tea.

The continental currency became the lifeblood of the revolution. $200 million was authorized and $200 million issued. The currency functioned well. In late 1776 the notes were only at a 5% discount against coinage, when General Howe took over New York City and made it a center for British counterfeiting. The Brits counterfeited billions; newspaper ads openly offered the forgeries. . . In March 1778 after 3 years of war, it was $2.01 Continental for $1 of coinage.

The continentals carried us over 5 1/2 years of Revolution to within 6 months of its final victory. Thomas Paine wrote: “Every stone in the Bridge, that has carried us over, seems to have a claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten.”

Our constitutional convention considered two grand themes of humanity: First whether mankind could be self-governing or had to be ruled by authority. Often referred to as the American experiment. We are still learning the outcome, and one of the reasons it’s still in doubt is because of the way the convention mishandled the other grand theme – the nature of money. By the time of the convention, the great benefits of the continentals was nearly ignored; along with much of the rest of our hard won monetary experiences. Some wanted to emphasize that the continentals became worthless and rejected the idea of paper money altogether.

They ignored that paper money was crucial in giving us a nation; that abstract money requires an advanced legal system in place; that the normal method of assuring its acceptability is to allow the taxes to be paid in it. . .

The convention met from May to September 1787 but the money subject didn’t come up until August 16. Remember, Jefferson and Paine were not there. Franklin was too old to speak.

A curious book on money appeared just then, written anonymously by Calvinist Minister John Witherspoon, – the only clergyman signer of the declaration of Independence. The book attacked government money and promoted Adam Smith’s view that only gold and silver are money. . .

The power for government to properly create money, long considered as a necessary part of sovereignty, was contained in five magic words – to emit bills of credit. This provision was already in the Articles of Confederation, but the Federalists – the merchant/commercial interest, largely responsible for calling the Constitutional Convention in order to strengthen the national government, fought to exclude this monetary power from the new government, arguing that it could not be trusted with it. Some of them intended to get hold of the power privately as had been done in England.

The supreme importance of the concept of money now becomes evident: For if money is primarily a commodity, convenient for making trades, which obtains its value out of “intrinsic” qualities, then it could be viewed more as a creature of merchants and bankers than of governments.

But if the true nature of money is an abstract social institution embodied in law – obtaining its value largely through legal sanctions, then its more a creature of governments, and the Constitution had better deal with it adequately – describing how a uniform currency is to be provided, controlled and kept reasonably stable, in a just manner. It was on this crucial question that the Constitutional Convention faltered.

The delegates accepted Adam Smith’s primitive commodity definition of money as gold and silver and didn’t firmly place the monetary power into government, leaving it ambiguous. Later they’d argue over what they had done. But the power would still exist, since it is as important as the legislative, judicial and executive powers.

I am suggesting that the nature of human affairs requires government to have four branches, not three; the fourth branch to embody and administer the monetary power.

The Constitution trusted the people with the political power; but didn’t firmly place the monetary power in their government. This (along with slavery) is the original sin of American politics. As a result the power was left up for grabs. Alexander Hamilton wasted no time in “grabbing.”

The Constitution went into effect in late 1789; Van Buren described Hamilton’s first move as Secretary of the Treasury, in 1790: “Hamilton assumed some $15 million of the state debts. . . an act. . . neither asked nor desired by the states, unconstitutional and inexpedient. . . ”

What was so bad about it? “A large proportion of the domestic debt (was held by) the soldiers who fought our battles, and the farmers, manufacturers and merchants who furnished supplies for their support. . . .When it became known to members of Congress, which sat behind closed doors, that the bill would pass. . . every part of the country was overrun by speculators, by horse, and boat, buying up large portions of the certificates for (pennies on the dollar).” Madison, attempted to have the law pay speculators less than the original holders, but was voted down.

Next Hamilton and associates, having kept the monetary power out of government hands, moved to assume it themselves. The Bank of North America was the only bank in the US, formed in Pennsylvania on Tom Paine’s initiative to assist the revolution. Arguing that it was only a state bank, Hamilton suggested it come forward if it wanted to alter itself for the national purpose. Curiously, the bank took no steps toward this obvious increase in profit and power.

Hamilton’s Federalists quickly put through legislation to charter the First Bank of The United States, as a privately owned central bank on the Bank of England model. The Bank would be issuing paper notes not really backed by metal, but pretending to be redeemable in coinage, on the one condition that not a lot of people asked for redemption. They really did not have the coinage. The bank would do what they had blocked the government from doing. Print paper money.

While gold and silver served as a smoke-screen what the bankers really counted on, were the legal considerations of the money. They knew that all that was needed to give their paper notes value, was for the government to accept them in payment for taxes. That, and not issuing too excessive a quantity of them. Under those conditions, the paper notes they printed out of thin air, would be a claim on any wealth existing in the society.

And we see why the Bank of North America was not put forward for this purpose: the U.S. government had owned 60% of it. . . . The government would only own 20% of the new bank.

Just where did the money for first Bank of the U.S. came from? The $10 million share subscription for the banks shares, was oversubscribed within 2 hours. Less than 1/10 of it was ever paid in gold. The rest of the payment was accepted in the form of bonds – the very government bonds that Hamilton had turned from pennies on the dollar to full value. So you see where the money for the bank actually came from – from the American people. That’s how private central banking started in America.

Thanks in large part to Jefferson’s efforts, the bank was liquidated in 1811. Three quarters of it was found to be owned by Europeans – English and Dutch.

The 2nd Bank of the U.S. – the bank from hell – operated illegally from inception, accepting IOU’s instead of the required gold in payment for its shares. So again the banker’s gold “requirement” turned out to be a masquerade.

This private central bank immediately embarked on a wild monetary expansion. Beginning operations in April 1817, by July it had 19 branch offices and had created $52 million in loans on its books and an additional 9 million in circulating currency, based on gold and silver coin reserves of only $2.5 million. This tremendous expansion caused a wild speculative boom. Then in August 1818, the bank turned abruptly and began an insane contraction, causing the panic of 1819. It cut its outstanding loans and advances from a high of $52 million, down to $12 million in I819. Its circulating notes dropped from $10 million to $3.5 million in 1820. A massive wave of bankruptcies swept the nation.

The subsequent history of this bank and its fight to the death with President Jackson reads like a financial soap opera. The story of various state chartered banks is similar.

Meanwhile the US government acted responsibly In the aftermath of liquidation of the first and second bank; US Treasury notes were substituted in place of banknotes. About $65 million were authorized and only $37 million actually issued. The U.S. Treasury spent them into circulation. Initially they were all large denomination, paid interest; were redeemable in gold and required formalities to transfer. By 1815 they became bearer certificates with no redemption date, paid no interest and were in smaller denominations. Thus they were nearly a true money form. The fact is that the US government has always acted responsibly in creating money. Not so the private banks.

Greenbacks were on balance our best money system to date Thanks to 100 years of misreporting, the image of the greenbacks coming down to us is as inflated or worthless paper money. In fact, $450 million were authorized and $450 million were printed. Counterfeiters couldn’t duplicate the Greenbacks. Every Greenback was eventually exchangeable one for one with gold coin.

But greenbacks were not promises to pay money later – they were the money. Since they were not borrowed, they did not give rise to interest payments and did not add to any national debt. The U.S. Treasury printed them and spent them into circulation.

Economists usually harp on the Greenbacks dropping to 36 cents in gold, and they leave it at that. While that happened, its highly misleading. . .

What did happen was that in June 1864, Congress limited the amount of Greenbacks to $450 million.

There was inflation, but remember 13% of the population was fighting a terrible war. 625,000 died. Greenbacks performed well despite being spent on destruction. They were also being abused by the bankers. For every greenback created by Congress, the banking system created $1.49 in bank notes.

What if instead of being spent on destruction, they went into building infrastructure, and canals and roads? Spending such money on infrastructure need not be inflationary. For example the Erie Canal lowered freight prices from $114 a ton down to $9 a ton.

The great lesson of greenbacks is that in times of crisis – and other times too – our nation has power to do what is financially necessary, through our government. We don’t have to beg or borrow money from the wealthy and, create an astronomical national debt. We don’t have to tax the middle class into oblivion, or cancel necessary programs. We can carefully use the nations’ sovereign money power far more than we presently have been allowed to realize.

At the time of the greenbacks there were those who fully understood. Senator Howe said: “We must rely mainly upon a paper circulation; and . . . that the paper, whoever issues it, must be irredeemable. All paper currencies have been and ever will be irredeemable. It is a pleasant fiction to call them redeemable. . . I would not expose that fiction only that the great emergency which is upon us seems to me to render it more than usually proper that the nation should begin to speak the truth to itself; to have done with shams, and to deal with realities.”

The struggle between private versus public control of money continued throughout the 19th century. The greenbacks continued to constitute about a third of our money supply. Generally the private money power dominated. But in periods when the government exercised control, an excellent record was established- superior to that of private control. The bankers continued their pretense that gold was the basis of the system, and even the Federal Reserve in 1913 appeared to be a gold-based system. But immediately upon inception, we were pushed into warfare. Within 20 years Americas farms, cities, exchanges and money system were all wrecked, ending in the great depression. It was again left to our government to rescue the nation.

It’s forgotten today, but the Thomas Amendment passed with legislation in 1933, gave the President the power to create $3 billion in greenbacks if the banking system didn’t co-operate. . .

The de-funding of government at the local, state and federal levels, arises out of this disease of attacking government as the enemy.

This attack on government starts with Adam Smith. His purpose in smearing the English government was to keep the monetary power in the hands of the privately owned Bank of England. . .

To summarize the argument: The nature of the money power is societally derived, not one originating in the activities of private corporations. Because of its great importance to all, control over the process belongs under public authority. Both logic and history show that its not safe to delegate this power, and certainly not acceptable to allow its usurpation.

The current bailout

The demand for immediate action to avoid a meltdown is misplaced. Immediate and wrong action will accelerate the meltdown. There is only one thing Congress can do to inspire confidence and avoid a meltdown – that is to take deliberate and careful and good workable action to help resolve the crisis. In other words to fulfill its congressional duty to America. . .

Getting it right means requiring several conditions to protect the American people from the gang that’s been financially raping the nation; that gave us the unnecessary Iraqi war. It means facing the facts on where the banking crisis is and how it got there. It means examining the monetary and economic reforms of the Federal Reserve System that will assure that such thievery or foolishness won’t happen again; and taking back from those who improperly benefited from the tragedy and prosecuting them.

At the heart of the problem is that our money system has been privatized. Naturally it’s being run for the benefit of the “privates” in control, with minimal concern for the public interest. . .

Rather than borrowing the $700 billion being demanded, and ending up paying back about 3 times that amount after interest charges, The US government could issue the money the same way the banks do, instead of borrowing it from them. But while the banks issue credit that substitutes for money, the U.S. would issue actual money. Our government has the power to create the money, in an account, or by simply printing it as greenbacks.

There would not be inflationary effects, because it was already believed that those moneys existed in the form of the real estate values and loans. In effect this would stop a deflation which would follow from writing down those assets and loans to their present market values. Some conditions would be needed to assure that the banking system did not use those greenback dollars for further credit creation, as that would be inflationary. In essence the greenbacks would not be “re-discountable” by the banking system to create more loans, but would be legal tender for all debts public and private. . .

What the administrations proposal is doing is almost identical to what Keynes did during the Great Depression. He insisted that the bailout be in terms of government going into more debt to the banking system, whereas the Chicago Plan by the greatest economists in the nation at that time, was promoting the government to create money (greenback equivalents) instead of debt. . .

Keynes won the argument but his program did not work and it was only WW2 and [with] wartime employment, creating tanks to be blown up, airplanes to be shot out of the sky, and ships to be sunk, that Americans went back to work and we worked our way out of the depression, and into more debt. That’s where this proposal leads. Keynes answer was that “in the long run we are all dead,” but not our posterity. Based on what happened following his program before, our descendants, and society that survives become enslaved.

Unless monetary reform is in the mix now, it could take a tremendous worsening of the situation to come up again soon. One articulate friend, George Romero, summed it up for me: “The private sector has failed. The public sector is expected to rescue them, and it will. Therefore the public sector should be in control of the money system to benefit the country.”

The Chicago Plan of the 1930s

Henry Simons from the University of Chicago created the proposal and prominent economists from other universities joined him in what became known as the “Chicago Plan.”Economists like Paul Douglas of the U of C.; Frank Graham and Charles Whittlesley of Princeton; Irving Fisher of Yale; Earl Hamilton of Duke; and Willford King of NYU, to name a few. One version was sent to all the academic economists – about a thousand total. Of those responding, 235 from 157 universities agreed with the proposal; another 40 approved it with reservations and only 45 disapproved. So the plan had broad professional support. Variants of the Chicago Plan usually started by condemning the banking structure as foolish and harmful: “If the purpose of money and credit were to discourage the exchange of goods and services, to destroy periodically the wealth produced, to frustrate and trip those who save, our present monetary system (does that) most effectively!”

They dispensed with the gold standard as not a real standard, because the value of gold had changed violently up and down against commodities. From 1914 to 1917 wholesale prices rose 65% and, then increased another 55% to May 1920, So Gold coins lost over 75 % of their value against wholesale prices in the Fed’s first six years. Then by June 1921wholesale prices fell 56% against gold. “Hard money” advocates who believe that gold money has been stable should study these facts. One version of the plan quoted Roosevelt’s referring to gold as an “old fetish of so-called international bankers.”

The main features of the Chicago Plan were:

– Only the government would create money. The Federal Reserve banks would be nationalized, but not the individual member banks. The power to create money was to be removed from private banks by abolishing fractional reserves – the mechanism through which the banking system creates money. So the plan called for 100% reserves on checking accounts which simply meant banks would be warehousing and transferring the money and charging fees for their services.

– The Plan separated the loan-making function, which can belong in private banks, from the money-creation function, which belongs in government. Lending was still to be a private banking function, but by lending deposited long-term savings money, not created credits. In this way they’d restrict an unstable practice known as borrowing short and lending long – making long term loans with short term deposits.

– The proposal recognized the distinction between money and credit, which had been confused through fractional reserves and what was called the “real bills doctrine.” The confusion was seen as one of the causes of the depression, because when businesses reduced their borrowings on commercial bills which occurs during any downturn, parts of the money supply had been automatically liquidated. The Chicago Plan saw the instability of this – that it aggravates a downturn.

Simon made this grand observation: “The mistake. . . lies in fearing money and trusting debt. Money itself is highly amenable to democratic, legislative control, for no community wants a markedly appreciating or depreciating currency. . . but money is not easily manageable alongside a mass of private debt and private near-moneys. . . or alongside a mountain of public debt.”

Some variations of the plan had the U.S. government lending banks all or part of newly printed cash needed to achieve 100% reserves. This was a crucial part of the plan, because depositors were going to the banks and withdrawing their accounts, deflating the system.

This loaning of reserves feature also elegantly converted all the previously monetized bank credits into real US money on which the banks paid interest to our government. It post facto made them intermediaries, earning some reasonable spread for their loaning work.

Paul Douglas wrote: “This proposal will of course be opposed by the bankers from whom it takes the lucrative privilege of creating purchasing power. It would however insure the safety of deposits, give large revenues to the government, provide complete social control over monetary matters and prevent abnormal fluctuations in the capital market. At the same time it would permit the allocation of productive resources. . . to remain primarily in private hands. All in all it seems the most promising program for the reform of our monetary and credit system. . . ”

Marinner Eccles, who became Fed Chairman under Roosevelt, testified that the best course would be for the government to nationalize the Federal Reserve banks.

Congressman Jerry Voorhis made the case for hundred percent reserves and putting money into circulation by paying pensions and disabled persons. As late as 1945 Voorhis introduced legislation for a U.S. Monetary Authority as our sole creator of money.

Maurice Allais, the great French economist, backed the plan and published a book on it in 1948.

Irving Fisher of Yale, wrote on it extensively and popularly well into the 1940s. . .

There was no understanding or support for the proposal among the electorate. Only Irving Fisher seems to have understood the necessity for popularizing the matter.

Simons himself got cold feet and shied away from promoting the plan, desiring to remain on a level of professorial discussion. He even threw a wet towel on Fisher who was promoting the reform suggesting that Fisher avoid popularizing the idea!

The Plan was mishandled politically. . . The last attempt at 100% reserves was when Senator Nye of North Dakota tried to place it in part of the administration’s 1935 banking reform legislation, but his amendment was defeated.

The FDR administration had its own banking reform bill and remained ambiguous on the Chicago Plan, never commenting on it even though the political climate and professional support for the plan was sufficient to get it passed, had they made some effort. Instead his Treasury Secretary Morganthau was trying to make minor adjustments without fundamentally challenging the banking system. . .

Can we learn from what John Maynard Keynes was doing during all this? He was squarely behind the bankers and against such real reform. Yet he knew that he had to break out of orthodox economics or the whole system was in danger of being overturned. Keynesianism was a way to allow banks not government to keep control over the money-creation process, and while the more narrow minded economists fought Roosevelt’s attempts to create money and jobs as inflationary, during the nations worst deflation, Keynes knew better.

The New York Times in December 1933. . . got Keynes to write an open letter to Roosevelt, which they published. Keynes wisely advised Roosevelt that “Only the expenditures of public authority” could turn the tide of depression. . .

However, Keynes inappropriately warned Roosevelt not to create the money for this, but only to borrow it, and wrongly advised him that there was already enough money in circulation, and that: “increasing the quantity of money. . . is like trying to get fat by buying a larger belt.”

Keynes was therefore not “revolutionary” except in relation to the utter backwardness of the financial establishment. He didn’t come close to a real solution, but essentially protected his class. The real question has always been whether the nation’s money should be created under law, by government, or under the private caprice of bankers.