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[T]hreatening to default should not be a partisan issue. In view of all the hazards it entails, one wonders why any responsible person would even flirt with the idea. - Alan S. Blinder, Princeton professor of economics, former vice chairman of the Federal Reserve
A game of Russian roulette is being played with the national debt ceiling. Fire the wrong chamber of the gun, and the result could be the second Great Depression.
The first Great Depression led to totalitarian dictatorships, war to consolidate power, and concentrations of capital in the hands of a financial elite. The trigger was a default on the global reserve currency, in that case the pound sterling. The U.S. dollar is now the global reserve currency. The concern is that default could create the same sort of global panic today. Dark visions are evoked of the President declaring a national emergency, FEMA plans locking into place, camps being readied for protesters, and the secret government taking over . . . .
This may all just be political theater, but do we really want to get close enough to the economic precipice to find out? The conservative ideologues toying with the debt ceiling are doing it to force cuts in the budget, a budget that was already approved by Congress. Congress is being held hostage by a radical minority pushing a risky agenda, one that is based on an economic model that is obsolete.
High-stakes Gambling
On May 16, the Wall Street Journal published an opinion piece titled “The Armaggedon Lobby,” which claimed that a “technical default” on the federal debt was just “political melodrama” and not really a big deal:
[B]ond markets can figure out the difference between a genuine default when a country can’t pay its bills and a technical default of a few days if it serves the purpose of fixing America’s fiscal mess.
Not so, said Saudi Prince Alwaleed bin Talal in a May 20 interview on CNBC. "That's gambling. This is the United States. You're leading the whole world. You cannot play games with that."
It is not just that the government could be brought to a standstill, with a third of its bills now being paid by borrowing; or that interest rates would shoot up, forcing thousands of homeowners into foreclosure. Failure to pay on the national debt could trigger a default on the global reserve currency. As one commentator described what could go wrong:
[T]he consequences of a US default could spark yet another global financial crisis. The US could lose its triple-A rating, which could cause a sell-off in Treasury notes by institutional and foreign investors. This sell-off could lead to higher interest rates, and banks’ balance sheets might be decimated by the decline in their bond portfolios. Thus, global banking and financial market liquidity could dry up. Lending between institutions and people or businesses could possibly cease altogether or become cost prohibitive.
A Rerun of 1931?
The sort of chaos that could ensue was seen when Great Britain reneged on its deal to redeem pound sterling banknotes in gold in 1931. The result was the worst global depression in history.
When the pound went off the gold standard, markets panicked. People rushed to exchange their paper money for gold, in any currencies in which that was still possible. The gold wound up hidden under mattresses and in safety deposit boxes, unspent; and the banks from which it was pulled, having no reserves to back their loans, quit lending or closed their doors. Credit froze; business ground to a halt.
As other countries ran short of gold, they too were forced to take their currencies off the gold standard. The last holdouts suffered the most, including the United States, which kept its gold window open until 1933.
The 19th century had been plagued by bank runs, caused by banks having too little gold to back their outstanding loans. The Federal Reserve was instituted in 1913 ostensibly to prevent those runs, but its levee did not hold back the run of the 1930s. In 1933, the country suffered a massive banking collapse, forcing President Roosevelt to declare a banking holiday and take the U.S. dollar, too, off the gold standard.
Freed from the Bankers’ “Cross of Gold”
The transition off the gold standard was a painful one; but according to Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, the country was the better for it. In a paper read before the American Bar Association in 1946, he said that going off the gold standard had finally allowed the country to be economically sovereign:
Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.
Freed from the strictures of gold, Roosevelt was able to jump-start the economy with deficit spending. As Marshall Auerback details, the next four years constituted the biggest cyclical boom in U.S. economic history. Real GDP grew at a 12% rate and nominal GDP grew at a 14% rate.
Then in 1937, Roosevelt listened to the deficit hawks of his day and slashed the deficit. The result was a surge in unemployment, and the economy slipped back into depression.
What lifted the country out of the doldrums was again deficit spending, liberally engaged in to fund World War II. In wartime, few people worry about the national debt. The debt grew to 120% of GDP – twice what it is today -- and wound up sustaining another very productive period in U.S. history, one that set the country up to lead the world in manufacturing for the next half century.
On Inflation and Taxes
Ruml said federal taxes were no longer needed to fund the budget, which could be financed by issuing bonds. The principal purpose of taxes, he said, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’"
The government could spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency. Then, and only then, would the money supply need to be contracted with taxes.
“The dollars the government spends become purchasing power in the hands of the people who have received them,” Ruml said. “The dollars the government takes by taxes cannot be spent by the people,” so the money supply can be contracted with taxes as needed.
When the economy is in a recession, however – as it is now -- the government needs to spend in order to get purchasing power into the hands of the people. Businesses cannot hire more workers until they have more customers demanding their products, and the customers won’t come until they have money to spend. The money (“demand”) must come first. Adding money will not drive up prices until the economy is at full employment. Before that, increasing “demand” will drive up “supply” by setting the engines of production in motion. When supply and demand rise together, prices remain stable.
We now know that a government can go quite far into debt without a dangerous level of price inflation occurring – much farther than the U.S. has gone today. Besides World War II, when U.S. debt was 120% of GDP, there is the remarkable example of Japan. Japan has retained its status as the world’s third largest economy, although it has a debt to GDP ratio of 226% -- and it is still fighting deflation.
Critics of the deflationary theory point to commodity prices, which are soaring today. But if those prices were due to the economy being awash with “too much money chasing too few goods,” real estate prices would be soaring too. Instead, the real estate market has collapsed. What has actually happened is that the housing bubble has transmuted into the commodity bubble, as “hot money” has fled from one to the other. The overall money supply is still in decline.
The deficit hawks have been predicting for years that the federal debt would sink the dollar and the economy, and it hasn’t happened yet. In fact the federal debt has not been paid off since 1835, and no disaster has resulted. The debt has not only been carried on the government’s books but has continued to grow, and the economy has grown and flourished along with it.
This is not an economic anomaly. The economy has flourished because of the national debt. Nothing backs the currency today but “the full faith and credit of the United States.” Money is no longer a metal; it is an inflow and outflow, credits and debits. The liabilities of the government are the assets of the private economy. The national debt is what backs the money supply.
Dealing with the Rising Cost of Debt Service
There is a potential time bomb in a growing federal debt, but it is one that can be defused. The debt has risen from $10 trillion to $14 trillion just since the banking crisis of 2008, not from “entitlements” but due to the Wall Street collapse and bailout. Just the interest on this growing debt could cripple the tax base if interest rates were at normal levels, so they have had to be pushed almost to zero. The result has been to create a dollar carry trade. This has facilitated speculation in commodities, a major cause of today’s commodity bubbles.
There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Beardsley Ruml recommended. The Bank of Japan now holds an amount of public debt equal to the country’s GDP! As noted by the Center for Economic and Policy Research:
Interest on [Japanese] debt held by the central bank is refunded back to the treasury, leaving no net cost to the government on this debt. . . . Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.
Like the Bank of Japan, the Federal Reserve now returns the interest it receives to the government. With a rising interest tab on the federal debt no longer a problem, private interest rates could be allowed to rise to normal levels.
Today the Fed is not permitted to buy bonds directly from the Treasury but must go through middleman bond dealers. But that problem too could be fixed. In a supporting statement in 1947, Federal Reserve Chairman Marriner Eccles discussed a bill to eliminate the unnecessary cost of these middlemen. He said the Federal Reserve had been allowed to purchase securities directly from the government from its inception in 1914 until the Banking Act of 1935. Then:
A provision was inserted in that act requiring all purchases of government securities by Federal Reserve banks to be made in the open market, which means purchased chiefly from dealers in Government bonds. Those who inserted this proviso were motivated by the mistaken theory that it would help to prevent deficit financing. . . .
Nothing constructive would be accomplished by the proviso that the Reserve System must purchase Government securities exclusively in the open market. About all such a ban means is that in making such purchases a commission has to be paid to Government bond dealers.
The interest cost and the bond dealers’ cut could both be eliminated by allowing the Treasury to borrow directly from its own central bank, interest free.
Nothing to Fear But Fear Itself
We have been frightened into believing that government debt is a bad thing, but nearly all money today originates as debt. As Marriner Eccles observed in the 1930s, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”
The public debt is the people’s money, and today the people are coming up short. Shrinking the public debt means shrinking more than just the services the government is expected to provide. It means shrinking the money supply itself, along with the ability to provide the jobs, wages and purchasing power necessary for a thriving economy.
Ellen Brown is a frequent contributor to Global Research. Global Research Articles by Ellen Brown
...sounds like fuzzy math to me.
...but completely off base. You simply can not apply economic theory from 1947 to the current situation. In 1947, we were the manufacturing powerhouse of the world. Today, we only consume things manufactured elsewhere (Japan and China). Although the stuff the article talks about did work for 60 years, it is apparent that the model is unsustainable and must evolve. Housing prices were driven up by easy credit and not by rising wages which created an unsuppoerted bubble. The only thing that dropping the gold standard in favor of fiat currency has accomplished is to line the pockets of the elite. Our labor and taxes are the collateral for the debt carried by the government. The debt is also a fiction which can be erased by the government simply calling in it's bonds. A currency with no intrinsic value simply won't work in the emerging global community.
Just my two cents backed by many hours of reading forward thinking economists that understand what is ahead.
Thank a veteran if you can read this and respond in whatever way you see fit.
Well atleast it is better than allowing a central bank to create money out of nothing, "lend" it to a government and then require it to pay it back with interest. Aren't those Japanese bankers generous by forgiving the interest payments?
Here's an interesting economic turn of events. I'm starting to hear more about bitcoins. Perhaps in the future we can not only eliminate central banks, we can eliminate banking all together.
http://www.weusecoins.com/
Wendy
read your comments and see how she responds. Let me know.
J
On the surface, it sounds like a nice alternative, but after visiting their website, I still don't understand how it works. I also visited their forum http://forum.bitcoin.org/?board=5.0. There are several warnings about scams on that site. Maybe they're still working the bugs out.
Hi John,
Not sure who's comments you were talking about but it's all here for public view anyhow so fine with me.
Wendy
Below is an article which features some of Ellens' work, but it is advocating the elimination of debt by monetizing it with real money created by the government. The article in the first post seems to be saying that debt is a good thing. Guess I will have to read Ellen's book.
Stop this economic insanity
by Jerre Kneip
Delusion has become the dominant mental state of the American people, a people once recognized as the example for the world in their clear thinking and high moral standards and the application of these attributes to their system of government and society in general. Perhaps this is a natural human trait in that we perceive what we wish the facts to be rather than what they truly are. Exactly when delusion became the dominant influence in our society is difficult to ascertain. It must have been a major factor in starting the so-called “Civil War” (which we prefer to think of as the War of Northern Aggression, or the war to restore the subjugation of the South). The ideals of self determination, personal responsibility and government responsive to the people as expressed in the Declaration of Independence only “four score and seven years” earlier were thoroughly trounced by Lincoln when he denied the great writ of Habeas Corpus, arrested discenters, initiated a war without the declaration of Congress (a practice which has become common in modern times), causing a conflagration which claimed the lives of more than a million Americans and changed our form of government from a federal entity formed by contract between, and subject to, the several sovereign states, to a national government preeminent over the subdivision states.
That the American people are rather easily deluded is further illustrated by Woodrow Wilson convincing us that somehow the Kaiser was a threat to this country and again by Roosevelt’s machinations to bring about a direct attack on the United States so that we could get involved in the war in Europe. The same could be said about our involvement in Korea, Viet Nam, up to and including Afghanistan, Iraq I and II and all those indecisive actions in between.
The real threat to this country is not some foreign tyrant residing in a palace or hiding in a cave. It is the acceptance by the people of domination by internal influences which have deluded us into supporting these wars and the massive social changes which are destroying our country. As Dr. Thomas Sowell so aptly put it in 1994, “The barbarians are not at the gates, they are inside the gates - and have academic tenure, judicial appointments, government grants, and control of the movies, television and other media. The question of the hour - and of the next century - is whether all this can be turned around.”
These influences have brought us the destructive measures of NAFTA, GATT, the World Court, the International Monetary Fund (IMF), The Patriot Act, the Homeland Security Department and now a super intelligence (surveillance) agency - all under the imposed delusion that they are required to “protect our freedom.”
About thirty years ago my friend, former congressman Bruce Alger of Dallas, told me that when he was confronted by someone who wanted to debate national policy, he would hand them a card on which he had listed ten books and told them, “Until you have read these books, we have no common understanding on which to begin our discussion.” I don’t remember all the titles, but they included Gary Allen’s “None Dare Call It Conspiracy” and Cleon Skousen’s “The Naked Capitalist.”
A list today would include Donn de Grand Pre’s Barbarians Inside the Gates, F.W. Maisel’s Great American Ripoff, Theodore Thoren and Richard Warner’s The Truth in Money Book, Jacques Jaikaran’s Debt Virus, James “Bo” Gritz’ A Nation Betrayed, Michael Collins Piper’s Final Judgment, Eustace Mullins two books The World Order and Secrets of The Federal Reserve, and Des Griffin’s two books Descent into Slavery and Fourth Reich of the Rich.
An understanding of the themes of these books would make it clear that the control of money permits control of everything else. This control in the United States was accomplished in 1913 with the passage of the Federal Reserve Act. By this act the Congress relinquished its constitutional obligation and authority to “coin money and establish the value thereof” to a privately owned system which could then use the issuance of money to further its own agenda and for its profit.
How many Americans understand that money is not wealth, but merely a medium of convenience for the exchange of wealth. Best-selling novelist Tom Clancy understands it as he wrote in Debt of Honor , describing the antics of the Federal Reserve Board at the opening of chapter 3:
“The remarkable thing was that everyone accepted the entire process, seemingly as normal as the physical laws of nature, despite the fact that it was really as ethereal as a rainbow. The money did not physically exist. Even “real” money was only specially made paper printed with black ink on the front and green on the back. What backed money was not gold or something of intrinsic value, but rather the collective belief that money had value because it had to have such value. Thus it was that the monetary system of the United States and every other country in the world was entirely an exercise in psychology, a thing of the mind, and as a result, so was every other aspect of the American economy. If money was simply a matter of communal faith, then so was everything else.”
Learned men and serious thinkers have warned the people throughout the ages of the dangers of a credit money system and control of the money supply by the “moneylenders.” These warnings can be traced back to the earliest recorded civilizations. Moses, instructing the Israelites at Mt. Sinai (Lev. 25:35-36) and again before entering the land of Canaan (Deut. 23: 19); Solomon in the Book of Proverbs (28:8); Nehemiah on the return of the Israelites to Jerusalem after the Babylonian captivity (Neh. 5:10); all warned the Israelite people of the evils of usury.
In more modern times we have been warned by Presidents , Congressmen, industrialists and even bankers that a debt-money system is doomed to failure; yet we persist in our belief that our economic problems can be resolved by manipulation of the tax system and the interest rate. The folly of this mendacity is illustrated by the words of these leaders:
Thomas Jefferson during the time of his presidency: “The system of banking (is) a blot left in all our constitutions, which, if not covered, will end in their destruction . . . I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity . . . is but swindling futurity on a large scale.”
James A. Garfield, during his six months presidency in 1881 (perhaps so shortened by this comment): “Whoever controls the volume of money in any country is absolute master of all industry and commerce.”
Congressman Louis T. McFadden speaking before the House of Representatives, “The Federal Reserve (Banks) are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this Nation is run by the International Bankers.”
Horace Greeley, editor, publisher and founder of the New York Tribune, “While boasting of our noble deeds, we are careful to conceal the ugly fact that by an iniquitous money system we have institutionalized a system of oppression which, though more refined, is not less cruel than the old system of chattel slavery.”
Woodrow Wilson, the President who signed the Federal Reserve Act, the 16th Amendment (Income Tax) and the 17th Amendment (direct election of Senators): “A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the Nation and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world - no longer a Government of free opinion, no longer a Government by conviction and vote of the majority, but a Government by the opinion and duress of small groups of dominant men.” Just before his death, Wilson is reported to have stated to friends, “ I have betrayed my country,” referring to his part in the passage of the Federal Reserve Act.
Sir Joshua Stamp, President of the Bank of England in the 1920s and the second richest man in Britain: “Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your slavery, let them continue to create deposits.”
Thomas A. Edison, speaking on the occasion of the completion of the Muscle Shoals Dam: “People who will not turn a shovel full of dirt on the project nor contribute a pound of material, will collect more money from the United States than will the people who supply all the material and do all the work. This is the terrible thing about interest . . . But here is the point: If the Nation can issue a 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 twice the amount of the bond and an additional 20 percent. Whereas the currency, the honest sort provided by the Constitution, pays nobody but those who contribute in some useful way. It is absurd to say our country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good either. It is a terrible situation when the Government, to insure the national wealth, must go in debt and submit to ruinous interest charges at the hands of men who control the fictitious value of gold. Interest is the invention of Satan.”
Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, Georgia: “This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
Murray Rothbard, Professor of Economics at the Polytechnic Institute of New York: “Commercial banks - that is, fractional reserve banks - create money out of thin air. Essentially they do it in the same way as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money [meaning gold or silver - Ed.]. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned the money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: the law fails to treat the receipts as counterfeit.” - Rothbard, The Mystery of Banking, Richardson & Snyder, 1983, pp 98-9.
The delusion that the nations economic problems can be resolved by adjusting the taxing system or the interest rate, or by limiting the governments spending will only lead to this nations ultimate destruction. Until the control of the money system is taken from the private bankers and replaced in the hands of the people through their elected representatives, there will be no escape from the ultimate economic collapse of the system and the resulting oppression of the people.
As Theodore Thoren points out in an article in an engineering magazine several years ago, the adjustments to the money supply is an engineering problem with known parameters and is certainly not as difficult as that of placing a satellite in orbit or sending a probe to Mars. The delusion that the control of money is some ethereal project that can only be accomplished by trial and error by carefully trained economists and bankers has led the American people to this precipice of the abyss.
When money is issued by the Treasury without bearing interest. to pay its legitimate expenses and to fund the improvement of infrastructure, and in sufficient quantity to support economic activity at stable prices, there will be no need for taxes on income or property. A small fee of one or two percent on the borrowing by states or private banks to fund privately owned expansion would be sufficient to withdraw excess supply and maintain stable prices. The “Federal Reserve” rather than being the primary lender for its own profit, would become merely a clearing house for the transfer of funds to support economic activity. The fraudulent system of fractional reserve banking would be abolished as would the Internal Revenue Service. Local property taxes would be abolished and prices would plummet due to the illumination of business expenses of taxes and interest.
California Attorney Ellen Brown, in an article written in 2005, describes the process in detail:
[Quote] Today, all of our money is ’fiat’ money (money ‘by decree’), issued by private banks as credit either to the government or to individuals and corporations.
The Greenback Solution
A $7.7 trillion debt tsunami is currently bearing down on the United States.[Note: - this was in 2005, currently (2011) is over $14 trillion] Congress needs to liquidate it before it liquidates the United States. But how? The debt was created by sleight of hand. It can be eliminated by sleight of hand. Fractional reserve lending can be abolished by legislative fiat. The Federal Reserve can be made what most people think it now is – a truly ‘federal’ institution – and the power to create money can be returned to the people.
The $7.7 trillion federal debt was created with accounting entries on a computer screen. It can be eliminated in the same way. The simplicity of the procedure was demonstrated in January 2004, when the US Treasury called a 30-year bond issue before its due date. The Treasury’s action generated some controversy, since government bonds are generally considered good until maturity. (7) But calling (or paying off) a bond before its due date is done routinely by other issuers. Corporations and municipalities buy back their bonds whenever it is advantageous for them to do so. When interest rates fall, they call their bonds in order to refinance their debt at lower rates. The difference between a bond called by a corporation and one called by the US Treasury is that the Treasury has the power to make payment solely with a bookkeeping entry, without ‘real’ money backing it up. And that appears to be exactly what was done in this case. The Treasury cancelled its promise to pay interest on these particular bonds simply by announcing its intention to do so (or by fiat, as they say in French). Then it paid the principal with an accounting entry. Here is its January 15, 2004 announcement:
TREASURY CALLS 9-1/8 PERCENT BONDS OF 2004-09
"The Treasury today announced the call for redemption at par on May 15, 2004 of the 9-1/8% Treasury Bonds of 2004-09, originally issued May 15, 1979, due May 15, 2009 (CUSIP No 9112810CG1).
There are $4,606 million of these bonds outstanding, of which $3,109 million are held by private investors. Securities not redeemed on May 15, 2004 will stop earning interest.
These bonds are being called to reduce the cost of debt financing. The 9-18% interest rate is significantly above the current cost of securing financing for the five years remaining to their maturity. In current market conditions, Treasury estimates that interest savings from the call and refinancing will be about $544 million.
Payment will be made automatically by the Treasury for bonds in book-entry form, whether held on the books of the Federal Reserve Banks or in Treasury /Direct accounts." (8)
The provision for payment ‘in book entry form’ means that no dollar bills, cheques or other paper currencies are to be exchanged. Numbers will simply be entered into the Treasury’s direct online money market fund (‘Treasury Direct’). The investments will remain in place and intact and will merely change character – from interest-bearing to non-interest-bearing, from a debt owed to a debt paid.
Where did the government plan to get the money to ‘refinance’ this $3 billion bond issue at a lower interest rate? Whether it was from the private banking system on the open market, or from the Bank of Japan with notes printed up for the occasion, or from the Federal Reserve as the purchaser of last resort, the money was no doubt created out of thin air. As Federal Reserve Board Chairman Marriner Eccles testified before the House Banking and Currency Committee in 1935:
"When the banks buy a billion dollars of Government bonds as they are offered …. they actually create, by a bookkeeping entry, a billion dollars."
Treasury securities
If the Treasury can cancel its promise to pay interest on its bonds simply by announcing its intention to do so, and if it can pay off the principal just by entering numbers in an online database, it can pay off the entire federal debt in that way. It just has to announce that it is calling all of its bonds and securities, and that they will be paid ‘in book-entry form’. No cash needs to change hands.
The usual objection to this solution is that it would be dangerously inflationary, but would it? Paying off the US federal debt by ‘monetising’ it would not change the size of the money supply, because the US money supply already includes the federal debt; in fact, it consists of the federal debt. Treasury debt takes the form of Treasury securities (bills, bonds and notes); and Treasury securities are a major component of the money market funds and other time deposits included in the Fed’s calculations of M2 and M3. Converting bonds (government promises to pay) into cash (actual payment) would not change the total of these money measures. It would just shift the funds from M2 and M3 into M1. Treasury securities are already treated by the Fed and the market itself just as if they were money. These are traded daily in enormous volume among banks and other financial institutions around the world just as if they were money. People put their money into highly liquid Treasury bills in money market funds because they consider this to be the equivalent of holding cash. Converting Treasury bills and other securities into actual cash (US Notes) would not affect the size of the money supply. It would just change the label on the funds. The market for goods and services would not be flooded with ‘new’ money that inflated the prices of consumer goods, because the bond holders would not consider themselves any richer than they were before. The bond holders presumably had their money in bonds in the first place because they wanted to save it rather than spend it. They would no doubt continue to save it, either as cash or by investing it in some other interest-generating securities.
A Newer Deal
In 1933, President Roosevelt pronounced the country officially bankrupt, exercised his special emergency powers, waved the royal Presidential fiat, and ordered the promise to pay in gold removed from the dollar bill. The dollar was instantly transformed from a promise to pay in legal tender into legal tender itself. Seventy years later, Congress could again acknowledge that the country is officially bankrupt and propose a plan of reorganisation. By simple legislative fiat, it could transform its ‘debts’ into ‘legal tender’.
Roosevelts’s plan of reorganisation was called the ‘New Deal’. In this ‘Newer Deal’, foreign creditors would actually be getting the best deal possible. They have enormous amounts of money tied up in US government bonds, which the US cannot possibly pay off with tax revenues. If America’s creditors were to propel it into bankruptcy, the US government would have to simply walk away from its debts, and the creditors would be out of luck. If the United States pays off its debts with real ‘legal tender’, the creditors will have something they can take to the bank and spend in the global market. If it looks like a dollar, and feels like a dollar, it is a dollar. The only difference will be that the dollar will have been issued by the federal government rather than ‘borrowed’ from a bank.
One objection that has been raised to paying off the federal debt by ‘monetising’ it is that foreign investors would be discouraged from purchasing US bonds in the future. But once the government reclaims the power to create money from the banking cartel, it will no longer need to sell its bonds to investors. It will no longer even need to levy income taxes. It will have other ways to finance its budget.
A Modest Proposal for Eliminating the Personal Federal Income Tax
Returning the power to create money to the government and the people it represents would generate three new sources of revenue for the public purse:
1. The interest earned on loans would be returned to the government
Using the figures for 2002 (the last relatively normal year before the United Sates was at war in Iraq), total assets in the form of bank credit for all US commercial banks were reported to be $5.89 trillion. (9) Assuming an average interest rate of 6 percent, about $353 billion in interest income was thus paid to commercial banks. This interest was earned, not by lending anything of their own, but by advancing the ‘full faith and credit of the United States.’ Returning this interest to the collective body of the people to whom it properly belongs would thus have generated revenue for the government of $353 billion in 2002.
2. Congress could issue new interest-free US Notes (Greenbacks) to the extent (and only to the extent) needed to ‘grow’ the money supply in order to cover productivity and interest charges.
In the monetary scheme of Benjamin Franklin, paper money was issued ‘in proper proportions to the demands of trade and industry’. What is the ‘proper proportions’ of monetary growth? One way to approach the problem is to look at current growth. The money supply (M3) grew from $7.96 trillion in November 2001 to $8.49 trillion in November 2002, an increase of $529 billion or 6.6 percent. (10) Under the present system, the expansion in the money supply needed to keep up with productivity and interest charges must come from federal borrowing, since private borrowing zeroes out on repayment. If the government were to quit ‘borrowing’ money into existence, this source of growth would dry up, and there would be insufficient money to cover the interest due on commercial loans. Like in a grand game of musical chairs, some borrowers would have to default.
If the average collective interest rate is 6.6 percent, and if the government can no longer ‘borrow’ that money into existence, it will need to issue enough new Greenbacks to increase the money supply by 6.6 percent just to keep the system in balance. In 2002, that would have meant creating $529 billion in new debt-free US Notes.
3. If the government were to pay off the federal debt with new Greenbacks, it would no longer need to budget for interest on the debt.
Using 2002 figures, money paid in interest on the federal debt came to $333 billion. Paying off the debt would have reduced the collective tax bill by that sum.
Combining these three sources of funding - $353 billion in interest income, $529 billion in new US Notes to cover annual growth in the money supply, and $333 billion saved in interest payments on the federal debt – the public coffers could have been swelled by $1,215 billion in 2002. Total personal income taxes that year came to only $1,074 billion. Thus by reclaiming the power to create money from the private banking system, Congress could have eliminated individual income taxes in 2002 with $141 billion to spare. How much is $141 billion? According to the Unites Nations, a mere $80 billion added to existing resources in 1995 would have been enough to cut world poverty and hunger in half, achieve universal primary education and gender equality, reduce under-five mortality by two-thirds and maternal mortality by three-quarters, reverse the spread of HIV/AIDS, and halve the proportion of people without access to safe water world-wide (11) [End of Quote]
All this can be accomplished, but only through the removal of the delusions regarding the nature of money. It is the responsibility of the people to bring about these changes through the education of the people and their elected representatives.
NOTES to the above excerpt:
(7) US Treasury Defaults on 30 Year Bond Holders’, www.rense.com (January 20, 2004)
(8) Department of the Treasury, ‘Public Debt News’, Bureau of the Public Debt, Washington, DC 20239 (January 15, 2004).
(9) Federal Board of Governors, ‘Total Bank Credit Outstanding’, see W Hummel, ‘Financial Data Current and Historical: Money Stock’, www.wfhummel.cnchost.com/linkshistoricaldata.html
(10) Federal Reserve Statistical Release, ‘Money Stock Measures’ (January 2, 2003)
(11) Jan Vandermoortele, Are the MDG’s Feasible (New York: United Development Program Bureau for Development Policy, July 2002)
[Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In "Web of Debt," her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://www.webofdebt.com/ and http://www.ellenbrown.com/. Her eleven books include the bestselling "Nature's Pharmacy," co-authored with Dr. Lynne Walker, which has sold 285,000 copies. Article Source: http://EzineArticles.com/?expert=Ellen_Brown]
[This article will appear in the April issue of The Free Press, published monthly since 1994, 12 issue for $25, P. O. Box 2303, Kerrville, Texas 78029, Jerre Kneip, Publisher]