I found a video called “The Money Masters,” which presents a thorough historical account of money through the ages, including the modern fractional reserve system. Like all the other videos in our “Money as Debt” series of posts, it explains the dangers of our monetary system, but it goes one step further and proposes an intriguing solution. Unfortunately, the video is very long (3.5 hours!!!) and rather dry. So I’ve provided an excerpted conclusion from the video which follows:
Why can’t politicians control the federal debt? Because all our money is created in parallel with an equivalent quantity of debt. Again, it’s a debt-money system. Our money is created initially by the sale of U.S. Bonds. The public buys bonds, the banks buy bonds, foreigners buy bonds, and when the Fed wants to create more money in the system, it buys bonds but pays for them with brand new Federal Reserve Notes (or book entries) which it creates out of nothing. Then, whatever new money the Fed creates is multiplied by at least a factor of ten by the private banks, thanks to the fractional reserve principle. Actually, exceptions to the reserve ratios allow a much greater multiplier.
So, although the banks don’t create currency, they do create checkbook money, or deposits, by making new loans. They even invest some of this created money. In fact, over one trillion dollars of this privately-created money has been used to purchase U.S. Bonds on the open market, which provides the banks with roughly 50 billion dollars in interest, risk free, each year, less the interest they pay some depositors. In this way, through fractional reserve lending, banks create far in excess of 90% of the money, and therefore cause over 90% of our inflation (approximately 97%).
What can we do about all this? Fortunately, viewed purely as a technical problem there’s a way to fix the problem fairly easily (theoretically), speedily, and without any serious financial problems. We can get our country totally out of debt in 1-2 years by simply paying off U.S. bonds with debt-free U.S. Notes (or Treasury Department Deposits convertible to U.S. Notes) — just like Lincoln issued. Of course, that by itself would create tremendous inflation, since our currency is presently multiplied by the fractional reserve banking system.
But here’s the ingenious solution advanced in part by Milton Friedman, and others, to keep the money supply stable and avoid inflation and deflation while the debt is retired. As the Treasury buys up its bonds on the open market with U.S. Notes, the reserve requirements of your hometown local bank will be proportionally raised so the amount of money in circulation remains constant.
As those holding bonds are paid off in U.S. Notes, they will deposit this money, thus making available the currency then needed by the banks to increase their reserves. Once all the U.S. bonds. are replaced with U.S. Notes, banks will be at 100% reserve banking, instead of the fractional reserve system currently in use.
From that point on, the former Fed buildings will only be needed as central clearing houses for checks, and as vaults for U.S. Notes. The Federal Reserve Act will no longer be necessary, and could be repealed. Monetary power would be under government control. There would be no further creation or contraction of money by banks.
By doing it this way, our national debt can be paid off in a single year or so, and the Fed and fractional reserve banking abolished without national bankruptcy, financial collapse, inflation or deflation, or any significant change in the way the average American goes about his business.
To the average person, the primary difference would be that for the first time since the Federal Reserve Act was passed in 1913, taxes would begin to go down and inflation would cease, preserving the value of their savings, wages and fixed incomes. Now there’s a real national blessing for you, rather than for Hamilton’s banker friends.
Without their awful money-creating power, the Money Changers would gradually lose their political control and clout. Of course, their mass media control is another issue, but even it depends on their massive money-creating power.
Now, let’s take a look at these proposals in more detail. We have drafted a proposed Money Reform Act, which follows at the end of this text. Of course, variations with the same results would be equally welcome.
ELEMENTS OF MONETARY REFORM
1. Pay off the national debt with debt-free U.S. Notes (or Treasury department credits convertible to U.S. Notes). As Thomas Edison put it, if the U.S. can issue a dollar bond, it can issue a dollar bill. They both rest purely on the good faith and credit of the U.S. This amounts to a simple substitution of one type of government obligation for another. One bears interest, the other doesn’t. Federal Reserve Notes could be used for this as well, but could not be printed after the Fed is abolished, as we propose, so we suggest using U.S. Notes instead, as Lincoln did.
2. Abolish Fractional Reserve Banking. As the debt is paid off, the reserve requirements of all banks and financial institutions would be raised proportionally at the same time to absorb the new U.S. Notes and prevent inflation, which would be deposited and become the banks’ increased reserves. At the end of the first year, or so, all of the national debt would be paid, and we could start enjoying the benefits of full-reserve banking. The Fed would be obsolete, an anachronism. This same approach would work equally well in Canada, England and in virtually all debt-based, central bank controlled economies.
3. Repeal of the Federal Reserve Act of 1913 and the National Banking Act of 1864. These acts delegate the money power to a private banking monopoly. They must be repealed and the monetary power handed back to the government (in the U.S., the Department of the Treasury), where they were initially, under President Abraham Lincoln. No banker or person in any way affiliated with financial institutions should be allow to regulate banking. After the first two reforms, these Acts would serve no useful purpose anyway, since they relate to a fractional reserve banking system.
4. Withdraw the U.S. from the IMF, the BIS and the World Bank. These institutions, like the Federal Reserve, are designed to further centralize the power of the international bankers over the world’s economy and the U.S. must withdraw from them or lose its sovereignty and independence. Their harmless, useful functions such as currency exchange can be accomplished either nationally, or in new organizations 1imited to those functions. …
Issuing debt-free currency, not tied to bond issues, is not a radical solution. It’s been advocated in its parts by Presidents Jefferson, Madison, Jackson, Van Buren and Lincoln. It’s been used at different times in Europe as well. One current example is one of the small islands off the coast of France in the English Channel. Called Guernsey, it has been using debt-free money issues to pay for large building projects for nearly 200 years.
[Skipping the exploration of Guernsey’s monetary system.]
But what if we follow Guernsey’s example? The resulting advantages would include: no more bank runs; bank failures would be very rare (on the rare massive theft); the national debt would be entirely paid-off; the monetary, banking, and tax system would be more efficient and simplified; significant inflation and deflation would be eliminated; booms and busts would be reduced to insignificance; banker control of our industry and political life would end.
How would the bankers react to these reforms? Certainly the international bankers’ cartel will oppose reforms that do away with their control of the world’s economies, as they have in the past. But it is equally certain that Congress has the Constitutional authority and responsibility to authorize the issuance of debt-free money — U.S. Notes, just the same as Lincoln’s Greenbacks, and to reform the very banking laws it ill-advisedly enacted.
Undoubtedly, the bankers will claim that issuing debt-free money will cause severe inflation or make other dire predictions, but remember, it is fractional reserve banking which is the real cause of over 90% of all inflation — not whether debt-free U.S. Notes are used to pay for government deficits. The simultaneous transition to full reserve banking will absorb the new notes, thus preventing inflation, while stabilizing banking and the economy.
In the current system, any spending excesses on the part of Congress, are turned into more U.S. debt bonds. The 10% of the bonds purchased by the Fed (in order to provide the high-powered money liquidity in the capital markets needed to purchase of the rest of the new bonds), are then multiplied ten times over by the bankers, causing over 90% of all inflation.
President Obama, please read this!
If you have the time or inclination to watch all 3.5 hours of this video, here it is:
(This opinion belongs solely to the author and does not necessarily reflect the views of The Good Sex Network.)