The Solution to Our Financial Crisis?

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.


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.)

4 thoughts on “The Solution to Our Financial Crisis?”

  1. The following FAQ from The Money Masters is most informative. Note, in particular, the answer to the question, “What caused the US Housing market collapse?

  2. Interesting post. I had never heard about the idea of debt-free notes before, but it seems pretty interesting. Whenever I have 3.5 hours I will have to check this movie out.

  3. Fractional Reserve Lending Banking and central banking are the essence of the crisis today and… future crisis. The media carefully avoid to focus on the fact that the fractional reserve system promotes global growth through debt growth only. Money is debt and debt is money and….the banking system privately owned is… the main money creator. This leads to a world of excessive debt which simply… cannot be anymore be serviced by the overall disposable income. The last few years were very symptomatic since we had basically $5 of debt growth for $1 of GDP output!!!
    This crisis is interesting since we never have seen such a convergence of negative factors on such a broad scale. What should not have been happening… is happening.
    Could have been it avoided? I think so. Many advisors and analysts have been warning for years over the dangers of excess leverage. Since such crisis take a long time to occur it is hard to predict when they will indeed take place and therefore their warnings have been silently ignored. It is a little bit like knowing that a big earthquake will strike California but .. when and .. we keep building over it. All central bankers have a clear view about the overall disposable income available and the leverage accumulated. You do not need to be a rocket scientist to figure out that the more debt growth is accumulated… the more instable the system might become. Another fact is also simple. Some sources point out that early 2008, total financial assets value was around USD 160 Trillions and Global GDP… $50-60 Trillion. Hard to believe that such GDP size can…. provide decent returns on such broad asset market.

    What are the problems of such system:

    1. Globally, growth is achieved through debt growth which is inflationary. Debt growth tends te become more and more inefficient along with the leverage process. Just look at the evolution of M3 and you will see that the growth debt ratio to GDP output has been running to USD 5 to 1 the last few years. The process of asset price inflation feeds itself until growth and returns prospects falters. Then the created bubbles implode and result in such crisis as we have today.

    2. The tax return or dividend to society will diminish since a greater share of you tax money will be used just to serve the interest on the public debt (rarely paid back)

    3. Many argues that inflation is “under control”. Partially true since the income distribution is not even so…depending on the items, the inflation impact might be higher like… higher premium on your health insurance will be costlier if you earn 1’000 than if you earn 10’000. In addition, inflation calculation has several methods which.. usually presents quite large differences.

    4. What I call “taxflation” takes place. I mean you need to spend more of your disposable income to maintain your living standard. Ex: you could drive freely on the highway, now you need to pay a vignette or a toll; the quality of the public school diminish and you need to spend your kids to private school but… still pay your taxes; you could park your car free in the street and now you need to pay; your insurance deductible was lower and now is higher, your airline ticket was all inclusive and now has some additional fees for fuel, security etc.. billed separately; the police response to an incident was quick and now is slower etc…the list is endless!

    5. Let’s suppose that the interest rates is 5%. This means that for about every 14 years USD 1. becomes USD 2. This means that every 14 years the whole money stock has been siphoned by the banking system. If you look at M3 growth, you will see it clearly.

    6. The system has structural instability built in. It means that even though this crisis might be the only true financial crisis you will go through in your life you need to realize that there is almost 100% chance for any individual with a life expectancy > 70 years to face such a crisis during his lifetime. This bears tremendous implications over the whole retirement and pensions system of any society without mentioning the destruction of wealth he could pass to his heirs.

    7. The system over time promotes actively income inequality. Facts and data prove that. Wealth and capital will always follow a concentrating path over time due to the essence of the system. The middle class in rich countries has been under heavy pressure and savings capabilities have diminished a lot. The impoverishment of the middle class is a threat to true democracy and the tax share to the states paid form the riches becomes higher which becomes an incentive to tax evasion and/or “management”. At the end …. Government resources become under increasing stress due to growing social demand and programs.

    8. The dependence on the financial system has proven to be extremely damaging. This has lead to the acceptance of absurd standards like “to big to fail” (AIG , Citibank…) which have incentivated the financial players in leveraging their balance sheet to extreme levels. No private citizen neither corporation has a blank check backing up. Only the financial institutions. (we do not need more regulation, we already have to much of it, we need a clear message that bank must go under when they do bad and I can assure you that they will make sure to keep their risk well appropriate. Have you seen any private bank in need of capital recently?)

    9. The goals and interests of the “banking community” responsible of most of the money creation process collide with the interests of society . It is clear that greed is a powerful driver which lead individuals, corporations and ohers entities to take wrong investments decisions and this will not change. However, the “banking community” is forced by its controllers and shareholder seeking higher returns to constantly leverage their balance sheet and therefore take too much risks which… results in systematic crisis as we have today. You will understand that a financial system roughly doubling size every 14 years (5% int. Compounded) becomes harder to manage on the long run and “oversized” in comparison to other sectors (just compare total market capitalization).

    10. Since government debts is one of the main factor o monetary growth due to its appetite for deficits …. it means that government share/size to GDP will only grow overtime reaching proportions which are just unbearable to the productive side of the economy. We can end-up having an oversized government and financial sector which can turn into a monster due to the multiplier effect of interests. The world is full of countries which face this problem like Argentina, Brasil etc…and… now developed countries are following the same path due the huge bailout plans.

    Central bankers and other government entities take excuse now that they have been just fulfilling their mandate but… they had the tools to foresee such crisis. The leaders and individuals behind the public curtain have just ignored common sense. One very simple indicator easily available is the measure of debt and debt servicing over disposable income. The other one is savings rate. Constant decline in savings combined with accelerate debt growth is a sign of important changes to come. You do not need to be a genius to see that and this information is easy to obtain. I am sure that if you were a bank owner… your lending standards would be stricter since… your money and your wealth is at stake.
    The interests of large financial institutions whose shareholders base are broad have been largely abused by the reckless conducts of many CEOs whose short term objectives for revenues and profits have proven to be creator of excessive leverage. They might argue that their decisions are based on risk models but risk models have proven to be wrong (se the Black Swan). Give me some data and I will create any model which will suits your needs. Just imagine…. creating a risk model against the costs of global warming… We could sell an insurance policy to all the cow farmers of the planet since their cows produce a few litters of methane (or just plain fart) every single day. What a “brilliant” idea… isn’t it? And the consumers pay the bill at the end (another example of taxflation)

    What alternatives do we have?

    Money is to the economy what blood is to the human body. We need money to keep the system working and history has shown that the world has already been through various severe crisis.

    My proposal basically eliminates the central bank and fractional reserves system as we have today.
    We would just keep an “independent treasury or T” which would issue money as needed for the good functioning of trade and the broad economy. Banks or so called new banks would be able to accept deposits on behalf of T. and would make some “treasury loans” to their customers instead. This Treasuries loans could be done based on excess “unused” deposits or by fresh new money issued by T.

    No interest would be charged but… a tax rate. let’s say you borrow 100k for 20y and the tax rate would be higher due to the length. let’s say 120%. So as a borrower, you owe in fact 220k payable to the treasury in 20 years.

    The so called new banks would receive a fee of let’s say 20%-30% of the tax rate imposed (not the principal).This would be used to cover their administrative costs, part of it would be kept as insurance or mandatory reserves in case they ‘ve done a bad job assessing the payment capacities of the borrower and a loss would be incurred and part of this 20% would be paid as “Tax credits” on the money of the depositors. The remaining would stay with the banks

    Private debt issuance and private loans could be carried out as well without any problems. They would just obey the same rules as the treasury loans. The tax rates would apply the same way but the investors returns could be higher since they would be no need for reserves and administrative costs provisions. All private debt issuance and instruments would need to be registered at some clearing centrals or banks which would centralize the fund cash flow. It is basically already the case for most debt traded instruments today (euroclear).

    The overall tax rates would be decided by a board (treasury board) in function of time and other policies like … a “tax curve” instead of a yield curve. The advantage is that it would avoid the compounded effect.
    In case the government needs to embark on spending program or needs to stimulate the economy, it could ask the treasury to issue more currency to fund its programs, use unused deposits excesses in the system , lower the tax yield curve and or even tax the excess deposits balance in extreme case. Bad government spending could create inflation… as it is today which is anyway a hidden tax. On the opposite, if it needs to cool down the economy… the government could raise the tax yield curve etc..

    Today’s tax structure, taxes income anyway. So you receive interests on your investments and pay taxes back. You receive dividends and pay taxes on them. Taxes are just an internal transfer between the private and public sector which has become more and more complex.

    There would be no need for income and capital gain taxes in such a system. Government funding would come from private and public domestic and international treasury borrowing, currency issuance and eventually a kind of VAT or sales taxes if really required. In fact sound financial public policies will be judged on how carefully they balance tax loans revenues with currency issuance and eventual VAT revenues. If governments are managed by reckless public servants… we get what we can observe in Zimbawe today.

    People might criticise the present proposal arguing that governments need to have a counterweight to such easiness as printing money when needed. True, but anyway… government do what they want anyway as we can see today. I would say that such proposal might shift positively the public attitude towards government. It could create a much stronger sense of collective awareness and participation to public affair in our daily life.

    Basically almost all present financial transactions carried out today could be replicated including derivatives securitization etc… but there would always be the “tax curve” to price the length of the transaction. We could even imagine different “tax curve” in function of the importance of the amounts of this “treasury loans”. Consumer “tax rate curves” could be higher; tax curve on speculative or financial leveraged transaction leading to excessive asset price inflation could be different etc…tax curve on lower income families, on real estate investments etc…

    It might seem too simple to be true but the fractional reserves system is simple in its essence. Such exposed proposal is much less inflationary on the long run since the compounded effect is not built in and IS SIMPLE. The issuance of currency or money would be done by the Treasury through the banks and banks would simply fail if they had done a bad job assessing the payment capabilities of their Treasury Loans customers.

    In addition, the system offers the advantage of simplicity by diminishing tremendously all the fiscal red tape and administration. This represents a huge productivity gain for all economic agents.

    International exchange would not suffer since the currency would remain fully convertible as it is today. Foreign debtors would just add to the tax base and excess reserves kept by foreign countries would be kept as deposits at the treasury or other financial institutions following the same treatment as any other depositor.

    In such system the economy does not need to constantly borrow to grow. Excess deposits (savings) and currency issuance can be used in combination with tax curves policies to warm or cool down the economy

    The above analysis of the present system demonstrates that the fractional system is an un-necessary tax on the whole society.

    In my proposal, investors relying on income would shift their habits. Capital is automatically put at work for productive incentives the best way it should. I deeply trust that such a proposal would give incentive to the capitalist and entrepreneur spirit which has brought many great achievements. Individuals and corporation will try to make the best of their money.
    Imagine that the functioning costs of the present economic system would be lowered (no need for tax accountants etc..)Investors would be mainly rewarded by dividends and growth. Lower returns on bank deposit would be compensated by the lack of income and capital gain taxes.

    People and corporations would welcome such a system which simplify and rewards their life without having constantly the obligation to leverage exponentially the overall economy to grow. Lower income people could improve their living standard at much more affordable costs too and higher income people would feel comfortable knowing that their wealth building process is being protected. In fact all economic agents would feel comfortable about their wealth accumulation process.

    The present system could be quite easily adapted. . Existing central bankers would turn into monetary growth and “tax curve” administrators with the responsibility to hold the true purchase power of the currency over time.

    It’s kind of provocative….(would need a few details to be worked out due to the globalization of finance) but seems sound, simple and fair. Savers and investors would be rewarded anyway and bad GVT policies would be sanctioned anyway (as it is today… at the end)

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