Reform the Monetary System

Why Monetary Reform Is a Crucial Issue

by Paula Bradshaw, Green Party candidate for Congress

Under the Constitution, Article I, Sec. 8, Congress has the exclusive authority, and responsibility, to issue money. However, except for a tiny fraction minted as coin money, that is not how money is created in the United States. Congress long ago abdicated its constitutional authority to create our money supply to a consortium of private banks, known as the Federal Reserve.

Although the process of creating money is too complex to summarize in a brief statement, the essence is this: To fund its operations, our federal government borrows money by selling Treasury securities (bills, notes and bonds). These Treasury securities are sold mostly to domestic and foreign banks. The money creation process starts exclusively at the Federal Reserve Bank of New York. It buys these securities from a special list of private treasury securities dealers who represent banks, and from banks directly. The Fed pays for these securities by crediting the dealer’s bank account to pay for the securities sold to the Fed. At the same time the Fed credits that same amount to that dealer’s bank account at the Fed. That is, it is simply recorded on an account ledger as a liability – an amount the Fed ‘owes’ that bank. In other words, our money supply is created by a bookkeeping entry at the Fed, by a few keystrokes on a computer.

From that point, the money supply is expanded when the Fed loans money to commercial banks, through what is called the “fractional reserve system.” Under current rules, banks need only keep a small percentage of their deposits on hand, about 10 percent; the other 90 percent may be loaned to businesses, other institutions and consumers. When those funds are deposited in another bank, the latter bank need only retain 10 percent as reserves, and will lend out the remaining 90 percent – and the process is repeated. This is how the money supply is expanded. (For a fuller explanation, see the American Monetary Institute’s introductory paper, at www.monetary.org.)

What is wrong with this system? The American Monetary Institute summarizes it well:

First, it’s immoral, taking from the whole society and gives to a privileged few, who have done nothing to deserve it, except for manipulating accounts, without producing anything useful for life. Instead of using government money, spent into circulation, it uses bank debt loaned into circulation, concentrating wealth to obscene levels which must be stopped and reversed.

Second, the interest on money created as debt is like a ball-and-chain on the leg of everyone creating values for living. While the Fed turns over its (unaudited) earnings on initial money creation to the Treasury, the various banks keep the net interest they charge in the fractional reserve money creation. That concentrates money in the wrong hands, where its been used it to overcome regulation, as they did by ending the Glass- Steagall regulations in 1999. They are destroying our democracy!

Third, whoever controls the money system controls the direction of society. If it is government, then in a democracy, citizens can influence and decide what to do with it, and it can function under our constitutional system of checks and balances. If it’s banks, then only bankers will decide what to do with it, most likely in their own interest. We have seen what that means!

Under our current monetary system, all money is created by debt. However, only the principal is created, not the interest, which must also be paid back. Therefore, the money supply must constantly inflate, through more borrowing, or the system crashes. If individual Americans don’t borrow enough money, through home loans, car loans, credit card and student debt, etc., then the government steps in to borrow, in order to keep the supply going. This leads to a massive federal debt on top of individual debt.

This is unsustainable. Furthermore, we are constrained by private interests in the uses of the money created. We have many needs, and many unemployed workers. We could put people to work refurbishing housing, building renewable energy and sustainable transportation, providing health care and education, building parks, schools and libraries, but without money, we are helpless in the face of need.

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. 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.

– Robert Hemphill, Credit Manager of Federal Reserve Bank of Atlanta, 1935

They say that fish don’t realize that they’re swimming in water. Americans know that they depend on money for their everyday existence, but most don’t realize how money is created.

The good news is that, by reforming our monetary system, we can put our economy on a much healthier foundation, fund the programs that are badly needed to combat global climate change, modernize our infrastructure, provide tuition-free higher education and much more – and

move us toward the goal of full employment at living wages or better.

Real wealth comes from labor acting upon nature’s bounty. Money should be used to facilitate production and trade of the necessities of life and comfort, not to enrich the 1% by stripping our land of resources.

How do we achieve this? If elected, I would introduce The American Monetary Act, a version of which was previously introduced by former Congressman Dennis Kucinich as the “National Emergency Employment Defense Act.” Under the Act, the Federal Reserve System and the money-creating function would be moved into the U.S. Treasury, where all new money would be created by government as money, not interest-bearing debt. Money would be spent directly into circulation through the funding of federal agencies, programs and projects – that is, by paying federal workers and contractors. The money spent into the economy would then circulate through local communities, revitalizing them and facilitating a general prosperity. A Monetary Authority would monitor the money system to ensure that it is neither inflationary nor deflationary.

The Act would also halt the banks’ privilege to create money by ending the fractional reserve system. Banks would remain private companies, encouraged to act as intermediaries between their clients who want a return on their savings and those clients willing to pay for borrowing those savings, but they may no longer create any part of the nation’s money supply. This Act nationalizes the money system, not the banking system. Banking is not a proper function of government, but only government should provide the nation’s money supply.

Monetary reform is not often discussed as an issue of federal public policy today. However, the call for a publicly controlled money supply used to be a central demand of progressive populists – and it needs to be restored to prominence. Entrusting the nation’s money supply to private banks, which are in the business of promoting debt and charging interest, is not a rational system. On that matter, I stand with former Texas Congressman Wright Patman, who served as Chairman of the House Committee on Banking and Currency for 40 years. As he well summarized in the Congressional Record, September 29, 1941:

When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money. . . . I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.