What prevents us from swapping $3.5 trillion in non-interest bearing paper (i.e., money) for the $3.5 trillion in publically held National Debt (i.e., bonds), thereby saving all that interest? Actually, only one thing prevents us from doing so: the banking system could pyramid the $3.5 trillion into ten times that amount thereby creating massive inflation. If we take this capability away, however, nothing prevents us from eliminating the National Debt, in its entirety. All we have to do is simultaneously pay down the debt (by replacing it with non-interest bearing obligations) and (by degrees) remove the banking system’s ability to create and distribute money. By increasing the reserve ratio, ultimately to 100%, we will prevent undue growth of the money supply during the pay-off process. At the end of the process, a Treasury Certificate will stand behind every dollar in the system.
During the transition process, the Publically held National Debt will be completely paid off while the money supply will remain under control. The composition of the money supply will change, by degrees, from Federal Reserve money and bank deposit money to 100% U.S. Treasury Certificates. This effect is produced by slowly increasing the bank reserve ratio (the mechanism that currently allows banks to create and distribute money). For example, in Year 1, let’s say paper money (Federal Reserve Notes plus Treasury Certificates) increases by 100%. This requires that the reserve ratio also be increased by 100% (from 10% to 20%) in order to keep the money supply stable. In Year 2, paper money goes from, let’s say, $1 trillion to $1.5 trillion, or an increase of 50%. Therefore the reserve ratio has to also increase by 50%…from 20% to 30%. At the end, the reserve ratio is 100% (i.e., the money creating ability of the banking system has been completely eliminated) and $500 billion Federal Reserve Notes have been replaced by Treasury Certificates.
Major initiatives such as the one proposed above will always produce various primary and secondary effects. Defenders of the status quo often use this fact, alone, to instill fear in order to avert change. This technique works best with people who believe they cannot possibly understand the issues well enough and, who want to believe “the experts” know exactly what to do ---and are motivated to pursue the general interest rather than special interests. Virtually all of the noted experts are, themselves, among the few beneficiaries of the current system. Gone are the days when people like John Adams, Thomas Jefferson, Andrew Jackson, Roger Taney, Martin Van Buren, James Knox Polk, Abraham Lincoln, James Garfield, Thomas Edison, William Jennings Bryan, Henry Cabot Lodge Sr., and Charles Lindbergh (to name a few) argued publicly, passionately, and persuasively for positions along the lines I espouse here. So be forewarned: powerful forces (along with their dupes and lackeys) have a vested interest in keeping you mystified.
My proposal, clearly, has four very direct and obvious effects:
1. The Publically held National Debt will be fully retired.
2. Hundreds of billion in annual interest will be available for other purposes.
3. The money supply will be government issued rather than the debt of private corporations.
4. The money creation process will have been removed from banks.
All other effects are less direct, less predictable, and therefore, less certain. I personally believe, however, that these secondary effects are largely, even overwhelmingly beneficial. In summary, I believe my proposal will lead to a more equitable, more accountable, less risky financial infrastructure. Let’s discuss, however, the undeniable effects.
My proposal pays off the entire National Debt, saves substantial interest ($150+ billion per year), and creates no inflationary pressure in the process. What could we do with this “found money”? For one thing, we could give over $500 …every single year… to every man, woman, and child, forever. Alternatively, we could reduce personal income taxes by 1/3, across the board. Another possibility is to spend it on various government programs. This is somewhat more controversial. Everyone has a different favorite program and some opposes all “big government.” Virtually all such programs, however, are preferable to the big government program of paying unnecessary interest.
Defenders of the status quo might argue that it is impossible to eliminate fractional reserve banking (FRB) because the free market will demand the services that FRB uniquely provides, and, therefore, my proposal is inflationary after all. However, simple monetary regulation that requires banks to finance assets (e.g. loans) with liabilities (i.e., deposits) of equal or greater maturity is sufficient to disallow the offending behavior of FRB banks. Such legislation essentially revokes a bank’s money creating ability. It prohibits them from entering into the essentially fraudulent contractual obligations that arise when they lend out money that they are contractually obligated to pay out on demand (or within any other time frame shorter than the maturity of the “funding” asset). The “100%” reserve banks and other institutional arrangements will be fully capable of providing all of the “good” services that FRBs now provide … but without the inherent risk, instability, and unaccountable control over our money supply that FRB entails.
Defenders of the status quo may also argue that the economy needs a lender of last resort. There is absolutely no substance to this conventional wisdom mantra. As we now know, money is created out of thin air, anyway. If there is an emergency need for liquidity, the government, which is, at least, accountable to the people, is fully capable of dealing with it. Furthermore, the Fed’s track record as lender of last resort leaves something to be desired, to say the least. It actually contracted the money supply, thereby creating/exacerbating the Great Depression. Then, when it had its biggest opportunity to deal with the opposite problem, the double digit inflation of the 1970’s, it was, again, completely ineffective.
Defenders of the status quo will also tell you that under my proposal you will have to pay fees for your checking account. In this, they are correct. You must measure the cost of paying for your checking privileges against the huge offsetting benefits we have discussed. Rest assured that defenders of the status quo will come up with other, relatively unformed and vague allegations: capital market inefficiencies; financial turmoil; intolerable interest rate levels; mom; apple pie; the flag. Some or all of these will be put forth as reasons to reject this proposal.