Friends – Please print this out or order hard copies (see final page)and use it to explain monetary reform to your friends with an abbreviated yet complete explanation! Presenting the American Monetary Act (as of July 18, 2009) ©2009 American Monetary Institute, P. O. Box 601, Valatie, NY 12184 ami@taconic. net 518-392-5387 “Over time, whoever controls the money system controls the nation. ” Stephen Zarlenga, Director Introduction
Dear Friends, The World economy has been taken down and wrecked by the financial establishment and their economists; and by their supporters in the media they own, and even by some in the executive and legislative branches, in the name of “free markets” and insatiable greed. Shame! Shame on them all! The American Monetary Act (the “Act”) is a comprehensive reform of the present United States money system, and it resolves the current banking crisis. Reform” is not in its title, because the AMI considers our monetary system to never have been adequately defined in law, but rather to have been put together piecemeal under pressure from particular interests, mainly banking, in pursuit of their own private advantage, without enough regard to our nation’s needs. That is the harsh judgment of history as made clear
Chapters 1 thru 23 present the historical background and case studies on which Chapter 24 is based. We recommend serious students of our money system read the book now, and suggest that those who’ve read it read it again. This Act has been in preparation since December 2004 and was placed on our web site for public criticism in February 2006, and concurrently released in Philadelphia at the Eastern Economic Association Conference, for general comment.
It draws from and improves a previous proposal known as “The Chicago Plan,” which was advanced by Professors Henry Simons, Irving Fisher and other leading economists in the 1930s in response to the wreckage of the Great Depression, which resulted from our poorly conceived banking system. This Act is more comprehensive and includes improvements to infrastructure, including the human infrastructure of health care and education.
While The American Monetary Institute is responsible for its present form, the Act is based on Aristotelian monetary concepts in existence since at least the 4th century BC and employed successfully in a variety of monetary systems since then, ranging from democratic Athens to republican Rome. It is not merely a theory its main elements have a long history of successful implementation in major societies around the world, including the American Colonies and the United States. These concepts enabled us to first establish the U. S. and then to maintain it as one nation.
The current text of the Act (continuing to be developed) is presented on the right side of each page. On the left appears an explanation of the terminology and why it’s necessary. A background explanation is presented after each Title. Then the next Title is considered. This is still an open process – suggestions and criticisms are welcomed. This five page form of the Act is a structural summary, which gets more detailed and fleshed out by legislative aides preparing it for introduction into Congress as a Bill. The following brief summary: The Need for Monetary Reform serves as a preface to the American Monetary Act.
You are invited to join in this citizen’s movement and demand for monetary reform! Attend the AMI Monetary Reform Conference held annually in Chicago at Roosevelt University each September. Sincerely, Stephen Zarlenga Director, AMI * Please see The Lost Science of Money book for the case histories that demonstrate in detail, the points of this pamphlet. 1 The Need for Monetary Reform Monetary reform is the critical missing element needed to move humanity back from the brink of economic destruction and nuclear disaster, away from a future dominated by fraud, ugliness and warfare, toward a world of justice and beauty.
The power to create money is an awesome power – at times stronger than the Executive, Legislative and Judicial powers combined. It’s like having a “magic checkbook,” where checks can’t bounce. When controlled privately it can be used to gain riches, but much more importantly it determines the direction of our society by deciding where the money goes – what gets funded and what does not. Will it be used to build and repair vital infrastructure such as the New Orleans levees and Minneapolis bridges to protect major cities? Or will it go into warfare and real estate loans creating the real estate bubble – leading to a crash and depression.
Thus the money issuing power should never be alienated from democratically elected government and placed ambiguously into private hands as it is in America in the Federal Reserve System today. Indeed, most people would be surprised to learn that the bulk of our money supply is not created by our government, but by private banks when they make loans. Through the Fed’s fractional reserve process the system creates “money” when banks make loans into accounts; so most of our money is issued as interest-bearing debt (see page 14 below). Under the Constitution, Article I, Sec. , our government has the sovereign power to issue money and spend it into circulation to promote the general welfare, for example, through the creation and repair of infrastructure, including human infrastructure – health and education – rather than misusing the money system for speculation as banking has historically done; periodically causing one crisis after another. Our lawmakers must now reclaim that power! Money has value because of skilled people, resources, and infrastructure, working together in a supportive social and legal framework. Money is the indispensable lubricant that lets them “run. It is not tangible wealth in itself, but a power to obtain wealth. Money is an abstract social power based in law; and whatever government accepts in payment of taxes will be money. Money’s value is not created by the private corporations that now control it. As Aristotle wrote: “Money exists not by nature but by law. ” Unhappily, mankind’s experience with private money creation has undeniably been a long history of fraud, mismanagement and even villainy, and the present crisis could become the worst yet! Banking abuses are pervasive and self-evident.
Major banks and companies focus on abusing the money system instead of production. Billions have been stolen, trillions more are being shamelessly grabbed in so called bailouts! Much of our leadership is acting like patsies, instead of protecting our people as the financiers rape America. Private money creation through “fractional reserve” banking fosters an unprecedented concentration of wealth which destroys the democratic process and ultimately promotes military imperialism. Less than 1% of the population now claims ownership of almost 50% of the wealth, but vital infrastructure is ignored.
The American Society of Civil Engineers gives a D grade to our infrastructure and says it will soon be a D-; and estimates that $2. 2 trillion is needed to bring it to safe levels over the next 5 years! That fact alone shows the world’s dominant money system to be a major failure crying for reform. Infrastructure repair would provide quality employment throughout the nation. There is a pretense that government must either borrow or tax to get the money for such projects. But it is well enough known that the government can directly create the money needed and spend it into circulation for such projects, without inflationary results.
A reformed monetary/banking system can make this happen NOW! Monetary reform is achieved with three elements which must be enacted together for it to work. Any one or any two of them alone won’t do it, but would further harm the reform process. The reform has its best chance of passage in this severe monetary crisis created by the privatized money system. Considering that the same establishment controls our weapons systems, this may be humanities only chance for reform, to stop the now obvious slide of our middle class into slavery or some form of “Disney Fascism. ” First, incorporate the Federal Reserve System into the U.
S. Treasury where all new money would be created by government as money, not interest-bearing debt; and be spent into circulation to promote the general welfare. The monetary system would be monitored to be neither inflationary nor deflationary. Second, halt the bank’s privilege to create money by ending the fractional reserve system in a gentle and elegant way. All the past monetized private credit would be converted into U. S. government money. Banks would then act as intermediaries accepting savings deposits and loaning them out to borrowers. They would do what people think they 2 o now. This Act nationalizes the money system, not the banking system. Banking is not a proper function of government, but providing the nation’s money supply is a government prerogative! Third, spend new money into circulation on 21st century eco-friendly infrastructure and energy sources, including the education and healthcare needed for a growing and improving society, starting with the $2. 2 trillion that the Civil Engineers estimate is needed for infrastructure repair; creating good jobs across our nation, re-invigorating local economies and re-funding local government at all levels.
The false specter of inflation is usually raised against such suggestions that our government fulfill its responsibility to furnish the nation’s money supply. But that is a knee-jerk reaction – the result of decades, even centuries of propaganda against government. * When one actually examines the monetary record, it becomes clear that government has a far superior record in issuing and controlling money than the private issuers have had. * Inflation is avoided because real material wealth has been created in the process. Research and development of superior pollution-free technologies is facilitated.
What we’re proposing builds upon the “Chicago Plan” which came out of University of Chicago economists in the 1930s and was widely supported nationwide by the economics profession back then. It was thought to be the next immediate step in the reforms coming out of the Great Depression. This was before that important university and most other university economics departments went over to the “dark side” with their free market worship. That’s a religion with no supporting evidence that ignores the facts which clearly disprove it.
Lawmakers have often believed they could ignore the big questions on how our money system is structured. Right from the Constitutional Convention delegates ignored society’s monetary power and the excellent record of government issued money in building colonial infrastructure and giving us a nation. * They left the money power up for grabs, when properly estimating it would have meant placing it in a fourth monetary branch of government. “We marvel that they saw so much, but they saw not all things” wrote Civil War General and money reformer Benjamin Franklin Butler 80 years later.
My Friends, our Great Task is to complete that part of government left inadequately defined by the founders; to more precisely define the money power in our society and bring it securely within the proven system of checks and balances they established. History shows that the money power will act like a fourth branch whether we recognize it as such or not. It’s not safe to leave so much power and privilege in private hands! It’s counter to our system of checks and balances. The developing crisis requires us to re-evaluate and focus on it now.
We must not shrink from our responsibility to begin implementing the long known solutions to this problem. We start by placing the “money power” within our government where it obviously belongs. Or would you prefer to let “Enron” continue to control it, and us? And yes – Enron was on the Dallas Fed Board! As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said, « 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 believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the Congress for sitting idly by and permitting such an idiotic system to continue. ” Friends, look around you. That time has certainly come! Awaken – get up and fight for your family and nation. Thanks for your attention, Stephen Zarlenga Director *Please see The Lost Science of Money book by Stephen Zarlenga for the case histories that demonstrate in detail, the points of this pamphlet.
AMI is a registered 501c3 Publicly Supported Charitable Trust. http://www. monetary. org 3 AMERICAN MONETARY INSTITUTE © 2009 and earlier, Background The World’s greatest problem, besides poor spiritual values, is that the governments of the World do not create their own money, but have allowed private banks to usurp the special privilege to lend their credits into circulation in place of actual money. Whether a nation has a private or a governmentally owned central bank the private bank loans function as money within the world’s economies.
Two major problems arise: First the obvious interest cost which the banks receive when they create money out of thin air. This costs the US government about $400 billion per year in interest charges on the national debt – about 18-20 % of the annual federal budget. Not to mention the interest the banks also charge against all the private borrowings. So the private creation of fiat money acts like a private tax on all of society, to the benefit of those with the privilege to create such money. This has spread poverty and has concentrated wealth to obscene levels!
Societies might survive even with such a ball-and-chain around every producer’s leg, but the second problem is even worse: It’s the bankers, not the society, who decide the direction of the nation – what gets funded and what does not. Will money go into fixing New Orleans levees and Minneapolis bridges, or into real estate bubbles and Wall Street gambling, and warfare? Understanding The Nature of Money Mankind can survive under all sorts of political systems from democracy to dictatorship, but the best systems will be those in harmony with the nature of man.
Likewise all sorts of things can be used as money; but the best will be that in harmony with the nature of money. Therefore evaluating what constitutes proper monetary reform requires us to examine the nature of money. In 1718, John Locke wrote: “Observe well these rules: It is a very common mistake to say that money is a commodity… [but] Bullion is valued by its weight…money is valued by its stamp. ” America’s great Ben Franklin agreed, writing: “Silver and gold… are) of no certain permanent value…We must distinguish between money as it is bullion, which is merchandise, and as by being coined it is made a currency; for its value as merchandise, and its value as a currency are two different things…” (LSM, Ch. 14*) Founding Father Ben Franklin, the great scientist (early work with electricity) and statesman (guided the Continental Congress; convinced France to support our revolution) was a monetary genius. His 1729 essay The Nature and Necessity of a Paper Currency summarized the ideas he used to help Pennsylvania with its money system in 1723 rescuing her from a prolonged usury crisis.
Franklin told the world: “Experience, more prevalent than all the logic in the World, has fully convinced us all that paper money has been of the greatest benefit to the country”- thereby also identifying good thinking methodology. The Aristotelian Concept of Money – a legal fiat Both Locke and Franklin echoed Aristotle’s concept of money as an abstract legal power, a fiat of the law, summed up in Aristotle’s phrase “Money exists not by nature but by law. ” (Ethics, 1133) To Aristotle money isn’t a commodity that comes out of a mine or a farm.
It comes from “nomos” – the law or binding custom, and the Greek name for money was “nomisma. ” Aristotle makes the supreme distinction between money which is abstract, and wealth which is tangible. He is the creator of the “science of money. ” (Ch. 1) The history of ancient systems shows a pattern of Aristotle’s science of money being discovered; used to build the society; corrupted and then lost; and again rediscovered over the centuries. American Colonial Development Massachusetts rediscovered the science of money in 1690 when she issued “bills of credit,” the first paper money in the West.
She spent them into circulation paying for colonial expenses. In 1723 under Franklin’s guidance *Chapter notations are to chapters of The Lost Science of Money book containing the information. 4 Pennsylvania loaned such money into circulation and used the interest earned for colonial expenses. The colonial fiat currencies dramatically improved life in the colonies, facilitated the building of real infrastructure, reversing the flow of emigrants who for decades had been moving back to England. Dutch and English laws forbade sending money to the colonies.
By necessity we became a monetary laboratory trying everything from agricultural and metallic commodities to ‘land banks. ’ Finally Massachusetts issued paper “bills of credit,” spending them into circulation. They were not a promise to pay anything, but were a promise to receive them back in payments to the colony. It turned life around, building real infrastructure in the colonies. Right from the earliest days we have been a nation of fiat paper money. Without it there is no United States of America. Such American “nomisma” -the Continental Currency- helped us win our independence.
The Continental Congress authorized $200 hundred million in Continentals and issued $200 million (plus replacement notes). They have been smeared as inflation money, and while the British counterfeiting billions of them eventually destroyed the Continentals, still they carried us over 5 ? years of warfare to within 6 months of final victory. They gave us a nation! Later the Greenbacks let us keep it. $450 million Greenbacks were authorized and $450 million were issued. Eventually they exchanged dollar for dollar with gold coins, but few people bothered to exchange them.
Examining the real facts surrounding government money creation, a very different picture emerges than from the propaganda on them. Tom Paine, Father of the Revolution, praised the Continental Currency: “Every stone in the bridge, that has carried us over, seems to have a claim upon our esteem. But this was a corner stone, and its usefulness cannot be forgotten. ” “… But to suppose as some did, that, at the end of the war, it was to grow into gold or silver, or become equal thereto, was to suppose that we were to get 200 millions of dollars by going to war, instead of paying the cost of carrying it on. (Ch. 14) Why does this concept supporting government “fiat money” seem alien to investors and economists today? The answer was given by the great monetary historian Alexander Del Mar in 1905: « As a rule political economists… don’t take the trouble to study the history of money; it is much easier to imagine it and to deduce the principles of this imaginary knowledge. » Thus there is a mythology – a reigning error – that government always issues money irresponsibly. But this is the result of centuries of propaganda sponsored by those benefiting from privately issued money.
The Continental Currency is attacked, without discussion that the British counterfeited untold $ billions. They did the same for the French Assignats – the details became public when the counterfeiters sued each other in the English courts. The German hyperinflation is cited by the private money promoters without pointing out that the German Reichsbank was privately owned and controlled, and that the hyperinflation began the month that all governmental influence over it was removed on the insistence of the allied occupiers.
The hyperinflation ended when the German government re-asserted its control over the money system. These and other cases are detailed in The Lost Science of Money book, which all statesmen must read. 5 This Battle to Control the Money Power has raged for millennia over the same dividing line: will the money system be privately controlled by the few, to favor the few; or will it be publicly controlled by government, potentially for the common good. How a society defines money determines who controls it.
Define money as wealth, and the wealthy will control. Define it as credit, as is done today, and the “lenders” will be in control. Define it as Aristotle did – an abstract legal power – and government can control it to promote the general welfare. Despite the prevailing prejudice against government, historical case studies show much better results from publicly controlled money systems, than privately controlled ones. (see The Lost Science of Money book) This battle is summarized as Aristotle’s science of money vs.
Adam Smith’s metallic view of money. Smith’s definition (Wealth of Nations, 1776) obliterated the concept of money in the law: “By the money price of goods it is to be observed, I understand always, the quantity of pure gold or silver for which they are sold, without any regard to denomination of the coin. ” He took the concept of money back to metal by weight (ponderata), where it had been before the Romans arrived in England. (Ch. 12) “Adam Smith vs. Aristotle” summarizes the battle to control the Money Power.
Whether money should be tangible wealth and thereby be privately controlled to benefit the wealthy (Smith), or be an abstract legal fiat power publicly controlled to promote the general welfare (Aristotle). To all Goldbugs: Fiat money is not the problem – the private issue of fiat money is the problem, which is like a private tax on all society. What was Smith’s motive? We’re not mind-readers; however we note that his Patron’s family (The Scottish Duke of Buccleugh) had recently intermarried with the English House of Montagu, which was the power behind the private Bank of England.
We also note that Smith’s Wealth of Nations book came out in 1776, the year after the American Continental Congress began issuing our Continental Currency which enabled us to fight and win the revolution against England, then the world’s strongest military power. (Ch. 12) Was it ever Feasible to Use Gold for Money? Aside from going counter to the true nature of money as an abstract legal power, there is a very practical matter that supporters of Gold money can’t address: There is never enough supply of gold sufficient for such a money system.
The Gold supply has not kept pace with the growth of population and commerce. This periodically increased the real value of gold. Money systems usually solved this problem by cheating – pretending to be operating a gold based system but really mixing private bank paper into the money supply, pretending it was convertible; leveraging the amount of gold in the system through fractional reserves of one type or another. Because this bestowed great power and unearned wealth onto bankers, there has never been a shortage of apologists for such mixed systems – we call them “economists! The Bank of Amsterdam – A Gold Deposit Bank The greatest growth rate ever recorded in gold supplies occurred from 1500 to 1600 as centuries of gold accumulation was stripped from the Central and South American Indians at gunpoint. Spain did the bloody work on the ground, while English and Dutch Navies intercepted much of the loot in the Atlantic. Thus the value of gold and silver to fall 80% from about 1500 to 1650 as the metallic reserves of Europe rose over 400% and so did prices.
But industry thrived during this period as money became much more plentiful and more widely distributed sparking what’s been called the “Renaissance of the North. ” 6 The Bank of Amsterdam (1609-1815) was owned by the city. It was supposed to be a classic gold “deposit bank” holding deposits and transferring them from account to account. No interest was paid and no loans were to be made, except to the city of Amsterdam. But it did extend large secret loans to the Dutch East India Company, making it a “covert” bank of issue.
Even during this greatest period of growth in the European gold supply, taken at gunpoint from the America’s, it wasn’t possible to base a money system on metal alone, though if there was ever a time when that could be done, it was then. (Ch. 9) Andrew Jackson & Martin Van Buren Attack the “MONEY POWER” The only attempt at a true metallic money system in America was made by Presidents Jackson and Van Buren in the 1830s. Jackson paid off the entire US debt in 1835. He took the private 2nd Bank of the U. S. out of government affairs.
Van Buren set up 15 branches of the U. S. Treasury to handle government payments. But this real move to metallic money caused the worst deflation and depression crisis in the nation until then. Van Buren quickly introduced government issued money in the form of U. S. notes. (Ch. 15) Presidents Jackson and Van Buren acted to end special bank privileges. In the late 1830s They removed government funds from the private 2nd Bank of the United States and refused to accept inconvertible state chartered bank paper for land purchases from the government.
But while cutting off bank created money, they neglected to provide government created money in its place, thereby causing the worst deflation seen up to then in America. Such notes had earlier been carefully issued from 1812 in various denominations. A total of $60. 5 million had been authorized, but only $36. 7 million had actually been issued. Government error, if any, was on the side of taking great care, not recklessness. The note issuing process was not abused by government. (Ch. 15) The Civil War Greenbacks from 1862 The Greenbacks were created by our Government and spent into circulation interest free and debt free. 450 million were authorized and $450 million were issued, and they couldn’t be counterfeited. Greenbacks didn’t promise to pay something else – they were the money. Being printed, not borrowed, they didn’t create any more national debt or interest payments. Thus they were called “The best currency that ever a nation had. ” (Ch. 17) The Greenbacks provided a daily lesson in the nature of money. Greenbacks were eventually redeemable one for one with gold coin, but they were so convenient that hardly anyone bothered to redeem them. Ch. 17) A brief summary of developments since the Greenbacks: The National Banking System From 1864-1913 the National Banking Act shifted bank charters from the state level to the national level. It required more capital and reserves, and removed much petty corruption that plagued banking. But it formalized institutional corruption in allowing a form of fractional reserves, where banks were able to create money based on reserves (Ch. 17-18) It culminated in the Panic of 1907, which then led to establishing the “Fed. ” 7
The Federal Reserve System In 1913 the Federal Reserve System was surreptitiously created by America’s banking “elite. ” (Ch. 19). In summary, the Fed is “ambiguous” – it’s not a part of the Judicial, the Executive or the Legislative Branches. *It oversees itself. *It gets its own budget from its money operations *The 12 regional Fed’s shares are owned by the member banks in their district. *It is not owned by the Rothschild’s, or the Morgan’s, etc, as rumored. *The U. S. President appoints the Chairman for 4 years and the 5 member Washington board for 14 years. *There are no “shares” in the Washington Board. It is controlled by the banking “fraternity” and delegates powers to private bankers that should always remain under our constitutional system of “checks and balances. ” The Great Depression By December 1932, it’s been only 20 years since the establishment of the Fed, but in that brief time the Federal Reserve System had wrecked and taken America down to its knees: *Farms were wrecked with huge debt and falling land prices; *factories were closed; *banks were closing; *exchanges were destroyed; *the economy collapsed – people couldn’t find work and many were hungry. From 1929 to 1932: National income dropped 52%.
Industrial production fell 47%. Wholesale prices fell 32%. The real value of debt rose 140%! Unemployment rose 329% from 3. 5 million to 15 million people. Over a quarter of our workforce was unemployed. All that destruction in less than 20 years! (Ch. 20) The “Chicago Plan” Solution Clearly changes in the monetary system were called for, but most economists were useless, and J. M. Keynes merely entrenched the problem, advising that government must borrow money that they allow the banks to create out of thin air, instead of doing the right thing and creating the money itself.
What nonsense! Then Henry Simons and Paul Douglas, great University of Chicago economists, correctly diagnosed the problem: “The mistake lies in fearing money and trusting debt. ” Simons’ elegant solution, called the “Chicago Plan,” would substitute money for the debt in circulation as bank loans. It was supported by great economists across the country (Irving Fisher of Yale; Frank Graham and Charles Whittlesley of Princeton; Earl Hamilton of Duke; to name a few).
This brilliant plan nationalized the Federal Reserve System and stopped the banks from creating any part of the money supply (The American Monetary Act incorporates these 2 elements). Though Keynes’ advice dominated, yet some good but minimal banking reforms, such as the Glass-Steagal laws curbing speculation were enacted with the expectation that something more comprehensive like the Chicago Plan would follow; but once the crisis devolved into WW2, it was ignored. The main good achieved out of the horrible and deadly Great Depression was the Social Security System, America’s most important anti-poverty legislation.
Deification of Free Markets and Removal of Regulations A most destructive part of the late 20th century was the continued transformation of economics into a clandestine religion, which deified markets, and demanded de-regulation for unproven theoretical reasons: Don’t try to pass laws over the market – it will crush your puny laws (Omnipotence). Don’t try to dictate results to the market, it has the input of millions of participants and will always know more than any regulator (Omniscience).
Do the right things and the market will reward you; misbehave and you will be punished (Benevolence). Clearly the economists are defining a GOD, not a mere mechanism for buying and selling. Unfortunately, Libertarians considered Ayn Rand’s novels promoting capitalism, as historical evidence. One of her followers was Alan Greenspan, Federal Reserve Chairman for 20 years, and the person most responsible for de-regulation of markets. He allowed the banking system to run amok, and bring down the world economy.
Plutocratic Abuse and Criminal Activity Have Dominated Faced with the horrendous effects of his actions and inactions, Alan Greenspan, in late 2008, did admit his error in trusting financial leaders to act in the long term interest of themselves and their shareholders. What Greenspan missed was that sometimes in the short term it is possible to grab so much loot that these villains will not care about the long term. No one else has admitted this error! Interestingly, this same mistake underlies all free market theology. When one appreciates it, the structure falls.
Substantial regulation is always required, but substantial reform needs to be enacted first. Our apologies for cramming so much history into so few pages. The Lost Science of Money covers all this and much, much more, in detail, in 736 pages. It’s strongly recommend for your permanent family library. 8 Reforming Our Monetary System * Monetary reform is as old as money itself. And while Money plays such a crucial role in our lives and civilization that we couldn’t function without it, how few of us have given it the attention it deserves!
Not just to make more – but to understand how the money system works; the institutions and regulations that determine what is money; how it’s introduced or removed from circulation; who controls these decisions for what purposes. Who benefits, who loses? We want to live in a world of growing freedom and opportunity, but have we done enough to assure that society’s money system is operated to advance our civilization? Evidence grows that the money power instead has become oppressive. Lets see which changes are called for.
Why does reform become Necessary? A century ago the great monetary historian Alexander Del Mar wrote: “The money system is society’s greatest dispenser of justice or injustice. ” A good system functions fairly, helping to create values for life. A bad one, such as the present system, obstructs the creation of values; gives special privileges to some and disadvantage to others; causes unfair concentrations of wealth and power; leads to social strife and eventually warfare and a thousand unforeseen bad consequences.
Because great power is exercised through money, power-hungry elements from ancient times to the present pursued the political ambition to dominate through the Money Power. This requires societies to periodically reform corrupted systems. The main weapon in this battle has been the manipulation of language and thought, where definitions serve as heavy artillery. Those benefiting from the corruption fund university economics departments and finance “professionals” (we call them economists) to promote their viewpoint through economic theories. That’s why this corrupt system has continued for so long despite its abysmal performance.
Why is reform urgent now? Financial abuses of the world’s money systems are pervasive and selfevident. Dominant companies focus on usury instead of production. Globalization harms helpless third world nations – and even the Planet! Action on monetary reform has become urgent as we enter the 3rd millennium. How does reform proceed? It must start with an understanding of the nature of money; that money is not a commodity; that money and credit are two very different things. If society defines money as a commodity (as wealth) then the wealthy will control the system.
In our system money and credit have been confused. If society defines money as credit, as the present system does, then the bankers will control the system. Define money in the proper Aristotelian sense as an abstract legal power, and control over money and society can then be under our constitutional system of checks and balances. The Lost Science of Money book presents the historical chain of the concept of money from Aristotle forward to arrive at our concept of money: “Money’s essence (apart from whatever is used to signify it) is an abstract social power embodied in law, as an unconditional means of payment. (LSM, p. 657) Confusion, Complexity and Dishonesty Serve to “Protect” America’s Nightmare Monetary System Unfortunately explaining exactly how the credit circulating in our society is created is like walking into quicksand, because the process itself is so unjust and so counter intuitive and so harmful to good public policy, and full of poor banker terminology. We’ll present it here and see whether readers like this full explanation or instead would prefer a shorter summary, for the next printing. Modern Money Mechanics – The Chicago Fed’s guidebook.
Modern Money Mechanics (published and republished 6 times from 1961 to 1994 by the Chicago Federal Reserve Bank) is the most reliable and readable description of the Fed’s money creation operation. This process is a “moving target,” with elements potentially superseded recently by the Bank for International Settlements so called Basel agreements, but it continues to be a system of fractional reserves as discussed below; and remember that this process and practices keep shifting with increasingly horrendous results. *Special thanks for this section to Dick Distelhorst; Robert Poteat; Steven Walsh & Jamie Walton. Money is a crucial part of modern society – But Where Does Our Money Come From? Most people think our money is issued by our government and indeed money should be created and issued by government and used for the benefit of all by spending new money directly to promote the general welfare. That is what passage of the American Monetary Act will do. However, this does not happen. In our present system, the Federal Reserve Bank of New York, one of the 12 private Federal Reserve branch banks, begins the process by creating money out of thin air.
Then using this money as a reserve base, the rest of the banks create about ten or more times that amount of money out of thin air by what’s called “fractional reserve banking. ” The required “reserve” varies, ranging from 0% on the first few million loaned; then 3% and then to 10% for larger sums. How Does the Federal Reserve System Create Money out of thin air? This chart and its explanation are often used to explain fractional reserve banking because it was published on a number of occasions by the Federal Reserve Bank of Chicago. The following is an admittedly simplified description used for brevity.
Besides giving an excellent graphic reference showing how the money supply expands, it also helps explain how money is created. Source: Federal Reserve Bank of Chicago, “Modern Money Mechanics” (1962; rev. 1968; 1971; 1975; 1982; 1992; 1994) There are really two stages in money creation; the first is by the Federal Reserve, the second by the various banks. Notice in the bottom left corner the “initial” deposit of $10,000. This deposit was made by the Federal Reserve itself. The Federal Reserve created this money as a liability onto itself.
Or, in other words, it paid for it with its own bookkeeping entries. Its “checks” can’t bounce. This first process involves the government borrowing money. Congress and the Executive need to spend more money on social security, health care, education, infrastructure and sadly, war, than they raise in taxes or other revenue streams. To acquire this money the Treasury sells ‘securities’. These Treasury IOUs come to maturity in three time periods; up to one year the security is called a “Bill,” from one year to 10 years it is called a “Note” and over ten years it is called a “Bond. Treasury securities are sold mostly to domestic and foreign banks, and thus Treasury gets its operating money for government expenditures. The money creation process starts with the Federal Reserve buying these securities, not usually from the government, but from Treasury securities dealers representing banks, and from banks themselves. The Fed pays for these securities by notifying the dealer’s bank to credit the dealer’s account for payment for the 10 securities sold to the Fed. At the same time the Fed credits the same amount to the bank’s account at the Fed.
That is simply recorded on an account ledger as a liability – an amount the Fed ‘owes’ that bank. The following example shows this new Fed liability from an accounting perspective when the Fed purchases $10,000 in securities from Bank A. Federal Reserve Bank Assets Treasury Securities +$10,000 Liabilities Reserve Account +$10,000 Assets Reserve Account +$10,000 Bank A Liabilities Dealer’s Account +$10,000 This double-entry accounting system is described in Modern Money Mechanics. (That forty page, 8. x 11 booklet is available from the AMI at $25 per copy) Under the Federal Reserve Bank, the Assets column has increased by $10,000 because the Federal Reserve now owns the actual Treasury securities with the face value of $10,000 (plus the interest it earns). Under the Federal Reserve Bank, the Liabilities column has increased by $10,000, which was the cost of purchasing the security. The Federal Reserve is able to make these purchases with mere bookkeeping entries, only because of accounting rule privileges sanctioned by our government.
Under Bank A (the bank that has the Treasury securities dealer’s account), its Assets column is increased by $10,000. This is the first moment that this ‘reserve’ money has come into existence – while at the same time the Fed now holds the Treasury Security. Under Bank A, the Liabilities column represents the payment by the Fed to the Treasury securities dealer of $10,000 (banks call their customer’s deposits liabilities). Summarizing the above: The Federal Reserve at the time of purchase took those Treasury securities, IOUs, and gave securities dealer money and Bank A reserves.
This money the Fed gave the securities dealer was simply done by creating a liability on paper, and by doing this the Fed created money. Now that we have an understanding of the initial creation of money by the Fed, we are ready to learn about the second stage – fractional reserve banking. The Second Stage – How Fractional Reserve Banking Then Creates Money out of thin air: Let’s assume for illustration purposes that the $10,000 deposited into Bank A, received for the account of the dealer, for the sale to the Federal Reserve, stays in Bank A’s accounts.
Using the account ledger from earlier, under Bank A’s liabilities is the $10,000 in the dealers’ account, balanced by assets of $10,000 in Bank A’s reserve account at the Fed. As an asset, Bank A can use those reserves of $10,000 to create new money in the form of loans or investments up to at least 90% of that amount (with the accounting rules now in effect). Therefore, about $9,000 of new money can be created and lent out by Bank A. If Bank A loans Arthur $9,000 to buy a used tractor from Bill and Bill deposits the $9,000 in Bank A (or any other bank), the fractional reserve lending can continue.
After Arthur’s loan, Bank A can see that its asset column has just increased by $9,000. After Bill’s deposit, the bank receiving the deposit (if not Bank A) can see that its liability column and asset column has just increased by $9,000. The second bank can now create 90% of that amount, or $8,100 of additional money, and loan it out to Carl to build a porch onto his house. The contractor who gets this job deposits the $8,100 into some other bank and that bank can now loan out 90% of that amount, or $7,290.
Banks call the money they receive from other banks when a customer from one bank makes a payment to a customer of another bank “reserves” and the amount of this which they can loan or invest “excess reserves. ” What’s important is that the original deposit by the Fed of $10,000 can expand: $10,000 + $9,000 + $8,100 + $7,290 + $6,561 … with each addition being a new loan of 90% of the previous loan (after it gets deposited somewhere). The original reserve of $10,000 (the new money the Fed initially created) can continue to expand deposits with each new bank loan, to eventually become $100,000, or ten times the original deposit.
This is graphically presented in the diagram from the Chicago Fed. The above are some wholesome loan 11 examples. But most of the loaning went into overpriced real estate transactions, and stock market gambling and takeovers! The interest earned on $90,000 of this new money goes to the banks. Morally, the first use of this money should belong to everyone through our government for there to be justice. If the bank does not receive the interest plus any principal payments, from its borrowers, the bank can foreclose and take any collateral that the borrower has pledged.
Here are Three Problems with Fractional Reserve Banking: First, it’s immoral. It takes from the whole society and gives to a privileged few, apart from their not doing anything to deserve it. They get it for cleverly manipulating accounts, without creating any values useful for life. This has concentrated wealth to obscene levels in our society. Second, the interest on money created along with debt creates an unnecessary initial cost on all money in circulation. This is like a ball-and-chain on the leg of every person working to create values for living.
Third, whoever controls the money system controls the direction of society; if it’s government, then in a democracy citizens can decide what to do with it, and it will 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. In practice this has funded ridiculous bubbles on Wall Street, or incredible real estate bubbles. They did not fund the levee repairs around New Orleans or bridge repairs in Minneapolis, or the $2. trillion the engineers tell us is needed to make our infrastructure safe! The American Monetary Act corrects and reforms the system with three elements: First, the Federal Reserve system becomes incorporated into the U. S. Treasury. This nationalizes the money system, not the banking system. Banking is not a proper function of government, but control and oversight of the money system must be done by government. Second, the accounting privilege banks now have of creating money through fractional reserve lending of their credit is stopped entirely, once and for all.
Banks remain private companies and are 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. Third, new money is introduced into circulation by government spending it into circulation starting with the $2. 2 trillion the engineers tell us is needed for infrastructure repair and renewal. In addition, health care and education are included as human infrastructure. Everyone supports the infrastructure, but they worry how to pay for it.
That becomes possible with passage of the American Monetary Act. History shows that all three elements must be done, and done together, for the reforms to work. This is clear in the pages of The Lost Science of Money book, by Stephen Zarlenga. The system has again shifted in the present crisis. The Federal Reserve itself purchased about $1. 5 trillion bonds direct from the U. S. Treasury and has credited the government’s account, creating the money as a bookkeeping entry. This is actually better than the more complicated process described above that’s been operating for decades, because the Federal
Reserve has to turn over its net earnings to the Treasury. But this doesn’t represent reform. The simpler process, used in financing WW2, evolved into the more complex one because the financiers could then grab more money and power. For while the Fed turns over its earnings on money creation to the Treasury, the various banks keep the net interest they earn in the fractional reserve money creation process. That fractional reserve accounting feature is still in effect and at an opportune moment the system will obviously shift back to the more complex, more profitable one for banks. The above descriptions may seem difficult – the system’s main “protection” is the confusion it generates. Just keep in mind that the power to create our nation’s money has been usurped and privatized. Those in control promote their interests rather than the general welfare; destructively manipulating accounting rules; unfairly concentrating wealth and misdirecting society’s resources into various gambling activities instead of creating values for living. That must change once and for all. We must demand and act for that change. 12
THE AMERICAN MONETARY ACT The Purpose and Short Title of the Act are given. An Act to restore the Constitutional power to create Money to the Congress of the United States Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SEC 1. SHORT TITLE This Act may be cited as the American Monetary Act SEC 2. FINDINGS The Congress finds that – (1) The Federal Reserve Act of 1913 effectively ceded the sovereign power to create Money delegated to Congress by the Constitution to the private financial industry. 2) This cession of Constitutional power has resulted in a multitude of monetary and financial afflictions, including a growing and unreasonable concentration of wealth, an uncontrollable national debt, excessive taxation of citizens, inflation of the currency, drastic increases in the cost of public infrastructure investments, excessive un- and under-employment, and erosion of the ability of Congress to exercise its Constitutional responsibilities to provide for the common defense and general welfare. 3) The issue of means of exchange by private financial institutions as interest-bearing debts should cease once and for all. (4) The power of Government to create Money and spend or loan it into circulation as needed is similar but different in nature from the power to create and market instruments of indebtedness; it eliminates the need to pay interest charges on the nation’s money supply to financial institutions and removes their undue influence over public policy. 5) The unprecedented 2008 breakdown of the US banking and monetary system has brought severe and unacceptable effects on employment and the economies of the United States and every major country. (6) Under Federal Reserve administration of the US monetary power, mandates, directives, and common sense goals have not been met regarding: *full employment; *a relatively stable currency value; *avoiding excessive debt; *a destructive concentration of wealth; *operating in the public interest; *proper funding to maintain our vital infrastructure, which the American Society of Engineers informs us is $2. trillion behind in keeping it safe. The “Findings” summarize the problem – that Society’s monetary power has been privatized in the hands of the financial industry (1), especially the ambiguous but essentially privately controlled Federal Reserve System. This privatization has led to a multitude of afflictions (2) through the mechanism of allowing financial institutions to issue money in the form of interest-bearing debt (3). The “Findings” point out (4) how this differs from government creating money, not debt, and spending it into circulation interest free.
That removes the interest burden on our money supply and allows public control rather than private influence to determine how money is introduced into the economy. For example, whether it is largely directed as at present into real estate speculation and various Wall Street games, or into crucially needed infrastructure, such as levees protecting major American cities, and the nation’s bridges and dams. A solution is described (5 & 6) and its objectives are outlined (7), in a general form taken from the U. S. Constitution that all reasonable Americans can support in order “to promote the general welfare. ” 7) An examination of the historical record demonstrates that U. S. Government control over our money system, in providing the nation’s money supply has been superior to private control. The current crisis is the latest most glaring demonstration of that fact. (8) As our money system is a key pillar in maintaining our society and as the Federal Reserve System and the financial establishment have failed to operate to promote the general welfare, the US must directly re- assume the powers granted in Article I, section 8 of our Constitution. 13 Background: The Fed is a private organization, not a part of our government.
The Federal Reserve System consists of 12 regional Federal Reserve banks, with boards of directors, under an umbrella direction of the seven member Federal Reserve Board in Washington, which has the power to determine major aspects of banking activity, such as setting interest rates, and the reserve and other operational requirements. There are no shares of the Washington Fed Board organization; the only “ownership” of the Fed is in shares of each of the 12 regional banks. They are entirely owned by the private member banks within their respective districts, according to a formula based on member bank size.
The ownership is highly restricted in that such ownership is mandatory; the shares can’t be sold; and they pay a guaranteed 6% annual dividend. Thus the stories that the Federal Reserve is “owned” by foreign bankers (the Rothschild’s and other prominent banker names usually come up) are not accurate and these types of rumors have mainly served to discredit wholesome criticism of the banking system. It will be clear from the following facts that the Fed is definitely not part of the US Government. *The Fed is not organized within the Executive, Legislative or Judicial branches of our government. Who pays the Fed’s bills and determines its budget? Not any part of our government. The Fed gets its funding from its own specially privileged operations. The Fed Board determines Fed budgets. *Who monitors and oversees Fed activities? Again the Fed itself. While some important elements of proper auditing have taken place, there has not yet been a comprehensive independent audit, by the Government Accountability Office as proposed in a recent letter from Ralph Nader to new Fed Chairman Ben Bernanke, calling for greater monetary transparency. Federal Reserve employees are not part of the US Civil Service System and are not covered by government employees’ health insurance or pension programs. Who does the hiring and firing? Except for the highly publicized Chairman and seven member Washington Board, this is in private, unelected hands. *Federal Reserve Banks are not listed as government organizations by the telephone companies, a small but telling fact. The ambiguity surrounding the Fed arises because the U. S. President appoints the Fed Chairman to four year terms, and the seven member board to 14 year terms.
Also the Fed is supposed to implement government fiscal policy, but it has not really done so. (see Is the Federal Reserve System Part of the U. S. Government, at our website http://www. monetary. org/federalreserveprivate. htm) Several structural problems arise from private control: The system tends to be run to benefit those in control rather than the whole society. This concentrates wealth into fewer and fewer hands. The interest received by the banking system for money creation flows into their hands.
The control over where the money goes determines the direction the society moves in. Privately controlled money tends to go into speculation to make a quick buck. Infrastructure, health and education get ignored or short changed. The private banking system, not government, now creates our money in the form of debt. Most Americans think our money is issued and controlled by our government. They are surprised to learn that most of our money is created when people and businesses have to borrow from banks, since this is the main way that money now enters the system.
The banks make loans by crediting the borrowers account. This is fiat money, or “purchasing media” created out of thin air, thanks to a special legal privilege granted to them called “fractional reserve banking. ” They write a computer credit in the account of those whose needs have driven them to the banking system to borrow money. This concentrates great power and transfers tremendous wealth to the financial sector. Under this privately controlled monetary system, it’s not surprising that wealth and power have become concentrated to obscene levels ever before seen in our society, where less than 1% of the population is now claiming ownership of nearly 50% of the nation’s wealth! This money creation prerogative, often referred to as “THE MONEY POWER,” (President Martin Van Buren always capitalized it! ) has traditionally been associated with national sovereignty. Alienating the power from government into private hands has inevitably served to concentrate elements of what should remain national sovereign power into those private hands, where predictably it has been used to promote the interests of the few in control rather than the society as a whole.
That is clearly unacceptable in both a democracy and a republic. It establishes plutocracy – the rule by wealth. 14 Sections 101 & 102 specify the U. S. Dollar as our currency unit and make it “legal tender” – meaning all debts can be legally paid with it; creditors must accept it in payment. It does not prescribe a value for the dollar in terms of commodities, or labor or any other thing. The value of the currency unit is already known in the market in terms of its relation to assets and goods and services and existing obligations.
This value is not fixed but adjusts to continuous changes in supplies and desirability of goods and services and is also influenced by the existing supply of money. This is a valid use of the market mechanism. If the money supply and economy are reasonably guided, such changes should be gradual and gentle and are a normal part of life. They help assure that the forces of production and consumption are rooted in economic realities, not frozen or dictated ideologically. Sec 103: “Negative Fund Balances” is the Treasury term for how much money the government needs to come up with to balance its available funds with its immediate expense needs.
At present this balance has to be obtained through taxation or borrowing. This process in effect allows the private banking system to create the money and loan it to the U. S. at interest. But under this Act, our government will create such money directly, and interest free. Sec. 104 requires the Secretary of the Treasury to forecast these disbursements in a timely and effective way; and maintain enough research muscle to analyze and understand the impact of these disbursements both in the U.
S. and internationally. TITLE I – DISBURSEMENT OF U. S. MONEY SEC. 101 AUTHORIZATION FOR DISBURSEMENT Not later than 90 days after the effective date of this section, all United States Government disbursements shall be denominated in United States Money, the nominal unit being the U. S. Dollar. SEC. 102 LEGAL TENDER United States Money shall enter into general domestic circulation as full legal tender in payment of all debts public and private. SEC. 03 NEGATIVE FUND BALANCES The Secretary of the Treasury shall directly issue United States Money to account for any differences between Government appropriations authorized by Congress under law and available Government receipts. Note: The fact that the Treasury will be able to make disbursements based on direct issuance of United States Money for negative fund balances reflects Congress’s Constitutional authority to “coin Money”, because Congress will then have the ability to adjust the amount of Money so created by regulating both appropriations as well as revenues from taxation and other sources.
The focal point of power will be the House of Representatives as the initiator of revenue bills. Restoring to Congress its Constitutional authority will shift the ability to create Money and enter it into circulation from the private banking industry to our elected representatives, as the Constitution mandates. SEC. 04 FORECASTING OF DISBURSEMENT REQUIREMENTS The Secretary shall: forecast disbursement requirements on a daily, monthly, and annual basis; provide such forecasts to Congress and the public; integrate forecasts with the Federal budget process; maintain a sufficient research capability to continuously and effectively assess the impact of disbursement of United States Money on all aspects of the domestic and international economies; report to Congress and the public regularly on the economic impact of disbursements of United States Money and the status of the monetary supply. 1) (2) (3) (4) (5) SEC. 105 MONETARY CONTROL (1) The Monetary Authority and the Secretary shall pursue the policy that the money supply should not become inflationary nor deflationary in itself but will be sufficient to allow goods and services to move freely in trade, in a balanced manner. 15 Section105 instructs the Secretary to pursue a stable monetary policy and neither cause inflation nor deflation through monetary policy.
To oversee and assure that this policy is carried out, a 9 member Monetary Authority, is appointed by the President and confirmed by the Senate, to establish the monetary targets to accomplish this policy and any substantial discrepancies between the targets and actual results are quickly reported. Section 106 specifies that instead of borrowing money created by the banking system, the U. S. will create the money directly.
However, the Congress continues to have the power to borrow money on behalf of the United States, should the Congress consider that advisable in a given situation. Section 107 provides thorough, independent and timely accounting of this money creation process. Section 201 provides that as U. S. debt instruments (bonds and notes) become due, they are to be paid with U. S. Money, not by rolling over more debt. This will be a gradual process as the debts extend decades into the future.
Such payments will then be available for many other productive investments, and will tend to lower interest rates. (2) Monetary supply targets shall be established by a Monetary Authority consisting of a Board of nine public members appointed for staggered six-year terms by the President with the advice and consent of the Senate. The Board reports periodically to the U. S. Congress. (3) Administrative responsibility to regulate he monetary supply in reasonable accordance with targets established by the Monetary Authority shall rest with the Secretary of the Treasury. (4) The Secretary shall report to Congress any discrepancies between targets and supply in excess of one percent at the end of each quarter. SEC. 106 DISBURSEMENT IN LIEU OF BORROWING (1) Disbursement of United States Money under this Act shall be made in lieu of borrowing through Treasury instruments. 2) Such borrowing shall cease as of the date stated in Section 101 of this title, unless otherwise authorized by Congress; (3) Nothing in this Act shall prevent Congress from exercising its Constitutional authority to borrow on the full faith and credit of the United States. SEC. 107 ACCOUNTING The Secretary shall account for the disbursement of United States Money and of current fund balances through accounting reports maintained and published by the Secretary and by departments and agencies of the Government.
The General Accountability Office shall conduct an independent audit every second year. TITLE II – RETIREMENT OF U. S. INSTRUMENTS OF INDEBTEDNESS SEC. 201 COMMENCEMENT OF RETIREMENT Not later than one 120 days from the effective date of this section, the Secretary shall commence to retire all outstanding instruments of indebtedness of the United States by payment in full of the amount legally due the bearer in United States Money, as such amounts become due. Background: Publicly created money – the key ingredient needed to achieve human rogress Two Important effects will result from our Government creating money directly instead of borrowing money the banks have created. First we’ll begin saving the interest costs which in 2007 was $465 billion; which was 17% of the U. S. federal budget that year. At present, the interest cost that is paid on infrastructure construction generally doubles to triples the cost of construction. Saving the interest will make it much easier to bring our crucial infrastructure up to acceptable 21st century safety levels.
The American Society of Civil Engineers gives our present infrastructure an embarrassing grade of “D” and estimates that $2. 2 trillion is needed to make it safe once again. More importantly, private lenders will have far less influence over public policy decisions. The power to determine the fiscal cours