Country’s Banking System at the Heart of Economic Problem

John Howell

Athens Messenger

Oct. 6, 2011

Thanks to the Messenger for giving some coverage to the protests now occurring on Wall Street, and elsewhere around the country. These protesters have it right; the basic economic problem is the banking system in this country. The fundamental problem is that the system allows private banks to create money, which it then lends to the rest of us, including the government. The greatest portion of the money supply in this county is created in this way – as debt. That is, it is generated by being loaned out by a bank. The bank expects both the principal of the loan and interest to be paid back. The debt, then, is greater than the amount of money that was created. It can only be paid back by borrowing more money or getting it from someone else who has taken out a loan. The total debt can never be paid back!

It is absurd for the U.S. government to be in debt. It can issue money debt-free, as it did during the colonial period and again under Abe Lincoln during the Civil War. The government can use its own money to pay people for services rendered to it – soldiers, bridge builders, the power company, etc. – and the money gets into circulation. Government can also loan it out, as it did during the colonial period, and use the interest to cover its costs, eliminating or reducing the need for taxes.

The quantity of money in circulation determines the value of the money – too much and the value falls (inflation), not enough and the value rises (deflation). It has been argued that Congress can’t be trusted to get the amount right, and, given the present Congress, that concern seems legitimate. But history suggests that government has actually done a better job than private bankers. With money creation in the hands of bankers we had the Great Depression of the 1930’s and we have the present catastrophic situation; the bankers clearly haven’t done a good job. And they can’t, because they can only create money by creating debt.

Congress that can get us out of this debt mess, by taking on its rightful, Constitutional role of creating money, by taking it away from banks and by eliminate the practice of fractional reserve banking which only amplifies the debt. This doesn’t eliminate the need for private banks, but it gets them back into banking instead of money creation.

The necessary act of Congress has been introduced. You can read about it on the web at monetary.org. What the present super committee should do is to endorse that legislation. The spending it will cut is the spending incurred by governmental borrowing.

Country’s Banking System at the Heart of Economic Problem

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One Comment on “Country’s Banking System at the Heart of Economic Problem”

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