Archive for April 2015

The Current Money System and an Alternative


John N. Howell

  1. Money is continually created. It has to be, in order to accommodate growing populations and growing economies. New money is created out of nothing. Federal Reserve Notes, our money, are backed up only by the good faith credit of the U.S. government. An important question is, “Who creates money.” Creating money is a very lucrative privilege. Throughout history it has been created at various times both privately by financial institutions and by governments.
  2. What is money in our system? Three things: coins, bills, and money in accounts (“digital money”). Coins and bills constitute only about 3% of the total money that has been created. The rest is money in accounts.
  3. Who creates money in the current system?

Coins. The government, via the U.S. mint creates the coins. It can sell 4 quarters that it makes for 11 cents each, i.e., for $1. That is 56 cents profit for the government per dollar. This profit is called “seigniorage.”

Bills. The government Office of Printing and Engraving prints bills for about 11 cents each and sells them to the Federal Reserve System for the cost of production. (No seignorage for the government.)

Account money. Money in accounts created by banks when they make loans or buy securities.

  1. The Federal Reserve system of banks creates money. Is the Federal Reserve a government agency?

The Federal Reserve Board of Governors is federal in that it is appointed by the U.S. President, but the 12 regional federal reserve banks, which carry out the business of the Federal Reserve, are all privately owned.

The Federal Reserve System was created in 1913 and serves as the central bank of the U.S. Its objectives are 1) maximum employment, 2) stabilize prices, and 3) moderate long-term interest rates. It was established as an agency to be independent of government.

In 1982 the Ninth Circuit Court of Appeals ruled that “Federal reserve banks are not federal instrumentalities …, but are independent, privately owned and locally controlled corporations in light of fact that direct supervision and control of each bank is exercised by board of directors, federal reserve banks, though heavily regulated, are locally controlled by their member banks, banks are listed neither as “wholly owned” government corporations nor as “mixed ownership” corporations; federal reserve banks receive no appropriated funds from Congress and the banks are empowered to sue and be sued in their own names. . . .”

  1. At $85 billion a month of Quantitative Easing (QE), the Federal Reserve System is currently (in 2013) creating at least $1.5 trillion a year in new money. All of this money is created as credit, which means it is created as debt. Banks in the Federal Reserve System create this money as they make loans. Banks of the Federal Reserve System loan money to, among other entities, the government. $2.4 trillion of the total federal debt of $16.8 trillion is held by Federal Reserve banks.
  2. In addition to creating money by making loans, commercial banks also create money through “fractional reserve lending,” which basically means that after someone deposits money in a bank, the bank can lend most of that money (~90%) out to others, who then deposit it in their accounts in the same or other banks, which again lend most of out to yet another person, and so on. Each bank client thinks he has the money he deposited, the total of which now far exceeds the amount that was originally deposited to start the chain. This has set the stage for bank runs and bank failures – when depositors lose.
  3. The new money created each year, about $1.5 trillion at present, could be created by government. It could be used in a variety of ways – to build the infrastructure needed to maintain a healthy economy, to reduce taxes, to pay down the debt, to support state and local governments in providing infrastructure, education, health care, etc. Building infrastructure would create jobs, good ones, and it can be done without increasing taxes or the federal debt. As this money filters into the economy, improving employment and increasing the amount of money working people have, personal debt will fall as the economy improves. Money created by government is a public asset; money created by banks is an asset to the banks, and a liability to the rest of us, the public.

“For the government to permit banks to issue money, borrow that money, and pay interest on it is idiotic.” William F. Hixson (

  1. The debt money system puts most of us in debt, including governments. The payment of interest on government debt, the 3rd largest item in the federal budget, systematically transfers money from tax payers to those wealthy enough to loan money to the government, from the poorer to the richer. Government is unable to end deficit spending, because decreased government spending, which is about 22% of national economy, and/or increased taxes sufficient to make a significant dent, would throw the economy into severe recession. Increased spending alone could stimulate the economy, but would increase the federal debt. The Federal Reserve is trying to stimulate the economy, but is unable to do so, because it can only increase the money supply by increasing lending, and it has already lowered interest rates as far as it can to encourage borrowing. Purchase of securities by the Federal Reserve banks (QE) creates new money, but puts it in the hands of those wealthy enough to have securities (such as Treasury bonds) to sell. Little of it gets to Main Street; most goes to Wall Street, where it underwrites the rising prices of stocks.
  2. The U.S. Constitution, Article 1, Section 8, gives Congress the authority to “coin” money and set its value. “Coin,” used as a verb here, means to create, as in “to coin a phrase.” The Federal Reserve Act of 1913 gave that authority to the Federal Reserve System of private banks. Prior to that time, money creation had partly been governmental, through the “greenbacks” initiated during the Lincoln administration, and partly private, through issuance of “notes” by private banks. A national system was needed, but the Federal Reserve Act unfortunately put money creation in the hands of private banks.
  3. A bill introduced into Congress in 2012, H.R. 2990 (not yet introduced this year), provides a real solution. It transfers money creation to the government, ends fractional reserve banking, and commits the government to use the profit from creating money (seigniorage) for repairing and building infrastructure without increased taxes, and for paying down the federal debt as it comes due. It brings th11e Federal Reserve into the Department of Treasury, and sets up an independent Monetary Authority, whose only responsibility is to determine the appropriate rate of money creation, based on economic and population data.
  4. H.R. 2990 has been critically analyzed by economists associated with the IMF (Benes and Kumhof, ) and found to be able to stimulate the economy without inflation, to reduce debt, and to eliminate, or at least minimize, boom and bust cycles.

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JNH 7/23/14