Special Edition: A Truly Historic Moment of Opportunity

With the imminence of a two-year budget deal including targets for the next decade comes removal of the only substantive objection we have heard from any expert to re-introduction of debt-free United States Notes….that the ability to fund deficits without cost may tempt Congress to throw itself into reverse and spend our way into hyper-inflation. That unlikely scenario will be gone with the amount of spending to be done established by the budget. The only decision yet to be made concerning this budget is whether to fund the deficit with Federal Reserve Notes that will cost the government hundreds of billions of dollars to borrow or to fund it at least in part using historic debt free United States Notes issued directly by the Treasury. We can as much as turn the 2014 deficit into a surplus.

Is there really a choice as simple as that? Yes, if we properly design our “new” alternative. Consider: The original authorization for US Notes (Lincoln’s “greenbacks”) was for a limited dollar amount. But the widening Civil War required additional issuances at the same time that massive wartime shortages drove up prices as they would have no matter what form of currency was used. There was inflation, during the course of the war – as much as 80%. At the end of the war, however, prices and the value of the greenback stabilized. Labor and agrarian interests sought to expand the number of greenbacks in circulation to foster growth and, it was alleged, to make debts repayable with cheaper dollars. Banks and creditors fought for re-introduction of the gold standard as the means then in use to tighten the money supply. There went the debt-free greenbacks, due solely to the operation of a political contest. That is the only reason we don’t have them today. Today, neither gold nor silver backs either US Notes or Federal Reserve Notes and we have other ways to tighten or expand the money supply - a new game.

Congress could, once again, authorize an issuance of greenbacks (paper and electronic equivalents) limited by dollar amount. There might also be a limited authorization time, perhaps with a one-year sunset date. That would give Congress a chance to assess how things are going. Interim administrative assessments could be made by the Fed and the Treasury, as the US Notes need not be issued all at one time. The Fed and the Treasury coordinated effectively during the 80+ years that United States Notes and Federal Reserve Notes circulated side-by-side. Even if we fund the whole deficit by US Notes, that would only be about 5% of the conservative M2 money supply measure (see our October newsletter). The Fed would clearly remain in the driver’s seat. Should the US Notes eventually be withdrawn from circulation, that can happen exactly as it did before; you can still deposit US Notes at a bank, but you’ll only get Federal Reserve Notes if you withdraw cash. The rest is “swallowed by the machine.” Let’s be clear: a dollar is a dollar, by law “Legal tender for all debts, public and private.” Nothing “backs” Federal Reserve Notes any more than US Notes–in both cases it is only the “legal tender” declaration of the government, which allows either Federal Reserve Notes or US Notes to purchase Treasury bonds, gold or anything else according only to their dollar denomination. There is absolutely no technical or practical reason why United States Notes cannot be issued again, used interchangeably, just as in the past.

If we were in the middle of another Civil War, the buying power of Federal Reserve Notes would decline just as much as United States Notes. Neither form of currency is “weaker”. With the gold and silver standards now abolished, both have value sustained by precisely the same things: (1) the initial fiat power of government to declare them “Legal tender for all debts, public and private”; (2) limitation of the total number of dollars of both types in circulation; (3) the health of the US economy, in which a factor is the financial health of the US government (which the use of debt-free US Notes would promote). Unlike the Civil War period, we now have a Federal Reserve capable of tightening the money supply, of which the US Notes would be “a drop in a rainstorm”. The Fed would be able to effect monetary policy on its own, even without the cooperation of the Treasury concerning its pittance, but isn’t it reasonable that there would be cooperation again? Besides, we are not just at a sensitivity crisis point, not on the very verge of collapsing into hyper-inflation, but rather in a position to, without precise micro-management, expand employment and production (supply in balance with demand).

Are debt-free United States Notes more inflation-causing than an equal number of dollars in Federal Reserve Notes? Absolutely not. That question was specifically addressed by a Congressional Research Service paper.

Does it really cost the government less to issue debt-free United States Notes than to borrow Federal Reserve Notes, given that the Fed returns interest on Treasury bonds to the Treasury? You bet it does! We are surprised by how often that question comes up. The Congressional Research Service report cited above notes that only 10% of the federal debt is held by the Federal Reserve. The rest of the debt is funded by other borrowing, primarily selling Treasuries to domestic and foreign investors who will not return the interest, who may not always be as able or as motivated to purchase them as today, and who will require higher returns when interest rates rise from today’s all-time lows.

Why haven’t we wisened up to the use of debt-free United States Notes before? We have. The politics surrounding the greenbacks after the Civil War reflected a struggle between massively powerful interests – 19th century labor and agrarian interests versus banks and wealthy creditors - with the later coming out on top. However, the debate has raged on in every decade since, as described in past issues including the November, 2013 Policy Winners. Is there still a struggle going on, sometimes behind-the-scenes, with the banks and the very rich pitted against working class interests? Indeed there is. But….

We need not think in terms of a winner-take-all sweepstakes. Let’s put it in perspective: We have licensed the banks to create money “out of nothing” via the fractional reserve system that allows them to lend 10 times or so what they actually have. This is the way most of our money is created. What gives the money that they lend value? It is nothing that the banks do. It is nothing more or less than the fiat power of government stipulating that the money is “Legal tender for all debts, public and private.” This license we have given the banks is very generous indeed. (We would throw counterfeiters in jail).

After the redistribution of wealth from the great middle to the “uber rich” we have seen during recent decades…by now a phenomenon well-known to the public at large…and after the Great Recession, is the public in the mood to be just a bit less generous toward the banks and the money masters? Is it too much to ask that the public be given, say, five percent of the benefit the banks are given…that the government license to itself, in accordance with the mainstream of historical orthodoxy, the old sovereign right to create money - even if just a tiny part, not all (as per the Chicago Plan) of our money?

Why should we go hundreds of billions of dollars further into debt this coming year, rather than be willing to fight a little over the bitty scrap we need? The irony is, if we use United States Notes wisely to strengthen the governments’ financial position and the health of the economy, everyone will gain at least some benefit…including the banks and the very rich. If there’s one thing we should have learned from the Great Recession, when both the banks and the public had their scary moments, it is this: Ultimately, we’re all in the same boat together and the ability to bail it out is our underlying security.

A moment of opportunity? Our slow recovery, our present super-consciousness of debt, our recent history of failures of “the system” and now the establishment by Congress of the spending we will do can come together as a unique moment of willingness to try something new–particularly in the cautious manner here proposed. We can escape the dismal “science” (?) of dire fiscal prophesying by showing a new willingness to explore and work out new solutions, now that Congress has initiated a fresh start. The stars may not so align and such a moment of opportunity may not re-appear for a very long time.

A New Grand Bargain, Wrapped Up in a Bow!

Santa knew what we needed: a new Grand Bargain!

The perfect Christmas gift is a fully satisfactory solution to a true need. It is not the pile of scraps from which desperate efforts might or might not yield a makeshift winter coat for a child, but is the well-made, well-fitting coat with hat, gloves and scarf that arrives before the full bite of winter. So it is as we enter December surrounded by last year’s discarded idea scraps and a sense of resigned desperation, lacking a realistic plan to avoid our second “fiscal cliff”. We hear dispirited talk of things that did not work before, and of theories of what might happen in a show-down yet to come…but there has been no equivalent to the timely arrival of a coat that is ready, complete and capable of providing warmth when needed. We do have a babe in a manger – the Affordable Care Act – but as many seem bent on strangling that babe as on working out the salvation it can be for those most in need of it. We did have food stamps, which have fed many hungry children, no matter how our scrooges may have wanted to judge their parents. But our society has gotten so jaded that we select vestigial efforts to feed the hungry and care for the sick as those things to first discard, while the ultra-wealthy rack their brains to think of things they do not already have to put on their list for Santa. What we have seemed to lack, barreling toward our January deadlines with our eyes firmly closed, is a solution for our affairs of state, come January, as practical as a winter coat!

For many months, talk of a solution to our fiscal crisis has involved the idea of a “grand bargain” – an agreement that the quid pro quo for not savaging the present budget would be cuts in long-term spending, with mention most frequently made of entitlements. “Don’t get too over-wrought about near-term deficits”, is the proposition, “we’ll deal together on spending in the long term bye and bye.” Those who have read our last two newsletters know we propose dealing with our deficits now, not in the bye and bye, by using a small store of debt-free United States Notes as our country has done, quite successfully, in the past. We have pointed out that our current Federal Reserve Notes (upon which all those electronic debits and credits are based) are a printed, fiat money currency with absolutely nothing “behind them” but the authority of the government to declare them “Legal tender for all debts, public and private.” For reasons that escape a great many of us and have since Franklin and before, the government is willing to borrow a congressionally-determined amount of fiat money from others which it has created, plunging the nation further into debt, rather than use the orthodox system of printing up the same number of dollars, on the same presses, for its own use, within the medium of exchange requirements of the economy.

Last year’s “grand bargain” of which we heard so much, nominally focused on issues of debt, short-range vs. long-range. Why should our proposal, which would reduce the debt, call for the negotiation of such a “grand bargain?” Why wouldn’t the Party of Lincoln embrace the solution of Lincoln and his Republican Congress? It is not, unfortunately, the Party of Lincoln we will have to contend with. It would have to be someone even older than us and preferably a Republican to tell the tea party newcomers, “I knew Abraham Lincoln – and you, sir, are no Abraham Lincoln.”

The truth is debt itself has never been the number one item on the agenda. It’s talk about debt that is. Talk about debt can be used to keep government from growing, and to minimize government spending so as to avoid the true concern of very rich contributors – inflation. We do not hear inflation-fearing calls from this interest group for increased bank reserve requirements, which would temper the amount of money being created “out of nothing” by our private banks, as most of our money is. The Congressional Research Service Report for Congress #96-672, Paragraph 4 under “Other Forms of Money”, states that United States Notes are no more inflationary than a like dollar amount of Federal Reserve Notes. What we have is the unfounded fixed idea among some that any spending by the government (yet not by others) raises the specter of inflation; that any lending (not spending) by the Federal Government directly comparable to lending done by private banks…is inflationary, whereas lending done by private banks is not; and that any investment by government, however similar to that done by private investors and Wall Street is inflationary when done by the government but not so when done by private investors and Wall Street.

It is for these rather spurious reasons, as we see it – yet reasons we must acknowledge and address - that we need a “grand bargain”, even to negotiate the elimination of our FY 2014 deficit. It would be interesting to observe a debate in which the erstwhile deficit hawks protest, “No! We want a deficit!” even as their opponents argue for greenback elimination of it. Human nature being what it is, however, we know we have to provide for a resolution of such a dispute before it even begins.

As we have sent our newsletter to over 1,000 economists during the last year, we have learned what the substantive arguments are concerning our often-proposed use of debt-free greenbacks. It turns out there is only one such argument against it – the concern that being able to fund a deficit without cost would make it too easy for government to grow and spend too much money over time, resulting in problematic inflation. Getting the real issue on the table is the first step to finding a solution. Debt never has been the most-feared thing, and no plan to reduce our national debt has ever been sufficient to relieve what is. Indeed, if we totally got rid of the national debt, what would happen to the Treasury bond reserves against which banks can leverage by a factor of ten or so to lend money they don’t actually have? Preservation of the Federal Reserve and of a healthy amount of national debt is vital to the big banks and the big-money interests – so our proposal concerns only a minuscule portion of the money supply, a minor correction to our insolvency iceberg course.

So the “grand bargain” we propose is akin to a balanced budget amendment for future government spending in exchange for debt-free funding of our current skinnied-down FY 2014 budget. We would hope for a way to bring back food stamps and to make affordable health care, the noblest idea of Republican as well as Democratic administrations, work – but those are no new ideas.

United States Notes would be a new and immensely useful tool in near-future years when realistic spending goals will still leave a small delta versus tax receipts. We need to avoid what even the IMF now sees as ruinous austerity in order to give our economy a chance to fully recover rather than weaken this coming year, and we should co-invest with banks and private investors in real, income-generating assets as described in our September newsletter. The 535 members of both houses could form many committees to find ways for government to operate more efficiently, to lower healthcare costs, to eliminate outmoded subsidies and to better enlist private sector investments to profitably do things society needs done and not necessarily by government. We can reduce our total debt, not just our annual deficit, if we follow in the footsteps of those most notable for doing it - Harry Truman and Bill Clinton. (Republicans have had more modest successes, but for fairness’ sake we should mention Dwight D. Eisenhower and the holding of the line by Richard M. Nixon).

As cited in last month’s newsletter, Abraham Lincoln declared: “the privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest opportunity.” The needy girl in the story quickly recognized the gift she had been given was good enough, and started to wear her new coat. Whether Washington will remember its past triumphs and act upon them in the manner of Lincoln and the practical young girl in our story remains to be seen - and indeed will be, in the very near future. Meanwhile, the gift is for the taking.

Too Extreme For America?

Too extreme for America... but not by much, and easily correctable. With just a bit of tweaking, we can restore enough orthodoxy to our monetary system to eliminate our unnecessary accumulation of debt. 

Last month we cited facts and figures to show just how small a percentage of our money supply (“like a drop in a rainstorm”) would be required to close the FY 2014 federal deficit with the use of United States Notes – our longest-lasting currency, first issued in 1862 and on hand in the vaults of the Treasury by law until 1996. Debt-free United States Notes or “greenbacks” were the heir to the currencies of all great civilizations prior to that date, including their use as the Constitutionally–described currency of the United States far longer than our more recently-devised Federal Reserve Notes, which are another type of printed, fiat money. These two currencies, which circulated side-by-side for over 80 years, exhibited exactly no difference in use but only a difference in that United States Notes have been created debt-free by the U.S. Treasury, whereas every time the government uses Federal Reserve Notes to fund a deficit it creates unnecessary debt in like amount.

A panel “expert” at one of Washington’s leading think tanks made the statement, “I don’t know anything about greenbacks.” He was of an age to have carried them in his wallet 20 years ago, yet says he knows nothing of them. How short memories can be! Some readers of this newsletter have struggled and struggled to understand them as debt instruments, objecting to their inferiority as “investments” in the eyes of prospective investors, when all they ever were was a currency, given worth as are our Federal Reserve Notes by the fiat power of government to declare them “Legal tender for all debts, public and private”. There are those who object that Federal Reserve Notes are special because they are “backed” by the full faith and credit of the government of the United States. That’s language lifted from Treasury bonds. Take a Federal Reserve Note from your pocket and see if those words appear on it, or if there is any guarantee of its exchangeability for any alternate form of asset. It is printed, fiat money, period. Take a pocket full of United States Notes, if you still have them, and see if you cannot buy exactly the same amount in Treasury Notes, gold, silver or Popeye’s fried chicken with either of these issuances of the U.S. Dollar.

Sovereign currency “greenbacks” seem to be thought of, by some, as a sort counter-culture, “out of the box” throw-back to a quirk in history. Actually, they represent the established orthodoxy of civilizations since the dawn of time; the type of currency provided for and specifically described in the Constitution; and the norm of American history. It is, rather, the idea of 100% privatization of the monetary system…we object to that last, greedy one or two percent - that is radical, a departure from the norms of history, a relatively recent experiment that can now be seen to have failed. When the last of the greenbacks on hand in the Treasury were destroyed in 1996, we were making excellent progress toward eliminating the national debt. Since then the national debt has exploded, and for no good reason. What we have is the bad reason of big-money interests who want to tie all money creation to debt creation as a stratagem for keeping the commodities they dominate – money and credit – in tight supply optimal for them but not optimal for the economy.

There are those who say that re-introducing greenbacks would be little different than what we are doing now, by borrowing money from the Federal Reserve. After all, they say, the Fed just keeps rolling its Treasures over and over and pays back to the Treasury the interest paid on them each year. Without getting into the issue of whether debt owed to the Fed isn’t in fact real debt, we must point out that the Fed must buy Treasuries from third parties, and that many Treasuries remain in the hands of third parties who will not obligingly roll them over indefinitely and who will not sent back the interest at the end of the year. Those who worry about our grandchildren being buried in debt have a real and valid concern.

When the greenback question was raised at an “event” of one of the major think tanks in Washington, the moderator’s response was: “Good luck with that one.” Indeed, not one of the panel members was willing to hazard a reply, except the one who said he knew nothing about the subject. When the Executive Director of the same think tank was asked to match us 1 for 12 in ways to improve our economy with targeted investments, no increase in debt, no austerity and no forfeitures in tax revenues, his response was not, “wow, that’s a tall order.” It has not been difficult for us to come up with a dozen and more ways to do so…surely his organization could come up with one! His response was, rather, “We are not interested at this time.” He, the moderator referred to and the panel member who said he knew nothing about greenbacks made it very clear that they, institutionally, do not want to go fishing in that pond. What, if not the out-sized contributions at least unseemly received from Wall Street Banks (thank you, Google), could account for this “disinterest” in the most pressing economic issue of our time? This is a subject we need think tanks to honestly think about. (A few of their number are catching on).

If the problem could possibly still be confusion, let’s break it down as clearly as can be, using a parable about a family farm. Pa harvests the fields, producing enough income to meet or nearly meet the expenses of the household. Ma, who keeps track of the bookkeeping, notices that too often their annual income falls slightly short of their annual expenses. So she starts baking pies to sell up and down the valley. Like any business, she must decide how many pies to make. Flood the valley with them, and they will have no value. But as Ma does have an ounce of common sense, her pie-making ensures the household has enough income to meet its expenses, and in good years, some left over to put into savings and investments. Eventually, of course, the pie-making will become less important, as only one among several supplementary sources of the household’s income.

Who do these characters represent? Pa represents the government, collecting taxes (etc.). Ma represents the government doing something it does uniquely well: making money (literally). After all, is it not only the government that can print money and proclaim it to be “Legal tender for all debts, public and private”? (And is earnable, usable money not as useful a product as buyable pies?)

This story might seem too humble, until we remember that what it represents is the Jeffersonian ideal, and in more ways than one. Thomas Jefferson was one of those who labored for months to ensure the Constitution would provide for a sovereign currency, issued by the federal government, rather than a privatized monetary system. On this subject, he wrote: “I sincerely believe the banking institutions having the issuing power of money, are more dangerous to liberty than standing armies.” (See, http://info.fmotl.com/GreenbackPound.htm ). It is fitting that Jefferson is memorialized, in Washington, DC, within the architecture of a Roman pantheon. Those who did so wanted to remind us that our founding fathers stood on the shoulders of great leaders of civilizations past. The sovereign base-metal copper coins issued by the Caesars provided a way of paying their armies, but more importantly of facilitating trade and enabling Rome’s subjects to pay their taxes – unlike the economic strangulation of the British who raised taxes and then required they be paid in British currency rather than those of the American colonies. The sovereign currency of the Caesars is thus meaningfully sanctioned in a familiar teaching of Jesus: “Whose image is cast upon this coin?” (“Caesar’s”, they replied). “Then render unto Caesar what is Caesar’s, and unto God what is God’s.”

In the middle of the National Mall stands an Egyptian obelisk memorializing George Washington. Like the Pharaohs, whose image was cast upon their coins, Washington used a sovereign currency to pay his armies and establish our great commerce-based civilization. Without the Continentals (money) issued by the Continental Congress, there would be no United States of America today.

At the west end of the mall, Abraham Lincoln is fittingly memorialized within a Greek temple. The Greeks were very meticulous in their philosophy, as was Lincoln in his thoughts. Their sovereign currency took the form of iron coins which were pickled so they would crumble and be useless in
the event someone tried to melt them down for their intrinsic value. It was thus made clear that the
basis of Greek currency was nothing but the authority of the sovereign state. So it was with the
Republican Abraham Lincoln and his Republican congress, which issued the greenbacks having no basis of value other than the fiat power of the government to declare them legal tender. With the choice of the greenbacks over money borrowed from the banks, Lincoln and his successors funded the Civil War and the Reconstruction. As in the case of the Continentals, there would be no United States of America today without the greenbacks. Here is what Lincoln wrote, concerning them:

The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers…. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.    (Senate document 23, page 91, 1865).

We could fill page upon page with quotations of great figures in public life and great economists who have argued for a restoration of our original constitutional currency. Some 235 of America’s foremost economists - Fed Chairman Marriner Eccles and scholars from 157 leading universities – backed the Chicago Plan to radically change the Federal Reserve and our privatized system of money creation. Great economists like John Kenneth Galbraith and Milton Friedman have argued the case, and even today there are bills before Congress to make these sweeping changes.

Yet, what we propose are not sweeping changes. We have focused on that miniscule portion of the total money supply (see our October newsletter) which would be involved if the government were simply to use its existing constitutional authority to issue debt-free United States Notes or greenbacks to close the budget gap.

What could we then do? We could start a national investment account with several bases, one of which was described in our September newsletter. Many a company has survived a bad year or two on account of having a strong balance sheet. If we want government to act in a more businesslike manner, here is an opportunity to let it do so. There are subsidies and tax write-off’s that need to be re-thought, because their effects are not always beneficial. Entitlement reforms can be examined, like treating Social Security as the insurance it was originally intended to be. There are many things the Administration and Congress could and would work on if not for such hysteria over the inevitable gap between revenues and expenses in near-future years…if we knew we could close a reasonable deficit by the issuance of greenbacks in such a quantity as to pose absolutely no danger of “hyperinflation” beyond the power of established monetary policies to control it.

Our argument is simply that a 100% privatization of the monetary system – denying government any opportunity whatsoever to use a sovereign currency as civilizations throughout history have - is simply too ideologically extreme.

A wise man once said, “The profound things in life are simple. Complicated things are just… complicated.” There was a context to these words. He did not mean that complicated things are never good. But, with all the things that have been considered and done lately, things truly have gotten unnecessarily complicated…and most definitely not in a good way.
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PolicyWinners.org and The Commitment Group Economic Development Consultancy ∙ Keith L. Rodgers, Director
Marina Towers Suite 616, 501 Slaters Lane, Alexandria, VA 22314 ∙ Tel:703-203-1680 ∙ Direct E-mail: KLRodgers1@aol.com

Print Just 600 Billion in U.S. Notes - And Eliminate the 2014 Deficit

A Proposal That Would Quickly Re-Set The Stage of Our Over-Long Greek Tragedy

In a September 26, 2013 article, CNBC journalist John Schoen points out:

In the current fiscal year, which ends October 1, the federal government ‘s spending gap shrank by more than a third, to a little over $600 billion, from about $1 trillion a year ago. As the economy has grown, the deficit has also fallen in relation to gross domestic product – a widely used benchmark of spending policy.

Part of the improvement comes from the year’s compromise package of tax hikes and spending cuts, which slowed the growth of federal spending by $85 billion (and is set to trim another $20 billion for the next fiscal year beginning in October.)

Following Schoen’s calculations, we should have a deficit of less than $600 billion for 2014 – a drop in a rainstorm compared to our $10.5 trillion M2 money supply (per the Fed) and $16 trillion annual GDP.

While the shrinking deficit makes us wonder why some on the Hill are inclined to undertake huge economic risks, it also suggests a tempting response to the fact that they are. In this we are reminded of the man who jumped into his red sports car every day and zoomed off to work, followed in hot pursuit by a neighbor’s ferociously barking dog. One day he stopped, looked around at the dog and called out, “OK, now that you’ve caught it, what are you going to do with it?” With more than one cause for perplexity, the dog walked away.

The numbers are such that we can stop, turn around to those who seem about to shut down the government and perhaps drive us into default, and say: “OK. You want to reduce the deficit by further cuts. We have a plan to eliminate the FY 2014 deficit entirely, with no more economy-weakening, revenue-weakening cuts. What are you going to do with that? The irony is that the plan of printing US Notes is what many of them (notably Libertarians) have urged for years, so it is no new thing to them. The new thing is the driver of the car – our current (not to say past) economics establishment - getting on board with it.

United States Notes are well known to all of us who earned money prior to 1971. They were the bills with the red Treasury Seals instead of the green ones. That’s the only way most people could remember the difference from the Federal Reserve Notes now exclusively in circulation. The same Bureau of Engraving and Printing printed both, and the Fed kept track of how many of each were printed well enough to implement monetary policy.

The Constitution provided for a sovereign currency, but it was the Republican Party in the days of Lincoln and the Congress of the time that inaugurated United States Notes or “Greenbacks” as a way of funding the Civil War and the Reconstruction without burdening future generations with debt. The famous Chicago Plan of the thirties was Greenback-based, and many feel today Roosevelt would have done better to go along with America’s leading economists than to follow Keynesianism to the extreme of the reactionary spending cuts of 1936 and the Second Depression of 1937.

Printing US Notes requires the simple discipline of not printing too many of them, whereas every Federal Reserve Note used by the government requires the creation of federal debt in like amount. Whoever came up with that idea? Some smoke-filled roomful of bankers for whom debt is a stock-in-trade, we must assume. In covering words that make no sense, such debt is described in the 1913 Federal Reserve Act as an asset should the government ever take over the Fed…but, realistically, who looks upon their debts as assets?

We’ve gotten the lead out of gasoline and the asbestos out of insulation. As long as people are willing to produce goods and services for US Notes, as they always were in the past, they will have value in trade without the economy-destroying toxin of debt. They worked for us in the past. Why not use them again?

The Establishment of a Meaningful, Functional Bank Reserve System

We have reached the midpoint of our 12-part series on ways to improve the economy using targeted investments, no increase in the national debt, no austerity and no net reduction in tax revenues…what we believe to be essential criteria for economic sustainability and thus plans with a reasonable chance of passing Congress…plans that Congress should pass.

In introducing this Solution #6, it is tempting to begin by citing the various fiscal crises that are swirling about, and then point out that we are on the wrong road exclusively if we spend all our time focusing on the fiscal tyranny of the urgent when what is most important is monetary reform for the long term. We continue to hold our view that the root cause of recessions is monetary, not fiscal, and that recessions end primarily when malfunctions in the system of money and banking work themselves out. We then, however, have to respond to the too-comfortable who say we really don’t have any problems except those that might be caused by extreme maladroitness in handling our fiscal issues…again, a challenge to our challenge to focus on the important and do something. It is true that some economic measures are improving, and there has been a run-up in the stock market. But there have always been monthly up’s and down’s in economic measures and occasional run-up’s in the stock market, no less so just before crises and recessions than in durable recoveries.

It is not our goal to give short-term prognostications concerning the economy, but to advocate an approach of being more strategic in formulating policy. We are under clouds that have all the appearance of storm cells, with some rays of light penetrating through. We can choose the attitude of a pessimist or an optimist. Consider the man who was told to cheer up, things could be worse. “So I cheered up”, he recounts, “And sure enough, things got worse.” Here’s the point: if we give any credence at all to the patterns of history, it will only be a matter of time – how much time is subject to debate - before we face another economic crisis and the 20th major recession since 1913. That is inevitable, unless and until we significantly reform our system of money and banking. Whether we choose to cheer up or not, whether a new crisis will befall us within months or after a few good years, would it not be wise to work while we can on reforming our system of money and banking to better weather the next storm? Could that not, in fact, give us new tools to bring about a full and complete recovery from the Great Recession, and something to provide new assurance to those looking down the road as they consider our financial future and thrash out our current fiscal conundrums?

Future cycles are inevitable, but there do seem to be some things that are not just cyclical but permanently changing. In the face of still-remaining concern over still-increasing debt, will Congress or perhaps a future administration be as inclined to sponsor another major, TARP-style bail-out of the big banks? Will we be able to keep so freely borrowing money from China, now that its industrial hiccups and the very scary story of its “ghost cities” show it may be in for major financial problems of its own? Will the undeniable trend toward the abandonment of the US dollar as the international trade reserve currency of choice continue? Will our climate change calamities continue to get worse? Will Europe be unable and unwilling to do as much as in the past to lend a hand to faltering economies? Will the sea-change politics of the Middle East yield non-functioning governments and economies for years to come? Will some war or catastrophic act of terrorism occur? Will the Fed be willing to go the extra mile and 20 more that it is recently has, considering its already-expressed intention to start backing away from policies that have resulted in artificially low interest rates and extraordinary “quantitative easing”? Will there come a time when the Fed, under pressure, will no longer consider I.O.U.’s that can always be recycled, but some doubt can ever be paid in un-inflated dollars (US Treasuries), and junk bonds (as some of the mortgage-backed securities are or could be in a renewed crisis), and various and sundry things the banks are now calling “securities”, to be sufficiently sound reserves or to constitute adequate reserves? The precise set of tactics we patched together to cope with the Great Recession may not always be available, and already there are signs that international monetary organizations including those to which the US is a party are devising alternate plans that would put public and private depositors at risk in the next crisis.

The world was shocked when bank depositors in Cypress were called upon to take a “haircut” – to forfeit some of their deposits – under the theory that their deposits actually belonged to failing banks and could be used to bail out the banks. Yet, this wasn’t something devised by the Greek government or devised just for a crisis confined to Cypress. The International Monetary Fund, the European Union and the European Central Bank not only approved but mandated the confiscation of depositor funds to “bail in” the two bankrupt banks in Cypress. The strategy was based on a global model that goes back to a directive from the Financial and Stability Board (an arm of the Bank for International Settlements) dated October, 2011, endorsed at the G20 Summit in December, 2011.i In 2009, the G20 nations agreed to be regulated by the Financial Stability Board, and “bail in” policies have now
been established for the US, the UK, New Zealand, Australia and Canada, among other countries.

The term “bail in” is described in the article cited above as “a quantum leap beyond a ‘bail out’”. The passage continues: “When governments are no longer willing to use taxpayer money to bail out banks that have gambled away their capital, the banks are now being instructed to ‘recapitalize’ themselves by confiscating the funds of their creditors, turning debt into equity, or stock, and the ‘creditors’ include the depositors who put their money in the bank thinking it was a secure place to store their savings. Rather than banks being put into bankruptcy to salvage the deposits of their customers, the customers will be put into bankruptcy to save the banks.”

The obvious question is, if we are part of organizations that impose this strategy on banking systems abroad, might not the same thing happen here? One might point out that we have the FDIC to insure deposits, but only up to a certain level often exceeded by individuals and organizations including NGO’s and state and local governmental entities. As of 6/30/2011, the FDIC deposit insurance fund had a balance of only $3.9 billion to provide loss protection on $6.54 trillion of insured deposits. That means $10,000 in deposits was protected by only $6 in FDIC reserves. The FDIC could borrow from the Treasury, but the Dodd-Frank Act (sec 716) now bans taxpayer bail-out’s of most speculated derivatives activities, which may well be the trigger of a 2008-style collapse.ii

So the question has been raised, is our FDIC insurance fund adequate to cover another system-wide banking crisis? In Europe, the national insurance funds were not. The European Free Trade Association ruled in the case of Iceland that the insurance funds were not intended to cover that sort of system collapse.iii In a climate of true crisis, when sovereign insolvency might be at issue in the eyes of some, might a future Congress take the same position? After all, have we not had those who called into question, via their challenges to raising the debt ceiling, the foundational assumption that Congress would pay the debt occasioned by its own appropriations? Do we not have even now, in both parties, a willingness to go down to the wire in terms of shutting down the government, as we have done a number of times now? If depositor funds are to be protected, what period of uncertainty might there be and by what means would the crisis be dealt with? The truth is, we are still in uncharted territory, as we have been since 2008, however much cheering up we may do…we really don’t know what might happen in the event of major crisis propelled not only by reckless bank activity, but also by possible catastrophic world and national events such as those that routinely fill the news.

Here we cannot resist commenting on those who might say our thinking is “outside the box” and thus “radical”, despite our repeated calls for a return from relatively recent experimentalist conventions to proven orthodoxies. Is it the mind of the radical that is so concerned with a banking system with reserves sufficient to endure realistic scenarios, or is it more accurately the mind of true conservatism in the realm of money?

As support for the claim that it is our recent banking practices that have become radical and in need of reining in…not us Progressives…let’s consider some examples. We certainly had a supply of them in the 2008 banking crisis, when the banks got caught not only on the back side of reckless mortgage lending and syndication, but also in credit default swaps, derivatives and other forms of assets and stocks previously forbidden by the New Deal era Glass-Steagall Act. These were re-allowed by the 1999 Graham-Leach-Bliley Act, which repealed portions of Glass-Steagall. The banks’ use of this new-found freedom led, within less than a decade, to the 2008 crisis. To what extent have the big banks reformed since?

A most interesting account has been furnished in an article titled, “The Leveraged Buyout of America”, by Ellen Brown.iv In it, she refers to two hyperlinked articles by Colin Lokey and one by Bill Frezza with the descriptive title, “Too Big to Fail Banks Gamble With Bernanke Bucks”. In going through this material, the mechanics can be seen by which the big banks have, as a thank-you for bailing them out, used the funds accessible on account of unusually low lending rates in recent years as collateral for borrowing through repurchase agreements (to avoid blatant illegality) to raise short-term capital for use in purchasing derivatives, corporate bonds and stocks, referred to in the main article as bringing about a $700+ trillion speculative derivative bubble. Brown writes, “If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper hypothecation, this pledged collateral gets pyramided, creating a ticking time bomb….”

The above article also cites a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, from US Representative Alan Grayson and three co-signers which expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. The letter stated, “We are concerned about how large banks have recently expanded their business into such fields as electric power generation, oil refining and production, owning and operating of public assets such as ports and airports, and even uranium mining.” The letter expressed concerns that, “These financial service companies have become global merchants that seek to extract rent from any commercial of financial business activity within their reach.”

In the same article, Ms. Brown notes, “It seems like there is a significant macro-economic risk in having a massive entity like, say, JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries.” We would add, in particular, a concern for control of commodity markets; a concern that, as seen 2008, the finances of very complex operations are difficult to monitor and regulate; and a concern, also as seen in 2008, that the inter-relatedness of operations by financial service companies makes it difficult to intervene to “save the financial system” in emergencies, indeed to segregate out and protect the interests of bank depositors.

To the maxim, “buy low, sell high”, a noted Real Estate professor added, “and use other people’s money.” If we have a situation emerging where the big banks can use tax payer’s money and depositors’ money to get involved in high-risk, short term investments and we are insuring them against any downside, are we on the right path?

We would actually like to see the banks invest in things like power plants, but not as part of a whole raft of investments outside the banking sphere, and not at the expense of reduced lending. Let’s focus on power plants, for a moment, as that is certainly one of the more sensible investments mentioned when it comes to institutional stability.

During the 1950’s, when the Eisenhower Administration was pursuing its Atoms For Peace program, the government explored several alternatives for the engineering of nuclear power plants. One was a Thorium reactor, which did not generate highly radioactive waste materials and was not a source for enriched uranium (for weapons). However, the administration chose the uranium model precisely because of the concerns of the Cold War and because it had the benefit of providing enriched uranium for nuclear weapons.

Somehow, the Atoms For Peace idea got a little muddled in the context of a two-superpower world. Nevertheless, we have the example of the French shouldering on to help develop uranium reactors in Iraq. Some time later, the Israelis perceived a need to un-develop them, and part of the rationale for the US invading Iraq was the suspected nuclear component of “weapons of mass destruction.”
Today we tell countries around the world they cannot have the benefit of Atoms For Peace held out to them not too many years ago by our country …that developing nuclear power carries with it the risk of economic sanctions, sabotage (as not verbally threatened but demonstrated in Iran), or military attacks by the United States or its allies. Paradoxically, there are risks to our national security from climate change, not to mention those involving conflicts over oil and coal and economic crises involving multiple nations – risks not insignificant when stacked up against the risks of nuclear proliferation. How long will saber-rattling without using the saber (present policy, it would seem) work in a world in which urbanization and industrialization are proliferating, the cleaner fossil fuels running out in areas less endowed with them than we are, and nuclear technology is proliferating?

Recent literature suggests that the Thorium reactor remains a viable alternative. Many believe nuclear fusion may not be that far away if we, globally, give the research effort a concentrated push.
Consider the cost of defense against nuclear war or terrorism, the costs of climate change disasters, the need for clean power in the US as periodically emphasized by brown-out and black-out scares, and the potential for greater prosperity for the US if a fulfillment of Atoms For Peace promotes economic development throughout the world. Shouldn’t investments in nuclear research (at least to bring us up to par with Europe) qualify as a national priority? Shouldn’t available funding to build a bevy of new plants be something we should plan for?

Some things governments do best. Our government could partner with European governments and others throughout the world in an effort to conduct appropriate nuclear research, and could raise the funding to do so without increasing government debt. For one thing, we could do so by simply printing money. No one has yet explained why we couldn’t print a limited quantity of US Notes or “Greenbacks”, just as the (Republican) Lincoln Administration did, and put them to good use now while we are still recovering from the recession rather than in an over-heated stage of the economy. (It should be noted that the Greenback-based Chicago Plan, proposed during the 1930’s, had the active backing of 235 economists and 157 universities and today is eliciting renewed interest at the highest levels).v Of course, if we do enter an over-heated stage of the economy, the classic solution (and a reason we are supporters of the Federal Reserve System) is to increase required reserves – money going into the pot we propose to create). Since no one has given a reason why Greenbacks could not be used, we assume silence is an acknowledgment that they can. But there are other strategies as well.

In our May issue our guest contributor (Michael Kirsch) described how the historic Bank of the United States converted government debt from the revolutionary war into shares in investments in economic development, and how new investors were attracted as subscribers to the Bank. During the Second World War, the government had no trouble selling war bonds, as people believed the cause was linked to their own survival (and because the Federal Reserve bought so many of them). If we created an investment vehicle for which outstanding Treasury notes could be traded in, we could afford even to guarantee returns on the new security when used as a replacement because we would only be replacing a guarantee already in effect. So instead of paying off or re-cycling a certain number of outstanding T-bill’s, we could use that money to fund two things: research and operations, as we already have a need for new plants using existing technology that the government is in a position to expedite. A good start-up is one that has promise; a great start-up is one that has promise and a positive cash flow.

Dr. Armen Papazian has proposed the use of “public capitalization notes” as part of a transition from a debt-based financial system to an asset-based financial system. His thoughtful article is relevant, here, and included via hyperlink in our bibliography.vi

Where would the banks come in? The renewed Atoms For Peace project (a Republican initiative, conservative readers note) should be among a limited class of investments of national importance worthy of special treatment by the government including possible co-investment and return-of-principal guarantees. This limited class may include others, such as revenue-generating infrastructure investments and the NAWAPA initiative of the Kennedy administration to bring not an oil pipeline (which shows it can be done, if the Romans hadn’t) but a water distribution system from the northwestern US and Canada – areas where there are great excesses of fresh water – into the dangerously parched western states.vii

What do these investment types have in common? Once financed and in operation, power plants generate (so to speak) consistent income little affected by recessions. Infrastructural investments such as toll roads and bridges generate income through and beyond recessions, though slightly affected by recessions. There are many parts of the country where water can be sold consistently, and at a good price. These kinds of assets can bring stability inthe form of ongoing income through periods of economic crisis, and could be pledged or sold on the world market to raise major infusions of cash to meet the kinds of financial crises we are not prepared to meet now.

There has been much discussion of bank reserves being too low. We think the focus should be on not only quantity of reserves, but quality of reserves. The Federal Reserve Act of 1913 provided for reserves so that in the event the government had to nationalize the Fed it would acquire assets to balance its obligations. What kind of asset for the government is a bunch of Treasury notes only evidencing its existing debt? What is the real value of some of the other securities held by the Federal Reserve, and those we have described above in the ownership of bank holding companies but not necessarily in their banking arms, if and when the economy goes really sour?

Taking a step back from it all, the big banks are dependent on “we, the people”… which includes the banks and the other third of the Federal Reserve Board of Governors…establishing a sound, long-term direction for the economy. They are dependent on the services of government which have included bailing them out. Is it not a fair quid pro quo that they be required to participate in the establishment of reserves a small amount of which need consist of programs for economic development that are of critical national interest and of a type that will provide for increasing stability in our financial system through the provision of consistent income?

FOOTNOTES AND BIBLIOGRAPHY

i http://www.opednews.com/articles/Think-Your-Money-is-Safe-i-by-Ellen-Brown-130706-145.html - Page 1
ii Ibid, Page 1
iii Ibid, Page 1
iv http://www.counterpunch.org/2013/08/27/the-leveraged-buyout-of-america/
Article by Ellen Brown with hyperlinks to articles noted by Colin Lokey and Bill Fezza. Upon opening this hyperlink, scroll down slightly to the “Leveraged Buyout” article.
v http://www.monetary.org/wp-content/uploads/2012/08/ChicagoPlanRevisited.pdf
Article by Jaromir Benes and Michael Kumhof, IMF working paper, 2012. This article contains an excellent synopsis and evaluation of The Chicago Plan. (We have tried and trust this file from the web site of the American Monetary Institute)
vi http://www.keipr.com/sitebuildercontent/sitebuilderfiles/aptcsaskispapazianfinal1111.pdf
Article by Dr. Armen Papazian: “A Product That Can Save A System: Public Capitalization Notes”
Paper presented at The Sorbonne of Paris, October, 2011. (We have tried and trust this file).
vii http://larouchepac.com/node/27962
The Kennedy-era NAWAPA plan for distributing water through the parched West is much too important and too timely to be ignored, and tireless work in pursuit of it by a contemporary staff member of this organization (Michael Kirsch) who contributed our May article on the Bank of the United States is to be commended.

Summer Sailing, and Time to Check Our Course

In the rhythm of the seasons, August is the time to take a break from the ordinary – to shift attention from the many things that matter to the fewer things that matter most. For many, thoughts of sailing refresh the mind well. Capturing the patterns of the wind centers the mind on the way of fruitful efforts. The disciplines of sailing are few, but essential. One of them is to take a moment, not too far out, to check your course. It is with that image in mind that we ever so briefly sight (OK, in the word-world, cite) a moment in economic history (of all things to think about, on a good sail!).

It was a moment when a ray of light broke through the dark sky of the Depression. It was a moment when six of our greatest economists joined forces to urge the Roosevelt Administration to make a well-conceived course correction. The “magnificent six” were: Fed Chairman Marriner Eccles, American Economic Association President John Commons, “Chicago School” founder Henry Simons, Irving Fisher of Yale, Lauchlin Curry of Harvard and Richard Lester of Princeton.

Supporters of the basic idea of Keynesian stimulus, they were yet concerned by the idea of effecting stimulus solely through increased government debt. They were also concerned about the austerity likely to come in time in response to ballooning debt. They knew there was another way that had been employed since the dawn of time and particularly well employed by the Republican Lincoln Administration and Congress of the time to enable a bankrupt Union to fight the Civil War and provide infrastructure for the Reconstruction, westward expansion and industrial revolution. Greatness seeks true solutions, does it not? So it was with these “magnificent six” economists who urged the re-introduction of Lincoln’s debt-free Greenbacks as a step in solving the Great Depression (though Greenbacks, alone, are not our subject here).

Roosevelt chose another course, confident that debt-based Keynesian spending would soon bring the country out of the Depression. So confident was he in the progress being made that by 1936 he shifted his focus to reductions in government spending to “tackle the deficit”. (Sound familiar?) In 1937 the economy plunged into the Second Depression, ending only with the war. If the “magnificent six” of the thirties had had the benefit of hindsight to bolster their case, might they have prevailed?

Might such a “magnificent six” today prompt a full recovery as we so badly need without unmanageable debt or austerities that could again prove ruinous? We have suggested and will suggest at least a dozen ways of achieving the goals of growth without debt, austerity of loss of tax revenues … not with the end of asserting that we, as a small consulting practice engaged in economics research are uniquely qualified to do so … but in order to show that if even we can do this, great minds and great institutions in economics can do so now as in the past.

But we must think of the prevailing winds in our sailing analogy. Not everyone is interested, for reasons many and sundry. By spreading our sails aloft, can we capture the attention of those who are? Perhaps 50 who really care about these issues, out of 1,000 we hope to sometimes read us, and out of those 50 another “magnificent six” who are in a position to be heard and to speak with a unified voice like that of Marriner Eccles, John Commons, Henry Simons, Irving Fisher, Lauchlin Curry and Richard Lester?

However, in keeping with the sailing analogy, it is time to check our course. Who is really reading us? We have encountered some wonderful organizations, and feedback from individuals that gives us that certain amount of gratification that comes from “preaching to the choir”. But our goal is to foster communication between camps that rarely communicate, and to reach our end destination…not just tap dance on deck!

So here’s our August change-of-pace. We’d like to hear from you. We expect to hear from but a few... not everyone need respond. A voice from cyber space saying, simply, “I’m here” tells us something. A voice from here and there commenting on where we are and aren’t hitting the mark would be much valued. Should we alter our format, perhaps become a forum for discussion and select either anonymous or attributed comments, according to the wishes of commenters? What is the gamut of efforts already underway?

Summer sailing… a time to seek harmony between propulsion and tack…to be sure we are on course to reach our destination… to relish conversations about little-known facts of history and visions of what lies beyond the horizons all about. Oh to bring back to the tired city the influences of sun, wind and the blue expanse!

The Growing US and Worldwide Use of Complementary Currencies

This is the 5th in a series of 12 articles on strengthening our economy through the use of targeted investments involving NO increase in government spending, NO austerity measures and NO reductions in tax revenues. We regard these as essentials of sustainable economic policy. To date we have proposed a limited issuance of Greenbacks as used, with no increase of government debt, to finance the Civil War and Reconstruction; a National Economic Development Bank to be initially capitalized by Greenbacks; a re-creation of the original Bank of The United States; and support for the growing state and local public banking movement. Past issues of this free e-newsletter will be gladly sent to those who request them and we welcome, on or off record, comment from or discussion with any of our readers.

The Legacy of the Worgl "Experiment"

How can a punctual scholar spend a few interesting minutes “surfing”… perhaps while waiting for a less punctual colleague? Type “the Worgle Experiment” in the search bar and several brief, interesting articles from credible sources pop up concerning this striking demonstration of economic creativity in the face of the terrible suffering of the Great Depression as experienced in Austria. What if the Mayor of a mid-sized industrial town (Michael Unterguggenberger was his name) came to the realization that the essential cause for the Depression was simply the lack of credit and money in circulation, and decided to print and spend into circulation the town’s own supply of money? What an interesting “experiment” ensued.

Notice we use quotation marks around the word “experiment”, however... for since the dawn of time chiefs and village elders and governors and emperors have issued coin of the realm or monetary certificates in a quantity calculated to meet the needs of their economies as a medium of exchange without either constricting economic activity or causing inflation. A particularly strange twist of history…and a real experiment…occurred when a Dutchman installed as an English King (William III of Orange) found himself running out of money to fight the Nine Years War and came up with the daring idea of ceding to a group of Dutch bankers the power to issue coin of the realm and control over the money supply held by sovereigns since time immemorial in exchange for funding of his war. So we have, between William III with his radical break from orthodoxy and Michael Unterguggenberger with his later return to orthodoxy, not just a tale of two cities but a tale of two rulers each embarked on an experiment still being played out today in the US and around the world.

When the bright Dutchmen who ruled England put their heads together, they had enough PR sense to realize they should not call their new central bank the Bank of Holland or some such thing, but the Bank of England. In 1946, the UK nationalized the Bank of England, just as the US Congress is currently considering a bill (HR 2990) to nationalize the daughter of the Bank of England. (In deference to some of our readers, we’re not even going to mention the name). Our position is not on the bandwagon of such a nationalization nor is it as an advocate of certain other measures that would radically revolutionize our current banking system. We are pragmatists. If a thing works, keep it. But don’t use it to totally frustrate democracy and the free market, to exclude complementary currencies and methods of banking…the necessary selection of choices to which true freedom inevitably leads.

We must be brief in surveying the Wörgl Experiment and other examples of complementary currencies, providing a number of citations for further reading at the end of our article. We especially urge our readers to read the brief but very informative article first cited there, which puts an emphasis on “where the rubber hits the road” amid first world triumphs and a third world crisis situation of an urgent nature today.

Quickly then, about Wörgl: With a population of about 4,500, the town suffered an unemployment
rate in excess of 30% when the mayor-with-the-long-name took office. Some 200 families were virtually penniless. The town itself had but little cash and heavy debts. The Mayor was a follower of the economist Silvio Gesell, then recently deceased, and he ran an effective town meeting in which he explained and got strong buy-in for his pursuit of Gesell’s theories. He deposited 40,000 Austrian Schillings of the town’s money in a local bank to “back” a new scrip to be issued. It could be taken to the bank and exchanged for Austrian Schillings at a 2% discount, but it is apparent that didn’t happen much because contemporaneous records (later cited) showed most of the money was lent out at interest. This behavior paralleled that of the holders of Abraham Lincoln’s Greenbacks - when given the opportunity to exchange them for specie, the Civil War inflation period had ended and Greenbacks served well enough as currency that hardly anyone saw the need to make the trade.
Much has been said about the demurrage or negative interest the Wörgl notes carried. Each month a 1% stamp (like a penny stamp on a dollar bill) had to be affixed to maintain the value of the scrip.

The Mayor and others believed this to be a great incentive for promoting velocity of circulation, even in prompting people to deposit money in the local bank or to pay their taxes early before the end of the month. There are certainly other possible explanations for why the money was spent quickly by impoverished workers or spent within the area as the only place they could be spent. The bottom line is that records show a tremendous velocity of circulation. Workers were paid in part (50% to 75%) with the new script in completing an impressive array of infrastructural improvements throughout the town and prosperity flourished (described in a “Suggested Reading” citations). Within a year 170 Austrian towns were following suit.

That’s when the Austrian Central Bank stepped in to defend its monopoly on the money supply. In cases reaching up to Austria’s supreme court, the townspeople lost. The region around Wörgl fell back into the Great Depression, with Wörgl returning to a 30% unemployment rate. The experiment over, disaster returned. An interesting observation is that it was a disgruntled Austrian seeking to establish a new economic order, by some accounts early named Adolf Schicklegruber, who led a gang into Germany for the Beer Hall Putsch launching his career as Adolf Hitler.

But the experiment did return to the area. Some 30 miles from Wörgl, across the border in the Rosenheim area of modern Germany, the Chiemgauer flourishes among dozens of other privately operated regional currencies in that nation that are part of the Regiogeld Movement. An announced purpose of that movement is to “combat capital scarcity and capital costs”. The Chiemgauer, which is pegged to the Euro as the Wörgle scrip was to the Austrian Schilling, also involves similar demurrage in that it expires every three months, requiring the holder of the note to pay 2% of the nominal value of the note to reactivate it. Its (web site) backers claim, “by diminishing the ‘store of value’ function in this way, its ‘means of exchange’ function is enhanced”; and it is claimed “the Chiemgauer circulates about 2.5 times faster than a Euro, meaning less money (and interest) is required to finance the same economic activity.”

The Wikipedia article on Community Currencies lists some 121 of such currencies in the U.S. Some are state-focused, like the Arizona Dollars. Some are city-focused, like the Atlanta Hours. Our Tulsa, Oklahoma readership may find interest in the Tulsa Hours. Our friends at Brookings (South Dakota) may find interest in the Brookings Bucks. The BerkShares (they have a good web site, like many of the others) are very similar to the Chiemgauer of Germany. Many of these currencies can be shown to have increased trade in US Dollars as well as in the local currency. While there are claims they also increase federal tax revenues, that is a subject that perhaps needs further study, along with the regulatory revues now being made in some of the states regarding potentials for money laundering in “virtual” currencies like Bitcoin. In general, though, we have a certain faith in “pump priming” and would rather see active, growing local economies than those just waiting for times to get better. A variety of motives are being employed to promote these currencies, ranging from pure local economic development to encouragements to serve the community, contribute to charities or help the environment. Strange bedfellows, therefore, find themselves in the same camp.

The US Constitution allows local organizations of all descriptions to issue these forms of printed or electronic scrip, as long as they do not closely enough resemble US Dollars to be confused with them. It does not allow the states, however, to authorize currencies except to make “gold and silver coin a tender in payment of debts.” There are movements in a dozen or more states to follow Utah’s lead in instituting silver and gold coins as a state substitute for the US Dollar. South Carolina legislators have even considered accepting foreign coins like the South African Kuggerand. Why?

Much of the rhetoric has concerned the supposedly fragile state of the US Economy and speculations about collapse of the Federal Reserve System. There are older roots than that, though. Congressman Ron Paul has introduced a bill to allow for a “competition of currencies” between the States and the Federal Government, following the theory of Friedrick Hayek that such competition would leave citizens less vulnerable to federal policies that would de-value the dollar.

People of these schools have revived old arguments about possible inflation-causing policies of the government right in the middle of a deflation-induced recession, and acting as if what the dollar needs is an attack upon its value by the competition of a proliferation of monetary gold…that, somehow, that will give us a more secure national economy. As presidents from both parties - Franklin D. Roosevelt and Richard M. Nixon - knew, a return to the gold standard may strengthen the hand of commodity speculators in gold but would weaken our economy due to an artificial constriction upon the amount of money that our economy can, without problematic inflation, put to good use. (A good reason to support the Fed’s proven inflation-fighting power).

So our argument, let us be clear, is for complementary currency which will keep the US Dollar strong. The successful use of such currencies in Wörgle and in many other times and places as described in the reading below indicates they can serve a significantly helpful role.

Suggested Reading

Current Crisis: For information about complementary currencies worldwide and economists caught in a crisis in Kenya, see: “The Crime of Fighting Poverty: Local Currency’s Success in Kenya Ends in Forgery Charges”, by Ellen Brown of the Public Banking Institute, at the following site: http://truth-out.org/news/item/17297-the-crime-of-alleviating-poverty-a-local-community-currency-battles-the-central-bank-of-Kenya
Regarding William III’s transfer of monetary authority to the Bank of England, see Stephen Zarlenga’s address to the House of Lords (page 12 of that text) on the web site of the American Monetary Institute at http://www.monetary.org
For a list of Community Currencies in the US, see:
http://wikipedia.org/wiki/List_of_community_currencies_in_the_United_States
For contemporaneous accounts of the Wörgle Experiment, see Thomas Greco’s case study at:
http://www.reinventingmoney.com
For discussions on complementary currency innovations, see Articles and Papers of Prof. Paul Lietaer (Berkeley) on the web site of Currency Solutions for a Wiser World at: http://www.lietaer.com
For an evaluation of the Wörgle Experiment by economic scholar Anthony Migchels, see:
“The Power of Demurrage: The Wörgl Phenomenon” by Anthony Migchels on Real Currencies,
July 2, 2012 (see: The Power of Demurrage)

Strengthening the Economy and Reducing Public Debt Through the Public Banking Movement

This is the fourth of twelve articles on improving the economy within these criteria: Use of targeted investments; no increase in the national debt; no austerity today or tomorrow (such as raids on Social Security and Medicare) and no reduction in net tax revenues. To date we have presented a proposal to issue a limited amount of debt-free United States Notes (“Greenbacks”) such as funded the Civil War and the Reconstruction; a proposal for a National Economic Bank similar to those of the world’s fastest-growing economies, to be initially capitalized by Greenbacks; and a proposal re-create the original Bank of the United States as established and put to good use by the Founding Fathers.

Addressing Root Issues

The public banking movement, which stems from the great success of the public bank of North Dakota since 1919 and of state and local level public banks throughout the world (notably throughout Germany), directly addresses the monetary and credit roots of our modern recessions. This is refreshing, after so much debate about peripheral issues like federal budget decisions and calls for tax and regulatory relief. A straight-line extrapolation of the national debt reductions of the second term of the Clinton Administration shows we were on course to eliminate the federal debt by the year 20ll, without the kind of austerity some are insisting on today. When was the last time in the world we saw such austerity serve an economically useful purpose? Some propose tax cuts and regulatory relief, as tried during the Bush Administration. Did they lead to an improvement in the economy or a reduction in the national debt then? Whichever way we go on these issues, it is a sideshow. It is not addressing the root issues, the credit and monetary issues, which we all know from Economics 101 are the root causes of our modern-day recessions.

Why should we say credit and monetary as if they were one word? Because, under our fractional reserve banking system, a large part of our money supply is created as banks lend and re-lend money. When the banks stop lending money, they also stop creating money. The formula always holds: too little money chasing readily available goods and services results in a recession. Our purpose is not a rant against Wall Street, but just a bit more must be said to paint the picture of the need for public banking.

We have created a monster by giving into Wall Street in ways that controvert the free market system. We have made it easy to lend recklessly and play in derivatives that were actually defined as gambling games and not permissible for banks to engage in during the 1920’s. There have been bail-out’s and bonuses where any other business would feel the full consequences of excess risk. There have been large-scale purchases of toxic mortgages and mortgage-backed securities and other toxic securities by the government where no other industry has such a dumping ground. Being able to cash in those assets and infusing the banks with $16 trillion dollars of bail-out money (according to the recent first-ever audit of the Federal Reserve) gives the banks plenty of liquidity, which was the goal, but what we hoped was that the banks would lend the money. Being given a guaranteed 6% interest in their stock in the Federal Reserve provides income without risk. What we have created is staying power to sit out a recession rather than go out there and lend.

Do periodic recessions benefit banks? Andrew Mellon has been notoriously quoted as saying, “during recessions, assets return to their rightful owners” (meaning the banks.) Between foreclosures and bankruptcies, vast amounts of assets wind up in the hands of the banks. Home-owners who have never made a payment late are in “default” on their loans because of decreased housing values, and cannot re-finance when step loans increase. Unavailability of credit means businesses cannot re-finance loans that become due. This very murky picture is worth mentioning on historical grounds, as the pioneering public bank of North Dakota was founded in 1919 to protect farmers in that state from rampant foreclosures. It is, unabashedly, a movement with populist roots. They are also pro-business roots, though with an orientation more to Main Street rather than Wall Street. That’s not all bad. Without our thousands of Main Streets, Wall Street could not exist.

WHAT ARE PUBLIC BANKS?

Public banks can be set up by states or even cities. They can be capitalized by public employee and other labor pension funds, and can sell subscriptions. Their core deposits can come from tax and other revenues from city, county and state governments. The cash management fluctuations of city, county and state governments are enormous, as the receipt and use of revenues rarely match. There must be substantial “rainy day” funds. One governmental authority may be saving to pay off a bond when due, while another borrows for other purposes. They are constantly involved with the banking system, with huge amounts of money flowing back and forth with Wall Street. In an example given on the web site of the Public Banking Institute (PBI), Ellen Brown cited the State of California as of the end of 2010. At that time, it had general obligation and revenue bond debt of $158 billion, of which $70 billion or 44% was owed for interest. She points out: “If the state had incurred that debt to its own bank – which then returned the profits to the State – California could be $70 billion richer today. Instead of slashing services, selling off public assets and laying off public employees, it could be adding services and repairing its decaying infrastructure”. Yet, as she points out elsewhere, that’s only part of the picture. By keeping state money working in the real, physical economy in the state rather than wherever and however distant banks and investment houses want to use it, a state benefits from the economic growth the state is able to foster.

Here’s how it works in North Dakota. In all but a few loans for public infrastructural purposes, their state bank (BND) has functioned as a participation lender in cooperation with community banks. Loans originate with the community banks, and both the risks and the rewards are shared by the partnering banks. As the PBI website article on the subject puts it, “another way to look at it is this: the public sector sets up the standards that identify how liquidity is injected into the economy, and the private sector not only gets to vote on each deal but has skin in the game for each deal. They can’t throw them over the fence, which is what had been happening in the public sector mortgage securitization market”. This partnership approach has resulted in smaller, local, in-state banks having an opportunity to participate in large loans, giving North Dakota the most community banks per capita and the lowest number of bank failures in the US. It is a system that is geared to local use of local money, providing credit to farms and industries and Main Street businesses that the big international banks might turn their noses up at during good times and especially during bad times.

Through this mechanism, North Dakota’s public resources are leveraged. Furthermore, the sum of all the lending done by all the banks creates money in the local economy through the fractional reserve system. Through profitable operations over a long history, the BND has been able to build its resources while also turning over to the State general fund over $300 million during the last 10 years. This has allowed North Dakota to have, throughout the recession, the biggest state budget surpluses, the lowest default rates and the lowest unemployment rate in the country. This all began long before shale “fracking” was thought of.

There is much more to be said on the subjects of the history and the future of public banking in the US and other countries. A wealth of information is provided on the web site of the Public Banking Institute. There are presently bills to establish public banks in 20 states and active movements to do so in other jurisdictions. (For those of us who are D.C. locals, movements are well underway in the District, Maryland and Virginia.)

As we conclude this newsletter on Sunday afternoon, June 2, a large conference on this subject (June 2-4) is beginning in San Rafael, CA. Details and even the opportunity to view the simulcast of the various sessions can be found on the web site of the Public Banking Institute.

Let’s take inventory:

 -   Targeted investments to improve the economy
 -   No increase in the national debt
 -   No austerity required
 -   No forfeitures in net tax revenues
 -   A system that has worked well since 1919 in North Dakota and throughout the world including extensive use in Europe’s healthiest economy, that of Germany

What’s wrong with that?

A Proposal to Generate A National Economic Development Bank in the U.S.

In our February newsletter we promised to present 12 ways to improve our economy using these sustainability-oriented criteria:

(1) Use of targeted investments in the economy;
(2) NO increase to the national debt;
(3) NO damaging austerity today or tomorrow;
(4) NO sacrifice of tax revenues.

Think tanks, we welcome competitors!!!

In our March newsletter we proposed the re-introduction of debt-free United States Notes. For a fuller history, see Prof. Richard Striner’s article. We noted that many economists have responded to our idea, falling into two categories: (a) those who explicitly accept it as an immediately available tool and (b) those who tacitly accept it but worry about the political aspects of change to the status quo…whether “anything good” could happen in our present political climate, or whether Congress would go to excess if it again utilized its constitutional power to print money. We do not find the latter concern to fit the nature of our present Congress, and Congress has not historically abused its power to create money in the same way it has its powers to create debt and to create austerity (as in 1936, when most economists believe the “second depression” was so triggered). None of the “reticent” economists we quoted last month has suggested that issuing debt-free United States Notes could not be done again, or that it would be difficult to determine an appropriate limit to the dollar amount issued so as to avoid any risk of “hyperinflation”… as was avoided in the $787 billion ARRA stimulus. At least an equal issuance of debt-free United States Notes should be an option free of inflation worries. They would circulate side-by-side with Federal Reserve Notes, as they did between 1914 and 1971.

Now the question is, how would they best be used? They could be used as they were in the Lincoln administration, for general government expenses. They could be used to fund infrastructure projects, again as during the Lincoln administration. A mark of the greatness of the Lincoln Administration (and the Republican Congress of the time) was that as an initially bankrupt government they not only fought and won the Civil War but also provided for the reconstruction, the westward expansion and the industrial revolution by funding a vast network of infrastructure – all without creating unmanageable debt. What a great subject for another Lincoln movie!

Despite the present excess capacity in the economy and the well-proven effectiveness of Fed measures to dampen inflation if and when that becomes a concern, we propose balancing increased demand caused by an infusion of new money by using some of it to foster increased supply of key inflation-prone items like medical care, food and sustainable energy. Along with targeting the kinds and locations of economic development most needed, these things could be done by chartering a National Economic Development Bank (NEDB) to be initially capitalized by debt-free United States Notes. It would have many of the characteristics of state economic development banks across the US and of national economic development banks throughout the world. A May, 2010 article in The Economist points out that the credit crisis of 2007-2009 was softened in major countries that have such banks, citing Brazil, India, Russia and China. The China Economic Development Bank has had a powerful domestic economy-building role as well as well as an international trade role. A recent book on it by Henry Sanderson and Michael Forsythe has been reviewed by Erica Downs of the Brookings Institute.

Our NEDB would not have to be constantly funded, due to loan repayments. With a zero cost loan fund, there would be strong prospects for profitability in all cycles, and thus for selling subscriptions. The first Bank of the United States, which was oriented to lending for economic development, drew upon subscriptions. The charter of the NEDB would protect the public interest, but the public interest overriding any limiting mandate would be that it simply operate profitably. It would create money by lending and re-lending money against “fractional reserves”, like present banks in the Federal Reserve System. It would leverage money by joining commercial banks or investors in economy-spurring loans and investments, and/or do so with state economic development banks or agencies. Money and banking is supposed to be something we’re good at. Why let ourselves be out-done by the Chinese?

A National Economic Development Bank could do much to prompt a full recovery. We can print some money and use it to acquire valuable investment shares and loan assets. We can strengthen our economy and get our debt under control without short-changing grandpa on the social security he paid into or making it more difficult for grandma to pay for a visit to the doctor using Medicare.

We’ve heard both plans…Isn’t accelerating growth better?

We Have Seen the Enemy, And It Is Not As Fearsome Now

...Let's be done with the Fiscal Cliff

A couple of years ago, the world was divided between those who thought we might yet plunge into another Great Depression,  and those who thought their Depression-type Keynesian responses might lead to a wreck of the ship of state.  Fears of debt-fueled stimuli added to fears that demographics would drown us with Social Security and Medicare costs.  “Change something!” they cried, like the mate on the bridge of the Titanic.  We now find ourselves in a corner… but is it in a sinking ship?

Tax reform is the first solution the parties have agreed to.  Unproductive subsidies are low-hanging fruit.  So are questionable deductions… but let’s keep in play the word “questionable”.  Many of these are integral to specific business decisions.  The Tax Reform Act of 1986 suddenly curtailed Historic Preservation Tax Credits, ruining investors in publicly-responsive projects.  Proper studies of subsidies, deductions and credits will require time.

Simple tax rates could be addressed right away.  Were we not paying slightly higher rates, prior to the Bush cuts? Can we place fully 100% of the burden on one class, the “rich”, and expect to have a healthy political dynamic?  It’s hard to argue we should beg from the rich or borrow money from foreign countries to subsidize our FICA taxes, when by paying about 15% more than what we are paying now we could cover the cost of benefits more of us will enjoy longer in part because of our increasing life-spans.  We should all pay a little more in taxes, even if just a very, very, little more, not as much as we did pre-Bush.  There is no reason why the upper middle class cannot take even a wee step in the direction of paying the same taxes they did in a pre-Bush, pre-McMansion mentality. 

Then comes the subject of the short-term spending cuts – those that are at least emotively critical.  An 11^th-hour formula could be an across-the-board cut of 5% to every agency – adjustments later as needed.  Those who have had to bring a construction project back on budget understand the institution of a “haircut” as a community experience.  If you absolutely have to cut 5% from an agency’s operations, you re-schedule undertakings, simplify them, bargain harder, allow a little attrition to occur, have a little Chris Christy style heart-to-heart with overly-demanding public service consumers at the “counter”, or resort to the refreshing discourse or a masonry foreman with his crew as he seeks to beat a storm front:  “Push!  Keep it moving! Push!” The crew of a good foreman knows this will only last to a needed break, and wouldn’t have it any other way.  So will properly-led government workers.  The business economy will not be as concerned over a 5% federal cut as over total uncertainty over a line of business, because they have faced 5% cuts themselves and know very well business can go on.

Well, that’s our posture for an eleventh-hour plan for the immediate Fiscal Cliff issues.  It can be accomplished with a modicum of faith that the long-term issues now have enough attention that they can be addressed within a sane time frame that Congress can control.  With 535 members of the House and Senate, why not 50 small committees to each properly study maybe 4 issues over 2 years – a couple of hundred specific aspects of our quest to bring our long-term finances under control?  Why not disallow bundling, so their work will have the best chance of producing results, or allow a line-item veto?  A lot of little and indisputable steps like cutting outright fraud in Medicare and having Medicare buy patents on drugs it buys so many of – if that can be shown to be an economic winner – would have as great an effect as packaged bills that attract televised ideological posturing spectaculars. 

How about eliminating earmarks?  How about letting the government return to creating money the constitutional way for certain purposes, by printing it, without buying every dollar needed from the private banks of the Federal Reserve System, at the cost of a significant portion of the national debt?  There are things we could do to build the economy without costing one cent to the national debt through borrowings, or through guarantees or revenue losses, as described in our last newsletter.  More ideas will come, from us and many others.  In fact, there are a lot of good ideas we can explore, if we nick away at the problems one at a time rather than through super-committees and marathon bargaining sessions where no one even knows exactly what is being talked about.  We can get past this hurdle of a created deadline without swallowing the “Fiscal Fly in the Ointment” – a better term than we have been using - at a time when the economy is, after all, improving.  “Bully!” we think T.R. would say.                     

After the Surgery, How to Save the Patient

The surgery over, Dr. Simons checks on the patient. With him are three interns – two who are certain they want to practice medicine, and then Marlene, who is uncertain about whether she might rather become an economist.

Dr. Simons doesn’t like what the monitors show. He listens here and there with his stethoscope and places his fingers on key arteries and fleshy areas. “It is important that the blood be flowing throughout the body”, he explains. “I am looking for signs of a clog, signs of blood building up in one area and not circulating properly. The heart must be beating strongly enough, and efficiently enough, and the blood pressure within bounds. We must also be alert to impurities in the blood. Why do you think this patient is recovering slowly?” he asks the interns.

Paul, eager to impress, suggests that new European cure. “Bleed the patient. It will take out the bad humours and eventually restore the patient to health.” “Oh sure, just like austerity cured Europe’s economy”, quipped Marlene. “What?” says Paul, “We are talking about blood and the body here, not money and the economy.”

Roger disagrees. “This patient’s recovery is too sluggish”, he declares. I think we should put more blood into the body, but spike it with caffeine, like the energy drinks we use to keep awake. That will stimulate the patient back to health.” “I couldn’t agree less”, says Paul. “This patient is in fragile health, and a big dose of caffeine in the bloodstream would act like a toxin. Whoever heard of giving a transfusion of a blood-caffeine mix? The toxin would do as much harm as the blood does good.”
“Well, it’s done all the time in economics”, Marlene stated. “Consider the American Recovery and Reinvestment Act. Didn’t we pump money into the economy, and debt at the same time, by using Federal Reserve Notes as the basis for the money infusion?”

“I do not need the boldface, Marlene, and I must bring this conversation down to earth” says Dr. Simons. This patient has lost blood in surgery, and needs a transfusion. Fortunately, he has provided two pints of his own blood pre-surgery. Assuming they have not been hoarded away somewhere or impounded for some other purpose, they will be available to restore him to health. Otherwise, we will have to resort to the blood bank.”

“Two pints”, interjects Marlene. But isn’t that just a small part of the total amount of blood in the human body? A margin, as we would say in economics?” “It is, but for reasons that will be later explained, it will do nicely. Two pints of blood, and not mixed with any foreign substance that would act as a toxin – like caffeine, Roger, or like… debt, if you prefer, Marlene”. “So what you mean is, you want to use the ‘United States Notes’ of blood instead of the ‘Federal Reserve Notes’ of blood. You do know the difference....” “Yes, a prior life… but we must talk later about your lack of subtlety”, said Dr. Henry C. Simons. “A two-pint transfusion of unadulterated blood, STAT.”

There followed a talking-to about lack of subtlety (“I thought it important, considering most people only think of such things while multi-tasking a mouse, donut and coffee before the real day’s work begins”). Marlene’s ears stung as she made her way home – a meandering, pensive walk it would be – around Washington Circle, then right at Dupont, for the long walk home down the avenue.
Hallowed ground here - but so lifeless, this morning, after what she had just been through…ivory towers on the Left, ivory towers on the Right, where she knew the great minds were beginning to ponder, “What do we dare talk about today? Must we start out the new year pretending again that the cause of the recession-and-debt was fiscal-fiscal-fiscal, or dare we to finally step on some big-money toes and get to the heart of the matter (so to speak) - the malfunctioning monetary system?”

From the moment Dr. Simons had seen the monitors askew, he had realized a correct diagnosis and timely action were imperative – a necessity of working in the real world of medicine; an example to other professions. “I want to live that daringly, that decisively”, thought Marlene to herself. Maybe she would stay in medicine, after all.
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