Debt Free Is The Way To Be

There are many different problems facing this country today, but none as hazardous as the national debt. This problem could potentially cripple the entire country, sending it into a modern day dark age. There are so many people suggesting so many different ways to fix the debt problem, have a flat tax, cut spending, spend more and raise taxes, don't do anything at all just keep raising the ceiling, and these are all good ideas that need to be carried out in some degree. However, the debt problem we face today cannot be fixed by merely changing the country's spending habits, the country's monetary system itself must be changed. Although this plan may sound outlandish because it is not widely discussed in the media, common sense should be enough to make this idea more than convincing.

Jefferson Would Be Proud

The first step that needs to be taken to solve the debt problem is to explain to every member of Congress what Monetary Sovereignty is. If this term is broken down into the two separate words which comprise it, the meaning can be gleaned. If you remember from high school history, sovereignty means to answer to no higher authority. A nation which is sovereign makes it own rules, and follows them because it is accountable to no other power. The word monetary means pertaining to money. So the term Monetary Sovereignty means, "Answering to no higher authority pertaining to money." If the United States is monetarily sovereign, which it should be, it should be in complete control of its currency. Most people will agree with me so far.

Where a lot of people get lost is when I tell them that the United States does not create its own money, which means that our government is not monetarily sovereign. This is the reason why our government is in debt; they need money to pay for things, but they do not create it. If our government does not create our currency, then who does? The Federal Reserve Bank. It is essential to realize that the Federal Reserve is not part of the United States government, and that they create money and lend it to the United States Treasury.

Senator Louis T. McFadden, Chairman of the House Banking and Currency Committee in the 1930s, said, "Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders." The Ninth District court even concluded that the Federal Reserve was not a federal agency in Lewis v. United States, 1982. This can be seen when the court writes, "The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations."

So the Federal Reserve banks are privately controlled corporations, but how is it that they have complete control over the creation of the United States currency? The Federal Reserve Act of 1913 made it unlawful for a national bank not to be a member of the Federal Reserve system. Then, section 15 of the Act stated, "Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are hereby authorized." This means that Federal Reserve Notes, the currency which our country currently uses to represent a dollar, is issued at the discretion of the Board of Governors to be deposited into member banks. Member banks can only use Federal Reserve Notes, and since all national banks must be member banks, the Board of Governors have control over the entire money supply in this country.

Now it can be seen that it is not the United States which creates its own currency. It is a privately owned and locally controlled group of corporations, and because they control the money supply, the United States must borrow the money it needs from these banks if the Treasury wants to create money. When you borrow money you are in debt, when the United States borrows money it is also in debt. This is of course the national debt. The way that the United States borrows money is by selling bonds. These bonds are government promises to pay back the amount of money which is borrowed, plus interest. These bonds for sale to the general public, but the general public cannot buy enough of them to fund the country. The bonds which are not purchased by the general public are then put up for sale by the Treasury to the Federal Reserve banks. When the Federal Reserve banks buy these bonds, they create money out of nothing, remember they have the ability to create currency because of the Federal Reserve Act.

The other way which money is created is through fractional reserve banking. For example, when the United States sells a $1 million bond to the Federal Reserve, that money is created out of nothing, and  deposited into a member bank account in the Treasury's name. If the Treasury does not spend the money, the bank is only required to keep 10% of the deposit in the account, and is allowed to loan out the other 90%. The reason why money is created this way is because both the deposits and the outstanding loans are able to be claimed as assets to the bank. So not only does the bank have the original $1 million, but it has $900,000 in the form of debt. For this reason the same $1 million can be loaned and deposited multiple times, as shown in the table bellow. So when the Treasury sells bonds for a total of $100 billion dollars, they are actually creating and injecting $1 trillion into the economy.

When I asked my political science advisor what needs to happen to solve the debt problem he quickly replied, "create government surpluses until the debt is payed off, then balance the budget." This does need to happen, but not under the current monetary system being used. Any government surplus right now would be severely detrimental to health of the US economy. The first thing that would happen, if a law was passed to pay off the debt and balance the budget, is that taxes would increase, and spending would decrease. There is no way to balance the budget without doing both. In 2010 the government spent $3.5 trillion yet only took in $2.2 trillion in taxes, a $1.3 trillion deficit. Taxes would have to increase close to 60%, or spending would have to decrease about 60%, two things which are not feasible. Now that the mostly likely course of action can be seen, we can think about what consequences these actions would have on our economy. Decreased governmental spending would significantly constrict the money supply. As we have seen, a government bond sale to the Federal Reserve results in an injection of about ten times the amount the original bond was sold for. If the budget was reduced by $100 billion dollars, the money supply would be missing out on an injection of $1 trillion.

If these spending cuts were introduced at the same time as tax increases, there would be a severe economic downturn. There would be a reduction in the growth of the money supply, and taxes would strip the middle class, knocking many families into the lower class. Why would this happen? Interest rates would increase, and loans would be harder to obtain as a result of the decreased money supply. Consumers would have no extra income to buy extra goods, which would result in lower profits for companies selling those goods. The companies would have a hard time borrowing money to pay their employees because of the interest rate change, and as a result they would lay people off. These laid off people would seek government help, however, there would not be as much as would be needed because the government had to decrease spending! A balanced budget will result in a nightmare for this country. Another reason why the economy cannot stand the hit of a balanced budget is because of how much debt the citizens of the country have. Imagine yourself taking out a loan for $10,000 with a 10% interest rate. The loan which has just been made to you has created $10,000 as we have seen, however, over time you need to pay $11,000 to the bank. This means that $1,000 extra dollars must be created for you to even have a chance to pay off your loan, but as we have seen, this extra $1,000 dollars can only be created if someone else takes out a loan, thus resulting in a situation exactly like your own. If the United States stops borrowing, then money creation slows down. Money creation is necessary interest on loans to be paid, so if the US stops spending, nobody has enough money to pay back their loans.

It can now be seen that there is no way to get rid of the national debt as long as money is created through loans. The only way that the budget can be balanced is by issuing a new debt-free currency. The treasury already prints the currency for the Federal Reserve, and they also create the bonds which are now sold to create our currency, so it makes sense that the Federal Reserve Act can be amended to allow the Treasury to skip the bond selling step, and simply create currency without the Federal Reserve. This would mean that the United States could pay off its debts without creating new ones. Of course, these printed United States Notes could not just be released into the economy to pay off the country's outstanding debts because the value of the dollar would decrease. The money supply would effectively double, unless Federal Reserve Notes were simultaneously removed from the economy. This could be done by the Fed increasing interest rates and creating their own bonds. These bonds could be sold to the public only in exchange for currency from Federal Reserve member banks. Once these bonds were in the market the Treasury could buy them with United States Notes. This would slowly remove Federal Reserve Notes from the economy, while introducing about the same amount of United States Notes into the economy. There could even be an exchange rate between the two notes to create more buying power for the United States Notes.

If this system were to be put in place there would need to be some changes in banking practices also. Fractional reserve banking, remember, creates about ten time more money than is introduced to begin with because of the ability to create money through loans. This practice would have to stop. If a loan was made by a bank, it must come directly from the owner of the funds. Either the bank's profits, or the depositor himself.

Furthermore, interest must be illegal. This is the most important part of fixing this nation's economy. Remember, money is just a tool to facilitate trade, it is not a commodity itself. Interest is the price of money. If money is in high demand, interest rates naturally increase, just as if demand for peanut butter would also increase its price.

Another reason why interest must be abolished is because it inherently creates a class system. Imagine two people, one in the top 10% of wealth in the nation, and the other below the poverty line. The wealthy man deposits all of his money in the same bank as the poor man. The poor man lives paycheck to paycheck, and one day needs a new tire. If he has no cash on hand to pay for the tire, he must borrow the money to pay for the tire. If he borrows money from his bank, he will owe the principle plus the interest to the bank. In contrast, the wealthy man who simply has his money in a high interest account makes money simply for having money. The poor man pays more money because he has less money, and the rich man gets money just for being rich.

What would our country's economy look like ten years down the road if this plan were put into practice tomorrow? First of all there would be no debt. I cannot stress this enough. No debt. The United States would be printing its own money, and it would be in complete control of the money supply. The best part about this monetary plan is that the buying power of the dollar would be constant. There would be no inflation if this was done correctly, because the rate at which money was created by the Treasury would be the rate at which the economy expanded, not at the rate that people needed to borrow money. The third benefit of this system is that the government would be forced to do only the things which it was originally created to do. If a constitutional amendment was put into place limiting the amount of money that could be created depending on economic factors, then the power of the federal government would be much more limitted than it is now. It would not have the money to have a standing military during times of peace. It would not have the money to support welfare states (even though there would be no need anyway if the buying power of the dollar were restored). The government would have to pick the best ways to introduce money into the economy by paying for education, infrastructure, scientific research and so on. Only the programs that would benefit society would be paid for by the government, because war and welfare would not be in as much existence as it is today. War would not be as profittable because the government would need to pay cash for any military conflict which it was involved in, no more bonds to sell to raise funds, no more profit made with interest, and less of an economic reason for a country to want to wage war.

Do not fail to realize than the debt crisis, and even the country's economic problems, cannot be solved withing the confines of the current monetary system. We need to get back to the basics of money and trade.