Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 40 - Helicopter Money

the late 1990s had popped in 2000, leading to a serious global economic slowdown in 2001. Before that, the Fed had been bent on curbing inflation; but now it had suddenly switched gears and was focusing on reflation – the intentional reversal of deflation through government intervention. Duncan wrote:

Deflation is a central bank’s worst nightmare. When prices begin to fall, interest rates follow them down. Once interest rates fall to zero, as is the case in Japan at present, central banks become powerless to provide any further stimulus to the economy through conventional means and monetary policy becomes powerless. The extent of the US Federal Reserve’s concern over the threat of deflation is demonstrated in Fed staff research papers and the speeches delivered by Fed governors at that time. For example, in June 2002, the Board of Governors of the Federal Reserve System published a Discussion Paper entitled, “Preventing Deflation: Lessons from Japan’s Experience in the 1990s.” The abstract of that paper concluded “. . . we draw the general lesson from Japan’s experience that when inflation and interest rates have fallen close to zero, and the risk of deflation is high, stimulus – both monetary and fiscal – should go beyond the levels conventionally implied by baseline forecasts of future inflation and economic activity.”

Just how far beyond the conventional the Federal Reserve was prepared to go was demonstrated in the Japanese experiment, in which the Bank of Japan created 35 trillion yen over the course of the following year. The yen were then traded with the government’s Ministry of Finance (MOF) for Japanese government securities, which paid virtually no interest. The MOF used the yen to buy approximately $320 billion in U.S. dollars from private parties, which were then used to buy U.S. government bonds.

Duncan wrote, “It is not certain how much of the $320 billion the MOF did invest into US Treasury bonds, but judging by their past behavior it is fair to assume that it was the vast majority of that amount.” Assuming all the dollars were so used, the funds were sufficient to float 77 percent of the U.S. budget deficit in the fiscal year ending September 30, 2004. The effect of this unprecedented experiment, said Duncan, was to finance a broad-based tax cut in the United States with newly-created money. The tax cuts were made in America, but the money was made in Japan. Three large tax cuts took the U.S. budget from a surplus of $127 billion in 2001 to a deficit of $413 billion

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in 2004. The difference was a deficit of $540 billion, and it was largely “monetized” by the Japanese.

Duncan asked rhetorically, “Was the BOJ/MOF conducting Governor Bernanke’s Unorthodox Monetary Policy on behalf of the Fed?

. . . Was the BOJ simply serving as a branch of the Fed, as the Federal Reserve Bank of Tokyo, if you will?” If so, Duncan said, “it worked beautifully”:

The Bush tax cuts and the BOJ money creation that helped finance them at very low interest rates were the two most important elements driving the strong global economic expansion during 2003 and 2004. Combined, they produced a very global reflation. . . . US tax cuts and low interest rates fuelled consumption in the United States. In turn, growing US consumption shifted Asia’s export-oriented economies into overdrive. China played a very important part in that process. . . . China used its large trade surpluses with the US to pay for its large trade deficits with most of its Asian neighbors, including Japan. The recycling of China’s US Dollar export earnings explains the incredibly rapid “reflation” that began across Asia in 2003 and that was still underway at the end of 2004. Even Japan’s moribund economy began to reflate.

. . . In 2004, the global economy grew at the fastest rate in 30 years. Money creation by the Bank of Japan on an unprecedented scale was perhaps the most important factor responsible for that growth. In fact, ¥35 trillion could have made the difference between global reflation and global deflation. How odd that it went unnoticed.7

The Japanese experiment ended in March 2004, apparently because no more intervention was required. The Fed had agreed to begin raising interest rates, putting a stop to the flight from the dollar; and strong economic growth in the United States had created higher than anticipated tax revenues, reducing the need for supplemental budget funding. The experiment had “worked beautifully” to reduce deflation and provide the money for more U.S. government deficits, except for one thing: the U.S. government was now in debt to a foreign power for money the Japanese had created with accounting entries -- money the U.S. government could have created itself.

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Can You Trust a Pirate?

After the Japanese experiment came the Caribbean experiment, which was discussed in Chapter 38. Joseph Stroupe, editor of Global Events Magazine, warned in 2004:

[I]nternational support for the dollar and for related US economic and foreign policies is noticeably weakening, at a time when it is most needed to support an unprecedented and mushrooming mountain load of debt. . . . The appetite of the big Asian economies to continue buying dollar assets is waning . . . . Hence the possibility of a Twin Towers-like vertical collapse of the US economy is becoming greater, not lesser.8

That was the fear, but collapse was averted when “the Pirates of the Carribean” stepped in to pick up the unsold bonds, evidently at a substantial loss to themselves. As noted earlier, these traders must have been fronts for the Federal Reserve itself, which alone has pockets deep enough to pull off such a maneuver and absorb the loss. (See Chapter 38.) The Fed manipulates markets with accounting-entry money funneled through its “primary dealers” – a list of about 30 investment houses authorized to trade government securities, including Goldman Sachs, Morgan Stanley, and Merrill Lynch.9 These banks then use the funds to buy government bonds, in the sort of maneuver that might be called “money laundering” if it were done privately. (See Chapter 33.)

In December 2005, M3 increased in a single week by $58.7 billion

– a 30 percent annualized rate of growth. Financial adviser Robert McHugh compared this increase to the hyperinflation seen in banana republics. “This is nuts folks,” he wrote, “unless there is an incredible risk out there we are not being told about. That is a lot of money for the Plunge Protection Team’s arsenal to buy markets – stocks, bonds, currencies, whatever.”10

The question is, can this secretive private cartel be trusted with so much unregulated power? Wouldn’t it be cheaper and safer to give the power to create dollars to Congress itself, with full accountability and full disclosure to the public? Congress would not have to conceal the fact that it was financing its own debt. It would not even have to go into debt. It could just create the money in full view in an accountable way. The power to create money is given to Congress in the Constitution. Debt-free government-created money was the financial system that got the country through the American Revolution and the

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Civil War; the system endorsed by Franklin, Jefferson, and Lincoln; the system that Henry Clay, Henry Carey and the American Nationalists called the “American system.” The government could simply acknowledge that it was pumping money into the economy. It could explain that the economy needs the government’s money to prevent a dollar collapse, and that the cheapest and most honest way to do it is by creating the money directly and then spending it on projects that “promote the general welfare.” Laundering the money through non-producing middlemen is giving the people’s Constitutionally-ordained money-creating power away.

The Fear of Giving Big Government Even More Power

The usual objections to returning the power to create money to Congress are that (a) it would be inflationary, and (b) it would give a corrupt government even more power. But as will be detailed in Chapter 44, government-issued money would actually be less inflationary than the system we have now; and it is precisely because power and money corrupt that money creation needs to be done by a public body, exercised in full view and with full accountability. We can watch our congresspersons deliberating every day on C-SPAN. If the people’s money isn’t being spent for the benefit of the people, we can vote our representatives out.

What has allowed government to become corrupted today is that it is actually run by the money cartel. Big Business holds all the cards, because its affiliated banks have monopolized the business of issuing and lending the national money supply, a function the Constitution delegated solely to Congress. What hides behind the banner of “free enterprise” today is a system in which giant corporate monopolies have used their affiliated banking trusts to generate unlimited funds to buy up competitors, the media, and the government itself, forcing truly independent private enterprise out. Big private banks are allowed to create money out of nothing, lend it at interest, foreclose on the collateral, and determine who gets credit and who doesn’t. They can advance massive loans to their affiliated corporations and hedge funds, which use the money to raid competitors and manipulate markets.

If some players have the power to create money and others don’t, the playing field is not “level” but allows some favored players to dominate and coerce others. These giant cartels can be brought to heel

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only by cutting off their source of power and returning it to its rightful sovereign owners, the people themselves. Private enterprise needs publicly-operated police, courts and laws to keep corporate predators at bay. It also needs a system of truly national banks, in which the power to create the money and advance the credit of the people is retained by the people. We trust government with sweeping powers to declare and conduct wars, provide for the general welfare, and establish and enforce laws. Why not trust it to create the national money supply in all its forms?

The bottom line is that somebody has to have the power to create money. We’ve seen that gold is too scarce and too inelastic to be the national money supply, at least without an expandable fiat-money system to back it up; and somebody has to create that fiat system. There are only three choices for the job: a private banking cartel, local communities acting separately, or the collective body of the people acting through their representative government. Today we are operating with option #1, a private banking cartel, and it has brought the system to the brink of collapse. The privately-controlled Federal Reserve, which was chartered specifically to “maintain a stable currency,” has allowed the money supply to balloon out of control. The Fed manipulates the money supply and regulates its value behind closed doors, in blatant violation of the Constitution and the antitrust laws. Yet it not only can’t be held to account; it doesn’t even have to explain its rationale or reveal what is going on.

Option #2, the local community fiat alternative, is basically the national fiat currency alternative on a smaller scale. As one commentator put it, what would you have more confidence in – the full faith and credit of Ithaca, New York (population 30,000), or the full faith and credit of the United States? The fiat currency of the national community has the full force of the nation behind it. And even if the politicians in charge of managing it turn out to be no less corrupt than private bankers, the money created by the government will be debt-free. Shifting the power to create money to Congress can relieve future generations of the burden of perpetual interest payments to an elite class of financial oligarchs who have advanced nothing of their own to earn it. The banking spider that has the country trapped in its debt web could be decapitated, returning national sovereignty to the people themselves.

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Section VI

VANQUISHING THE DEBT SPIDER: A BANKING SYSTEM THAT SERVES THE PEOPLE

The great spider was lying asleep when the Lion found him . . . .

It had a great mouth, with a row of sharp teeth a foot long; but its head was joined to the pudgy body by a neck as slender as a wasp’s waist. This gave the Lion a hint of the best way to attack the creature.

. . . [W]ith one blow of his heavy paw, all armed with sharp claws, he knocked the spider’s head from its body.

—The Wonderful Wizard of Oz,

“The Lion Becomes the King of Beasts”

Chapter 41 - Restoring Natonal Soverignty

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Chapter 41

RESTORING NATIONAL SOVEREIGNTY WITH A TRULY NATIONAL BANKING SYSTEM

“If I put an end to your enemy, will you bow down to me and obey me as the King of the Forest?” inquired the Lion.

“We will do that gladly,” replied the tiger. . . .

“Take good care of these friends of mine,” said the Lion, “and I will go at once to fight the monster.”

-- The Wonderful Wizard of Oz,

“The Lion Becomes the King of Beasts”

William Jennings Bryan, the Cowardly Lion of The Wizard of Oz, proved his courage by challenging the banking cartel’s right to create the national money supply. He said in the speech that won him the Democratic nomination in 1896:

[W]e believe that the right to coin money and issue money is a function of government. . . . Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson . . . and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business. . . . [W]hen we have restored the money of the Constitution, all other necessary reforms will be possible, and . . . until that is done there is no reform that can be accomplished.

The “money of the Constitution” was money created by the people rather than the banks. Technically, the Constitution gave Congress the exclusive power only to “coin” money; but the Constitution was drafted in the eighteenth century, when most forms of money in use

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today either did not exist or were not recognized as money. Thomas Jefferson said that Constitutions needed to be updated to suit the times. A contemporary version of the Constitutional provision that “Congress shall have the power to coin money” would give Congress the exclusive power to create the national currency in all its forms.i

That would mean either abolishing the Federal Reserve or making it what most people think it now is – a truly federal agency. If the Federal Reserve were an arm of the U.S. government, the dollars it generated could go directly into the U.S. Treasury, without the need to add to a crippling federal debt by “funding” them with bonds. That would take care of 3 percent of the U.S. money supply, but what about the other 97 percent that is now created as commercial loans? Would giving Congress the exclusive power to create money mean the government would have to go into the commercial lending business?

Perhaps, but why not? As Bryan said, banking is the government’s business, by Constitutional mandate. At least, that part of banking is the government’s business that involves creating new money. The rest of the lending business could continue to be conducted privately, just as it is now. Banks would just join those non-bank lending institutions that do not create the money they lend but merely recycle pre-existing funds, including finance companies, pension funds, mutual funds, insurance companies, and securities dealers.1 Banks would do what most people think they do now -- borrow money at a low interest rate and lend it at a higher rate.

Returning the power to create money to the government would be more equitable and more Constitutional than the current system, but what would it do to bank profits? That was the concern of government officials who reviewed such a proposal recently in England . . . .

The Fate of a British Proposal for Monetary Reform

The Bank of England was actually nationalized in 1946, but the monetary scheme did not change much as a result. The government took over the function of printing paper money; but in England, as in the United States, printed paper money makes up only a very small percentage of the money supply. The bankers still have the power to

i	As an aside to community currency advocates: this would not prevent local

organizations from issuing private currencies, which are not the national medium of exchange but are contractual agreements between private parties.

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create money as loans, leaving them in control of the money spigots.3 In Monetary Reform: Making It Happen (2003), James Robertson observed that 97 percent of Britain’s money supply is now created by banks when they advance credit. The result is a grossly unfair windfall to the banks, which get the use of money that is properly an asset of the people. He proposed reforming the system so that it would be illegal for banks to create money as loans, just as it is illegal to forge coins or counterfeit banknotes. Only the central bank could create new money. Commercial banks would have to borrow existing money and relend it, just as non-bank financial institutions do now. In Robertson’s proposed system, new money created by the central bank would not go directly to the commercial banks but would be given to the government to spend into circulation, where it would eventually find its way back to the banks and could be recycled by them as loans.4

It sounded good in theory, but when the plan was run past several government officials, they maintained that the banks would go broke under such a scheme. Depriving banks of the right to advance credit on the “credit multiplier” system (the British version of fractional reserve lending) would increase the costs of borrowing; would raise the costs of payment services; would force banks to cut costs, close branches and reduce jobs; and would damage the international competitiveness of British banks and therefore of the British economy as a whole. An official with the title of Shadow Chancellor of the Exchequer warned, “Legislating against the credit multiplier would lead to the migration from the City of London of the largest collection of banks in the world. It would be a disaster for the British economy.”

Another official bearing the title of Treasury Minister argued that “if banks were obliged to bid for funds from lenders in order to make loans to their customers, the costs to banks of extending credit would be significant, adversely affecting business investment, especially of small and medium-sized firms.” This official wrote in an August 2001 letter:

It is evident that this proposal would cause a dramatic loss in profits to the banks – all else [being] equal they would still face the costs of running the payments system but would not be able to make profitable loans using the deposits held in current accounts. In this case, it is highly likely that banks will attempt to maintain their profitability by re-locating to avoid the restriction on their operations that the proposed reform involves.5

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