The letter from the Fed was written by a director at the Federal Reserve Board of Governors. Although the content of letter was predictable and disappointing, I give the Federal Reserve credit for taking the trouble to answer my correspondence. Their response is important because they have put their position into the public record. This is rare. I wish Senator Pat Toomey and Treasury Secretary Timothy Geithner had the courage to publicly state their position regarding the matter of Treasury issued debt free money.
It was no surprise that the Fed official rejected my proposal to supplement our debt based money supply with Treasury issued, debt free United States Notes. Undeterred, I quickly composed a letter rebutting his position and mailed it on April 19, 2011. To date, there has been no response. At the end of my letter, I asked for permission to put the Fed’s letter, with my rebuttal, on this blog site. It has been more than a month since I sent the letter. Because I have no way of knowing if I will ever hear again from the Fed, I will publish only my rebuttal.
When you factor in the Constitutional provisions for the issuance of debt free money, the current debate regarding the federal budget deficit and the national debt becomes a scandalous exercise in stupidity. I say this because our national debt is nothing but a slush fund for the global bond market and Wall Street speculators. It is a $14 trillion taxpayer shakedown. This diabolical scheme to back our money supply with federal government debt is an insult to the intelligence of the American people.
Here is a question that no politician, including Senators Pat Toomey and Bob Casey, Representative Tim Murphy and many, many others, will not dare to address: How can we pay off the national debt when our money supply, our “savings” and our pensions depend on the existence of Treasury bonds, bills and notes? Who dreamed up this ridiculous system? It was the Federal Reserve, Wall Street and their agents in our government. Here is another vitally important question. Why can’t we follow the Constitution and increase our national money supply without piling more debt on the backs of American taxpayers?
We have been suckered into perpetual dependency on a national debt that threatens to destroy social security, Medicare and our standard of living. This is the trap that the financial markets and our political “leaders” have thrown us into. My rebuttal to the Federal Reserve letter below explains how we can escape this trap of debt slavery:
PO Box 815
Coraopolis, PA 15108
April 19, 2011
Federal Reserve System
Washington, D.C. 20551
Dear Mr. ///////////////:
Thank you for responding to my letter.
Yesterday, Standard and Poor’s downgraded the outlook for United States Treasury debt. This action spooked the markets and provoked an immediate reaction from the White House. It’s a mystery why anyone would pay attention to S&P considering their culpability in the housing bubble disaster. However, the message of the downgrade was clear. Reduce the budget deficit or else. Setting aside the policy blunders that produced a $1.5 trillion budget deficit and a $14.1 trillion national debt, it is obvious that revenues to the Treasury have not kept up with government expenditures. And there isn’t much chance of this situation changing any time in the future.
States and municipalities across the country (thanks to fraud and blunders on Wall Street) have revenue shortfalls because of reduced tax revenue. Important government programs are threatened because of budget constraints: Medicare, Medicaid, the Veterans Administration, NASA, the SEC, the CFTC, the EPA and the Pension Benefit Guarantee Corporation are all underfunded. $2.5 trillion, raided and spent by the politicians, is owed to the social security trust fund. And more liquidity is still needed in some areas of the private sector economy. I could go on at length but I’m sure you get the point: Our country needs more money in order to function for the benefit of the American people.
As was the case with the Great Depression, in 2007/2008, an unregulated financial sector destroyed a large part of the national money supply. This happened, of course, when the housing bubble burst. The Federal Reserve valiantly tried to recapitalize the banks and revive the financial markets with low interest rates and “quantitative easing.” Unfortunately, the result has been mixed at best. High unemployment and persistent economic problems clearly expose the limitations of conventional monetary and fiscal action when faced with a severe credit disruption.
We are told by politicians and pundits that the solution to this lack of money is for the American people to make painful sacrifices. We are told that we must submit to the austerity demanded by the “bond vigilantes.” And we are told that “America is broke.” Since it is the Federal Reserve that controls our money supply, I will ask you. Why is America broke?
The obvious solution to our economic problems is more money in the national money supply. But every time I propose increasing the money supply with Treasury issued, debt-free money -- United States Notes -- I get the same knee jerk reaction. “That will cause inflation and destroy the value of the dollar.” If there is not enough money, but increasing the money supply will destroy the value of the dollar, apparently, there is something terribly wrong with our monetary system. This is the essence of my argument.
I believe the Federal Reserve has painted America into an economic corner with its debt-based, fractional reserve financial system. Money is scarce but increasing the money supply will increase our already massive $14 trillion national debt. Is this is a hopeless dilemma? Fortunately, there is an alternative to this unstable, self-destructive system. Increasing the money supply with Treasury issued debt-free United States Notes is the only logical solution to our current fiscal crisis and economic problems. Issuing U.S. Notes is perfectly legal. This fact is confirmed by the law as stated on the Treasury Department’s web site.
The main stumbling block preventing sensible monetary reform is the foolish notion that dollars, our medium of exchange, are just another commodity. This blunder exposes our money to manipulation by the currency markets. The United States Constitution, (Article one, Section eight, Paragraph five) clearly states that only Congress has the authority to issue, and control the value of, our money. Of course, in 1913, Congress, in defiance of the Constitution, gave this power to the Federal Reserve. This blunder is responsible for our $14 trillion national debt.
In his May 11, 2010, speech, Chairman Bernanke quoted the economist David Ricardo: "It is said that Government could not be safely entrusted with the power of issuing paper money. Abuse by the government of the power to issue money as a means of financing its spending inevitably leads to high inflation and interest rates and a volatile economy.” First of all, this statement flies in the face of the United States Constitution. Second, this statement is an insult to intelligence of Abraham Lincoln (see below.) And third, the crash of 1929, the Great Depression, the recent housing bubble, the crash of 2007/2008, the Great Recession and many other financial disasters over the years, proves that the ability of the private sector to manage a country’s finances is wildly overrated.
What does the historical record tell us about the relationship between the money supply and inflation? Beginning in 1862, Abraham Lincoln increased the money supply by 25% with United States Notes, and there was no inflation.
To counter the disastrous “deleveraging” brought on by the 2007/2008 global credit meltdown, central banks around the world pumped multi trillions of dollars worth of liquidity (money) into the global financial system. Not only was there no significant inflation, monetary authorities were worried about the threat of ruinous deflation. It is true that the banks did not, to any great extent, loan this money out into the broader economy. However, the general consensus among economists and business pundits was that this liquidity injection was highly inflationary. The lack of significant inflation would seem to discredit the commodity theory of money.
Many people point to the hyperinflation experienced by Germany in the 1920s as a reason to limit our money supply. This is a flawed interpretation of history. War reparations imposed by the Treaty of Versailles and a large external debt weakened the German currency and started the downward cascade in the value of the mark. Uncontrolled, rampant speculation in commodities caused price inflation. A small segment of the population actually profited from the hyperinflation. People with access to strong foreign currencies could buy assets at bargain prices. Internal and external economic forces (the Great Depression), social instability and the possibility that the Weimar government might be overthrown also drove up prices. The German government printed more money in a vain attempt to maintain adequate liquidity in the economy. The massive amount of money in circulation was the result of the hyperinflation, it was not the cause. Strong government intervention and regulation could have stopped the hyperinflation in its tracks.
Of course, the Nazis had their own interpretation of events. They claimed that there was a conspiracy by international bankers (with the complicity of the Weimar Government) to steal the wealth of the German people. And they rode this conspiracy theory right into power in 1933.
Today, our inflation is not caused by an increased money supply. The amount of money in the hands of the general population has remained flat. Today’s inflation is caused by the demand for commodities in emerging market economies and the actions of the speculators who control prices in the commodity markets. The notion that the Fed is causing the inflation by “running the printing presses” is a myth. The Federal Reserve’s quantitative easing money went directly to the banks and the financial sector. It is the speculators in the large money center banks who drive up the price of food, oil (gasoline), gold and other commodities. And at the same time, they lower the value of the dollar. For the average American, the money supply remains the same, but his or her dollar buys less. You might say the Fed is the enabler, but it is the banks and the speculators who cause the inflation.
Chairman Bernanke, in his May 25, 2010, speech, stated: “We expanded the scale, scope, and maturity of our lending to provide needed liquidity to financial institutions.” Unfortunately, Chairman Bernanke’s good intentions have backfired. The Fed’s actions were a bonanza for the financial sector but they caused a bigger burden for the taxpayers and consumers. This brings up the question that I have been asking for close to seven years: Why can’t we increase the money supply (liquidity) without loading more debt on the backs of the American people? Nobody will dare to respond to this question because the answer is too explosive: Our money is based on debt. The money supply is increased by increasing the national debt. This occurs when our government issues more U.S. Treasury debt securities. This is why the national debt will always increase and will never be paid off under our current monetary system.
Increasing our money supply with debt-free U.S. Notes will not monetize our national debt. Monetizing the national debt occurs when the Federal Reserve buys U.S. government debt from the private sector in order to increase the monetary base. Of course, the national debt must be increased in order to provide the initial government debt securities to the private sector. This peculiar and illogical arrangement reflects the false choice that has made debt slaves of American taxpayers. Increasing the money supply with Treasury issued, debt-free, U.S. Notes does not monetize the national debt because no debt for currency swap is involved. Government debt is not a part of the transaction.
The problem of monetizing the debt is at the heart of the current debate over raising the national debt limit. The government needs more money, but it has to sell debt to the private sector to get it. In order to make our debt more attractive to the “bond vigilantes,” austerity must be imposed on the American people. This is a stupid, false choice. The national debt will never be paid off because it is government debt that backs our money supply. The austerity and cuts in government spending are just a way to bleed more money from taxpayers and weaken the government. If Congress and the Treasury would have followed the example of Abraham Lincoln and John F. Kennedy, raising the debt limit wouldn’t be an issue at all: The government could finance itself, just as the Constitution intended. Abraham Lincoln and John F. Kennedy had the wisdom and courage to issue debt-free, U.S. Notes. Tragically, their brilliant monetary reforms died when they were assassinated. And their deaths cleared the way for our $14 trillion national debt.
The Federal Reserve is the subject of severe criticism since the housing bubble collapse and the disaster of the Great Recession. A recent Rolling Stone article: “The Real Housewives of Wall Street” has given the growing number Fed critics even more ammunition for their attack on the central bank. Fortunately, there is a way for the Federal Reserve to redeem itself: The Constitution-based, debt-free monetary reform that I propose is the perfect opportunity for the Fed to show that it can do more than load enormous debt on the backs of American taxpayers.
My proposal is simple. Congress can use the Legal Tender Act of 1862 to authorize the Treasury to replace the $2.5 trillion raided from the social security trust fund with United States Notes. U.S. Notes can also be used to make up the funding shortfall in the Pension Benefit Guarantee Corporation. These actions are of no concern to the currency markets because the U.S. government owes this money to the American people. I understand that this action is the responsibility of Congress and the Treasury department. However, since no politician or anyone at Treasury will respond to my correspondence and address this issue, it is up to Chairman Bernanke to bring this matter to their attention. Issuing United States Notes is the only way that the federal government can repay the debt owed to the social security trust fund without raising taxes and increasing the national debt. (Using future tax revenue to “replace” the money raided from social security only perpetuates the theft.) Issuing United States Notes will be a precedent setting starting point that will open the door to America’s emancipation from debt slavery.
I read your April 11, 2011, letter and Chairman Bernanke’s May 25, 2010, speech carefully and objectively. These are arguments that I have heard (and rejected) many times. You cite a Congressional mandate to maintain price stability as the justification to restrict the money supply to its current arbitrarily low level. However, you ignore the fact that Wall Street speculators, using their enormous hoard of cash, can drive up the prices of commodities and manipulate the value of currencies simply to produce huge profits and blackmail the government. History as shown that this, largely unregulated, free flow of capital has caused tremendous damage to society. While, at the same time, this blatant manipulation produces no benefit whatsoever. This dreadful (and at times deadly) situation reflects the shocking weakness and complicity of the political class around the world. Currency exchange rates, and thus the value of the dollar, are negotiated at economic summits. And central banks “intervene” in the currency markets, by buying and selling currencies, to gain a trading advantage. All this illustrates the fact that the value of the dollar and inflation can fluctuate wildly with no increase in the money supply. The money supply/inflation myth is a red herring designed to keep the world to mired debt.
The global debt burden is a lash across the backs of the poor and the workers of the world. This evil explains why loaning money for interest is condemned in both the Old and New Testaments of the Bible and the Koran. How can this fact be reconciled with the debt/interest based global financial system? Obviously, there is a moral imperative for government regulation of finance.
It is said that inflation must occur when the money supply is increased because “there are too many dollars chasing too few goods.” This is another false notion that must be debunked. Of course, the point at which there are actually “too many dollars” is never specified. It is true that inflation can occur when producers and merchants raise prices when there is increased money in circulation. This is what I call “greed inflation.” Greed inflation can be controlled by government action. Space does not permit a detailed description of what form this government action would take. However, I have explained it in past web site articles. My proposals reflect government actions that were recommended by Abraham Lincoln.
Some people will recoil at the thought of government intervention to control greed inflation. However, letting producers and sellers have complete discretion in pricing, irrespective of labor or other cost factors, is problematic. This “freedom” is a major cause of inflation, poverty and weak economic growth. Our current economic problems are a perfect illustration of this fact. The American people and the American economy need more money. But the fear of greed inflation prevents the Federal Reserve or the federal government from increasing the money supply. Greed inflation benefits producers and sellers, but it harms the rest of the population and the country. You don’t have to be a brain surgeon or a rocket scientist to realize that this is a problem that must be resolved in order to have true prosperity in America.
I prefer not to engage in a protracted debate about debt-free monetary reform. I’ve wasted nearly seven years already trying to explain the obvious to people who should know better. The monetary status quo has led to our current and ongoing fiscal and economic difficulties. The national debt, our hollowed out economy and the blunders of our business and political leaders are much more of a threat to the dollar than increasing the money supply. In fact, increasing the money supply with Treasury issued, United States Notes is the best way to strengthen the dollar.
Please give my monetary reform proposals serious consideration. The disastrous events that began in the summer of 2007 have glaringly exposed the flawed nature of our debt-based, fractional reserve financial system. Thank you for your attention to this vitally important matter.
Would you mind if I put your letter and this response to it on my web site? The debt-free monetary reform issue is too important to remain hidden from the American people. Please respond to this letter in a timely manner. Thank you.