Why does America need a new monetary system?
Before we answer these 3 questions, let’s go back and study the principles of money set forth by the United States Congress in the 1792 Coinage Act. The 1792 Coinage Act declared lawful money to be gold and silver coins. What were the principles that made gold and silver coins work so well as money?Gold and silver are raw elements of the earth. Before one can have gold and silver coins someone must find the raw elements and extract them from the ground with labor. Nothing is gained with out some effort by someone. Gold and silver never comes out of the ground in coin form. It has to be taken to a mint, processed and formed into coins. There are private mints, but under the Constitution, minting of the United States monetary coins was turned over to the United States government for the purpose of having a national uniform coinage. The first United States mint was established at Philadelphia, Pennsylvania. The Coinage Act of 1792 stated that the gold and silver coin minted at the mint shall, by law, be current as money within the United States. Anyone who found the raw gold and silver bullion and extracted it from the ground with his labor could take it to the mint and have it coined (monetized) free of charge.Under the principles set forth in the 1792 Coinage Act, the answers to the 3 questions would have been:
We use gold and silver coin as money
It was coined by the government, without cost, when the people brought their production (gold and silver bullion) to the mint.
It went into circulation when the people exchanged the coins into the market place for other goods also produced by people through a combination of their labor with some raw element of the earth.
Once extracted from the ground, it never went back into the ground but would have remained in circulation; barring a few instances where someone might have lost it.
When put on a Tee chart it would have looked like this:
Under the principles of the 1792 Coinage Act. the more gold and silver that was mined, taken to the mint and coined into money, the more money that went into circulation to exchange goods and services.
There is no disagreement. We need a money system. Without money – a medium of exchange – people would need to engage in direct trade, goods for goods or goods for services. This would be impossible in today’s world. What kind of money system and under what principles should it operate? Under the principles of the 1792 Coinage Act, money was produced as a wealth to the people by the people without debt to anyone (monetized production). Yes, one person could borrow it from someone else after it was produced and in circulation. Although we still produce all the goods under the same principles as we did in 1792 (labor combined with some resource of the earth), the principles of money production have switched.
Today money is only produced as a debt to the people, when they go to the bank and get a loan. In this process, only the principal is created, never the interest. Today no one can obtain any “money” (medium of exchange) until someone has gone into debt. As long as the money ‘exists’ in circulation, it accrues compounding interest, this debt is not money. The detrimental effects of “money” created as debt is why American’s need a new monetary system. The answers to the 3 questions are far different today than they were under the 1792 Coinage Act.
Today we have no money. We use credit at the bank (bank credits) as “money”. Money is what you pay credit with, therefore credit and money can not be the same thing. If it were, we would not now have over 26 trillion in debt credits hanging over us, drawing interest and compounding daily.
Banks manufacture the “money” by simply writing numbers on ledgers when they make loans to individuals, corporations and government.
The “money” gets into circulation when the people spend the credit they borrowed.
Put on a Tee chart it looks like this:
In the above process only the principal is created – not the interest. Today, the results of using this “money” are far different from what they were in 1792. We are told “money” is based on trust. Before, it was based upon work performed. There is nothing wrong with trusting someone, but blind trust is seldom wise.
The people, trusting their bankers, deposited their gold and silver coin with them for safe keeping. The banks held the gold and silver coins as reserves and loaned the people bank notes. Banks convinced the people, with clever lies, that because the bank notes were ‘backed’ by gold and silver coins they were the same thing. however, the banks were loaning out many more dollars in bank notes than there were dollars of gold and silver coin. The excess bank notes increase the money supply as a debt to the people. The principles of money production had switched. Most people never have understood what happened. Free coinage of gold and silver coins increased the money supply as a wealth to the people. Bank notes increased the money supply as interest bearing debts to the people. There is a world of difference between, I own and I owe.
At first glimpse, bank credits seem to work well as money. The banks obtain greater profits. The people get a short cut in acquiring capital. Instead of producing first and through trade acquiring money as a debt-free wealth. Now people just go to the bank, and based on their promise to perform in the future, acquire debt-credit on the spot. The whole principle and function of money has switched. Money has been switched from an evidence of wealth to an evidence of debt. Now, it is loaned into circulation as debt against future production, not exchanged into circulation as production performed. At first, the banks used gold and silver coins for reserves and made loans with bank notes. Then they began to use certain ‘eligible paper’ (notes, drafts, bills of exchange and government debt) as reserves for the bank loans and made loans in check-book money (just the number in your bank account).(Study National Banking Act of 1863)
As the debt money supply expanded men began to create corporations to limit their liabilities for the debt they were creating to have a medium-of-exchange. Shares of stock were issued to the creators of the corporations. The corporations soon learned that they could expand their capital base by issuing bonds and more shares of stock in the corporations. soon people formed securities companies just to deal in the buying and selling of the securities of the other companies.
When bank credit expands the money supply as interest bearing loans, only the principle goes into circulation. When the interest on the loans, comes due, the debt obligation is always greater than amount of money created by the loan. As long as, gold and silver coins were produced and spent into circulation as wealth money, there was money available to pay interest on the loans. When the government stopped the free coinage of gold and silver and demonetized gold and silver as money; there was no longer any way to pay the interest on the loans.
Once all the wealth money is removed from circulation there is no money to pay interest on the bank credit. The interest we all think we have been paying simply comes from another person’s loan. For this system to function without depression, the debt must constantly grow. Congress created the Federal Reserve as the lender of last resort.
This brings us to how government debts are used to create new bank reserves. Marketable Treasury securities are sold at competitive public auctions. The Treasury issues three types of marketable securities — Treasury bills, Treasury notes and Treasury bonds. These securities are direct debt obligations of the United States Government. The primary distinction between a T bill, a T note and a T bond is the length of time before the government must pay back the money (credit) it borrowed with the issuance of it debt obligation. T bills are issued for one year or less. T notes are issued for more than one year but always less than ten years. T bonds are issued for more than ten years.
Security dealers go to the Treasury auctions and buy the Treasury’s Marketable Securities. Marketable Securities means that after the government originally issues the securities, investors can turn around and resell them. These auctions are different from other auctions. In most auctions the one that bids the most is the successful bidder. Treasury Securities are sold to the bidder who bids the lowest rate of interest they will accept on the money (credit) they are willing to loan to the government.
Where do the Security dealers get the money that they use to buy the securities? It all must come from money (credit) created as a bank loan to someone. It may come directly from a bank that created the money, as an investment in debt. It may come from money that the banks created and loaned to someone in the past, that the dealers obtained through past business deals. It may come from bank loans made directly to the dealers to buy the securities.
When the Federal Reserve decides to increase the money supply, it buys Treasury’s Securities from Securities dealers. The Fed pays for them with money(credit) they create by simply going to its book-keeping department and making a book-entry on their ledgers. It would look like this on a Tee Chart:
In the above process, only the principal is created, not the interest. This newly created money (credit) becomes new reserves (high powered money) for the commercial banks. Once the commercial banks receive the new (free) reserves, they can create roughly ten times that amount in new loans to their customers. The commercial banks however are not limited to just those reserves. If the commercial banks make more loans than they have reserves they can go the Fed. and borrow reserves. The Fed. will again create the new reserves by simply making a book-entry on the bank ledgers. The only difference is that these new reserves are not free to the banks. They are interest-bearing loans. In this process, only the principal is created – not the interest.
In summary, let’s recap the principles of money set forth in the 1792 Coinage Act compared to today and the results of working by those principles. Under the first principle, the people provided all the money as a wealth to themselves and to the nation, based on their present production monetized by their government free of debt and interest. These principles create a wealthy, productive, happy, self-sufficient people.
The principle of our present money system is: money is provided to the people as an interest bearing debt, monetized by the bank, based on future production. The money to pay interest is never created. That forces the people to engage in a dog-eat-dog, kill or be killed type of economy, always trying to capture some part of the other fellow’s loan to survive and gain financially. When we successfully pay off a loan, the debt is transferred to someone else in the economy. The debt must constantly grow as the interest compounds. As we labor hard to try and pay the debt, the growing money shortage results in a growing loss of buying power causing an ever rising cost-of-living.
These principles create a nation of debtors who must work harder, faster and smarter while going deeper and deeper into debt as a whole. This ever increasing debt causes, higher taxes, higher prices, constant loss of buying power, creates diminished unit-volume demand which results in lay offs, down-sizing and mergers while increasing tax pressures on the remaining employed for social programs which simply shuffles money. It does not create the additional money needed to fill the shortage caused by the compounding debt. This great stress causes unhappiness, dissatisfaction , a growing feeling of frustration, anger, demoralization in the people as a whole, which contributes to the loss of life and liberty and makes the Pursuit of Happiness increasingly difficult.
The Solution is to reform our money system by returning to the principles of wealth money. The plan to accomplish the needed reform is set forth in the American Transportation Act. Call your congressperson today! Demand Action!
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