Chapter 26. A Modern Money Commons

Money is the mirror image of a modern economy and many people instinctively point to financiers as the source of society’s problems. Yet one has to research deeply to get beneath the social-control-paradigms which protect the subtle monopolization of money and finance capital.1

From Barter to Commodity Money

Before the widespread use of money, trading involved the simplest form of commercial transaction, barter. Barter is the exchange of two or more products of roughly equal value. This limits most trading to persons possessing equally valuable items. Eventually cattle, tobacco, salt, tea, blankets, skins, and other items were used as a form of money. Such commodities were the most desirable because they were durable, portable, readily exchangeable, and had the most recognizable common measure of value.

Products intended for consumption typically have one to three owners on their way from producer to consumer. Those that are used as money may have dozens or even hundreds of owners. Whether a product is used for exchange or consumption distinguishes it as money or a commodity. The products listed above were imperfect as a medium of exchange, and their limited usefulness limited trade. They created problems of storage, transportation, protection, and not everyone could use these commodities.

From Commodity Money to Coins of Precious Metal

Only highly desirable, useful items could become money. No one would accept a piece of paper, brass, or copper in trade for what he or she had worked so hard to produce. Such a trade would effectively rob one of hard-earned wealth.

Gold and silver have been highly esteemed and accepted as money in most cultures. The first known coin, the shekel, was minted in “the temples of Sumer about 5,000 years ago,” and coins of measured value have been routinely minted from precious metals ever since.2 Except for scarcity values, the labor required to produce a given amount of gold, silver, or precious stones was roughly equal to the labor required to produce any other item that this treasure could buy. As accustomed as we are to viewing gold as money, it is still commodity money: desirable, useful, and requiring roughly equal labor to produce.

Inequality of money values is only inequality of exchanged labor values. Often when rulers became strapped for cash (usually because of war), they resorted to debasing their currency by lowering the gold or silver content and replacing it with inexpensive metals such as copper. The labor value represented by these debased coins was less than the labor value of the items purchased. Assuming the labor cost of gold was 300-times that of copper, each day’s production of copper substituted and traded as gold would confiscate the value of 300 days of labor spent producing useful items. It was the universally recognized value of pure precious metals that became the first readily acceptable money.3

With gold (or any precious metal) divisible into units of measurable value, a trade could be made for any product. This convenience fueled world trade, for it was only with handy universally accepted money that commerce could flourish. However, as these precious metals had to be located, mined, delivered, stored, and protected before society could have money, trades were still clumsy.

From Gold, to Gold-Backed Paper Money, to Paper Money

The use of gold as money was handicapped by its weight, bulk, and the need for protection against debasement. These problems were eventually eliminated by printing paper money that could be redeemed for a stated amount of gold or silver (the gold standard). As this paper money was backed by gold, there remained the complication of finding, mining, smelting, and storing this valuable commodity.

The next step in the evolution of money was the use of pure paper money. (Paper money was almost universally resorted to in revolutions, although it usually had little value once the banking systems returned to the gold standard.) Benjamin Franklin had proposed paper money, and, while it was used less successfully in the New England colonies, it was used productively in the middle colonies in promoting production and commerce while controlling deflation. The powerful of Britain recognized the threat to their control of trade and outlawed the printing of money in the colonies. This effectively dictated control of commerce and who would profit, and was a contributory cause of the American Revolution.4

World Wars I and II weakened the old imperial nations, eroding the subtle monopoly of the gold standard.5 As most of their gold had been traded for war materiel, these countries had to keep printing money to rebuild their shattered cities and industrial plants. To return to money backed by gold would have been to leave their economies at the mercy of U.S. bankers. Thus the subtle monopoly of the gold standard was partially broken in these countries. The arms race that followed WWII almost totally eliminated gold-backed money as nations continued to print money wastefully for war.

Once freed from its bondage to gold, paper money represented rather than possessed value. Printed at little cost, it could be traded for as much wealth as its stated value. Society now required only one finished product to make a trade. Those who sold their labor in the form of these products received in return the paper symbols of value and needed only save this money until they wished to buy products produced by others. Paper money, used productively and not backed by gold, was true money.

From Paper Money, to Checkbook Money, to Money as a Blip on a Computer Screen

As simple and light as paper money was, it was still too clumsy for most trades. Most of these units of value called money were deposited in a bank (just as gold had been) and trades were then consummated with checks. These were more efficient than cash, because each check was a symbol that the signer had produced, saved, or borrowed that much wealth, and that its money form, safely deposited in the bank, was now being traded for equal value in other products or services. Most family, business, corporate, and international trades are done with these symbols of deposited savings—checks, drafts, notes, bills of exchange, and the like.

Commodity money (hides, tobacco, et al.) had dozens, possibly hundreds, of owners before this trading medium returned to its status as a commodity to be consumed. Gold (still commodity money) retained the status of money much longer and had thousands of owners. Gold-backed paper money traded more conveniently and passed through the hands of many tens of thousands of owners. Reserve deposit money, traded by check—via bank debits and credits—can have an endless number of owners, as this representation of value keeps moving from owner to owner. Modern computer money (still reserve deposit money) is but a blip on magnetic tape or disk that can be instantly debited from one account and credited to another. Though tied closely to checkbook money, this is the ultimate in efficient money.

Paper money and checks are familiar to everybody. Even a child learns quickly what they are and how to use them. When most of the historical and ideological mystiques are eliminated, money is easy to understand. The banking system collects all production (symbolized by money), completes society’s trades through debits and credits, lends the surplus production (savings) to those who—at any particular moment—have capital or consumer needs greater than their savings, and—through borrowing from the Federal Reserve to expand their reserves and increase their loan capacity—creates more money for an expanding economy. Money is no more complicated than this.

What makes money appear mysterious is that the powerful have always controlled it. Its secrets are protected by governments, bankers, and subtle finance monopolists of every shade trying to siphon to themselves others’ wealth. The process is quite simple. In a trade, symbolized by money, the actual value of products or services, bought or sold, could be higher or lower than its actual labor value (higher priced or lower priced). The production of labor may be claimed either by underpaying for labor, by overcharging for products or services, or both. To make this clear, we will quote our own words from our opening chapter:

In direct trades between countries, wealth accumulation potential compounds in step with the pay differential for equally-productive labor. If the pay differential is 5, the difference in wealth accumulation potential is 25-to-1. If the pay differential is 10, the wealth accumulation advantage is 100-to-1. If the pay differential is 20, the wealth accumulation advantage is 400-to-1. If the pay differential is 40, the wealth accumulation advantage is 1,600-to-1. If the pay differential is 60 (the pay differential between the defeated Russia and the victorious America, 23-cents an hour against $14 an hour), the wealth accumulation advantage is 3,600-to-1.

Credit or Trust Money

People accept money because they trust that the value represented can be replaced by equal value in another commodity or service. Credit (pure trust) is both the oldest and most modern currency. When credit is given, nothing is received for the item of value except a promise. Each month, families and businesses are provided with products or services (value) and then billed. This is a procedure based on trust. Cash money is also based on the trust that it can be redeemed for equal value.

If money is controlled with equality and honesty, there is trust. Money then exchanges freely and is easily understood. We are describing money and banking in the everyday language that would apply if the remaining flaws in money’s creation and control were eliminated.

The Different Meanings of Money

Money is correctly referred to as a unit of accounting, savings, stored value, a measure of value, a standard of value, a receipt for value, a system of accounting, a deferred payment, a transferable claim, a lien against future production, an IOU, and an information medium. At a fundamental level, money represents the value of the final product of combining the elements of production—land, industrial capital, and labor. In a properly structured society, money represents the value of labor, profits on stored labor (capital), and a share of the costs of running society represented by landrent being paid to society as outlined in the above chapter on land.

To the layperson, money is normally explained as a medium of exchange. This is true. However, a medium of exchange implies equality and it is precisely the inequality of exchanges that is the greatest problem. To understand these inequalities, we must have a better explanation of money.

Money is a Contract against another Person’s Labor

Money is first, and foremost, a contract against another person’s labor. Except for land or scarcity items, value is properly a measure of the time and quality of labor spent producing a product or service. If the difference between the payment received for productive labor and the price paid by the consumer for a product or service is greater than fair value for expediting that trade, either the producer was underpaid, the final consumer was overcharged, or both. When intermediaries underpay producers or overcharge consumers, they are siphoning away the production of the labors of one or the other, or both. This process is seen in the notorious and once common practice of forced shopping at the company store. The underpaid workers’ meager wages were further reduced by their compulsory purchase of overpriced merchandise.6

Savings implies that something has been produced and not consumed. But even if a commodity is produced for consumption, it is properly understood as capital until sold to the final consumer. It then becomes his or her wealth for consumption (some commodities, such as a meal, are consumed in minutes and some, such as homes, are consumed in decades or even centuries) and is no longer capital. Products are sold, production expenses are paid, any surplus is deposited in a bank, and that deposit is credited at the Federal Reserve to expand the depositing bank’s reserves. Banks lend these reserves to others for investment or consumption. The savings (stored labor) has become money capital. The parties who labored to create or distribute these products are only lending their surplus production in its money form with the promise to be paid interest for what their stored labor produced. Interest is the money form of wealth produced by that stored labor (capital).

Money Productively Contracting Labor

Because money is always controlled by those who rule, revolutionaries resort to printing money to finance their insurrections. As opposed to wars to control trade, successful revolutionary wars, like those of the United States, France, the Soviet Union, and China, were fought for freedom, were productive expenditures of labor, and all were fought with paper money.7 Every battle for freedom requires large expenditures. Most labor is donated by those directly involved, but much of the weaponry, clothing, food, and medicine must be paid for with money. Money is thus a tool for mobilizing society’s labor to produce great things—in this case freedom.

Examples of money properly employing labor are seen every day in farming, in the creation of consumer products, and in the building of homes, roads, schools, shopping centers, and factories. The rebuilding of Europe after WWII was a productive use of labor employed by U.S. capital, as was the industrialization of Japan, Taiwan, and South Korea. However, as most of this book exposes, the politics of their capital development would point more to the powerful protecting their interests than to meeting humanitarian needs.

Money Unproductively Contracting Labor

An efficient economy requires only $3 of speculation money for every $1 invested in the real economy and currency speculation for financing world trade alone is 55-times the real economy (year 2000, possibly two to three times that today, early 2005). The massive profits from this unnecessary speculation are a charge against other stakeholders within the world economy.

To use one’s own earned money for speculation is properly one’s privilege. But borrowing society’s money capital for speculating on land, gold, silver, commodities, already issued stock, derivatives, or currency, is an attempt to intercept social production by speculating with society’s savings; there is no intent to produce.

The use of society’s savings for corporate takeovers usually is a battle between the powerful for control. Whether the takeover is successful or not, these unproductive uses of social capital continually milk money from the economy. All this unnecessary activity diverts money capital from its true purpose, production and distribution. More appropriately, massive speculation beyond that needed for an efficient economy is an exercise in social insanity. By taking the easy way out, society is being irresponsible.

An even more nonproductive use of money occurs when labor is contracted to destroy others’ capital (war), or to work at endeavors from which neither the present generation nor its descendants will benefit (see Cooperative Capitalism: A Blueprint for Global Peace and Prosperity by this author). In 1800, Robert Owen, manager of a family textile mill in Scotland, began his famous social experiment of paying workers well, giving them decent housing, educating their children, and doing all this profitably. He calculated that this community of 2,500 persons (workers and families) was producing as much as a community of 600,000 did less than 50 years before.

Owen wondered where the wealth from such a large increase in efficiency was going. He concluded it was being consumed by the petty wars continually fought by aristocracy.8 The mill workers were being underpaid for their work, the customers were being overcharged for their cloth, and the production of their labor, in its money form, was being siphoned away and used to contract materiel and labor for war. Labor was being paid to fight because this generated the greatest rewards for those who controlled the use of money. This was wasteful to the rest of society; nothing useful was produced when that confiscated wealth was spent, and much of what existed was destroyed.

In the 15th-Century, “about 70% of Spanish revenues and around two-thirds of the revenues of other European countries” were employed in these wars.9 Most of this revenue was siphoned away from a country’s own citizens. The treasure pillaged from the Americas was but a small share of the wealth destroyed in European wars:

Until the flow of American silver brought massive additional revenues to the Spanish crown (roughly from the 1560s to the late 1630s), the Habsburg war effort principally rested upon the backs of Castilian peasants and merchants; and even at its height, the royal income from sources in the New World was only about one-quarter to one-third of that derived from Castile and its six million inhabitants.10

The powerful today are wasting massive wealth battling over the world’s wealth, identical to Robert Owen’s analysis 200 years ago.

There must be Money before Wealth

In a modern economy, credit money (trust) must be available. People would not produce beyond their immediate needs unless they knew they could safely lend that production (savings) and reclaim it when needed. Just like a powerful train or modern roads, money expedites the transfer of commodities between producers and consumers. Because it represents a set value of labor, a person can trade that value for equal value of any of the millions of items or services produced by other people.

If there are not enough savings to fully employ resources, labor, and capital, it is a simple matter to create (print) more money. So long as money contracts labor to produce needed products, the value represented by that money (the item or service produced) is real. First printed to contract labor for increased production of wealth, this money continues through the economy employing more labor for the needs of whoever passes it along the economic chain, or it is lent to others to finance their needs. Once an economy is fully employed and in balance, there is a continual circulation of these contracts against labor we call money, and there is no need to print more.

If there is to be trust in money, and if the financial machinery of a society is to function smoothly, there must be fair pay for productive labor. But with land, industrial capital (technology), and money capital subtly monopolized and thus claiming an excessive share of the wealth produced, labor is underpaid. Much of those excess profits are spent on siphoning more wealth away from the weak, graft spent for that same purpose, extravagant lifestyles, and wars to protect it all.

Allowing for protection of the environment and conservation of resources, if the best possible living standard for every person were society’s goal, resources, labor, and industrial capital would be used to capacity through efficient contracting of all labor for true production. As technology improves and social efficiency increases, the decision will eventually have to be made that living standards are adequate at the current production level or that resources are inadequate to employ more labor. Working hours should then be reduced in step with that gain in efficiency without lowering living standards.

Here subtle monopolization becomes highly visible. Let us assume that society wrenched control of government from the powerful. Society could then print the necessary money to employ the idle labor and resources to produce the amenities of life many people are currently unable to obtain. Those who control land, capital, money capital, and fictitious capital would immediately protest that they have the capacity to produce for these needs. This would be true. However—within subtly-monopolized economies—unearned rent, unearned profits, and the fictitious wages of wasted labor siphon away at least 60% of productive labor’s efforts without having produced anything of value to trade. This creates unnecessarily high costs, leaves the underpaid and unemployed with insufficient money to contract for their needs, and assures that industrial capital will produce at some small fraction of capacity. If each person were productively employed, the average hours worked per week for the same standard of living would shrink by half or more.11

For those who look at every progressive recommendation as communist, remember that communism had as one of its specific goals the elimination of money. This philosophy considers money an indispensable tool as society maximizes money’s efficiency as any businessperson would his or her tools.

Learning the Secret of Bank-Created Money

The secret of creating money was first learned by goldsmiths. Others’ gold was deposited with them for safekeeping. Goldsmiths learned that deposits were usually left for a substantial period and they could safely make loans in the form of receipts for gold. These receipts circulated as money with the gold remaining on deposit. On balance, loans were paid off faster than the gold was reclaimed. Therefore, loans could be issued for several times the amount on deposit and loans of several times the value of the deposited gold became “created” money.12

Whenever Rothschild or other early bankers loaned 10 certificates of gold at 10% interest, for every unit of gold they owned or held for safekeeping, each year their personal net worth would increase equal to all gold on deposit. When a banking system used gold or goldbacked currency as money, its creation of money was identical to that of the goldsmiths.

One hundred years ago, a prudent bank with $1-million in gold that decided to maintain its reserves at 10% could print $10-million in banknotes and loan them all that same day and $9-million of that would be bank-created money. Viewing the banking system as one bank, which any one-currency banking system is, a bank today with $1-million in reserves and a 10% reserve requirement could initially make only $900,000 in loans. But, as the money kept circulating back, it could loan 90% of each new reserve deposit and eventually would loan out $10-million, the same as the prudent banker 100 years ago. Assuming a sound economy and prudent bankers, the money created in a modern economy—as it circulates within the economy productively contracting land, labor, and industrial capital—is backed by the wealth produced.

The 13 American colonies printed money to fight the Revolutionary War but this power of government to create money was not used by the United States again in any great measure until President Lincoln printed greenbacks to finance the Civil War. As soon as the Civil War was over, the U.S. government ceased creating money and started pulling those greenbacks out of the economy. This destruction of money caused bankruptcies to soar for the first 10 postwar years as wealth was again consolidated within the hands of entrenched wealth.13 There was no need for those bankruptcies. If those greenbacks had been allowed to stand, and so long as there were unemployed resources and labor and consumer needs, that money would have continued to circulate freely within the economy, combining labor and industrial capital with America’s immense natural wealth, creating even more wealth.

While conservative banks were reining in loans, a post-Civil War level of $33.60 of gold or gold-backed currency in reserve for every $100 on deposit dropping to $1 in gold for each created dollar (as it was gold-backed, it was bank-created money) by 1913 hid the fact that greedy bankers loaned 20 to 50-times their reserves or even more. Banks pooled funds to cover runs on banks but runs on weak banks would spill over into runs on strong banks. With their depositors’ money loaned out operating the economy, thus not immediately collectable (illiquid), perfectly sound banks would go under and bankrupt many farms and businesses with them.

Primary-Created Money and Circulation-Created Money

Bankers substantially resolved their liquidity problems in 1913 through the establishment of the Federal Reserve System.14 Since that act, U.S. banks that were members of the Federal Reserve System could not loan above a set multiple of their reserves. The reserve requirement of state chartered nonmember banks varied for the next 67 years, some requiring no reserves. In 1980, all U.S. banks were brought under the Federal Reserve System and creation of money has ever since been regulated by the Federal Reserve, not private banks.

With all banks under the reserve requirements of the Federal Reserve, it is the circulation of money proper that creates most money, not the banks themselves. Money already created by the U.S. Treasury or the Federal Reserve is only assisted by banks in its circulation (and thus creation) of more money, just as every other person through whose hands that money passes assists in money circulation and money creation. A bank cannot credit a customer’s account unless that bank is already credited with those funds in its account at the Federal Reserve. In short, the first, or primary, money in the historic circulation of money is first created by the Federal Reserve or Treasury (government) through crediting a bank’s reserves without debiting anyone’s funds. When those credited reserves (primary-created money) are loaned out, spent, and returned to a bank to be credited to their reserves and again loaned out, that is circulation-created money. Some excess profits are made by banks in the money creation process but only on the wide difference between the interest rate paid the Federal Reserve and that charged the customer.

If a bank credits a borrower’s account with $10,000, we are taught this is the creation of money by private banks. But that is not so. That private bank must have 110% that much money credited to it in its reserve account at the Fed before that loan could be made. Not one cent will have been created except to the extent the borrower—and others into whose hands the money circulates—spends that money and that then is circulation-created money, not bank-created money. Under fractional reserve banking, only when a banking system is viewed as one bank does a bank create money and even then it is still the Fed that creates the money through crediting a member bank’s reserves without debiting another account. None of the individual member banks create money.

If the receiver of what is commonly referred to as “bank-created money” puts it under the mattress instead of depositing it into a reserve account, the money creation process stops. But as soon as that person spends that money or deposits it into a reserve account, the money continues to circulate and create more money each time it changes hands.

So each person spending money is every bit as important in the creation of circulation money as the banks which credit their borrowers’ accounts with 90% of their reserves. In fact, one could argue that the spenders of that money are more important. That money could be spent several times as cash, be counted each time, and, until someone deposits it in a bank from which it is loaned, there is no need to deduct any part for reserves.

The Fed’s Open Market Operations hide the Simplicity of Money Creation

To maintain the mystery of how simple money creation really could be, bankers conceived the devious Open Market Operations of the Fed. The interest on Treasury securities owned by the Fed being returned to the U.S. Treasury leaves no other conclusion than that this money was surreptitiously created under cover of the Fed. The expansion or contraction of treasury notes owned by the public either creates or destroys money. Reserves are increased through the U.S. Treasury selling bonds to the Fed and the Fed crediting the treasury with those funds but not debited from any other account. The Fed is “printing” the money to buy those bonds. The Treasury was thus spending what appeared to be money borrowed from the Fed but, since both are arms of the government (see below), this was actually money it had printed itself.15

When all the books are balanced, any money printed and spent for government purposes or used to purchase treasuries on the open market, both expanding the money supply and neither debited from another reserve account, is primary-created money. That money is deposited into the receiver’s account in a private bank and credited at the Federal Reserve to that bank from which, under current reserve requirements, 90% can be loaned out. Private borrowers would spend that loaned to them and those moneys would circulate within the economy and be deposited back into some bank’s reserve account.

Each time the Fed transfers reserves from one bank’s reserve account to another bank’s reserve account (via cashed checks), 90% of those transferred reserves can be loaned out. Once the limit of money creation through circulation of money is reached, any further increase in the money supply requires either the Treasury openly printing more money for government expenditures, private banks borrowing from the Federal Reserve to increase their reserves (also created money), or the Federal Reserve creating money when purchasing treasury bonds in the market (again created money).16 (The Canadian banking system has had no reserve requirement for several years, so Canadian banks do create money.)

The purchasing of treasury bonds on the open market is the Fed’s primary money creation tool but, when one analyzes that the final owner of those treasuries, or goods and services from that created money is the American people, all three methods of creating money function the same. A Treasury check is cashed, the banking system returns the check to the Fed for clearing and the Fed credits the bank in which that check was deposited with an increase in reserves equal to the face value of the check. However, no reserve account is debited as it is with private checks presented to the Federal Reserve for clearance; it is primary-created money of which typically 90% can be loaned out. The loaned money is spent and is deposited back into some bank’s reserves, 90% of those reserves are again loaned out, and this money-creation circulation continues until the increase in money is too small an amount to consider.

The interest paid by the U.S. Treasury on Fed-purchased T-bills goes to the Fed, which annually returns all that plus a part of other profits (currency trading, priced services to banks, et al.) to the Treasury. Thus in 1994 the Fed received $19.247-billion from the U.S. Treasury as interest on bonds and paid to the Treasury $20.470-billion, or $1.223-billion more than it received in interest.

That the Fed is privately owned is all a shell game. The unpaid principal and interest on those Fed-purchased, and thus government-owned, bonds are simply credits and debits on the Fed’s and Treasury’s books. Both are government agencies and when interest is paid to the Fed by the Treasury that interest, plus other profits, are promptly returned to the Treasury, thus proving there never was a debt to the Fed. Those Fed-held Treasury bonds are a charade. The Treasury could have openly created that money and bought back those treasuries, just as was done surreptitiously by the Fed. But this would have made the simplicity of non-debt-created money visible to all and maintaining that secret is the whole purpose of the charade.

Member banks only technically own the Fed. If they really owned it, they would be receiving the interest on bonds owned by the Fed. In 1994, as discussed above, member banks received $212-million in dividends and $283-million for their mysterious “surplus fund,” which only means the government should have received $20.965-billion instead of $20.470-billion.

Those Fed buildings were built with created money, operation costs are paid for by charges to banks, the Fed reports to Congress, and the payment of 97% of the profits of the Fed to the Treasury is proof that bankers know well that the Fed is an appendage to the treasury and both are arms of the federal government.

Under the fiction of ownership, bankers do control Fed policy. That they do not have the courage to distribute amongst themselves the profits from those Fed-owned bonds proves they know they do not own the Fed. That part of the national debt owed to the Federal Reserve can be eliminated by simply writing it off. After all, one cannot owe money to oneself. The only sense in which private banks own the Federal Reserve is that it is they who receive most of the interest on that created money. This is accomplished through the rate spread between the interest paid the Fed and depositors and that charged the consumer.

A growing economy requires more money, which banks obtain by selling government bonds to the Federal Reserve.17 To pay for these treasuries, when the Fed’s check comes back to itself for clearing, the Fed simply credits the selling bank with that number of dollars without debiting from any reserve account; it is primary-created money. That primary-created money is deposited into the reserves of the bank which sold those bonds and that bank can now make new loans at whatever multiple is dictated by reserve requirements; that multiple of the original created money is circulation-created money.

When loans are being repaid faster than money is borrowed, the money disappears from an economy by that same multiple. The produced wealth has been consumed or becomes storage of real wealth owned by those who produced more than they consumed.

In a steady state economy, money is being destroyed (by consumption and depreciation) as fast as it is created or, if you prefer, created as fast as it is destroyed. To put it another way, consumption and production are in balance.

Whether used for fighting wars, building social infrastructure, expanding industry, or providing services, primary-created money is continually circulating. Each time this money changes hands between a depositor in a reserve account and a borrower from those reserve accounts, it is used either to create value or purchase value. Each change of hands between saver and borrower is counted. This, we are taught, is the classic creation of money by banks. However, when checks are presented to a bank for deposit into one reserve account or for payment of that loan, the funds are deducted from another bank’s reserve account. The original primary-created monies, the reserve accounts, do not increase as money circulates; one’s credits are always another’s debits.

It is the counting of that money each time it changes hands that gives the appearance of more money. If one had been using diamonds (commodity money) as money, they too would have gone from hand to hand, that value would have been counted each time as an increase in the money supply, but one could see that—when that circulation began, throughout its circulation, and when that circulation was complete—there was at all times only the same number of diamonds.

So a bank making a loan based on reserves does not create money. Money circulation itself creates money. For the first loan of a classical circulation of money to have been made from a reserve account, the primary funds had to have been created by government printing money for social infrastructure or services, by the Fed printing money through purchasing treasuries, or by the Fed loaning money to a bank through crediting their reserves without deducting from any other account.

A lowering of reserve requirements creates money and an elimination of all reserves transfers the right of money creation to private banks and, if other limitations are not established, eliminates all limits on the creation of money.

If an economy is stable, savings within the circulation of money, in the form of continual crediting and debiting of reserve deposits, will continue to operate the economy. Although the speed of circulation has some bearing on quantity of money, an expansion of an economy typically will require the creation of more money.

Money is destroyed when it is deposited in a bank and not loaned back out. Pay off all debts and all that is left is circulating currency. When reserve deposit money quits circulating, money disappears from the economy even if vast pools of reserve deposits (potential circulating money) have built up. The moribund Japanese economy with trillions of dollars in savings on the books, as addressed above, is a prime example. If Japan’s equity prices collapse, the fiction of trillions of dollars on the books will be exposed. If those equities rise in price, those savings will be valid.a

It is a matter of semantics.b One can claim the money creation process starts at any point. A person is creating money if he or she writes a check without funds in the bank. He or she must then earn that money (we assume honestly through productive labor) and depositing it in the bank before the check comes in. The bank only balances the reserve deposits and loans. Assuming the earnings from that productive labor are in cash and it is deposited in the bank just before the check is presented for payment, no bank has made any loan and no one’s reserve deposits are lowered, but money has been created by the writing of that original check.

All borrowers (consumers of the moment) are borrowing the deposits of all producers (savers of the moment). (One may be borrowing from oneself, either from a checking account or out of pocket, and expecting to replenish the bank account or pocket change [both are savings]). The banking system keeps an account of these trades between people. Many are equal trades—in a month or year, most people earn roughly what they spend—but the unequal trades (more produced [earned] than spent, or more consumed [spent] than earned) are balanced by lending and borrowing deposited savings residing in banks’ reserve accounts.

Some believe that it is by producing value that money is created. Commodities are produced and offered for sale, money is borrowed to buy them, and—on balance—the money received by the producer goes right back to the bank and essentially finances the sale of what was produced. Others hold that it is the offering of money that motivates production of wealth. The first argument is more accurate in describing the early use of money and the second is more typical of a modern economy.

As described throughout this author’s The World’s Wasted Wealth 2 and the Cooperative Capitalism: A Blueprint for Global Peace and Prosperity and the classics of Veblen, Chase, Borsodi, and others, it is possible to be paid but not produce value. If the purchasers think they are receiving value, in the current monetary system that is tantamount to real value. However, if money contracted only productive labor and full value were paid for that labor, money would represent a more realistic value and would become a symbol of actual wealth. Money would then be only a tool, a symbol for the trade of productive labor.

Under conditions of equal rights (when each person is fairly paid for his or her genuinely productive work), money lent combines land, labor, and industrial capital to produce full value in needed goods and services. A society can be fully productive only if each of its citizens are fully productive. Neither money nor the economy can become truly efficient until all nonproductive siphoning of wealth through unequal trades in value, as opposed to producing and trading equal value, is eliminated. Likewise, every contracting of labor for nonproductive use must, on final analysis, be paid for by appropriating value from other stakeholders’ productive labor.

A Money Commons structured to protect the Rights of All

People unproductively attached to the arteries of commerce, either for making a living or making fortunes, see only their momentary self-interest and will not permit the necessary legal and social changes to eliminate those wasted labors. Because of the social-control-paradigms created by think-tanks supported by the power-structure and perpetuated through the university system and the media (see Chapter 6), only under extreme crisis can change be imposed upon them. For the sake of precision and clarity, and recognizing that only small changes are likely and then only under severe crisis, we will be outlining a fully reconstructed banking system.

Let’s assume that an economically viable, highly-educated population emigrates and starts up a new economy in virgin territory and was planning to manage it honestly, equally, and efficiently. There are no labor-created values in this virgin territory but this population brings with them basic industrial tools and has the knowledge to run an economy and create a new nation. These modern Pilgrims arrive with the papers already prepared to establish a Treasury to create money, a Federal Reserve to keep account of this new nation’s trades through debiting and crediting between bank reserves, and bankers to overseeing the depositing of savings and its loaning for both production and consumption.

The Treasury is empowered to create interest free/debt free money for combining their industrial tools (industrial capital) and labor with the plentiful resources to produce the necessities of life, basic infrastructure, homes, businesses, consumer products, and more industrial tools. The primary-created money that created that wealth is deposited into reserve deposits where 90% is loaned out, circulated within the community, returned as new reserve deposits, and 90% is continually loaned out again.

This primary-created money, and the circulation of that money creating more money, financed cutting and sawing timber, mining ore, smelting ore, producing machine tools, building shoe and textile factories, building factories to produce consumer durables, building retail outlets, and so forth. Of course, to make the function of money and banking visible, we have theoretically shrunk several generations of building industrial and social capital into a few cycles of the creation and circulation of money.

So long as there is surplus labor, unused resources, and a social need not cared for through the current circulation of money, a nation’s treasury can properly create (print) more interest free/debt free primary-created money. A society can design the proper balance between money creation and money destruction. The proper balance between wealth creation and wealth destruction (consumption) will mirror that proper money balance. Economists can easily calculate any surplus buying power that may occasionally develop. An increase in the discount rate will soak up that surplus buying power and a decrease will expand the money supply.

Efficient money under a banking system as a part of the modern commons will be so productive it will quickly strip the earth’s resources. Thus the creation of money must be planned within the earth’s resource capacity and its ability to absorb society’s wastes without ecological destruction. In a nation’s early development stage—so long as there are surplus labor, resources, and industry—interest free/debt free primary money can be created to build schools, roads, railroads, electric power, sewer systems, and post offices. All such infrastructure is properly a part of the modern commons and makes society far more efficient and the wealth created backs the new money. This productive wealth provides the backing for the money created to produce it and the commodities and services produced are the wealth that both backs and absorbs the circulating money operating those industries and services.

When primary-created money is spent for development, society owns what is built or has a mortgage against that created wealth. To the extent an economy needs an increase in the money supply, federal, state, and local needs and basic infrastructure (roads, railroads, schools, et al.) could be financed by Treasury-created money and there would be no debt. To the extent there are unemployed workers, unused resources, unused industrial capital, and unmet human needs—and taking into consideration the capacity of the earth to recycle wastes to protect resources, ecology, and environment for future generations—it is only necessary for a nation’s treasury to create the money to employ that labor, utilize those resources, and meet those needs.

Instead of almost exclusively lending against equity, bankers would need to be knowledgeable about community needs and lend appropriately for those needs. Each region and each community should have equal rights to a nation’s (or the world’s) savings and equal rights to created money.

So long as an economy is expanding productively, and providing value to be purchased by this debt free newly created money, there is no need to tax the public for constructing public buildings or providing services. However, if there are no idle resources or labor to expand wealth production, creation of money will create inflation. If there is not to be an expansion of wealth production, public construction and operation of governments must then come from society’s collection of landrent or taxes.

Note how close banking already is to a modern money commons: Through a “Revolving Reserve Account,” total deposits and loans of each individual bank should be accounted for just as they are now through banks debiting and crediting customer accounts and the Fed debiting and crediting bank reserves. Reserve requirements should be regulated just as now. Banks should be collectors and loaners of the nation’s savings, just as now. All loan institutions should be brought under reserve requirements. All money loaned above the revolving reserves would be created by the Treasury Department (just as now except the accounting of Treasury-created money is buried in a fictional debt of the Treasury to the Fed).18

The Fed can lower margin requirements where loan needs are high (poorer regions which need development, regions of natural disaster, et al.) and raise margin requirements in booming sectors of the economy. (That would be primarily the “paper” sector—stocks, derivatives, currency speculations, commodities, and bonds, which each should have the pure speculative aspect [95% of current stock, commodity, and currency market activities], but not the entrepreneurial speculative aspect [the 5% actually investing in the real economy], eliminated.) The affluent sectors of the economy awash in funds are thus rebalanced with the undeveloped sectors deprived of finance capital.

With banking rights held in common, there would be local rights to finance capital. Each region and each bank would have “rights” to, and pay interest on, its share of created money and savings, but only the national treasury could create money without debt. That creation of money would be by a formula established by law and, adjustable to the deficits or surpluses of a region, automatically distributed. There would be neither control by an elite nor control by politics. It would be a formula of regional, local, and individual rights to created money and savings. The sucking of regional money to money-center banks to be used for speculation would disappear.

The success of local currencies proves that regions, localities, and individuals are denied their full rights to finance capital. But local scrip is not legal tender, not universally accepted, and thus limited in circulation. With banks attuned to take care of those needs, each locality would, in the form of rights to finance capital, effectively have its local currency and, because it is legal tender and can be spent anywhere, it would be much more efficient than current, enormously labor intensive, local currency schemes, LET Systems, Ithica Hours, Time Dollars, et al.c

Honest money, such as we are proposing in the modern commons, is efficient locally, nationally, and internationally. Efficient means they are instantly acceptable anywhere and accounting costs are infinitesimal. The money itself is the accounting system and those accounting costs are reduced to a fraction of the accounting costs under subtle monopolization.

The Populists of the late 19th-Century studied banking reform and their agenda

became a sourcebook for political reforms spanning the next fifty years: a progressive income tax; federal regulation of railroads, communications, and other corporations; legal rights for labor unions; government price stabilization and credit programs for farmers…. The populist plan would essentially employ the full faith and credit of the United States government directly to assist the “producing classes” who needed financing for their enterprises. In effect, the government would circumvent the bankers and provide credit straight to the users…. The government would provide “money at cost,” instead of money lent by merchants and bankers at thirty-five or fifty or a hundred per cent interest.19

There have been many reforms since those days of blatant extortion by the owners of finance capital, but “the money-creation system that Congress adopted in 1913 [and reformed during the Great Depression] … preserved the private banking system as the intermediary that controlled the distribution of new money and credit.”20

That current exorbitant interest rates are unnecessary was demonstrated by early Scottish bankers, whose thrift is so well known that even today a person careful with his or her money is called “Scotch.” In the 19th-Century, the universal practice of Scottish banks was to set interest on loans between 1-and-2% above that paid depositors. Their innovative practices are still considered a model of banking stability.21 With the proper banking service charge having been well established at 1-to-2% for small-volume banking using expensive hand accounting, 1% would be a proper service charge for large-volume banking using inexpensive computerized accounting.

During the stable years following WWII, the real rate of interest in the United States (allowing for inflation) hovered between that 1-and-2%. Previously, the normal world rate had been 2-to-3%.22 Although the real rate of interest in the United States during what were considered the best years the world economy has ever known was under 2%, we will allow the highest long-term average real rate of interest, 3%, as a fair rate. With subtle monopolization and the waste it engenders eliminated, with workers fully paid for their fully productive labor, and with true interest at the high end of historical norms, both capital (stored labor) and current labor would be well paid. People would save and those savings would be available for productive investments.

There need be nothing more than checking accounts paying, by law, 3% interest. Each person’s checking and savings would be the same account. Interest rate controls would eliminate money market instruments and the attendant wasted labor competing for deposits. Detractors may decry this as a loss of their rights. But the only right lost is that of the powerful to intercept the production of others’ labor, especially those pure gamblers whose wagers in the world market casinos amount to 50-to100 times the investment, labor, commodity, bond, and loan activity in the real economy.

In a banking system, total debits and credits will balance (withdrawals equaling deposits). With a fully integrated banking system, any deviation from that balance could be quickly corrected. The visible flow of funds would be the economic pulse of the nation. Any unexplained deficit in one bank could be immediately looked into while normal deficits are balanced by others’ normal surpluses. Increasing or decreasing the interest rate for consumer credit and/or decreasing or increasing it for investment in productive capital would balance the economy.

As a tool under a banking authority (under community control), money can fine-tune an economy to the maximum capacity of resources and labor. It must be emphasized that such a truly efficient society (democratic-cooperative-[superefficient]-capitalism) could quickly consume the world’s resources and pollute the environment. The needs of a society must be balanced with conservation of these resources and protection of the environment. This can be done only with social policy firmly under social control—not under corporate, finance monopoly control.

To provide an adequate living standard for all people and still protect the world’s resources and environment, a balance between a respectable living standard and the capacity of the earth’s resources and ecosystem would have to be reached. Assuming centers of capital could no longer siphon the world’s wealth to themselves and then waste it battling over that wealth, societies could then progress calmly. To prevent inflation, an empowered Treasury/Federal Reserve could both restrict creation of money and/or increase interest rates. Energy taxes (which are landrent taxes) can be quickly raised to pull surplus money out of an economy or lowered to put more money into the economy. To prevent inflation, interest and/or energy taxes and/or transaction taxes flowing to the Treasury/Fed could be increased where that money would be destroyed by virtue of not loaning it back out. To prevent deflation, an empowered Treasury need only lower interest rates or create more debt free money.

The opportunity to restructure could happen by default. In all banking crises in all countries, massive public funds are infused into the banking system to stabilize it. Under the rules of capitalism, those whose money are invested own, and make decisions on, that property.”23

As Eastern Europe and the former Soviet Union have demonstrated, restructuring any society is painful. But restructuring to honest banking after a financial crisis will stabilize, not destabilize, an economy. As one integrated banking system, all loan institutions, including money markets, should be subject to reserve requirements and regulated interest. In short, all banks and quasi-banks should operate as one bank. The regulated interest rate on savings should be a real rate of 3%, which, as typically the bank rate paid on savings is less than the rate of inflation, is much more than most of the world’s banks are now paying.d

Even with a nation’s Treasury/Fed as the only creator of money, countries cannot control their finance markets except by coordinated action of the major currency nations. To prevent flight of capital, all major countries would have to act simultaneously to bring money markets under control.

Most countries’ banks are publicly owned and currencies in the world banking system cannot escape even from a private banking system such as in America. Whenever a serious policy dispute erupts between any country (Iran, Iraq, Cuba, North Korea) and the United States, their dollar accounts throughout the world are frozen. Every trade financed by money capital of any currency that moves between two banks just creates a change in bank reserves at the central bank for that currency. If that central bank does not honor a transaction in its currency through suspending targeted banks’ access to their reserves, those banks have lost access to their currency and no money can change hands. In November 2001 President George Bush threatened to suspend rights of disbursing or accepting dollars for any bank in the world that does not cooperate in the search for those who are funding terrorist attacks on America. The U.S. central bank (the Federal Reserve) can control dollars anywhere in the world. Theoretically other countries can control their currencies but this is true only of countries that are economically powerful. The power to discount currencies of weak nations gives powerful nations effective control over other nations’ currency values and thus control over their ability to create money.

With coordinated action to bring the world’s money markets within a banking system with required reserves and regulated interest, bidding for a nation’s savings—and other subtle methods of finance monopolization—can be eliminated. Nothing is more important for a nation’s economy than productive use of its investment funds, and nothing is more important to the world economy than the stability of currency and commodity markets.

Inflation, Deflation, and Constant Value: Creating Honest Money

Eliminating inflation and deflation and maintaining a constant-value currency while expanding the money supply to finance true production and distribution is as simple as, and an extension of, the obsolete gold standard. A banking authority need only tie its money to the value of “a basket of 30 or more of the most commonly used commodities—gold, wheat, soybeans, rice, steel, copper, et al.”24 The uncontrolled money markets can be brought within the banking system by law and required to deposit reserves with the Federal Reserve. To establish this stable-value money, a nation’s treasury/federal reserve could use a part of the reserves to buy commodity contracts and would be the official arbitrageur for those contracts. As this use only replaces previous users of these same reserves, this does not reduce the money supply (reserves) operating the real economy. Ralph Borsodi, economist and lifetime promoter of a banking authority issuing money backed by a broad base of commodities, sums it up:

The essential difference [between speculation and arbitrage in commodity and currency markets] is that the arbitrageur buys and sells [contracts of different maturity dates] simultaneously [on different markets] while the speculator buys and sells at different times. The effect of arbitrage on price movements is to stabilize them; the effect of speculation is to intensify them. If arbitrage were to be conducted on a large enough and wide enough scale, speculation would become less and less enticing. But perhaps even more than this, if it were to be promoted and practiced by an independent international agency such as the bank-of-issue I am calling for on the magnitude this would make possible, it would stabilize prices to such a degree that stabilization as a serious problem would disappear. Stabilization would make speculation peripheral instead of central in the determination of the prices of basic commodities of the world.25

It is not necessary to wait for a nation to establish honest money. Any international bank could do so by establishing a commodity market database, updating it continuously by computer, and agreeing to debit and credit trades in a constant value backed by this “basket of commodities.” In the currency markets, with the value of this new money indexed to, and backed by, those commodities, other currencies would adjust their value to this constant value and those currency values too would be updated continuously. With the risk of loss eliminated, the contracts of international traders would be tied to constant-value accounts and they would accept payments and make payments at that constant value.

Commodity-basket contracts would be purchased with these reserve deposits. When a demand was made on that account, the bank would convert the money to the currency demanded using its commodity basket value, pay the demand, and debit the account. The natural function of the market pays owners of those contracts and, rather than interest on loans, normal holding profits would be made on commodity contracts. As currently commodity contracts require funding, there would be no increase in demand for finance capital. Social policy would only shift from speculation financing to stability financing.

Once enough constant-value accounts were established, incoming and outgoing money would roughly balance. As the purpose is to maintain the broad average of values, the bank commodities traders would do no speculating. They would be selling contracts approaching their delivery dates and buying new ones of later delivery dates. The security provided by this constant-value money would be so attractive that it would drain money from other banks and money markets, which would have to follow suit or lose deposits. “We will have Gresham’s law operating in reverse; good money will be driving bad money out of circulation.”26

With the pattern established, commodity markets would establish contracts for this basket of commodities and update its value continuously. It would be most economical to include the maximum amount of commodities in one basket, and all countries, banks, and markets could index their money to this same standard. If done properly, there would be one international currency. Any bank in any country could then buy these commodity-basket contracts to back constant-value reserve deposits and sell them to debit demands against those reserve deposits.e

In the currency markets, the value of any currency relative to that stable money would be available to everyone at all times. The more banks and countries that backed their money with these commodity-basket contracts, the fewer funds they would need to keep in reserve to protect their money. If all countries tied their currencies to these stable values, world trades would match currency transfers and all would have a secure international currency that could be redeemed by simply spending it in the marketplace. The “national character of currencies would be of no consequence, they would be but different tokens representing the same commodities.”27 Their value would be ensured and could be realized simply by being spent.

With speculation eliminated, the value of all contracts, and thus the money required to fund them, would equal the value of all commodities in transit and storage. So long as market speculation was eliminated through commodity contracts backing a nation’s money, all money would retain its value relative to those commodity contracts.

If producers and buyers organized into respective trade associations that continually analyzed world supply and demand, this would not eliminate the producers’ opportunity as sellers to maximize their prices or as buyers the right to minimize prices.28 That would still be subject to supply and demand.

Because banks could not protect against counterfeiting, they would issue credits but could not print currency. But with computers to verify a customer through thumb prints, infrared thermogram palm images, artery, vein, eye pattern, and signature scanning (procedures now in use), a check on a constant-value account would be equal to currency. This would attract world traders looking for secure currency and other countries would have to follow suit or lose finance capital. As they can protect against counterfeiting, any nation that desired stable money values could print a constant-value currency and protect it with commodity-basket contracts. This currency would not only be of high value to world traders, world travelers desiring constant-value currency would flock to its use.

Money “cannot be stabilized unless trade is stable.”29 Assuming the shenanigans—selling short, futures on options, and other “derivative products” designed within the worldwide market casino to accelerate the siphoning of wealth from the weak and innocent to the powerful and sophisticated—were eliminated, each country would produce commodities equal to the contracts sold by its farms, firms, and industries. The more waste that is eliminated and replaced by true production and efficient distribution, the more commodity contracts a country can sell, the more of others’ commodities it can buy, and the wealthier it will be. Assuming subtle monopolizations were eliminated, all had access to capital and markets, and these newly capitalized countries formed trade associations to sell their commodities and labor at fair market prices (meaning elimination of the massive wage differentials between equally-productive labor worldwide), each currency would be valued and backed by its nation’s production. Understanding and implementing this process would be the best method of minimizing waste, maximizing production, protecting a nation’s wealth, and organizing a peaceful, wealthy world.

To depositors who kept an adequate bank balance, credit cards could be issued in this constant-value money. A part of these funds would be invested in constant-value commodity-basket contracts. Once constant-value money was widely used, countries could no longer debase their currency by printing money for nonproductive purposes. It would be immediately discounted in the markets, citizens would flock to the constant-value money, and nothing would be gained (meaning their citizens’ wealth could not be arbitrarily siphoned away by inflation induced by their government). Neither could external powers siphon away the wealth of weak nations through discounting their currency and thus deflating its value. (To pull in more deposits and thus strengthen their currencies, developing nations should invest in a broad basket of commodities as opposed to U.S. or euro treasuries in which their reserves are now invested.)

“When for a time in the 1970s the price of copper was held fairly steady many dealers went out of business. There was nothing to speculate on in that market”30 With stable constant values, individuals not using those commodities or currencies in their businesses would no longer borrow society’s finance capital to speculate in commodity markets, nor would they do so with their own cash. Protected by constant-value money backed by the world’s commodities, true producers would not need to speculate. Speculation in commodity and currency markets would cease and the funds of both speculators and true producers would be available for productive investment. Commodity prices, thus consumer prices, would decrease by whatever amount was once siphoned away by these gamblers and confidence in constant-value money would increase efficiencies in international trade, creating even more values. Individual commodities could suffer temporary losses in value but average values would remain stable and those stabilized values would virtually eliminate world economic collapses.f

By indexing reserve deposits, loans, and wages to commodity-basket values a country would be placing its currency on a commodity-basket standard. Responsible law would require that the printing of money could not exceed any increase in a nation’s commodity or service production.31

Once all commodity contracts were owned by businesses dealing in those commodities and by the world’s central reserve banks, the world will have achieved honest money. If ever commodity-basket backed money were started anyplace, it could eventually force honest money on the world.

By tying money to commodities one has only gained a part of full trade rights. Equality in commodity trades requires weak countries being equally paid for their labor and resources. When equally and fully paid and—assuming quality management, access to markets, access to technology, et al—resource-rich poor nations can immediately start accumulating wealth.

Accumulation of Capital through Democratic-Cooperative-(Superefficient)-Capitalism

Powerful bankers thousands of miles away have no concept of local needs and no loyalty to local people. Farmers, homeowners, and small businesses are strapped for finance capital with their locally produced wealth siphoned thousands of miles away and lent to stock speculators, merger and takeover artists, currency speculators, and other gamblers in the worldwide market casino.

It will be a simple matter to calculate finance capital needs and assign a loan surcharge to all loans to go into a socially-owned capital accumulation fund kept in, and loaned from, local banks. Capital needs of each region, state, county, and community could be calculated. So long as there are surplus labor and resources and real value is to be produced, finance capital can be obtained through printing money (primary-created money). But once the capital accumulation fund is established, it will largely replenish itself through loan repayments and interest rates high enough to cover loan losses.

A quick analysis of the simplicity of a socially-owned capital accumulation fund makes it clear that capital accumulated in the past through monopolization has gone for many other things besides society’s finance capital needs, primarily for extravagant living.

Every alert entrepreneur knows that the big profits end up with those who call the tune with their money. With a socially-owned capital accumulation fund, instead of capital accumulation through subtle monopolies, citizens with sound ideas, but no capital, would have the opportunity to realize the profits from their abilities and accumulate capital in their own names. As talent is broadly diffused, wealth, now accumulated by true producers, would quickly diffuse itself broadly and relatively equally throughout the population.

Just as each individual has rights, regions and communities should have rights to their share of a nation’s finance capital. By outlawing the borrowing of social funds for speculation in the worldwide gambling casino (but permitting borrowing for new speculative enterprises), and giving each community or region rights to capital, a national banking authority could guide lending into productive channels throughout the nation. An international authority could guide capital to productive channels and needy regions worldwide. Regional authorities could lend productively within their region, and local authorities within their locality. A nation’s banking system would then be structured for the maximum support of all its citizens, and the needs of other countries would be receiving attention. Society could set a minimum housing standard and eventually reach that goal; innovative businesses should have high priority, but a society could give equal priority to ecological protection, farms, homes, schooling, roads, parks, public buildings, or whatever investment would maximize that society’s well-being.

Assuming they had access to voters through reserved Wi-Fi TV channels as advocated in the next chapter and were elected to a single 10-to-12 year term, regional directors could be freed of political pressures. These directors could oversee their region’s financial rights, while local directors could oversee state, county, and community funding rights. A national director should be little more than an umpire overseeing the equitable sharing of the nation’s finance capital as outlined in law or, better yet, the Constitution. If those rights of access to capital were coupled with the elimination of unnecessary labor, with the remaining productive jobs shared, and if equally-productive work were equally paid, there would be equality relative to one’s ability and energy expended.

Consumer credit (within limits) should be a right instantly available, just as it has been pioneered by computerized credit cards. Using infrared thermogram palm images, artery, vein, eye pattern, thumb print and signature scanning (procedures now in use), along with a credit check, the risk will be small. Each person’s right to credit would be tempered by being subject to standards much as they are now, and the local credit union—now an integrated member of the banking system operating as one bank—would be in a position to know a member’s creditworthiness. Local bankers should best know the needs of society and the creditworthiness of those who borrow to build and produce for that society. If not, they should not be bankers.

The economies of all prosperous nations are dynamic due to the hopes and dreams of its citizens. These hopes are the motivation for the millions of small businesses springing up. The economic health of a nation requires that those with ideas, talents, and energy have access to finance capital. With rights to credit, a nation’s talented can bring together land, labor, capital, and technology at the right time and in the right place to fulfill society’s needs. If there is a shortage of finance capital for productive use, and the resources are available and can be used without destroying the environment, a nation’s treasury can quickly create the money to increase the reserves of the private banking system.

Only individuals operating under free enterprise and competition can develop the millions of ideas necessary for the progress of science, industry, and society. In order for citizens to fulfill these visions and provide their special expertise, it is necessary that they have access to credit. With entrepreneurs having rights to finance capital and banking personnel trained to be generous, yet careful, innovation in production by business and industry (productive speculation) would be unhampered.

Credit is now rationed by the simple method of checking track records, and lending up to a certain percentage of the borrower’s equity—a great rule for monopolists. “Loans are made in a very impersonal way—everything depends on ‘track record,’ and if you don’t have a ‘track record’ [or equity], as most young people do not—you can forget it.”32 Access to investment capital should be a right based on productive merit as well as collateralized equity. Thus credit for productive people in their first ventures would be easier to obtain. With employees of the banking authority trained to be alert to productive investment requests, these loans would be quite simple. When a loan request was received, an evaluation would be made of its potential productive and financial success. If it looked reasonable, the loan would be approved. This is precisely how loans in America were made for the first 15-to-20 years after WWII. After the boom years were over, banks reverted to primarily loans against equity.

With the elimination of capitalized values in land, monopolized capital, and “fictitious capital” under democratic-cooperative-(superefficient)-capitalism there will not be these artificial values against which to lend. But neither will money capital be needed to purchase these fictitious values. Smaller loans will be backed by a smaller, but more secure, true value. A loan would, of course, require financial accountability by the borrower just as it does now.

With initial capital promised from the regional capital accumulation fund, an entrepreneur could issue stock for the rest of his or her financial needs and this primary bank loan would be secure. With elimination of subtle communication monopolies (addressed next), those who buy this stock will be investing risk capital directly into production rather than having to go through finance monopolies that will claim most of the physical and intellectual labors involved in the endeavor.

It is not necessary to lend strictly to owners who would then hire workers. Those with insight need only prepare a prospectus describing the product or service, market potential, profit expected, financial requirement, and labor needs. The loan institution would study the proposal and—assuming the ideas were sound and beneficial to the community—would approve the loan. Workers would study the prospectus, and agree to 10-to-20% of their wages being deducted as payments for 60 to 80% of the stock.

With workers owning a share of an industry and a share of their wages being used to pay off the loan as we have suggested earlier, the owners of this capital would be true producers. Society would receive useful products or services and the nation’s savers and national treasury would be fully paid for their finance capital.

With these triple benefits to society, bankers should be taught to pay close attention to requests for investment credits; they are the sinews of capitalism. Most workers would stay on the job, but, once the new business was secure and their new stock had capitalized value, the talented ones would search out another prospectus, help develop another business, train more workers, gain more capitalized value, and move on again. Labor would be both mobile and highly productive just as capital is now and the most productive of those workers would be the accumulators of capital. This would be mobilization of labor without the dispossession that has been so typical of past capitalization processes. Labor would have the same rights to gains in efficiencies of technology as investors now have. The talented would be in high demand by the developers of industry.

Besides collateral protection, there are three flows of money that make those loans secure—landrent, profits, and a share of wages. Society’s collection of landrent could, and should, permit it to accept a larger share of the risks of new entrepreneurs. Every success increases the use-value, and thus the rental value, of that land. The risk of uncollateralized investment loans could also be offset by a surcharge on the interest to go into an insurance fund. With these restructured borrowing rights, many more people would qualify for investment capital than under equity loans. If successful, they and their workers would, through the shares purchased, own that capital honestly, as opposed to the current custom of capitalizing values through subtle monopolization of social wealth.

Those searching for a higher return—and confident they have found good investments—could directly employ their capital. Those with the opportunity to lend their savings at a higher rate would be free to do so. But they could no longer obtain high profits by simple tribute for the use of subtly monopolized capital. Those who once bid for money market funds would now have to compete for loans on their projects’ productive merits. This would eliminate pure speculation with social funds while retaining that right with personal funds.

Once restructured, a society will have to address the increased efficiencies and technology’s massive reduction of labor needs. They must then reduce labor time and share the productive jobs. If this is not done, new monopolizers, in the form of excessive job rights, will emerge.

A socially-owned capital accumulation fund within a modern financial commons will eliminate the centers of power created through monopoly capital accumulation which have historically controlled governments and maintained the worldwide wealth-siphoning system and its inevitable wars.

Japan operated just such a capital accumulation fund and utilized it with a vengeance to reach its current position on world trade. We do not suggest a nation’s international trade capital accumulation fund be that aggressive but it would be great protection against others’ predatory trade practices.

(The subchapters “If Society Collected Landrent, All Other Taxes Could Be Eliminated” (Chapter 24), “Creation of Money” [this chapter] and “Investment and job Opportunities” [Chapter 27] support this subchapter.)

Negative Interest

Throughout the expansion and stable stages of business cycles, most property and business owners clearly recognized that a steady inflation rate increased their property values faster than the interest costs on money borrowed. Entrepreneurs recognized that this negative interest carried them through the early tough years until their business matured and this had a lot to do with establishing a productive economy.

Where slightly negative interest rates were the rule during the early and middle stages of an economic cycle, supernegative interest rates were the rule in bubble phases of economic cycles. When those bubbles collapsed, loans then carried superpositive interest rates with all the destructive forces a theoretician would expect.

Negative interest can function well on the investment side of the ledger of an economy but not on the savings side as promoted by classic negative interest theorists. Money saved is properly only a symbol for produced wealth. In a modern economy, where capital accumulation depends upon the individual savings of millions of people, there would be inadequate investment money if savings decreased in value each year as promoted by classic negative interest theorists.g

The Simplicity of Paying Taxes through Taxing the Circulation of Money

In countries where social collection of landrent is not feasible due to the political power of property owners, there is another option for eliminating inequitable taxes and improving the efficiency of economies. In both 1988 and 1998 a transaction tax on the circulation of money (a user fee) was proposed to the American congress which sent it to the Congressional Research Service of the Library of Congress for study where it was found quite feasible. A tax of only 1/20 of 1% (.0005) upon the $550-trillion that passed through America’s Federal Reserve in 1998 would have brought in more than the $2.3-trillion collected by both Federal and State taxes that year. Not only would this have relieved every citizen of personally paying those taxes, it would have relieved each one of many days work of keeping those records, of all the money paid to tax accountants and attorneys, of the cost of all tax cases in the courts, of the cost of legislative battles over tax law, and on and on. Certainly millions of lawyers, accountants, judges, federal and state lobbyists, all the secretaries and support workers, those who maintain those offices and furnish their supplies and all those people will have to find productive work. But that is a saving to every productively employed person and is just what creating an efficient economy is all about.h

Money: A Measure of Productive Labor Value

Citizens judge the value of most commodities by imperfect memory and comparison. Witness our exposure in these four chapters on a modern commons of current unnecessary costs built into the price of products and services. Our earlier research, documenting distribution through unnecessary labor, addresses unnecessary costs of legislated monopolies (insurance, law, health care, and welfare).33 Using money to contract only for productive employment would give a true measure of labor value to every product and service. It is the responsibility of the leaders of society to maintain an honest relationship between the compensation paid capital and labor to produce and distribute commodities and services, and the price charged the consumer.

This philosophy—first proposed by the founders of free-enterprise philosophy, the French Physiocrats—can become reality only by eliminating the unearned share of income from private landrent, monopolized technology, fictitious capital, and fictitious wages (those doing unnecessary labor). All inflate costs and siphon to non-producers the wealth created by truly productive labor. This does not limit a person’s right to contract out his or her labor, or to contract for others’ labor. It eliminates the nonproductive element of contracts siphoning away the labor of others. If the labor value of wealth is protected from inflated fictional values, the value of the symbol of wealth (money) will be stable. The public will then much more accurately judge values and society will function efficiently and equitably.

With proper control of society’s money we could have full employment, stable prices, low interest rates, and stable exchange rates. If this could be managed, there would be no inflation, deflation, recessions, or depressions (except from natural disasters or war). How to achieve a peaceful and just society is no secret; what is required simply conflicts with the privileges of powerful people.

Again, the most important aspect of regaining rights to a modern money commons is that private ownership is retained, yet subtle money monopolists disappear, and the wealth created by the efficiencies of money (not that created by labor and capital [stored labor]) is—through working less for a higher standard of living—instantly and without cost distributed to all. Distribution of wealth would be through fully productive labor and fully productive capital. Full and equal rights under democratic-cooperative-(superefficient) capitalism means none would be in poverty.

Assuming maintaining buying power through sharing the remaining productive jobs, the economic efficiency gains for society through elimination of subtle monopolization and establishing a modern land, technology, and financial commons would equal the invention of money, the printing press, and electricity. Under that reclaiming of the modern commons through democratic-cooperative-(superefficient)-capitalism, a quality lifestyle is possible working only 2-to-3 days per week.

The efficiencies of subtle-monopoly capitalism we have heard about for generations are fictions protecting the monopolization of wealth and power. It is the arteries of commerce running through these unproductive subtle monopolies and the battles over monopolization of resources and the wealth-producing-process that wastes enormous amounts of labor, resources, and capital. Many are forced to the margins of the flow of commerce and some are excluded altogether.

The expansion of full private property rights, individualism, and competition to all people under democratic-cooperative-(superefficient)-capitalism, the logical structure of Henry George philosophies, brings all within the economic system, eliminates that waste, and creates an efficient, productive, peaceful society. With work time halved and free time doubled, the arts (music, sculptors, painting, singing, et al.) will expand exponentially.

Working on a bill to submit to the Eighth Session of the Provisional World Parliament, Professor Glen Martin of Radford University expanded upon the Biblical and Koranic principles that it is wrong to charge interest. As money and banking are social technologies understood for thousands of years and ownership is only proper for items built by one’s labor or purchased with funds earned by one’s labor, and money and banking systems are neither, this is a logical social-legal structure.

What caught professor Martin’s attention was, if properly structured, the elimination of the waste of monopolies and the attaining of full and equal rights through sharing the remaining productive jobs (each working only 2-to-3 days per week) equalized the earnings of all and thus did away with the huge accumulations of money formerly appropriated by those monopolies.

With the disappearance of those huge blocks of appropriated wealth and the equalization of pay for equally productive work, the need for paying interest disappears. Beyond application, accounting, and brick and mortar costs, well under 1% of loan values, there was no one producing anything through either mental or physical labor so no one would be entitled to “earnings” of 6%-to-24% interest on loan values.

Professor Martin further recognized that banks paying high interest on savings and typically zero interest on checking accounts acknowledged this difference. After all, the average positive balance in checking accounts is as much a part of a banks loanable funds as are savings accounts.

The Eighth Session of the Provisional World Parliament in Lucknow, India, in August 2004 passed a legislative act stating that the maximum pay differential for the federated Earth will be a maximum of 1-to4 and that equally productive work within the federation will received equal pay. With each productively employed, most people-on balance-consuming most of their earnings, and with a policy of no interest loans, checking accounts would operate as now, depositors paying their bills from their checking accounts. The banks would loan out the average minimum monthly balance covering costs through a nominal 1% service charge.

No-interest buffs and socialists here is an opening to expand your philosophies. Study the elimination of monopolies, the disappearance of the huge blocks of appropriated capital, and the equality of income through full and equal rights as presented in our research.

Throughout our work we have stated that, “economic efficiency under democratic-cooperative-capitalism would be so efficient the world would be quickly stripped of its resources and this would force social oversight of the entire production-distribution system.” As the medium of exchange in every transaction, money movements are a mirror image of an economy. Thus control of an economy is logically through society controlling banks and money.

As resources get scarcer and scarcer the variables are many. So we leave it at that with the confidence that, through social control of money under strict rules of full and equal rights for all, the elected managers of a federated earth will regulate the wealth-producing-process to provide a quality of life for both current citizens and those into the far distant future.

Those full and equal rights can be attained under a system of interest on, or one with no interest on, savings and loans. However, our philosophy is that savings (financial capital) is but a symbol for wealth produced but not yet consumed. That unconsumed wealth is primarily highly efficient industrial capital and infrastructure continually increasing the efficiency of labor.

The key is what is done with that interest. As capital is but stored labor we hold that those who did the mental or physical labor deserve to be paid. For that reason, even with Professor Martin’s pointing out that an economy can run efficiently without paying interest, we will change the above description of an efficient banking system only to the extent of what is to be done with that interest.

Saving should be rewarded and we do so through, as outlined above, the payment of interest at the high end of long term averages, three percent which goes to the savers. This conforms to the need for investment profits; savers have the choice of secure investing in bonds or savings accounts with low earnings or higher risk investing in stocks with higher earnings.

But, as no one’s labor is involved beyond that of well-paid managers and accountants within the banking system, the proper recipients of the higher interest earned by banks is society itself. Along with societies’ collection of landrent, as per above, this adds up to enormous sums of money. Such huge investment funds match up well with the world’s need for the several innovative economic policies we have been advocating.

The world must develop nonpolluting energy, build industry and basic infrastructure within impoverished regions, establish a Wi-Fi satellite educational system which will graduate students worldwide in all languages for 5% to 15% the cost of brick and mortar schools, create a worldwide currency and banking system that protects all regions rights to created money and investment capital, and establish an Earth Federation to oversee this system of full and equal rights for all.

As those interest charges go right back to the people in the form of essential services and none is accumulated in huge blocks of unearned wealth, there is, just as preached in the Bible and Koran, effectively no interest. Without that source of funds, those expenditures would have to be obtained through taxes. Society has simply taxed the loan structure in the form of an annual percentage on outstanding loans at 3%-to-10% as opposed to the current 6%-to-24%.

Once the impoverished world is developed to a sustainable level, the wealthy world will have repaid the world for 500 years of slavery and plunder through which their massive wealth was accumulated. At that point interest and other taxes must be reduced to the level it requires to operate a peaceful federated world. To not federate means continual war. To federate means peace for all time.i

Footnotes

1. Bankers know all this and successfully lobby bailouts for their larger troubled banks. Japan is right and Western banking rules are wrong. The world should take note of this inadvertent example of protection of both banks and people that banking rules need changing to protect all stakeholders, not just bankers. By accounting rules, most Japanese banks have been broke for years. By those same rules, if Japan had closed those banks that would have destroyed what was left of its land and stock values, wiped out those trillions in savings, forced the sale of property in America and in American bonds, and not only collapsed the Japanese economy but would have collapsed the world economy. Witness the violent 1987 collapse of the American stock market when Japan started selling American bonds (Richard C. Longworth, Global Squeeze: The Coming Crisis of First-World Nations [Chicago: Contemporary Books, 1999], pp. 22, 53). Back to text
2. Funds deposited in a bank are earned monies identical to funds used to establish the bank. Claims that banks created those redeposited funds are simply wrong. Back to text
3. An Internet search will locate these local currencies and more. Tom Greco, Understanding and creating Alternatives to Legal Tender (White River JCT, VT: Chelsea Green Publishing, 2001) will bring one up to date on local currencies worldwide. Back to text
4. There is some validity to the theory of interest continually expanding debt, better described as continually expanding the money supply. A stable economy could require the lowering of interest rates to where interest paid and money destroyed (loss of capitalized values, bankruptcies) balance. Back to text
5. Inflation and deflation can also be eliminated, and thus a stable value currency created, by indexing wages and contracts to the price changes of a broad basket of commodities. Back to text
6. Through preventing, on average, surpluses in commodities or consumer products, commodity backed money will prevent economic crashes. But, if shortages occur, there will be an increase in price which means a lowering of the value of money. Community oversight maintaining a balance between resources and consumption will be necessary. Back to text
7. We are fully aware that this is not the classical interpretation of negative interest. But we feel the classical interpretation fails when it comes to savings while this interpretation remains valid. Back to text
8. This paragraph supports our previous work, J.W. Smith, The World’s Wasted Wealth 2: Save Our Wealth and Save Our Environment, (http://www.ied.info: The Institute for Economic Democracy, 1994) and Cooperative Capitalism: A Blueprint for Global Peace and Prosperity, updated and expanded 2nd edition (http://www.ied.info: The Institute for Economic Democracy, 2005) outlines how 50% of all work in America is unnecessary except as a system of distribution. Tax lawyer John A. Newman proposed this transaction tax on the circulation of money to the American Congress in 1988 and Paul Bottis (http://www.taxmoney-notpeople.com and http://www.madashellclub.com) is continually proposing it to the those legislators today. Back to text
9. We wish to alert you to Stephen Zarlenga’s outstanding book The Lost Science of Money: The Mythology of Money – the Story of Power. This is arguably the deepest study of money out there; thoroughly demolishing many common errors in monetary theory. Back to text

Endnotes

1. William F. Hixson, It’s Your Money (Toronto, Canada: COMER, 1997); T. R. Thoren, R. F. Warner, The Truth in Money Book (Chagrin Falls, Ohio : Truth in Money, 1994). Back to text
2. Joel Kurtzman, The Death of Money (New York: Simon and Schuster, 1993), p. 11. Back to text
3. William Greider, Secrets of the
   Temple (New York: Simon and Schuster, 1987), p. 335. Back to text
4. John Kenneth Galbraith, Money (Boston: Houghton Mifflin, 1976), pp. 62-70. Back to text
5. Ibid, pp. 167-78; Greider, Secrets of the
   Temple, pp. 228, 282. Back to text
6. Philip S. Foner, From Colonial Times to the Founding of the American Federation of Labor (New York: International Publishers, 1947), p. 67. Back to text
7. S. P. Breckinridge, Legal Tender (New York: Greenwood Press, 1969), Chapter 7; Galbraith, Money, pp. 72-75. Back to text
8. Carl Cohen, Editor, Communism, Fascism, Democracy (New York: Random House, 1962), pp. 13-14; Paul Kennedy, The Rise and Fall of Great Powers (New York: Random House, 1987), p. 53. Back to text
9. Galbraith, Money, pp. 18-19.
   Back to text
10. Paul Kennedy, The Rise and Fall of the Great Powers. New York: Random House, 1987,p. 53.
    Back to text
11. J.W. Smith, The World’s Wasted Wealth 2 (http://www.ied.info: Institute for Economic Democracy, 1994). Back to text
12. E.K. Hunt, Howard J. Sherman, Economics (New York: Harper and Row, 1990), pp. 491-93, 505-508. Back to text
13. Thoren and Warner, Truth in Money, pp. 120-24. Back to text
14. William F. Hixson, Triumph of the Bankers: Money and Banking in the Eighteenth and Nineteenth Centuries (Westport, Conn: Praeger, 1993), Chapter 23; Hixon, It’s Your Money, Chapter 5. Back to text
15. Hixon, It’s Your Money, Chapters 5, 6. Back to text
16. Ibid Back to text
17. Greider, Secrets of the Temple, pp. 61-62. Back to text
18. Hixson, It’s Your Money, Chapters 5, 6. Back to text
19. Greider, “Annals of Finance,” The New Yorker, November 16, 1987, pp. 72, 78, emphasis added. Back to text
20. Ibid, pp. 72, 78. Back to text
21. George Tucker, The Theory of Money and Banks Investigated (New York: Greenwood Press, 1968), pp. 219, 255. Back to text
22. Michael Moffitt, The World’s Money (New York: Simon and Schuster, 1983) p. 197; John H. Makin, The Global Debt Crisis (New York: Basic Books, 1984), p. 162. Back to text
23. Greider, Secrets of the Temple, p. 630; Christian Miller, “Wall Street’s Fondest Dream: The Insanity of Privatizing Social Security,” Dollars and Sense, November/December 1998, pp. 30-35; Edward S. Herman, “The Assault on Social Security,” Z Magazine, November 1995, pp. 30-35; Bernstein, Merton C., Joan Brodshaug Bernstein, Social Security: The System that Works (New York: Basic Books, 1988). Back to text
24. Ralph Borsodi, Inflation (E. F. Schumacher Society, Box 76 RD 3, Great Barrington, MA 01230, 1989). See also Irving Fisher’s work in the 1930s; Arjun Makhijani, From Global Capitalism to Economic Justice (New York: Apex Press, 1992), pp. 121-27, appendix; Michael Barratt Brown, Fair Trade (London: Zed Books, 1993), especially pp. 53-63, 150; Kurtzman, Death of Money, p. 236. Back to text
25. Borsodi, Inflation, p. 73. Back to text
26. Ibid, p. 8. Back to text
27. Ibid. Back to text
28. Brown, Fair Trade, especially pp. 53-63, 150. Back to text
29. William Greider, “The Money Question,” World Policy Journal (Fall, 1988), p. 608. Back to text
30. Brown, Fair Trade, p. 56. Back to text
31. Julian Schuman, China: An Uncensored Look (Sagaponack, NY: Second Chance Press, 1979), pp. 49-50, 160. Back to text
32. Robert Swann, The Need for Local Currencies (Great Barrington, MA, E.F. Schumacher Society, 1990), p. 6. Back to text
33. Smith, The World’s Wasted Wealth 2. Back to text

This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.