Another Neo-Greenbacker Central Banking Scheme
Michael S. Rozeff
by Michael S. Rozeff: Americans,
Listen to the Ruling Elite... Give Up Your Wealth for Nothing
In his article,
State Debt to State Money," Rudo de Ruijter criticizes
the existing "money system" and calls for "state
money". He thinks of this as "bank reform".
is reform? Not one little bit. We will have reform only when the
forms and supply of money are market-determined, not state-determined.
In other words, we will have reform only when each person decides
for himself what kind of money and how much of it he or she wishes
to bid for or offer in a free market. There is no reform when these
decisions are being made for each of us by a state, either in the
present arrangement or in a greenbacker version of state money.
Our core problem
now is that money is a state creation. The Fed and other central
banks decide how much high-powered money to create out of thin air.
It serves some purposes to emphasize the Fedís private character;
but the state created the Fed and gave it its power to create money,
and the Fed works hand in glove with the U.S. Treasury. The relevant
contrast is not, as Ruijter makes it, between a private institution
that controls money and a state that controls money. This is not
the either-or choice that we face.
Our core problem
is that money is very highly politicized. State money of the kind
that Ruijter proposes is also totally politicized money. His proposal
and proposals like his that keep the power to create money in the
hands of government officials do nothing to resolve the existing
choice thatís important is between free market-determined money
and state-determined money. Itís between liberty and slavery in
the monetary realm of human action.
of the U.S. Constitution, having lived through an era of inflationary
finance followed by the inevitable economic bust, took the money
power entirely out of the hands of the new government. They left
the determination of money supply to the market. Furthermore, they
restricted the central and state governments to using gold and silver
as money. State money creation in the form of paper or credit was
then and is now unconstitutional.
aside, Ruijterís proposal, if it were ever enacted, wouldnít solve
the problems with our monetary system. It would simply exchange
one distant and unaccountable money power for a closely-related
version of the same distant and unaccountable money power. It would
come down on the side of slavery, not liberty.
not a free people. If we were free, we would have monetary freedom.
We do not have monetary freedom. The U.S. government in one way
and another forces us into one collective that uses one money. How?
We are pressured into using the U.S. fiat dollar by legal tender
laws, taxes that heavily discriminate against metals, regulations
that control banking, privileges accorded to the Federal Reserve,
a payments system that is geared to fiat dollars, and IRS rules.
No one has to use dollars, but try not to use them. There are significant
barriers that the state has raised to switching voluntarily out
of fiat dollars into alternative currencies or moneys.
to replace the current unfree and collective system with a different
but closely-related unfree and collective system:
can introduce state money, also called public money...
this can be done rather simply. Instead of today's central bank,
a new central bank will be established, that is to say, a central
bank of the state. It will fall under the responsibility of the
Ministry of Finance and be controlled by the Parliament."
In the U.S.,
this means replacing the Federal Reserve by a new central bank housed
in the Department of the Treasury, under the responsibility of the
Secretary of the Treasury and controlled by the U.S. Congress. Instead
of Federal Reserve Notes (FRNs) and the corresponding electronic
credits that the Fed creates, we would have United States Notes
(USNs) and the corresponding credits that the U.S. government creates.
In this system,
the state decides on government spending just as it does now. The
state decides on taxes as it does now. The state decides on borrowing
as it does now. However, all of these are in terms of USNs, rather
than FRNs. The new element of government finance is that the state
can issue USNs and spend them into circulation:
the new system the government can very easily create a portion
of permanent money by spending an amount of money (= bring money
into circulation) without levying the corresponding taxes."
replaces the Fedís power to create thin air money (FRNs) by the
stateís power to create thin air money (USNs). The state spends
as much money as it wants to spend. It can create any amount of
thin air money it wants to, without limit, just as can the existing
is a very old (and bad) idea. Individual states used it with variations
in America in colonial days.
two alternatives as opposites that are not opposites. He thinks
that the creation of money should be in the hands of a democratic
government, rather than the hands of private bankers:
still pretend to live in democracy, while one of the major attributes
of society, the creation of money, is in the hands of private
bankers. De Nederlandse Bank N.V. (the Dutch central bank) is
ruled by private persons and is independent from the government."
he poses extinguish freedom. Money creation should not be in the
hands of any monopolists or any cartel or any government or any
group that has been awarded privileges backed up by government force.
Our monetary freedom doesnít rise if we exchange one money monopoly
for another. We are not more free when we exchange a private banker
monopoly or cartel, if it exists, for a public or government monopoly,
which in actuality will be run by a small number of self-interested
officials who are influenced by narrow lobby and interest groups
and over which the general public has no more control than it has
over central bankers.
Are we more
free when Congress issues USNs than when the Fed issues FRNs? In
both cases, distant bodies have political power over money. In both
cases, distant bodies decide how much money to spend and who shall
get it, and they are able to get their way because they have political
power or power derived from political power.
it backwards. Democracy in the form of government control over money
opposes and diminishes monetary freedom and freedom generally. People
who think that democracy, social democracy and socialism as forms
of government mean freedom or bring freedom are suffering from a
political delusion. In order to believe such an evidently false
proposition, one has to ignore the steel cages and penalties that
await anyone who attempts to opt out of the governmentís mandatory
ukases. Freedom isnít produced from the barrel of a gun, even when
that gun is pointed towards oneís head by a democratic majority.
USNs would be forcible legal tender, although Ruijter does not say.
An important way that the government can "very easily create"
as much new money as it wants to, place it into circulation, and
get the population to use it in preference to other moneys is to
enhance its acceptability by making people accept it as legal tender.
This is what Lincoln did in 1861 when he issued greenbacks, which
were USNs that the U.S. Treasury issued. (There was no central bank
at that time.) A legal tender law that makes people accept the USNs
in payments of debts and in other transactions is a device to drive
out the competition of other moneys.
If people do
not have to accept USNs and if a state spends or attempts to spend
lots of them into circulation, in excess of what it is going to
tax back to the state, or if people expect that the state will in
the future spend lots of them into circulation, then the value of
the USNs against goods will fall. The prices of gold and other goods
will rise. There will be inflation, as there is now. (This will
happen with or without a legal tender law.)
that interest paid on loans extended by the state central bank goes
"to the Treasury for the benefit of the population" He
makes it sound as if this eliminates an unnecessary expense of a
private banking system (even one that is not a cartel or in league
with a central bank):
state money system can function much less expensively than the
private money system we now have. In the first place all interest
goes to the Treasury for the benefit of the population.
is false because taxpayer capital is scarce and not without a cost.
To understand this, letís compare the private bank lending with
government bank lending.
a business gets a private bank loan and pays interest on it. The
interest paid flows into the bank. However, this is not pure profit.
Apart from all of its other expenses, the bankís cash outflows include
interest on deposits and bonds. That is part of its costs of capital.
Banks do not have access to free financial capital.
that the government takes over the bank and makes the same loan
to the business, and the business pays interest. It flows into the
government as one of its cash inflows. The government, having no
depositors, pays no interest to them. Instead, suppose that it returns
the interest to taxpayers as Ruijter assumes. Has the government
eliminated a cost of doing business (the cost of capital) by not
having to pay interest to depositors and has it found a new source
of wealth for taxpayers? No, because the taxpayers have replaced
the depositors as the source of capital.
could have invested privately in a bank and gotten a return. They
lose this opportunity when the government taxes them. If the taxpayers
are made to pay into the Treasury and do not get a return as great
as they could obtain privately, they are actually losing. If the
Treasury sends them the interest money or equivalent benefits, they
merely break even.
If the governmentís
bank doesnít get capital from taxpayers or through open market security
issues that carry interest costs, then the only other way to get
capital in Ruijterís system is to create it out of thin air by printing
USNs or by giving the business equivalent electronic credits denominated
in USNs. This inflation route is not costless either. It takes
capital from moneyholders indirectly but surely. Whoever holds
USNs finds that their notes are competing for resources with a larger
supply of USNs that has been augmented by newly-printed notes. In
the limit, if the government made direct purchases of resources
with its unlimited supply of USNs, it could outbid anyone. This
shows that it is actually taking capital away from existing USN
that the state bank will have "no expensive building up of
state bank does not need a separate capital, because all money
belongs to the community."
He is referring
to equity claims. Although government does not issue equity claims
and does issue bonds at rather low interest rates, that does not
mean that it bypasses capital costs or has low capital costs measured
by the bond rate of return. The reason, explained above, is that
either taxpayers or USN holders or both are being forced to give
up valuable capital to an enterprise run by government that is going
to make risky loans. Risk doesnít vanish or even diminish because
government is making the risky loans. That risk attaches to any
securities or claims that are issued that finance the loans. Costs
can be hidden but not evaded.
of this criticism of state money issued by a government department
implies support for the existing central banking system. That system
should be dismantled. Iíve outlined how to do that here
If we had monetary
freedom, Ruijter and other greenbackers could form a collective
and create their own government organization for themselves. It
would not be forced on others. They could devise their own state-owned
and state-operated central bank that issues state money in the form
of paper currency or credits. Their collective could operate as
it pleased. Others of us could supply and demand moneys of our choice
S. Rozeff [send him mail]
is a retired Professor of Finance living in East Amherst, New York.
He is the author of the free e-book Essays
on American Empire: Liberty vs. Domination and the free e-book
The U.S. Constitution
and Money: Corruption and Decline.
© 2011 by LewRockwell.com. Permission to reprint in whole or in
part is gladly granted, provided full credit is given.
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