REPORT DEAD LINKS --- we can't keep this site up-to-date without your help
Common Sense Economics (COMMONOMICS)
This is a work-in-progress, it is nowhere near its finished form. Things will be out-of-order and incomplete until I sign off on it. Please bear with me. I welcome all suggestions and questions. (MRC)
The goal of this writing is to explain, in easily understood language, how money is issued, regulated and controlled in the United States.
Q. Who has the right to issue and regulate money in the U.S.A.?
A. According to the United States of America's Constitution / Section 8 - Powers of Congress
"The Congress shall have Power ... To coin Money, (and) regulate the Value thereof, ... To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof."
The common-sense meaning of the above is that Congress shall operate as the nation's Central Bank and shall run the banking system.
Whether Congress is now doing what the Constitution says it should do is open to question and discussion. Basically Congress has outsourced the administration of money to the Federal Reserve System. Whether a branch of government can legally oursource its powers is not well understood by the general public. Perhaps it is not well understood by anyone, including our courts.
Q. What is a common, generally accepted definition of money?
A. From <<http://www.canadianeconomy.gc.ca/English/economy/money_concept.html>>
Money is any set of assets used to buy goods and services ... In the U.S., money is the set of bills and coins that an average person calls money
Q. How is the Federal Reserve (Fed) involved in money?
A. (a) The Federal Reserve is a private corporation operating under laws passed by Congress in 1913. The Federal Reserve was assigned the powers over money that was given to Congress in the Constitution. The Fed is basically a contractor that works for Congress. Presumably, Congress can take back the powers at any time by repealing the 1913 law or passing new laws.
(b) Under our present system of banking (fractional reserve banking), when a bank lends money to a person, corporation, or any other entity, that money is thereby created when the loan is made. That transaction gives rise to the concept that credit is money. We intend to discuss fractional reserve banking and "credit" being equal to "money" in more detail further along in this report.
Q. Do all countries operate their banking system in the same way as the U.S.?
A. No. In Canada, England and many other countries, the banking system is run directly by the central government. In these countries, there is little, if any outsourcing to any organization that is basically free of direct and immediate control by the government.
Q. Is there any controversy over who should actually run the banking system?
A. Yes, in the past and up until recent times there have been very serious, but generally ill-defined arguments between various powerful groups such as presidents, congress, bankers, political parties, merchants, manufacturers, economists, etc. Some argue simply that the Constitution should be precisely followed. Others argue that the direct running of the money system by Congress would lead to all sorts of trouble and inefficiencies.
Q. Have these arguments for and against direct control by Congress (or the Federal Reserve) ever been put forward in clear terms before the general public.
A. In the opinion of this writer -- no, except as recorded directly below.
Q. Where can good arguments for direct Congressional control of the money supply be found
A1. (a) The arguments are implied in the Constitution. Also Congressman Wright Patman makes convincing arguments that direct Congress control is best in (b), (c) and (d) below
(b) "A Primer on Money" -- By Congressman Wright Patman / August 5, 1964 / For the House Committee on Banking and Currency / a 141 page .pdf.
(c) Speech to Congress by Wright Patman, introducing the "Primer on Money" This speech basically covers the same ground as the before-mentioned "Primer ...". It is easier to understand than the "Primer ...". It also has the advantage of being in .html.
(d) "Money Facts -- 169 Questions and Answers on Money" -- A Supplement to the "Primer on Money". This 30 page report explains in relatively plain English what the "Primer ... " is about. An average person should be able to understand this report. If you read only one of these reports -- this should be it.
A2. As far as this writer can tell, there is no convincing and honest position put forth by anyone as to why the Fed is a better choice than Congress to run the money system. Much of the information put out by the Fed is confusing at best and devious misrepresentations of the facts at worst.
The following exchange took part on a Google group between this writer (mrc) and a group member (gm). It is directly related to the subject of this report (8/5 and 8/6/08)
(gm) Thank you for writing Mr. Carbone and I apologize for my late response. I am certainly no expert on our Federal Reserve system or our banking system but it seems to me that it's all a scam.
(mrc) It is sort of a scam. But the basic system is the best one that has been found ever since mankind created money. The big question raised recently by Ron Paul, as I understand it, is -- "why should not the Congress run the money supply as specified by the Constitution?" If that were done, the government would save the interest they now pay to the Federal Reserve system. That argument has been made by a number of Presidents -- including Lincoln and Kennedy -- but the Bankers have been able to see that the Fed remains in control
(mrc) Basically the banks have convinced the general public that the banks are more knowledgeable and trustworthy than the government. In general, they argue that if the Government controlled the money supply -- they would issue too much money and thereby cause inflation and a debasement of the dollar. They claim the Fed can't cause too much money to be issued -- because the government would not allow it. They, the Bankers, have thereby invented an unneeded checks and balance argument that is very shaky. The Congress is already checked and balanced by the Courts and the President.
(mrc) In my view, there is no good reason why the Congress should not run the money system.
(mrc) The one good thing about having the bankers run the system is that if they lose money -- that money theoretically comes out of the banker's pockets. If the government ran the system -- all losses would come out of the pockets of the taxpayers. Of course what has recently happened in March of 2008 shows that in any case -- the taxpayers will pay the bill for large-scale losses caused by unpaid debts.
(mrc) Most people do not realize that the fractional reserve system ( the underlying system we use now) gives the managing institution -- whether the Fed or Congress -- a system that has enormous leverage built into it. For every dollar of capital invested by the owners of the system - those owners can make loans adding up to ten times (or much more) the amount of the invested capital. In other words -- if a Federal Bank opens its doors with one million dollars of invested capital -- it has the right to immediately lend out $10 million at whatever interest is currently in vogue.
(mrc) And they actually have much more leverage than that. If a depositer deposits another $1 million with the bank -- the bank can lend out another $10 million. It turns out that there is no limit to how much the entire system can lend out.
(mrc) I know that sounds impossible -- but it is the way the system works as far as I know.
(mrc) Originally, it was thought that the enormous leverage would work to keep the Bankers prudent, conservative and cautious because for every dollar of bad loans, they would have to call back TEN dollars of loans and they would therefor lose the interest on that 10 dollars.
(mrc) Well, as the current situation shows -- bankers are not automatically prudent, conservative and cautious.
(gm) Just the thought that if we all went to the bank today demanding every penny
that we put into that bank, the bank would have to hand out a lot of IOU's and close it's doors.
(mrc) No they would not -- they would simply print dollar bills and use them to pay their depositors. After all the depositors did not deposit gold -- they deposited dollars and dollar denominated checks -- so they have not lost anything.
(gm) So it seems to me that the Government (is) taking 100% of my check and deciding how much I get to keep is not a good system to live by. And then I take the money that the government allows me to keep and I put it into a bank. Then the bank turns around and loans my money out to other people with interest, that the bank keeps. I know that is a very simple way of looking at it but it's the way I see it.
(mrc) You are, for the most part, right -- except for every dollar you put in the bank -- the bank lends out $10 or more.
(mrc) The problem is nobody has ever figured out a better system
(gm) I may be wrong. So I would replace the Federal Reserve with less Government spending.
(mrc) Think that through. Do you think the governments spending comes anywhere close to the amount of money controlled by the banks?
(mrc) (a) That does not make sense to me -- the Federal Reserve has nothing to do with government spending.
(mrc) (b) I assume the interest on loans is way more than the government's budget. I should figure out the total interest made by banks and compare it to the government's budget
(gm) There are hundreds of areas that our government needs to cut back instead of expanding and demanding we the people pay for it. I would have nearly all of congress replaced with candidates who still believe in the Constitution and limiting Government spending instead of encouraging it.
(mrc) That makes sense -- but it does not address the issue of who should run the banking system
(gm) Also I would certainly freeze the current money supply until it retained it's value.
(mrc) How would you freeze the money supply? I think that can only be done by closing down all bank lending. I think that would cause havoc beyond anything that has been seen to date in our country
(gm) Printing money with no value seems to be a bad idea to me.
(mrc) That sounds logical -- but it is very difficult to envision a system wherein all money would have some intrinsic value. Some think all money should be backed by gold. But I think that is essentially an out-dated impossibility.
(gm) Also I think that had our economy been stronger we would not have invaded Iraq for it's oil. But that's a whole other conversation.
(mrc) You are probably right -- but even wealthy countries are often greedy. Henry George explains all this in his book "Progress and Poverty" where he points out that wealthy countries have way more poverty than poor countries.
(mrc) I enjoyed writing this -- I never summed up the problem in quite this way -- I hope I made sense -- If I did not -- please write again
MORE TO COME -- early August 2008
See the annotated version of the Patman's 169 Questions. We are herewith deferring to that document -- and will not be doing any more work on this page. (mrc)
--------------------------- end ---------------------