Credit as a Public Utility: the
Key to Monetary Reform
by Richard C. Cook
www.globalresearch.ca/, May 26,
We live in an era of deregulation, where
economists and politicians speak of "the market," not
government, as the appropriate vehicle for economic decisions.
President Ronald Reagan said in his 1981 inaugural address, "Government
is not a solution to our problem, government is the problem."
This attitude has defined the U.S. approach
since then, including the Clinton years, when even a Democratic
administration cut the size of the federal bureaucracy and tried
to reduce its impact. The laissez-faire attitude has continued
under President George W. Bush, though resistance is appearing
from the Democratic majority elected to Congress in 2006 with
respect to selected issues such as the high cost of student loans.
But if market-based economics is so wonderful,
why do we have stagnating employee incomes, rapidly increasing
control of wealth by the very rich, a middle class in decline,
growing poverty, collapse of our manufacturing job base, a bursting
housing bubble, resurgent commodity inflation, soaring but shaky
stock prices, a trillion dollar war in the Middle East financed
by runaway deficit spending, and capital markets dominated by
predatory equity and hedge funds? Why and how has "the market"
done so much damage to the many while enriching the few?
On top of everything else is the exponential
growth of debt. American households today are deeper in debt than
at any time in history. So is the federal government. So are state
and local governments. So is business. The only ones not in debt
are the financial institutions and their controllers to whom everyone
else owes money. Maybe this is what is really meant by "the
Total U.S. societal debt has been reliably
estimated at $48 trillion dollars and growing. If we assume, on
the low side, that the cost of this debt is six percent interest
per year, that's about $3 trillion per year in interest payments
alone. This is equivalent to almost a quarter of the entire U.S.
gross domestic product. It doesn't even count the repayment of
the principle on the loans where repayment reduces the available
purchasing power, thus making new loans constantly necessary.
Debt is an albatross around the neck of
every citizen and resident, every man, woman, and child. Things
have become worse since 2005 when Congress passed a much more
onerous bankruptcy law at the urging of the financial industry.
Some types of debt, such as student loans and taxes, can never
And as the debt ripples through the economy
it makes everything else more expensive and turns individual financial
problems into crises. It affects people's health, keeps them up
at night with worry, and even drives many to alcohol, legal or
illegal drugs, or even suicide. Worldwide, economic stresses and
the need to constantly work harder and find new sources of income
just to survive contribute to tension among nations and increase
the chances of war or terrorism.
Is this really the legacy of the most
highly developed and productive economy in the history of the
world? Hasn't something gone terribly wrong?
CREDIT AS A PUBLIC UTILITY
In other recent reports the author has
analyzed the structural causes whereby a developed economy like
that of the U.S. fails to generate sufficient purchasing power
through wages, salaries, and dividends to balance the cumulative
prices of goods and services. In order to compensate, nations
have historically attempted to generate trade surpluses to boost
their income earnings, often resulting in international rivalries
Over the last several decades, the U.S.,
with its chronic negative trade balance, has compensated for the
gap between purchasing power and prices with debt of all types
and in all sectors of the economy, both private and public. One
effect of this general debt policy has been "dollar hegemony,"
whereby the dollars sent abroad to purchase products from countries
like China come back in investment by the Chinese and other governments
in the Treasury bonds that float the federal budget deficit.
In his reports, the author has proposed
a series of monetary reform initiatives that are based on the
idea that credit, properly conceived, should be viewed as a public
utility like water or electricity, not the exclusive private domain
of the financial industry. Given the high degree of interest by
readers in these ideas, the author has concluded that a more in-depth
explanation of credit is needed.
In particular, the author wishes to show
that the concept of credit as a public utility is not a new idea.
In fact it is inherent in the notion of a republic, a commonwealth
of citizens, under which the U.S. was founded, as well as other
forms of government throughout history. What is really anomalous
is not the idea that credit should be viewed as a public, not
a private heritage, but that the notion of the private ownership
of credit to be allocated under "market" conditions
ever should have gained so much credence in the first place.
OVERVIEW OF THE HISTORY OF CREDIT FROM
ANCIENT TIMES THROUGH THE BANK OF ENGLAND
The free market ideology current in the
U.S. and, increasingly, in other Western nations which today are
losing touch with their former social democratic history, is the
most extreme expression of private vs. public control of community
life anywhere in the world in the last 6,000 years.
From the beginning, the societies which
grew up in what we know as the cradles of civilization had communally
regulated economies, especially those of a proto-urban nature
in regions such as Mesopotamia, Egypt, India, and China. The same
was true in the case of the Hebrew society of Palestine as well
as other tribal cultures.
Among the most pressing concerns of all
human societies has been to balance the rights of the individual
with the needs of the community. The two have not always been
seen in opposition as they tend to be today.
Individuals need the protection of a nurturing
social environment, especially when they are young and when they
are old. Communities, on the other hand, flourish through the
contributions of strong, capable, and mature people.
The idea that is current today of the
individual and community in conflict is a sign of an unbalanced
paradigm. Thus we have in our own time two extreme views. One
is that individuals should be able to do just about anything they
want and that society is a hindrance. This is the mind-set that
has fostered free-market capitalist economics. The other is that
the individual should be totally subservient to the group as in
Curiously, though, neither ideology upholds
the same ideals for all members of the culture. Free-market capitalists
see nothing wrong if a handful of oligarchs hold everyone else
in thrall to debt. The commissars of communism find it perfectly
natural if their position in the party grants them privileges
the rank-and-file will never attain. So both systems are rife
with brutality, oppression, and hypocrisy.
Societies that wish to balance the needs
of the individual with those of the community also foster a complex
set of rules, laws, and customs to deal with the institution of
property. Ancient religions usually saw land and other types of
property as gifts of the Deity with men acting in a stewardship
Within the framework of this qualification,
private ownership of property has been recognized as normal and
natural by most cultures. The fact that no single individual can
totally possess tangible goods is shown by the fact that property
often outlives its owner. Thus laws of inheritance usually come
Concepts of private property were also
applied to money once it was invented and became current in commerce
and trade. The rights of the community were recognized through
the establishment of public institutions such as temples or royal
palaces, supported in some measure through systems of taxation
or revenues from the ownership of farmland or workshops. Both
private and public parties thus took part in economic life and
the exchange of money for goods and services.
A problem arose, however, when lending
became involved, for all but the most rudimentary economic systems
realized that a system of credit where money was borrowed and
then repaid was needed to allow trade to function smoothly. According
to economic historian Dr. Michael Hudson, lending was thus born
from economic necessity. It also served to moderate the ups and
downs of agriculture due to variations in weather by loans being
extended to farmers in lean years with repayment being required
when conditions improved.
Usually anyone who had money was allowed
to lend, whether private individuals, kings and nobles, or priests.
Interest rates were fixed by law and lasted unchanged for centuries.
The recipients of lending were mainly the merchants and farmers.
Failure to repay could have dire consequences, with the debtor
or his family members being taken into bondage until the loan
The harshness of such a system was ameliorated
by periodic forgiveness of certain types of debts. In the case
of commercial vs. agricultural lending, forfeiture of property
was common. The power of the creditor was greatest when interest
was compounded, which was the norm, causing the debtor's burden
to grow exponentially over time.
In the ancient Near East these practices
passed from Mesopotamia to the Hebrews, the Greeks and Romans,
and other cultures. But the problem of fair and equitable lending
was never really solved. The Hebrew culture frowned on lending
at usury, defined as charging interest. Still, lending often took
place, though among the Hebrews debts were also periodically forgiven.
In Athens, Aristotle railed against compound
interest, repelled by the idea that money, a sterile substance,
should be allowed to multiply while its owner did nothing to enhance
its productivity except to exact payment for its use from someone
Aristotle wrote: "The most hated
sort [of wealth getting], and with the greatest reason, is usury,
which makes a gain out of money itself and not from the natural
object of it. For money was intended to be used in exchange but
not to increase at interest. And this term interest [tokos], which
means the birth of money from money, is applied to the breeding
of money because the offspring resembles the parent. Whereof of
all modes of getting wealth, this is the most unnatural."
Aristotle and the intellectuals of the
classical age who agreed with him were the exception. Cato even
likened usury to murder. But none of the ancient cultures really
solved the problem that an effective source of financial credit
was needed for economic progress and to moderate the natural fluctuations
of economic conditions.
Over time, both the Greek and Roman cultures
became thoroughly debt-ridden, leading to extreme stratification
of social classes, endemic debt slavery, and eventual economic
collapse. In fact, Hudson identifies the enormous "overhang"
of debt as the principal cause of the fall of the Roman Empire
and the start of the Dark Ages.
Next came the Christian era. It seemed
that in prohibiting the practice of lending at interest, the Christians
had learned a lesson which the Greeks and Romans had not. The
Catholic Church outlawed money lending throughout the Middle Ages,
though it was still a commercial necessity. So it was taken up
by the Jews who had been excluded from most other professions.
The Church prohibitions faded after the Reformation, though Martin
Luther warned in dire terms against the unfairness of compound
In the Islamic world, lending at interest
was forbidden by the Koran. Yet a flourishing urban civilization
developed in many regions through a complex commercial code whereby
trade capital became available that allowed the provider to share
in the profits but also in the risks of the enterprise.
It was in Italy that both modern banking
and paper money were born. The Italian bankers of the Renaissance
were the foremost financiers of Europe, providing liquidity for
commerce but also lending large sums to kings and princes to pay
for their wars. This experience showed both the good and bad sides
of credit. The Medici bankers of Florence gained a reputation
for enlightened stewardship where lending supported the growth
both of trade and the arts of civilization. The bankers of Genoa,
by contrast, were seen as greedy and cruel speculators.
The period also saw the half-legendary
birth of what came to be known as fractional reserve banking,
one of the most dubious innovations in history. Money at the time
was viewed as a commodity-gold, silver, collectively called specie,
or other substances of value. Notes redeemable in specie were
printed and circulated to meet commercial needs. But a new era
opened when the bankers began to issue notes in excess of their
The bankers were required by the laws
of the municipalities to redeem their notes with gold or silver
on demand. If they could not, the punishment could be execution.
The value of the notes depended on the reputation of the banker
along with prevailing economic conditions. But with the use of
notes spread across geographical regions, through the intermediation
of money brokers, trade could expand virtually without limit.
This led to rapid expansion of industry and agriculture which
produced the goods offered in trade.
The fractional reserve system was institutionalized
on a national scale with the founding of the Bank of England in
1694. While the notes issued by the bank were ostensibly redeemable
in gold, much of the collateral was in debt instruments issued
by the king's treasury. England had become Great Britain and used
vast sums of credit issued on a fractional reserve basis to finance
its colonial wars, but only by creating a debt so monstrous that
only the interest could be paid, never the principal. This was
what was meant by calling it a "funded" debt.
The system was extremely ambiguous, with
no clear answer as to whose money it really was-the government's
whose debt instruments collateralized the system, or the private
financiers who owned the bank's stock, held its gold reserve,
lent the bank notes as currency, and lived off the interest payments
received from the national treasury and bank customers.
Naturally it was in the government's interest
to do anything it could to inflate the currency, so as to pay
the interest due in installments of lesser value, even though
such inflation worked against the population which had to accept
the paper money when offered in trade. This made the fractional
reserve system inherently corrupt and caused the government-and
the financiers who propped it up-to become the monetary enemy
of its own people.
THE AMERICAN EXPERIENCE
Monetary matters were clearer in England's
American colonies. From the founding of Jamestown in 1607 to late
in the American Revolution in 1779 there was not a single bank
in North America. Goods were bartered, coinage entered the colonies
through trade, and even Indian wampum was utilized. But all this
was insufficient, so the colonial governments began to issue their
own paper money. Notes were issued to landowners who use their
land as collateral, or, in Virginia, to owners of tobacco in government
In several of the colonies, including
Massachusetts and Pennsylvania, the legislatures simply spent
paper money-called "bills of credit"-into circulation
then accepted it back in payment of taxes. The system worked extremely
well and was explained by Benjamin Franklin in a famous 1729 pamphlet
entitled, "A Modest Inquiry into the Nature and Necessity
of a Paper Currency."
Franklin wrote, "The riches of a
country are to be valued by the quantity of labor its inhabitants
are able to purchase, and not by the quantity of gold and silver
they possess." The colonial paper currencies thus allowed
society to monetize the value of the goods and services its inhabitants
were able to produce.
Credit was thus treated as a public utility
that governments issued according to the needs of the producing
economy. They followed the pattern of the medieval English kings
who had issued currency in the form of specially notched sticks.
Once in circulation, such credit, as money free from any liens
of bank debt, could be transformed into the private ownership
of the people who worked for a living. Credit issued publicly
thus became private property and was protected from unlawful seizure
by legal traditions going back to the Magna Carta.
Because the colonial notes were spent
directly into circulation, not issued by a central bank through
lending at interest, they did not inflate. They remained in circulation
once spent, unlike bank loans which would have had to be repaid.
Again, there were no banks in British North America, so the problem
of lending never arose, though merchants financed the carrying
trade and other forms of commerce on a fee basis.
It was the colonial paper currencies that
by 1760 allowed the thirteen American colonies to build one of
the most flourishing economies on earth with prosperity reaching
to all social classes. The bankers who by now ran the British
government through the Bank of England were appalled.
So in 1764 the British Parliament, at
the urging of the financiers who controlled the Bank of England,
outlawed the issuance of paper currency by the colonial legislatures.
This act of tyranny is rarely mentioned in textbooks, but it was
the ensuing contraction of the currency resulting in economic
depression that was viewed by Benjamin Franklin and others as
the main cause of the American Revolution.
Despite the Parliamentary prohibition
on new currency issues, $22 million in colonial paper money remained
in circulation. Franklin, now serving as the agent of the Pennsylvania
Assembly in London, proposed a plan whereby colonial American
legislatures would loan paper money into circulation using interest-bearing
notes, with earned interest being shared with Great Britain in
lieu of Parliament-imposed taxes.
Again, the Americans were treating money
as a public utility, not the private property of a financier-owned
bank. As would be expected, the plan was turned down by the British
government. This was Franklin's last-ditch attempt to avoid an
irreparable breach by proposing a monetary solution to a monetary
The Continental Congress which began meeting
in Philadelphia in 1775 pursued the same monetary policy as the
colonial legislatures by authorizing the printing of Continental
Currency. As documented by Stephen Zarlenga in "The Lost
Science of Money," the currency inflated due largely to British
counterfeiting in New York City, which was being occupied by the
British army. The currency still served to keep Washington's army
in the field for several years, so played an essential role in
struggle for independence.
In 1778 The Articles of Confederation
were adopted which authorized the Continental Congress to continue
to "emit bills of credit"; i.e., to print and spend
paper money into circulation without the intermediary of a bank.
But over the next several years the pressures of wartime finance
prevailed, and American businessmen in Philadelphia founded the
Bank of North America which floated loans to Congress using the
first system of fractional reserve banking in the United States.
After the war came economic depression,
causing farmers, laborers, and debtors to demand new issues of
state-authorized paper money. Lack of a circulating currency was
the main cause of Shays's Rebellion in Massachusetts.
In 1787 the Constitutional Convention
convened in Philadelphia, where more than half of the delegates
were investors or speculators in public securities. The new Constitution
gave Congress the right to levy taxes, borrow on the credit of
the United States, and to "coin money and regulate the value
Reference to bills of credit as mentioned
in the Articles of Confederation was omitted, except that states
were banned from using them. This lack of any mention of paper
currency soon led to confusion in determining the role of the
federal government in creating money, indicating that maneuvering
was going on behind the scenes by financiers who were planning
to institute a system like that of the Bank of England.
In 1789 George Washington was inaugurated
as the first President of the United States and named Alexander
Hamilton of New York as secretary of the treasury and Thomas Jefferson
of Virginia, secretary of state. Hamilton now proposed a funded
national debt like the British and a national bank like the Bank
of England. Hamilton was strenuously opposed by Jefferson and
James Madison, who argued that a national bank was explicitly
rejected by the Constitutional Convention and would be unconstitutional,
as power to create one was not given to Congress by the Constitution.
Hamilton argued an "implied powers"
doctrine, which President Washington accepted. This stated that
Congress may take any measure necessary to implement a designated
constitutional power, such as taxation, borrowing, or monetary
regulation, even if the measure itself was not cited in the Constitution.
A funded debt and the First Bank of the
United States were approved by Congress, but were viewed by Jefferson
and his party as a virtual coup d'etat by Hamilton in imposing
British monarchical institutions on the U.S.
Hamilton was candid in his attempts to
bind the financiers who controlled the monetary power in the U.S.
and Great Britain to the new American government, even if it involved
what he acknowledged as "corruption." Hamilton also
gained Congressional approval of federal assumption of state Revolutionary
War debts, which led to huge windfalls for speculators who bought
the securities from their original owners for pennies on the dollar.
The controversies within Washington's
first administration were the origin of the American two-party
system, with the Federalists being controlled by what President
Martin Van Buren later called the Money Power and the Democrats
being more concerned with the rights, interests, and financial
solvency of ordinary Americans. Van Buren described how it happened
in his book "Inquiry into the Origin and Course of Political
Parties of the United States," published posthumously in
From 1789-1800 the government was dominated
by the Federalists, with Hamilton at its head. Jefferson was the
leader of the Republicans, later called Democrats. The First Bank
of the United States operated through investors, including foreigners,
who purchased Treasury bonds, then used them as capital to fund
bank shares. The bank then used fractional reserve lending to
issue paper currency which Hamilton candidly called "a substitute
Hamilton viewed his financial policies
as necessary to create what he called an American "empire."
While he favored the use of public credit for government investments
in public and private infrastructure, including manufactures,
borrowing by the government was largely confined during his tenure
as secretary of the treasury to paying war debts and starting
to build a permanent army and navy.
Meanwhile, the U.S. Mint was established
to mint gold or silver coins for individuals presenting bullion,
which offered an alternative national currency to bank notes.
Metallic coinage continued as a substantial component of the U.S.
currency system until the 1930s. Eventually the value of coinage,
except for purchases of convenience, was destroyed by inflation
under the Federal Reserve System.
In 1800 what was called the "Civic
Revolution of 1800" took place, with Jefferson being elected
over President John Adams, followed by the dissolution of the
Federalist Party. The triumph of what would be called the Democratic
Party now took place in the executive and legislative branches
of the government, though the Federalists retained control of
the judicial branch by Adams' last-minute appointment of John
Marshall as chief justice.
The Democrats dominated American politics
until 1860 except for two four-year interludes under the Whigs.
The electoral power of the Democrats was based on the numerical
superiority of farmers and town laborers whom Jefferson and his
successors were able to organize effectively. Sharp cutbacks took
place in federal expenditures, including those for the standing
army and navy, allowing Jefferson and his secretary of the treasury
Albert Gallatin to balance the federal budget each of the eight
years of his presidency.
Through the Louisiana Purchase of 1804,
Jefferson ensured that much of America's energies over the next
century would be devoted to westward expansion rather than foreign
wars against European rivals. Both the federal and state governments
benefited by selling public land to settlers. Later much of the
land was given away for free under the Homestead Acts.
In 1811 the charter of the First Bank
of the United States expired, and there was no national bank for
the next five years. By now, state-chartered banks, including
some banks owned outright by the states, had begun to issue paper
money through fractional reserve lending. But it was a regulated
system with restrictions on usury and lending confined mainly
to commercial transactions.
But due to having had to borrow during
the War of 1812, President Madison signed legislation in 1816
for the Second Bank of the United States, which acted as had the
First Bank as the fiscal agent for the Treasury, holding government
funds as part of its reserve collateral. The Second Bank gained
notoriety for corruption, favoritism, and bribery of politicians.
By 1830 gold and silver specie in circulation
amounted to only one-thirtieth to one-fiftieth of the U.S. gross
national product, showing the continuing need for paper currency.
In 1832 President Andrew Jackson vetoed a bill to renew the charter
of the Second Bank of the United States, though it continued to
operate under its original twenty-year charter.
In 1834 Jackson removed all federal funds
from the Second Bank of the United States and deposited them in
state-chartered banks. He later pulled federal funds from the
banking system altogether and created a system of "sub-treasuries,"
which continued until 1913. The elimination of federal deposits
as a banking reserve contracted the currency and caused an economic
In 1836 the charter of the Second Bank
expired. Until 1861 the federal government largely had balanced
budgets from import, tariff, and excise revenues, with some sale
of Treasury bonds to fund the Mexican War of 1845-8. State bank
currencies expanded and provided the paper money that fueled national
Still there was a currency shortage which
restricted economic growth, but the discovery of gold in California
increased the coinage in circulation and fueled the expansion
of trade and manufacturing. The railroad industry was one of the
main beneficiaries of economic growth during this period. Public
works such as turnpikes and canals were funded by state and corporate
In 1861 the Civil War began, resulting
in a monetary as well as a political crisis. Congress imposed
the first U.S. income tax and sharply increased excise taxes.
New York bankers, also acting as agents for British and European
financiers, demanded extortionist rates of interest from President
Abraham Lincoln to purchase government bonds, but he refused these
Congress, in emergency legislation, authorized
$450 million in Greenbacks, not immediately redeemable in specie,
which were spent into circulation in payment of government war
obligations. Greenbacks constituted eleven percent of the circulating
currency at this time and were no more inflationary than would
be expected from the usual wartime price increases.
Again, Congress had decided to treat credit
as a public utility, not the property of private bankers. Ordinary
citizens recognized at the time that it was the Greenbacks, a
true democratic currency, which saved the Union. Also at this
time the federal government began to market war bonds directly
to citizens, again bypassing the banks.
But the bankers were active in lobbying
Congress. In 1863-4 Congress passed national banking legislation
which set the stage for long-term growth in the power and influence
of the U.S. banking establishment. Under the legislation the banks
could issue paper debt-based currency through lending as well
as deal in government bonds. The legislation also taxed state
bank currency out of existence.
The post-Civil War era again saw insufficient
currency to fuel the growing economy, leading to political movements
such as the Greenback Party, the Populist Party, and a strong
monetary expansion sentiment within the Democratic Party. But
the government was largely under control of the Republicans who
became increasingly pro-bank.
Farmers were particularly hard-hit by
monetary scarcity, with price deflation steadily driving down
market prices of their commodities and leading to frequent default
on mortgages and erosion of rural economic power. Silver was demonetized
by the Coinage Act of 1873, also known as "The Crime of 1873."
This was in line with a worldwide banker-sponsored shift toward
a gold standard. The bankers favored this policy because it made
money more scarce and secure from inflation. From 1875 to 1896
consumer prices declined about 1.7 percent a year.
By the end of the century, relief took
place from discoveries of gold in South Africa and Alaska and
through improved methods of extracting gold from ore. But banks
using the national banking legislation were concentrating and
centralizing in the financial centers of New York, Chicago, and
Frequent money shortages resulted in banking
panics, though U.S. industrial expansion was largely fueled by
the reinvestment of profits rather than through bank loans. By
1900, the U.S. currency consisted of $346 million in Greenbacks
(by now redeemable in gold), $484 million in Treasury-issued silver
certificates, $76 million in coined or bullion silver, and $331
million in national bank notes. Thus of a money supply of $1.237
billion, only twenty-seven percent was bank-issued debt currency.
By the early years of the twentieth century,
through a period of tremendous economic expansion, the U.S. had
witnessed a century of relative monetary and fiscal stability
through a combination of fiat, metallic, and bank-issued currencies.
This was about to change drastically, as financial and industrial
capitalism had begun to merge, culminating in the appearance of
business trusts. The most powerful was the Money Trust under the
Morgan and Rockefeller banking interests allied with financiers
from Great Britain and continental Europe.
In 1913 the Federal Reserve System was
created by an act of Congress signed by President Woodrow Wilson.
He later regretted doing so, saying "I have unwittingly ruined
The Federal Reserve was a privately-owned
and controlled central banking system like the Bank of England.
But in creating it, Congress had ceded its constitutional authority
over the nation's monetary system to the private financiers. Congressman
Charles A. Lindberg, Sr., Republican of Minnesota and father of
the future aviator, called the Federal Reserve Act, "the
worst legislative crime of the ages."
The process was now established whereby
the Federal Reserve issued debt-based currency through purchase
of Treasury securities in the open market using ledger debit entries
as a substitute for real value. The collateral was the promise
of the federal government to pay its debts. This was done to increase
the reserves of the member banks which could then use them for
lending under the fractional reserve method. The more the government
borrowed, the more credit the banks could issue and the more profits
they would make.
An explosion in the U.S. national debt
now took place through Federal Reserve-backed financing of World
War I. The government could collateralize and pay interest on
the debt only through soaring income tax rates made possible by
the Sixteenth Amendment to the Constitution, ratified in 1913.
Through the Federal Reserve, U.S. banks
made massive loans to France, Britain, Italy, and other allied
nations for their war expenditures. Looking deeper, it was through
the Federal Reserve that international banking took over the U.S.
economy and used its industrial wealth as a base to finance the
century of total worldwide warfare that continues through today.
The current "War on Terror," also financed by public
debt generated through the banking system, is the latest phase.
Massive post-World War I inflation now
resulted as the Federal Reserve-generated debt doubled the consumer
price index. The inflation destroyed most of the remaining value
of the Greenbacks and Treasury silver certificates. U.S. government
insistence that the allies repay their World War I debts contributed
to European economic collapse and eventually to World War II.
This policy also assured that the focal point of Western economic
power now shifted from Europe to America.
The "Roaring 20s" saw massive
financing of stock and real estate speculation financed by the
banking system, combined with an ongoing decline of farm income
due to price deflation and foreclosures. The stock market boom
was a typical bubble economy made possible by the triumph of finance
capitalism in harnessing and dominating the productive forces
of manufacturing and agriculture.
Both in 1929 and 1932 the stock market
crashed, the latter due to sudden deflation of the currency by
the Federal Reserve which shipped a major portion of U.S. gold
reserves to the Bank of England. The Great Depression resulted
in unprecedented unemployment and economic distress. Creditors
purchased huge amounts of U.S. assets at bankruptcy prices, forming
the basis for many modern fortunes.
In 1932 President Herbert Hoover created
the Reconstruction Finance Corporation (RFC), which moved to recapitalize
failing non-Federal Reserve state banks in rural areas and small
towns. RFC loan programs had a major impact over the next twenty
years, providing low interest loans to the railroad industry,
farmers, exporters, state and local governments, and wartime industries.
$50 billion was lent by 1953, often at
interest rates of only two percent, as the RFC transformed the
federal deficit into employment and saved the U.S. economy. It
was another example of the effective use of credit as a public
utility, similar to the Greenbacks, Continental Currency, and
issuance of paper notes by the colonial legislatures.
In 1933 Franklin Delano Roosevelt was
inaugurated as president and called for a national banking holiday.
Roosevelt ended gold redemption for the U.S. currency and called
in citizen-held gold coins and bullion which the government purchased
at below-market prices.
From 1933-40 Roosevelt used the RFC, Public
Works Administration, Civilian Conservation Corps, and other agencies
to attack the depression and provide employment through infrastructure
investment. The modern U.S. physical economy came into existence,
including public schools and hospitals, dams, municipal water
and sewage systems, rural electrification, etc. The RFC continued
lending until 1953.
The economic expansion was financed through
high income taxes, large federal deficits, and low interest rates.
Later this method of producing economic growth was known as Keynesianism,
named after British economist John Maynard Keynes. Congress also
passed the Thomas Amendment which authorized new issues of Greenbacks,
though Roosevelt did not do so.
In the depths of the Depression, while
unemployment remained high, U.S. banks made more loans to European
nations, including Nazi Germany. The U.S. contributed to the Depression
in Europe by insisting on continued repayment of World War I debt
which bankrupted and fragmented the European trade-based economies.
It was financial control through bank lending that shifted the
balance of power in the Western world from Europe to the United
World War II Lend-Lease policies and military
spending finally gave the U.S. a full-employment economy while
the national debt grew 418 percent to a twentieth century high
of 120 percent of GNP. The post-war Bretton Woods agreements stabilized
international currency exchange rates until they were abolished
Post-war demobilization channeled economic
activity into the civilian economy, leading to continued industrial
innovation and expansion which began to stall by the time John
F. Kennedy was elected president in 1960. The Bretton Woods agreements
resulted in the creation of World Bank, International Monetary
Fund, and General Agreement on Tariffs and Trade. These institutions
became instruments of worldwide economic domination of developing
countries by U.S. trade policies.
In 1961 outgoing President Dwight D. Eisenhower
warned the nation against the growing power and dominance of the
military-industrial complex. After President Kennedy was assassinated
in 1963, mobilization for the Vietnam War and spending for President
Lyndon Johnson's Great Society dominated the economy. The Department
of Defense under Secretary of Defense Robert McNamara, expanded
the influence of the military-industrial complex throughout the
American economy and culture. The era ended in 1975 with the fall
of Saigon and failure of the Vietnam War.
THE PRESENT CRISIS
In 1971 the U.S. abrogated the Bretton
Woods fixed-exchange rate monetary agreements, destabilizing international
currencies and leading to an era of continuous currency speculation
and conflict. The main purpose was to allow the dollar to expand
as an international reserve and petroleum trading currency.
This also involved President Richard Nixon
in taking the final steps to remove the U.S. from any vestiges
of the gold standard. It left the Federal Reserve without any
monetary supply tools other than attempts to influence the economy
through raising and lowering of interest rates, a policy of targeting
known as "monetarism." An adjunct of monetarism was
the notion of deliberately allowing the dollar to inflate as a
The floating dollar allowed the U.S. to
finance its budget deficits arising from military expenditures
on the Vietnam War, its trade deficits resulting from the economic
recovery of other nations from World War II, and the growth in
domestic entitlement spending by sale of Treasury debt securities
to foreign countries. This policy later became known as "dollar
Then from 1979-83 the Federal Reserve
reversed its earlier pro-inflation policies by deciding to combat
inflation by contracting the money supply through steeply higher
interest rates. Rates topped out at over twenty percent, which
plunged the nation into the worst recession since the Great Depression.
U.S. industrial and infrastructure capacity
were devastated, including the destruction of the steel industry
and the creation of the "rust belt." Billions of dollars
in assets were acquired by financial institutions and investors
at bankruptcy prices as happened during the Depression. There
was also a major decline in government infrastructure investment
at all levels and the privatization of many public utilities,
services, and facilities. This was the start of the "service"
vs. the industrial economy as manufacturing jobs disappeared.
With deregulation of the banking industry
during the Reagan administration came the era of "junk bonds"
used for leveraged buyouts and mergers, along with the collapse
of the savings and loan industry. Deregulation led to a sell-off
of U.S. business assets with further erosion of the industrial
base and sharply increased foreign acquisition of businesses.
The Reagan tax cuts for the upper brackets,
combined with tax base erosion, the trillion-dollar military build-up,
and proxy military action in third-world countries around the
globe under the "Reagan doctrine" (Afghanistan, Nicaragua,
Angola, etc.) resulted in unprecedented growth of the national
debt. Overall, the Reagan years saw the greatest leap in bank
prominence and power since the passage of the Federal Reserve
Act in 1913.
Another recession now led to the election
as president of Democrat Bill Clinton over incumbent George H.W.
Bush in 1992. From 1992-9 the Clinton administration created a
"strong" dollar to attract foreign capital which led
to jobs and investment through the dot.com bubble. In 1992 international
financiers and speculators commenced purchase of the assets of
former Soviet Bloc nations in a manner similar to the U.S. sell-offs
of the 1980s.
Despite the economic upturn of the 1990s,
U.S. industrial jobs never came back. NAFTA, the World Trade Organization,
and bilateral trade agreements resulted in the export of even
more manufacturing jobs and a worsening trade deficit. Meanwhile,
U.S. infrastructure was crumbling. In 1998 the American Society
of Civil Engineers estimated a $1.8 trillion U.S. infrastructure
maintenance deficit, including roads, bridges, water systems,
school buildings, hazardous waste disposal, etc.
From 1998-2000 President Clinton achieved
federal budget surpluses through fiscal discipline combined with
capital gains tax revenues from the stock bubble. But in 2000
the dot.com bubble burst, leading to stockholder losses of $2
trillion, wiping out retirement funds, and eroding the tax base
at all levels of government.
Federal Reserve Chairman Alan Greenspan
stopped the crash after the damage had been done by creating a
"wall of money" with sharply reduced interest rates.
In December 2000 George W. Bush was designated president over
Al Gore by the U. S. Supreme Court after the Florida vote-counting
By 2001 the U.S. economy was in recession
again. Total U.S. debt of all types was running triple the GDP,
with annual principle and interest payments amounting to forty
percent of GDP. But the ability of the Federal Reserve System
to produce hundreds of billions of dollars in lending virtually
overnight was enhanced by computerized processing and modern methods
of "cash management" by businesses and the banking system.
With endless possibilities of leveraged
investment, equity funds, hedge funds, and derivatives trading
began to dwarf the legitimate business transactions of the physical
producing economy. The financial industry had become the largest
line of business in America with annual profits of over $500 billion.
This was more than the annual GDP of ninety-two percent of the
Attacks on the World Trade Center and
Pentagon on September 11, 2001, by alleged terrorists provided
an occasion for the U.S. invasion of Afghanistan using pre-existing
war plans. During 2001-2, nations designated by President Bush
as an "axis of evil"-Iraq, Iran, and North Korea-had
been moving toward a shift to the Euro for denomination of oil
and foreign trade, threatening a stampede of oil-producing nations.
U.S. intervention failed in an abortive
coup in Venezuela, the only western hemisphere OPEC nation. Meanwhile,
the state and local government borrowing deficit (funds borrowed
vs. paid back) reached $127 billion, up from $38 billion in 1993.
A threatened loan default by Argentina was shored up by massive
emergency loans by the International Monetary Fund.
By 2003 the U.S. export of jobs continued
as the recession produced rising unemployment despite productivity
increases from automation. The domestic economy was now largely
fueled by home mortgages and refinancing due to lower interest
rates that were offset by inflation of home prices, jeopardizing
home ownership for future generations.
Following false claims about Iraqi possession
of weapons of mass destruction, President Bush ordered the invasion
that started the second Iraq war in March 2003. The wars in Afghanistan
and Iraq were financed by huge quantities of government debt made
necessary by the tax cuts favorable to the upper income brackets
enacted by the Bush administration in 2001 and 2003.
Foreign holdings of Treasury securities
now reached forty-five percent as the dollar declined against
the Euro and other foreign currencies, threatening a recall of
foreign investment. The banks continued to pump money into the
securities markets, and the U.S. national debt reached $8.6 trillion
by 2006. Forty-three percent of the debt was held by Social Security
and other trust funds, endangered by the growing insolvency of
the federal government.
By 2005 fifty percent of U.S. economic
growth derived from the housing bubble, which began to collapse
over the next year owing to the resetting of adjustable rate mortgages
and the growth in foreclosures from subprime mortgages. Meanwhile,
Congress passed a much more stringent bankruptcy law. In 2006,
deeply concerned about the Iraq War and the shaky economy, U.S.
voters gave the Democrats majorities in both houses of Congress.
Behind all the disturbing political and
social events of the era was the steadily climbing burden of societal
debt threatening a system-wide crash. In early 2007, the head
of the Carlyle Company, an equity firm that handles investments
for many former high-ranking government officials, wrote in a
memo that was leaked to the press that after the expected collapse,
"the buying opportunity [for distressed businesses] will
be once in a lifetime."
ANALYSIS AND CONCLUSIONS
Perhaps the most consequential event of
U.S. history during the twentieth century took place when the
private banking system was given control of the U.S. economy in
1913 through the passage of the Federal Reserve Act. Those who
accomplished this were not only Americans but also financiers
from Great Britain and continental Europe. The Federal Reserve
today continues as a branch of international finance.
Since then this system has produced nearly
a century of almost constant warfare, the ascent to power of the
military-industrial complex/national security state, periodic
creation and destruction of gigantic financial bubbles, and the
erosion of ninety-five percent of the value of the U.S. dollar.
The vast productive resources of the U.S. and the talents and
hard work of its people have been used by the financiers for these
Side-by-side have been tremendous advances
in science, technology, and medicine, and a longer human life
span. But much of the investment that has produced these benefits
has come through public expenditures from tax revenues, supporting,
for instance, the large state research universities, or from private
corporations which draw on funding from retained earnings and
the capital markets.
Bank credit, by contrast, has historically
been oriented toward asset purchases and speculation, especially
real estate and business acquisitions, toward purchase of consumer
goods by people who lack ready money to meet their needs, toward
the profits drawn from capital gains fed by inflation, and toward
purchase of federal government securities and lending to foreign
governments. In the case of lending to governments, naturally
the greatest profits are made at times of financial distress and
It is extremely important to understand
that most of these transactions are essentially non-productive
in an economic sense, involve gigantic sums of money created from
"nothing" through the bankers' fractional reserve privileges,
and have little in common with the type of investment in the producing
economy that takes place through the capital markets.
A typical case involves the purchase of
a business by investors who borrow large sums of money to close
the deal, then sell off assets, fire many of the employees, and
slash the benefits of those who remain. They then use the profits
from the business to repay their loans or sell the stripped-down
company to other parties. This strategy is especially appealing
to equity funds and is called "restructuring."
This type of financial corruption in which
the banks and investment funds are complicit has become common
over the last twenty-five years. It's another area where "market"
forces are said to be at work.
The history of credit shows its power
to draw forth work on the part of men and women who need to exchange
goods and services among themselves in order to live. But as this
report dramatizes, credit can be used for divergent purposes.
Like electricity, it is neither good nor evil. It can be used
or misused. Electricity can electrocute prisoners or bring light
to cities. Credit in the wrong hands can start wars but used properly
can accomplish miracles of science.
Today the U.S. is in great peril. Through
the failed war in Iraq and the barbaric manner in which it has
been carried out, our standing in the world has never been lower.
As stated in the beginning of this report, our economy is wracked
with debt. This debt is growing exponentially through compound
In fact our producing economy has been
wrecked by monetary madness. Our working population is poorer
every day even as the Federal Reserve pours out trillions of dollars
in new debt and the incomes of the financial magnates soar. According
to a recent report from the Bank for International Settlements,
money is even being lent to hedge funds which are betting on our
economic decline. We are looking at a potential system-wide collapse
on a scale never before seen in history.
Further, the dollar hegemony we have used
so cleverly to float our national debt has come back to haunt
us as we see China using the dollars they have acquired, through
exploitation of their own domestic workforce in producing the
goods that fill the shelves of our Walmarts, to buy up assets
around the world-in Asia, Africa, Latin America, and now in the
U.S. Economists who work for the Federal Reserve have advocated
in print the sale of U.S. properties to China as a way of dealing
with the "functional bankruptcy" of the U.S. government.
China is already dictating trade policies
to us. Soon they will be dictating political policies as well.
Companies like IBM, GE, and General Motors are boosting their
stock prices by building factories in China to sell Chinese workers
consumer goods. It's great for the stockholders of those corporations.
It's death for the U.S. workers who have no jobs and no money
to buy the necessities of life except through more credit card
This brings us full circle to where this
report began, for "market" economics is nothing more
than the abuse of what should be a public good for just such selfish
purposes. That is why a powerful economy such as we have built
over the last several generations can do so much harm along with
the obvious benefits. It's the result of monetary policies where
what we were told were "market" forces were in reality
the expression of unbridled greed by a financial sector that is
totally out of control.
We now need to return to the recognition
that money and credit truly are public utilities as recognized
during colonial days and at the times of great crises such as
the Revolutionary War, the Civil War, and the New Deal.
Today we are in a similar crisis, when
the solution is the same as it has been in the past. It is for
the commonwealth of Americans, acting through their elected representatives,
to exert their constitutional prerogatives in controlling the
nation's supply of money and credit.
In other reports published over the last
several weeks, the author has made a number of suggestions of
the steps that now should be taken. These steps follow the guidelines
of numerous monetary reformers of the past but can generally be
summarized in two major provisions:
We should spend sufficient credit into
existence to supply the basic operating expenses of government
at all levels without recourse to either taxes or borrowing. At
least ninety percent of all taxes could be eliminated. The only
taxes that should be retained would be those in the form of user
fees for infrastructure operations and maintenance and those levied
only for dire emergencies. Capital expenses for infrastructure
construction at the federal, state, and local levels should be
financed through a self-capitalized national infrastructure bank
lending at zero-interest. Operating on a national scale, such
a bank could begin to rebuild our job base starting at the state
and local levels. A public program of direct government expenditures
as described herein would be as effective, as timely, far less
inflationary, and much cheaper than creating new public debt by
borrowing credit created "out of thin air" by the banking
The endemic gap between prices and purchasing power in an advanced
economic system in reality is the "leisure dividend"
that we never received from our amazing producing economy. That
gap should now be filled by a non-taxable National Dividend of
two types. One would be a cash stipend paid to all citizens which
would also serve the purpose of eliminating poverty by providing
everyone with a basic income guarantee. The remainder of the National
Dividend would consist of an overall pricing subsidy, whereby
a designated proportion of all purchases, including home building
expenses, would be rebated to consumers. The average National
Dividend per person would probably exceed $12,000 per year under
today's economic conditions. It would be a calculated value charged
against a government ledger but would be off-budget, with no need
to finance it with taxation or borrowing. The calculation of this
dividend was outlined by the author in his recent report, "An
Emergency Program of Monetary Reform for the United States."
The theory of this program of monetary reform derives from two
principal sources. One is the worldwide National Dividend movement
founded almost a century ago by Scottish engineer Major C.H. Douglas.
The other is the program of monetary reform based on direct government
spending set forth by groups like the American Monetary Institute
in its model legislation, the American Monetary Act, to which
the author of this report has contributed.
In Great Britain, similar work is being
done by the Bromsborg Group and other reformers. The monetary
reform movement is worldwide. Through his previous reports the
author has received positive support and feedback from many countries,
including Poland, Italy, India, Australia, Canada, Germany, New
Zealand, and others.
The top priority of the reform program
would be to use public credit to rebuild the producing economy
which has been wrecked by the phony ideology of "market"
economics and the inept and self-serving manipulation of the money
supply by the Federal Reserve and the banks.
Direct funding of government expenditures
would remove the banking system from the business of financing
a massive government debt. Implementation of a National Dividend
would establish the balance between production and consumption
which the banks failed to do through creation of huge quantities
of consumer debt to compensate for shipping our manufacturing
capabilities to China and other foreign countries. Both measures
would go a long away toward shifting the basis of our economy
from one that uses debt for making war and transferring wealth
to the upper income brackets to one that uses public control of
credit to facilitate peace, domestic harmony, and economic democracy.
Once these major steps were taken, other
measures could be instituted that would also reflect the status
of credit as a public utility. These include the ready availability
of low cost credit for consumers, small businesses, and students;
the ability of capital markets to function without the destructive
overhang of predatory financial methods; the elimination of all
bank lending for speculation, including purchase of securities
on margin, leveraged buyouts, and leveraged hedge funds and derivatives
trading; restoration of a liberal bankruptcy law and the writing
off much of the debt currently in place that can never be repaid,
including student debt and debt held by developing nations; the
elimination of fractional reserve banking by requiring that bank
lending in excess of deposits be done only with credit purchased
from a central government authority; the creation of a fair and
structured system of international finance and investment to replace
the tragically failed system of dollar hegemony; and a plan to
restructure the national debt that would pay off private and foreign
creditors but eliminate Treasury securities as bank collateral.
Such a program of reform would be far-reaching,
but it would be based on the best traditions of America, and it
would work. Above all, it would allow us as citizens of the American
constitutional commonwealth to take back our country from the
control of national and international finance. The same could
be done by other countries. The technical know-how for accomplishing
this program exists. A scaled-down banking system would still
exist, but the tail would no longer wag the dog.
What we need now is for the public to
wake up to the urgent need for change and for the political leadership
at all levels of government to step up and make it happen. Standing
in the way is the near-total control of the mass media and the
major political parties by the monetary elite. Given such control,
only a grass-roots movement among millions of concerned people
can have an impact.
Of course it is much easier to suffer
in silence, especially if people are uncertain about where their
economic interests lie. But the hour is late. The U.S. is in great
danger, particularly if our leaders continue to project our internal
economic problems onto external enemies. What we need is a monetary
system based on our best constitutional traditions that will allow
us to resume our place as a great industrial democracy and live
in peace with the rest of the world. The time for action is now.
Richard C. Cook is the author of Challenger
Revealed: An Insider's Account of How the Reagan Administration
Caused the Greatest Tragedy of the Space Age. A retired federal
analyst, his career included stints with the U.S. Civil Service
Commission, the Food and Drug Administration, the Carter White
House, and NASA, followed by twenty-one years with the U.S. Treasury
Department. He is now a Washington, D.C.-based writer and consultant.
His book on monetary reform, We Hold These Truths, will be published
later this year. His website is at www.richardccook.com. His articles
on monetary reform have appeared on Global Research, Dissident
Voice, the Arizona Free Press, and elsewhere.