Everything I've written thus far has been leading up to my actual proposal. As I contemplated it, I realized that something like this is what happened in Germany following WW1, except that it was inadvertant, unplanned, and highly unjust in the distribution of its benefits. Please follow me carefully, since I obviously don't want exactly what happened then. I want you to grasp the logic of the situation.
If after reading this you understand and agree with it, forward it to any friends you may have in Europe particularly, but also to any economists and academics with whom you may be acquainted. This plan is simple, bold, and as far as I can tell, sound.
People remember the wheelbarrows of money in postwar Germany. At the bottom, it took 1 trillion marks to buy what one dollar would buy. At the same time, the literal, physical mass printing of de facto Monopoly money (one sided in the end) by the government helped some people.
From Shirer's "Rise and Fall of the Third Reich":
. . .goaded by the big industrialists and landlords, who stood to gain from the masses of people who were financially ruined, the government deliberately let the mark tumble [i.e. kept the printing presses running day and night, and used that money to pay its bills] in order to free the state of its public debts, to escape from paying reparations, and to sabotage the French in the Ruhr. Moreover the destruction of the currency enabled German heavy industry to wipe out its indebtedness by refunding its obligations in worthless marks. The General Staff. . .took notice that the fall of the mark wiped out the war debts and thus left Germany financially unencumbered for a new war.
The masses of people, however, did not notice how much the industrial tycoons, the Army and the State were benefitting from the ruin of the currency." (p. 96 in the paperback)
Inflation, as I keep arguing, is wealth transfer.
How was this corrected? The mark was first pinned to the dollar, then to gold. In effect, a new currency--albeit one still called the mark--was created. In essence, this is my idea, except we do this intentionally, and spread the benefits generally, make the pain as short and contained as possible, and prevent the reemergence of the same problems through intelligent structural change.
Historically, Germany got rid of its debts, then used their Central Bank--the Reichsbank--to go right back to war. I don't want the government doing anything that is not supported by the people. If you can't inflate, you have to tax. If people won't vote for something, then it won't happen. This system fundamentally alters the political balance of power back towards the people.
Arguably we would not have fought any of the wars we fought this last century without the Federal Reserve. Certainly not the first World War. If you understand yourself as a dove, you should support these ideas for that reason alone.
More generally, this plan is intended to eradicate the risk of large scale financial trouble. This means no more recessions, depressions, and "melt-downs". It does not mean continuous high speed growth, but rather slow and steady growth, coupled with increases in the purchasing power of the average, middle class American. It will further enable the creation of the jobs that will help those living in poverty to raise themselves into comfort.
I am fully aware these are radical proposals, and likely only to be seriously considered in extremis. Yet, we have reached a point where the bankruptcy of the United States is something reasonable people can view as possible, and even inevitable, if we continue on our current path. We are also seeing credible talk of another Great Depression.
When things really hit the fan, we need to have thought the thing through. Any radical new idea has to be proposed for the first time, so people can get used to the sound of it. Here are my ideas:
- Use the Federal Reserve Open Market Operations to buy up every Treasury Note and security in existence. To make sure this gets done (since Congress currently has no direct authority over the Fed) we would first pass legislation bringing it directly under Congressional control. We offer the holders of such securities the choice of either taking the money, or getting that debt cancelled directly through default.
This will eradicate our debt. To be clear, we use the Fed to write some $10 trillion in checks (we owe roughly $13 trillion, but they already hold roughly 20% of our debt), such that the Federal Reserve holds the entirety of our debt. We further write checks to cover all the debts of all the States and municipalities in the country. This will be highly inflationary, which I will deal with in a later step.
- Use the Federal Reserve Open Market Operations to fully capitalize all banks and lending institutions, and in exchange for that require them to forgive all loans. All credit cards, all mortgages, all business loans. We start from zero, with sound banking.
My thought process here is that the loans banks made were made, by and large, with phantom money. It was created from nothing. My initial thought was to simply pass a law by which the loans were forgiven, but I realized that would mean the immediate bankruptcy of everyone, since they would then have no money to pay their depositors.
This, too, will be highly inflationary. I have been unable to find a number for the amount of private indebtedness, but let’s place it somewhere around $7 trillion for simplicity. The exact number doesn’t matter until the implementation phase.
- Require all banks to be henceforth 100% capitalized. They would only be allowed to make loans with actual investor capital, which would mean certificates of deposit held by individuals and investing institutions. Since most people would have extra money following the forgiveness of their loans, this would be the starter base from which liquidity would be built. In other words, this is how those banks would then be able to continue funding industrial and business growth.
Such banks would ever-after only be able to make money through investing real money, through charging "warehousing" fees for the safe storage of money, and through transaction processing. No more pyramiding of money. All credit card issues would have to be backed by corresponding Certificates of Deposit, and have maturities. No more revolving lines of credit.
The sheer volume of cash injected into the system would help reduce the economic impact of this, particularly since those already in debt would get a new start. This would be somewhat unfair to those few who were not in debt, but the task here is a global fix that will last. Such people would not be hurt; they simply wouldn’t benefit. The resulting improvements in the economy, though, would more than make up for it.
- Implement a stable currency based on gold. This needs to be done in steps.
First, Congress passes legislation to empower each of the fifty States to print their own currency, and establish gold depositories. The law will be a Federal law, but the implementation needs to be by the sundry States. These depositories are built, or converted from existing vaults.
Second, we create new currencies, which "translate" the inflation back to pricing we are used to. This is what Schacht did in Germany. This is by far the hardest step, and some imprecision is inevitable. There is an easy way to look at this, and a hard one.
The easy way, which I prefer, is to simply figure out how much money was in existence, determine the total of the checks written, and use that as a multiplier. If $13 trillion was in existence, and we wrote checks for $26 trillion, then the money supply has increased by 200%. It will now take $3 to buy what previous took $1.
Given this, we ask for $3 in the old money, and offer out $1 of the new. This will roughly normalize prices, and minimize economic disruption. All holders of U.S. Securities who were paid off do the same exchange.
This can be done through any bank. Obviously account balances are simply altered on a specified day, and money is distributed to banks to pay out. Excess currency can be printed to make sure there is enough, with the proviso that any leftovers will be returned promptly, then destroyed.
A few words of explanation are needed before I offer up the alternative.
There are two types of inflation: monetary inflation and price inflation. Monetary inflation is any increase in the amount of money that could be spent. The reality is that much of the money out there is not in circulation. Even if that money is sitting in a vault somewhere gathering dust, it has still been created, and could still be used to cause price inflation.
Price inflation is the actual increase in the costs of things like housing, food, and transportation. Following any injection of cash into the system, it takes some time for the prices to stop rising.
To expand on this point, which is a bit abstract, let us suppose that only 80% of the dollars in existence are actually in circulation. This means that the buying power of the dollars that are in circulation is artificially high. Our dollars are buying more than they would if the money left its hiding place. For the purpose of this translation, though, I’m assuming that money was in circulation.
To the point here, if we did this over the period of say one week or one month, the effects of the monetary inflation may not have worked through the system by the time we switch currencies. Were we to wait, it would be very destabilizing. Frankly, it will be chaotic, no matter how we do it, but we’re trying to save our democracy and way of life. Responsible adults understand that sometimes short term pain and confusion are the price of long term peace of mind and comfort.
Given this, the ratio may be somewhat deflationary in the near term, particularly if much of this money is held overseas, as it is today. Since the money to buy up our debt went out into the economy, prices will continue rising even after the transition, but in the near term $1 of the new money may not buy what $3 of the old money did.
The hard way, then, is to try to reconcile actual before and after purchasing power in our ratio—for example, maybe we make it 2.5: 1, or 2:1. There is no reason not to involve professional economists in thisk, but we need to understand this is new ground, and that things tend to work in large systems differently than we planned them. The world has a mind of its own.
Overall, I don't think we need to do too much hand-wringing. We need to gather data, take our best guess, then pull the trigger. To mix metaphors, this appears to me to be a Gordian Knot best cut quickly with a sharp knife.
The key consideration is that if all private citizens, banks, and businesses are suddenly all out of debt, they can deal with some short term price disruptions, particularly if they know they are coming.
If the ratio is wrong, prices and wages will go down quickly, and previous purchasing power will be restored in reasonably short order. It is, it should be noted, critical that the government not interfere with this process of price reconciliation.
This will be followed by permanent increases in our buying power, and corresponding standard of living, since the steady leak of our money into the pockets of the Monetary Mercantilists will have ceased.
In this system. Texas will have their own notes, as will Massachusetts. All the States will. All of them will equal one another. My thought process here is to begin returning the balance of power to the States, who were properly the focal political institutions in the intent of most of our Founders (for good reason, as I will argue in a later piece.) Practically, this may be more symbolic than real in its effect, but symbolism still counts for a lot.
Not to be glib about such an important issue, but I think this would be fun, too. It would offer a lot of room for creative competition in the designs of the various currencies.
The "control" of the currencies is a moot point, since there will be no more monetary manipulation, but in theory this will still be in the end under the control of the Federal Government.
Third, transfer the gold currently held in reserve in Fort Knox and the Federal Reserve Bank of New York to the States, in proportion to the money they issued. Foreign owners of dollars can "redeem" them in any State they want. Since the goal is to tie the currencies to the gold, logically the gold goes to those who issued the currency, such that the currency/gold ratio of all States is equal.
Historically, nations on the gold standard either saw the value of their currency fluctuate with the value of gold (the currency was defined as how much gold it would buy on the open market), or artificially pegged their money to some amount of gold, such that a dollar by definition equals X amount of gold, say 1/10th of an ounce. I don’t find either of these acceptable.
Returning to the analogy of the teacup and the dollar bill, please recall that inflation is equivalent to a decrease in the value of a dollar. Deflation equals an increase in the value of the dollar, achieved by reducing the number of dollars in circulation. In both cases, the value of real goods fluctuates for reasons extraneous to the actual value of the product. To put it bluntly, it can and has been manipulated by those able to do so.
There is absolutely no benefit to anyone in this, except the banks (or those who "create" gold), who as we have seen benefit almost exclusively from this process, even though most of us have not historically seen this. Obviously, the Federal government benefits, too, as it uses fiat money to fund war, social spending, and whatever else is the issue de jour.
As I see it, the task is to fix the value of the dollar, once, and never change it again. You will see people claiming that if the amount of money is fixed, and people "hoard" it—put it in a mattress or vault somewhere—that there won’t be enough. This is silly. What will happen is the value of the dollars in circulation will go up. When they reach a certain value, the money will come out of the mattresses, quite naturally. This is a good thing, and the only reason we don’t realize this is we have never experienced it. It hasn’t happened since the 19th Century, in the way it ought to.
Fourth, given the foregoing considerations, we fix the value of the money relative to the gold once, and never change it again. We have some 8,000 tons of gold in reserve. Let us say there are $13 trillion of the new dollars that are issued. This works out to some $50,000 per ounce. This is, of course, ridiculously higher than the price of gold currently, which I need to explain.
This concept is a hybrid between a true gold standard and fiat money. It is a gold standard, since gold backs the currency. It is "fiat" money, since the value of the money is fixed outside the marketplace, which would not come even close to valuing gold that high. In effect, I am inflating the value of the gold so the math works.
A logical question arises: if the "value" of the gold, or the money, is defined artificially, why use gold at all? I wrestled with this, and here is my answer: because the goal is to prevent any more money from being issued. That is it. This is best done if it is necessary to add gold to add money. Otherwise, it is too easy just to pass a bill to print your way out of trouble. Moreover, the knowledge that gold stands behind the money will strengthen our currency yet further.
We were for many years on a fractional gold standard, which meant that a multiple of dollars were issued against the gold in reserve. Say the gold was valued at $50/ounce. At a multiple of ten, this meant $500 could be issued against it. If it eases the cognitive dissonance, think of it that way. The point is that the need to have gold to issue money decreases the issuance of money, and that we already have this gold.
On one point I want to be clear: in wars, and other sorts of troubles, we have historically relied on the Federal Reserve (or its predecessors) to print money. This seems clean, but it is a tax, plain and simple, that take the fruit of our labor and reassigns it to the Federal Government and their contractors, and to those who collect the interest. One obvious example is World War 1. We printed our way through that, with the result that the purchasing power of the dollar was cut in half. If you had $2,000 in savings in 1915, it was worth, effectively, $1,000 in 1920. Where did that value go? To the war. It was a tax.
In future such situations, if they occur, we simply need to tax our way through it. This makes it plain to everyone what the cost of the war is. This will mean that the American people will need to be solidly behind the effort, or it won’t happen. This is more democratic than playing games with money only a few people understand. Obviously, the ability to play such games is one of the features that has made the Fed so attractive to the Federal Government all these years. It is not overstating the case to say that without central banks, here and abroad, neither of the World Wars could have happened. They could not have been funded.
- Abolish the Federal Reserve System, root and branch, and abolish with it all our national debt. We should encourage everyone else to do likewise. The countries of Europe could use this method to solve their problems.
I will reiterate that I fully grasp how radical these ideas are. At the same time, national bankruptcy, and another Depression are also quite radical. These things have happened in the past, and they can therefore happen again.
There was a horrendous amount of suffering in the Great Depression. There is horrific suffering around the world, today, as a result of despotic economic policies. My intent here is to restore decency, fairness, and social justice to our economic system. Actually, "restore" is perhaps not the right word: our system has never been fully just, even in the periods when we didn’t have a central bank, since it has always relied on fractional reserve banking.
This is a truly, genuinely brave new world (of the positive sort) I am proposing. Please consider it carefully.