At 22:52 07/05/2011, D and N wrote:
(D&N)
Thanks for all your comments, Keith,
I doubt this will ever get passed, primarily
because it would take all power out of the hands of bankers and their backers.
(KH) I presume you are referring to what I wrote
in my last paragraph -- that all the main items
in all bank accounts should be open to public
inspection. But this depends on what you mean by
banks. Banks today (except the small, local ones
in the US) are quite different institutions from
what they were, say 50 years ago and as described
in the text books. A quite new species of bank --
such as JPMorganChase or Goldman Sachs --
investment banking -- has arisen in the last 50
years or so which has superseded some of the
roles of the previous commercial banks which were
slow to develop the more sophisticated
derivatives which are necessary (or deemed to be
necessary) when involved in financing extremely
large and more risky ventures. It is these
derivatives (and derivatives of derivatives)
which, able to bought and sold, added yet another
vast tranche of credit (invented money) to the
already over-extended money supply. Banks have
gone through at least three or four 'mutations'
since their earliest origins as individual money
exchangers when they were specialists in
determining the relative values of perhaps as
many as 30 or 40 different gold coinages (mainly
in the Mediterranean region in pre-Renaissance
days). But, in all their subsequent phases, banks
are still subject to the law (and want to be in
their own interests as well as everybody else's)
even though reforms usually only follow
catastrophes. Even though banks resist being
reformed by government, I wouldn't be too
pessimistic. One or two good steps have been
taken since the credit-crunch with, one hopes,
several more to come. The political power and
wealth of today's investment bankers relative to
ordinary folk is much less than that of royalties
and aristocracies in the past, difficult though
it may be for us to imagine when we read of their
earnings. There are already signs that Goldman
Sachs and JPMorganChase have seen their glory days.
(D&N)What's fuzzy is whether or not the
Federal Reserve members would continue to
benefit from all taxes collected if moved under
the US Treasury. I'm presuming they would, though clearly not as before.
(KH) As already suggested, the US Fed and the
Treasury are virtually the same beast already.
Even though the Bank of England and the US
Federal Reserve started out as separate private
bodies they've long since become nationalized.
Although their functions are still regarded as
distinct (and are, in a legalistic way),
individuals at the very top move from one to the
other through swing doors. Geithner, for example,
was chairman of the New York Federal bank before
sliding over to become the Secretary to the
Treasury. (The New York Federal Bank is almost as
powerful as the US Fed itself because it still
has a lot of gold -- German, French, Swiss, etc
-- which actually belongs to others.)
(D&N)Being retained as an important research arm
implies that they (the individuals who command
it now) would be given new salaried titles, thus
still able to benefit from all US taxes
collected. What is spelled out in the Act is
that accountability would be instituted, whereas
under the current system, the Reserve can and do
waive all audit requests. They are quite apart
in their controls over money, and do not fall
under public scrutiny, unlike the Treasury department.
Yes, and this applies particularly to gold. The
US Fed refuses to be audited as to how much gold
it has. When President Nixon got scared as to how
much gold was being sold to European central
banks (in exchange for their dollar earnings) as
under the Bretton Woods Agreement -- and
unilaterally abrogated in 1971 -- then the US Fed
clammed up as to how much gold it had left. Even
the US Congress, to which the US Fed is legally
obliged to report, is denied the facts.
(D&N) Public control of the creation of money
should, with proper checks and balances, reflect a 100% backed supply.
(KH) Yes, indeed. And that is why an increasing
number of people are calling for the restitution
of the gold standard because that tied the
creation of money to an independent (and largely
stable) quantity (gradually growing only by
genuine economic productivity). It doesn't have
to be gold as the standard -- almost any sensible
package of valued goods would do as a standard --
but we can already see the general drift towards
the traditional use of gold as the most
convenient measure because many countries are now
buying gold for their reserves. Russia and China
are buying as much as they can (even though they
are major gold producers already), as are the
oil-rich Middle East countries such as Iran and
Saudi Arabia, as are many other developing
countries. (Mexico bought 80 tonnes in March and
April -- almost US$4 trillion of it! -- which is
a huge amount, considering that only 2,500 tonnes
are mined per annum.) They are doing this
because, of course, the US$ and the Eurozone Euro
are being devalued all the time (relative to the
price of food and other essential commodities).
(D&N) That way, it shouldn't matter what might
be promised by any given political party.
(KH) Yes.
(D&N) Under the current system, it has been observed that:
18) The enactment of the Federal Reserve Act in
1913 by Congress effectively delegated the
sovereign power to create money to the Federal
Reserve system and private financial industry.
(KH) "Effectively" (to private financial
industry), yes, but not legally specifically.
This is because the Fed was given the ultimate
control over the amount of money in circulation
then the banks had to place their fractional
reserves in the Fed. As a few of the banks became
major outfits in recent decades (increasingly
having to finance large national firms as they
became multi-national) then they became
increasingly dependent on the Fed's decisions as
regards interest rates and fractional reserves.
But this also meant that the Fed became
increasingly responsible for the major banks up
to the stage that the major banks knew that they
would be protected against failure if they
over-extended themselves. This occurred
repeatedly in the case of individual banks which
then (usually) had time to sort themselves out
(or were bought out by others). By the time of
the credit crunch in 2007 almost all the major
banks (in Europe as well) had extended themselves
so much (because they were then heavily into the
derivatives which they didn't understand and had
been foisted on them by the investment banks)
then they all went down together -- or would have
done without a massive money injection conjured
up as between the US Treasury and the Fed,
followed up by QE. This all happened because the
US Treasury and the Fed had long neglected
control over the banks by means of adjusting
fractional reserves. These were largely lost
sight of in previous decades while they
concentrated on interest rate control (because
this affected the buying habits of consumers).
This is why the Bank for International
Settlements is now trying to persuade Western
governments and banks to adopt a 10-12%
fractional reserve. It's been accepted in
principle but when the banks will get back to
this is another matter. (Switzerand's banks are
the exception. Because they want to regain their
former reputation they are already heading
voluntarily for a 20% target. China has always
used fractional reserve control as well as
interest rates in controlling the credit-making
abilities of its major state-owned banks and the
many hundreds of private ones -- and this is why
it wasn't so badly affected by the credit-crunch.)
(D&N)(19) This ceding of Constitutional power
has contributed materially to a multitude of
monetary and financial afflictions, including
(A) growing and unreasonable concentration of wealth;
(B) unbridled expansion of national debt both public and private;
(C) excessive reliance on taxation of citizens for raising public revenues;
(D) inflation of the currency;
(KH) Yes.
(E) drastic increases in the cost of public infrastructure investments;
(KH) Yes, but also due to the immense
proclivities of government departments to grow
their staff and siphon off a large proportion of
revenue for their salaries and index-linked
pensions. All bureaucracies do this, of course,
but governments are not disciplined by possible
bankruptcy as private firms are if their
bureaucracies and middle management become too large.
(D&N) (F) record levels of unemployment and underemployment;
(KH) But here we also have to take into account
that the industrial economy of the last 300 years
is now becoming less labour-intensive from year
to year due to increasing automation and (so far)
redundant personnel can't be re-trained quickly
enough. This is a major structural problem for
which no-one or no-thing can be held primarily
responsible (unless it be the ever-innovative
ability of the human mind!). Even in China, with
10% p.a. GDP growth, unemployment is now growing
in the prosperous coastal provinces. Not only are
the 200 million temporary migratory factory
workers being sent back to the rural interior but
also a few million of the provinces' own
graduates are without jobs (even engineering
graduates!) or have to take menial ones. The
great shift of low-skill employment from the West
to China has now probably largely ceased and
China is now beginning to face the same structural problems as the West.
(D&N) and (G) persistent erosion of the ability
of Congress to exercise its Constitutional
responsibilities to provide resources for the
general welfare 2 of all the American people.
As you state, this seems like an unlikely point
to institute such an ideal, but accountability
must start somewhere, and was proven inconceivable under the current system.
(KH) And here also there's a larger 'structural'
problem (in my opinion) which is of a more subtle
nature. This is that the political system in
Western countries appears to be failing. Our
politicians (as a whole) are simply not educated
enough, not only in the major technologies that
actually produce the primary wealth of the
economy, but also in the ways of the financial
sectors which at present are making hay while the
sun shines (that is, governments who don't
understand what they do until after the event).
This is why politicians are losing the
credibility they used to have. One of the
greatest (and underrated) presidents the US has
had in the past century put his finger on it when
he spoke of his fear of the military-industrial
complex -- that is, that there was a danger of it
increasingly running the show. This is roughly
where we are today. One of the reasons why China
has done so well since Deng Xiaoping's reforms of
1979 is that a highly Confucian system of
selecting (not electing) government was
instituted. What this has actually delivered is a
nine-person cabinet of post-doc graduates, of
which seven or eight (I haven't been keeping
track recently) are in the physical sciences
(plus one or two economists I think). I'm not at
all advocating the Chinese system, but I'd
suggest that, given the increasing technological
basis of our economies, we badly need to reform
the way that politicians are chosen (increasingly
because of their televisual appeal).
(D&N) From the Act:
(B) AUTONOMY OF MONETARY AUTHORITY
.The Secretary of the Treasury may not
intervene in any matter or proceeding before
the Monetary Authority, unless otherwise specifically provided by law.
6 (C) INDEPENDENCE OF MONETARY AUTHORITY
.The Secretary of the Treasury may not delay,
prevent, or intervene in the issuance
of any regulation or other determination of the
Monetary Authority, including the determination
of the amounts of money to be originated and
most efficient method of disbursement consistent
with the appropriations of Congress and the
statutory objectives of monetary policy as specified in this Act.
(2) MEMBERSHIP.
(A) IN GENERAL.The Monetary Authority
shall consist of 9 public members appointed by
the president, by and with the advice and consent of the Senate.
(B) TERMS.
IN GENERAL.Except as provided
in sub paragraph (E), each member of the
Monetary Authority shall be appointed to a
term of 6 years.
7 (C) POLITICAL AFFILIATION.Not more
than 4 of the members of the Monetary Authority
may be members of the same political party.
So, from the above, Presidential power would
come into play in appointment of the Monetary
Authority. Likely would end up the old Reserve
members. Many have described the Act as rather
loose. It needs tweaking. It has also been brought to the House before.
(KH) But the above is self-contradictory. How can
a monetary authority be independent and yet be
appointed by a president, particularly a
president without any knowledge or experience of
financial and currency matters (any recent
president, not just Obama)? Actually, there's no
need for a monetary authority such as the Fed at
all. The Bank of England (the original model for
all subsequent central banks) only came about by
accident -- as originally described (below).
Government revenues and disbursements could be
given to many independent banks for maximum
security (even to many small ones -- which would
then have the benefit of beginning to equalize
the size of banks -- which would be very
desirable). All that would be needed is for
Congress to decide from time to time what the
fractional reserve of all banks should be -- with
the sensible intention, in due course, of
arriving at 100%. Competition between the banks
would arrive at the current interest rate without
any governmental-central bank intervention. All
the many banks involved would be motivated to run
their banks as prudently as possible for fear of
losing their government account (which might well
be their largest), but if one failed then the
loss to the government would be low and the
motivation for the remainder to run their
operations properly would be even greater. It's
not risk-free of course, but nothing in life is.
It would certainly be a greatly smaller risk than
what has already happened by way of the
credit-crunch and possibly even worse to come as
we now seem to be poised on the edge of either a
major depression or hyperinflation which no-one
-- least of all Bernanke -- can be sure about.
Keith
Natalia
On 5/6/2011 12:58 AM, Keith Hudson wrote:
At 20:18 05/05/2011, D and N wrote:
Found on Sam Smith's Progressive Review, from:
<http://www.huffingtonpost.com/stephen-zarlenga/reducing-us-debt-and-crea_b_857230.html>http://www.huffingtonpost.com/stephen-zarlenga/reducing-us-debt-and-crea_b_857230.html
Reducing U.S. Debt and Creating Jobs Through
Public Control of Our Money System
Stephen Zarlenga & Greg Coleridge, Huffington
Post - Be it for ignorance or by intention,
few federal elected officials have examined
how a change in the way money in our nation is
created and issued could reduce our nation's
deficit and debt and, in doing so, increase
millions of vital jobs to transform our economy.
One of the few exceptions is Rep. Dennis
Kucinich (D-OH), who during the last
Congressional session introduced the National
Employment Emergency Defense Act.
The basis of the bill are three essential
monetary measures proposed by the American
Monetary Institute in their American Monetary
Act (AMA). The AMA's recommendations are based
on decades of research and centuries of
experience; are designed to end the current
fiscal crisis in a just and sustainable way,
and are aimed to place the U.S. money system
under our constitutional system of checks and balances system.
The three essential measures include:
Moving the mostly private Federal Reserve
System under the US Treasury Department. The
Fed would no longer be a virtual fourth branch
of government, unaccountable to the public.
Their important financial research functions
would continue. But the Fed would no longer
make unilateral monetary policy decisions beyond the reach of we the people.
(KH) The Fed and the US Treasury are an item
anyway. Central banks and governments always
have been, whatever they may say to the
contrary. The first central bank to be created
was the Bank of England and it was only created
because the government wanted a great deal of
money for warfare. In 1672, King Charles II had
reneged on the debts he owed to London gold
merchants and from then on nobody would lend
money to the government. In 1694 when the
government badly need money for warfare, it
only managed to borrow £1,200,000 (about US$2
billion in modern terms) from half-a-dozen
extremely rich merchants by giving them
exceptional privileges (as well as charging
8%!). These privileges were (a) the new Bank of
England would be the sole depository for all
the taxation that the government received and
the sole payer of government's bills; (b) its
own promissory notes (banknotes) would be the
only ones in the country (thus outlawing the
banknotes of all the other banks -- of which
there were scores of "country" banks and 20 or
so other major banks centred in London); (c) it
could print and issue (to borrowers) as many
banknotes as it wished. (This was subject to
any banknote being redeemable in gold on
demand. Because banknotes are much more
convenient than gold coins or tablets in normal
everyday retail or commercial use then
banknotes became the most common visible
currency, and gold tended to accumulate in bank
vaults as fractional reserves against bank runs
-- the BoE having by far the largest quantity
of all. During the next 200 years the BoE
accumulated more gold than any other bank or
private person the world -- probably about 80%
of it [similar to the 70% of the world's gold
that the US Fed had at the end of WWII].)
Thus the BoE was a private bank (just as the US
Fed is, and also all the other State Fed banks)
and its governor (chairman) and directors were
private individuals (each with their own
independent wealth) who were (originally!)
genuinely running the BofE for the benefit of
the country when moral principles were more
highly regarded than now. (Obviously, they
charged 8% in order to get their own original
loans back but once they were deemed to be
completely safe then they operated the bank
patriotically -- though not always wisely!)
Making the power to issue money a public
function -- bypassing the current system
which invited the careless and risky lending
that led to the global economic crisis. The
U.S. government would be authorized to issue
dollars debt free. This power would replace
the current undemocratic and unstable
"fractional reserve" system in which money is
created as debt through loans by financial
corporations who lend many more times what
they possess. Banks would no longer have this
privilege to create our money supply.
(KH) The fractional reserve system is not
unstable when it's 100% -- as all the original
Renaissance banks were originally and many of
the major private banks of Europe were for at
least two or three centuries. But this fraction
gradually sank over the following years. In
fairly modern times (1960s and 70s) the Bank
for International Settlements recommended 7%
for all banks, and this sort of fractional
reserve is what is quoted in the text books.
But this was largely fictional because it had
already reduced in practice to about 2% or 3%.
At the time of the credit crunch the fractional
reserves of most major banks were down to 0%.
In fact, they had lent out so much money
(created credit) that their fractional reserves
were more like -10% or even -20% -- and even
then only on the basis that the collateral
lodged with them (mainly property deeds) were
valued far higher than reality. Since then the
BISS has recommended 10-12% as being a sensible
fractional reserve and the banks -- with
copious help from governments (taxpayers) --
are now struggling to get their reserves up to
strength. But most of them are still
technically bankrupt (with negative reserves)
and only one or two are now gradually getting into the 2% or 3% region.
But as to the main point in the article above,
if the issuing of money were to become a public
function then this would be even more
disastrous than now. They would simply vote for
the political party that would be the most
generous -- and then we would run into hyperinflation immediately.
Enabling the U.S. government to use its money
power -- creating and spending money into
circulation -- to address pressing
infrastructure needs such as repairing our
crumbling roads, bridges, rails and highways.
The government also would be enabled to invest in health care and education.
(KH) This would be fine if governments were
able to do this. But America (and most advanced
countries) already have crumbling
infrastructures, failing health schemes and
declining standards of state education.
Governments only start these projects at
relatively brief periods of peak prosperity,
but cannot maintain them adequately in normal
times because, in the meantime, vast
bureaucracies grow and capture an increasing part of the tax revenue.
These projects would provide a huge numbers
of jobs without going into debt and having to
repay interest on debt to financial
institutions. Economist Kaoru Yamaguchi's
computer model has shown that a public-based
money system and spending government money on
jobs fixing our infrastructure is the best form of economic growth.
The irony is that these three provisions would
institutionalize what most Americans falsely
believe already exists: That the Federal
Reserve is public. That banks only loan money
that they possess. That the government creates our money. Wrong on all counts.
What really needs to happen at the very least
is that, because money is of importance to all,
then the main items of all banks should be
available to public inspection at all times.
Among these would be fractional reserves.
Gradually, competition for customers would
drive this to 100% (though it would take
decades). As far as governments' central banks
are concerned we would also want to see that
present and future commitments to basic
survival welfare and state pensions are paid
for out of existing invested funds and not, as
now, purely notional figures in the national
accounts which have to be paid for out of future taxation.
Keith
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