Friday, August 29, 2008


(Week 5 – Friday, Aug. 29)

In yesterday's column we walked through the private-bank-loan transaction by which our money is created, issued and controlled to show that the "national debt" does not refer to money that actually exists, is loaned out for a time, and is then paid back. It is not "real," therefore, in the dictionary or common-sense meaning of the word "debt." The question naturally arises, "How then can this "national debt" be "repaid" (whatever "repaid" might mean in this case)?"

The quick answer is, it cannot be "repaid." It can, however, be eliminated in a systematic manner by changing the basis on which the monetary system operates. Thomas Jefferson said, "But follow the principle, and the knot unties itself." If the operation of the monetary system were returned to sound principle, the so-called "national debt" would disappear in an orderly way over time, virtually of its own accord.

The present Federal Reserve System operates according to what might be called the "private-debt-money" principle. Our money is created by a private banking system, and "loaned" out at "interest," thus creating a supposed "debt" of society to that system. The money required to pay back such "loans" is available because it circulates in the money supply, but the money needed to make the "interest" payments is not because it was never issued. This means that participants in the economy must, in the aggregate, "borrow" increasingly more money into circulation in order to keep making the principal and "interest" payments on old bank loans, while maintaining a money supply. This is another way of saying that the "debt" associated with older money must be redeemed (rolled over) with "debt" attached to new money, with the result being that the total "debt" the nation "owes" to the banks builds up continuously in a snowballing manner.

If the present system issued money directly out of the U.S. Treasury, it would be operating according to what might be called the "public-debt-free-money" principle. Our money would be created by our own government, and then spent or loaned interest-free into circulation. This public money would for a time be used to make the principal and "interest" payments on old bank loans, and maintain a circulating money supply. The crucial difference is that in the new system, more money would not have to be "borrowed" into circulation from a private banking system to accomplish that. Old "debt money" would be redeemed with new "debt-free money," resulting in an ongoing reduction of the total amount of money in circulation for which the people "owe a debt" to the banks.

With the "private-debt-money" principle, the life of the nation serves money. With the "public-debt-free-money" principle, money serves the life of the nation. The contrast is that stark.

As bank loans were paid off with public money, the bubble of "national debt" that is attached to the nation's money supply would be deflated without default or economic disruption. By this process the "national debt" would be retired over time in an orderly way, and fade naturally out of existence.

This states the matter in principle, but the next step is to describe how, specifically, this would work out with respect to what I described in Col. #25 as the four forms of the "national debt"; i.e. the "Federal deficit," "Federal debt," "balance of payments deficit" and "money supply." I will pick up on that task in the next installment.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.