(Week 6 - Wednesday, Sept. 3)
In yesterday's column we noted that into the late 1970's the city of Flint, Michigan was the home of one of the largest automotive production complexes in the world, but after a concerted program by the management of General Motors to relocate these factories to other areas (like, for instance, the desert in Mexico) that in a physical and human sense had virtually no natural advantages over Flint (in fact were hugely disadvantaged), the workforce shrunk to only ten percent of its previous size in less that three decades.
The economic reason widely attributed in the media and claimed by the GM management to have compelled such a drastic move was that the Flint plants and workforce were somehow no longer "competitive" in the "global marketplace." By constructing a mental checklist of the relative physical and human advantages of the Flint-vs.-Mexico siting I attempted to demonstrate that this could not have possibly been the reason in actual physical or human terms. The only factor that did seemingly make the move economically compelling was the relative disequilibrium in the exchange ratio between the dollar (which currency American workers get paid in) and the peso (by which Mexican workers are paid).
If the value of the dollar remains high enough for long enough, this effectively becomes the reason that American workers cannot "compete," supposedly, with their foreign counterparts. That has evidently been the case for the last few decades, as the U.S. has run up enormous and mounting "balance of trade deficits." The perception that this "imbalance" was in effect, and would be for some decades at least, must, it would seem, have been a factor in the mindset of GM management (though perhaps not consciously in these terms) when they decided that they just had to move those plants to save the company.
The question then becomes, what has caused the value of the dollar to remain so consistently high with respect to the rest of the world that the American worker, even with every physical advantage, is no longer "competitive" (i.e. can no longer sell his goods at a competitive price on the international market)?
The answer is that the American dollar is the "reserve currency" of the world. That is, it is effectively the backing for every other currency. This status was established officially at the Bretton Woods Monetary Conference in 1944 which set the basis for the post-WWII monetary order. The dollar was unofficially dubbed "liquid gold," and it has since evolved in a way that is consistent with that nickname due to many factors.
These include that the U.S. economy for several decades after WWII was by far the largest, most materially productive and most stable in the world. It is only natural that the currency which was backed by the economic (not to mention military and cultural) might of this "superpower" would become the most sought after in global trade. If one had a dollar, one could be confident of being able to spend it freely almost anywhere in the world. If a nation had an ample supply of dollars in its central bank, that signified in the eyes of the world that it was "solvent" (much as gold used to indicate the same),which bolstered the value of that nation's own currency as well. World trade in oil was conducted (and still is) only in dollars. The list goes on.
The demand for the dollar has been, and remains, huge; so much so that well over half of American money circulates outside the U.S. (which is not to say that confidence is not wavering). As we have talked about since the start of this series of columns, the dollar is a "debt"-based currency that is created and borrowed into existence through private banks. It is out of the combination of these two factors that the potential for the American government to sell trillions of dollars worth of bonds "backing the dollar" arises. The process manifests in a cycle that basically unfolds as follows.
Participants in the U.S. economy borrow hundreds of billions of dollars into circulation through the private banking system every year. This money injects tremendous buying power into the American domestic market (which is complemented by American's huge appetite for goods). Americans could use the money to buy the output of their own factories, but it is often less expensive to purchase what they want from foreign nations, partly because these nations are willing to sell their goods more cheaply in order to obtain in the exchange the dollars that they need. They must, for example, have dollars to buy oil on the international market.
So, the U.S. runs up a huge "balance of trade deficit", and our dollars flow to foreign countries; but, they can't stay there. They have to flow back. Otherwise they will cause inflation in their own domestic market such that they will lose their "competitive" trading advantage and the flow of dollars will stop, or reverse.
Generally, foreign central banks, to support the value of their own currencies, buy up the "debt" paper (i.e. Federal bonds and other "debt" contracts) by which U.S. currency comes into being. They become the recipients of the "interest" payments that are made to service the "debt" on the U.S. money supply, and the American people abandon their "uncompetitive" industries, and borrow more money in an attempt to keep up lifestyles.
What I have described above is, in very simplified terms, the cycle that the American productive sector has been caught up in and driven out of business by, as exemplified by the fate of the auto industry in Flint.
The ways this play out are vastly more complex that what could be covered in this short article. The key to not getting lost amidst all the bewildering intricacies is to keep in focus that this all starts with the fact that the entire world is slipping into "debt" because it borrows its money into circulation from an international banking oligarchy, and these complexities arise out of the incredible manipulations that all parties feel obliged to participate in simply to survive.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites:
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Wednesday, September 3, 2008
Tuesday, September 2, 2008
Column #32 THE LESSONS OF FLINT, MICHIGAN
(Week 6 - Tuesday, Sept. 2)
On this Labor Day week of 2008, it would be well to reflect on what happened to Flint, Michigan. This small city northwest of Detroit was for many years the site of one of General Motor's largest production complexes. It was here in 1936-'37 that what came to be known as the "Flint Sit-Down Strike" transformed the United Automobile Workers from a collection of isolated locals on the fringes of the industry into a major union, which, in turn, led to the unionization of the auto industry in the U.S.
The number of people employed by GM in Flint fell from a high of 80,000 in 1978 to about 8,000 today. We should pause to ask, what has been the cause of such a steep decline? Many reasons have been offered, but almost all boil down to a supposed "lack of competitiveness" on the part of American industry, and by implication, the American worker. This is a tragic misinterpretation of what is essentially a monetary problem, and the industrial laborer, the country, and indeed the world is paying a terrible price for it.
In his classic film "Roger and Me," Michael Moore pursued the CEO of GM, Roger Smith, to try to find out why his corporation was closing auto plants in Flint, and reopening them in seemingly illogical places like, say, the desert in Mexico. He never did successfully corner Mr. Smith for an answer, but we can assume that the rationale would have had something to do with "competitiveness." Let us take a look at which location is really more "competitive" from the stand point of the physical and human realities involved, leaving monetary considerations aside for the moment.
To begin our reckoning, let us note that to move the site of production, the factories that had already been constructed over generations and at great cost in Flint would have to be disposed of and rebuilt in Mexico. What is more, those plants are located in Flint for good reason. They are within reach, via the greatest inland waterways in the world, of the vast iron ore deposits of northern Michigan and Minnesota. They have convenient access to the high-quality coal deposits of Appalachia via a well-developed rail system. They are in proximity to a bountiful fresh water supply. Flint's factories are located in mature communities with good roads, housing, medical facilities, schools, utility infrastructure, and all manner of amenities. They are interlinked with a well-developed network of suppliers and services that have grown up over the years as adjuncts to the auto industry.
The desert in Mexico is clearly lacking in all of these. If one were to make a listing of the tangible features of the Flint-vs.-the-Mexican siting, one would find that virtually all of the advantages are squarely in the Flint column. The only plus I can see for a Mexican location is perhaps a limited potential for assembly for local Mexican consumption, but even that is dubious. In any case, what reason could one offer for forcing Upper Midwest residents to buy their vehicles from Mexico?
But, we are scolded by pundits and politicians, American workers can no longer "compete." We need to take a closer look at this. The workforce at the Michigan plants is already well qualified for the job by training, experience and cultural tradition. I know that Mexicans are fine and hard-working people as well, and are fully capable of learning and performing the same jobs as those in Flint, but I have worked in the American workplace all my life, including a number of factories (one staffed almost entirely by immigrant Mexicans), and Americans labor well and hard also. There is not much to choose from when comparing the fitness of respective populations.
This begs the question, "Given the overwhelming preponderance of bona fide advantages embodied in the Michigan option, why can a factory in Flint 'not compete' with one in Guadalajara?" The answer is deceptively obvious and simple; the worker in Michigan gets paid in dollars, while the one in Mexico collects his wages in pesos.
But, I hear it argued, the peso is worth less than the dollar. Says who? Where is there written some universal law that dictates such things? Currencies are abstract human creations controlled by the banking system. They would find their own reasonable levels relative to each other if they were not forced out of such equity by the insatiable need to feed the "interest" bubble now almost universally attached to all currencies.
The notion that there is some natural disequilibrium in the exchange ratio between the dollar and the peso that impels economic actions which are in such stark contradiction to any sensible assessment of physical and human realities as there were in Flint, ought to be a huge blinking red light to alert us to precisely where the problem lies. The root is with the currencies themselves. The problem is traceable to the creation and issuance of "debt"-based currency by a private banking system, and the ensconcing of the dollar as the privileged "reserve currency" for the world.
We will continue our look into the lessons of Flint, Michigan in tomorrow's column.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites:
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
On this Labor Day week of 2008, it would be well to reflect on what happened to Flint, Michigan. This small city northwest of Detroit was for many years the site of one of General Motor's largest production complexes. It was here in 1936-'37 that what came to be known as the "Flint Sit-Down Strike" transformed the United Automobile Workers from a collection of isolated locals on the fringes of the industry into a major union, which, in turn, led to the unionization of the auto industry in the U.S.
The number of people employed by GM in Flint fell from a high of 80,000 in 1978 to about 8,000 today. We should pause to ask, what has been the cause of such a steep decline? Many reasons have been offered, but almost all boil down to a supposed "lack of competitiveness" on the part of American industry, and by implication, the American worker. This is a tragic misinterpretation of what is essentially a monetary problem, and the industrial laborer, the country, and indeed the world is paying a terrible price for it.
In his classic film "Roger and Me," Michael Moore pursued the CEO of GM, Roger Smith, to try to find out why his corporation was closing auto plants in Flint, and reopening them in seemingly illogical places like, say, the desert in Mexico. He never did successfully corner Mr. Smith for an answer, but we can assume that the rationale would have had something to do with "competitiveness." Let us take a look at which location is really more "competitive" from the stand point of the physical and human realities involved, leaving monetary considerations aside for the moment.
To begin our reckoning, let us note that to move the site of production, the factories that had already been constructed over generations and at great cost in Flint would have to be disposed of and rebuilt in Mexico. What is more, those plants are located in Flint for good reason. They are within reach, via the greatest inland waterways in the world, of the vast iron ore deposits of northern Michigan and Minnesota. They have convenient access to the high-quality coal deposits of Appalachia via a well-developed rail system. They are in proximity to a bountiful fresh water supply. Flint's factories are located in mature communities with good roads, housing, medical facilities, schools, utility infrastructure, and all manner of amenities. They are interlinked with a well-developed network of suppliers and services that have grown up over the years as adjuncts to the auto industry.
The desert in Mexico is clearly lacking in all of these. If one were to make a listing of the tangible features of the Flint-vs.-the-Mexican siting, one would find that virtually all of the advantages are squarely in the Flint column. The only plus I can see for a Mexican location is perhaps a limited potential for assembly for local Mexican consumption, but even that is dubious. In any case, what reason could one offer for forcing Upper Midwest residents to buy their vehicles from Mexico?
But, we are scolded by pundits and politicians, American workers can no longer "compete." We need to take a closer look at this. The workforce at the Michigan plants is already well qualified for the job by training, experience and cultural tradition. I know that Mexicans are fine and hard-working people as well, and are fully capable of learning and performing the same jobs as those in Flint, but I have worked in the American workplace all my life, including a number of factories (one staffed almost entirely by immigrant Mexicans), and Americans labor well and hard also. There is not much to choose from when comparing the fitness of respective populations.
This begs the question, "Given the overwhelming preponderance of bona fide advantages embodied in the Michigan option, why can a factory in Flint 'not compete' with one in Guadalajara?" The answer is deceptively obvious and simple; the worker in Michigan gets paid in dollars, while the one in Mexico collects his wages in pesos.
But, I hear it argued, the peso is worth less than the dollar. Says who? Where is there written some universal law that dictates such things? Currencies are abstract human creations controlled by the banking system. They would find their own reasonable levels relative to each other if they were not forced out of such equity by the insatiable need to feed the "interest" bubble now almost universally attached to all currencies.
The notion that there is some natural disequilibrium in the exchange ratio between the dollar and the peso that impels economic actions which are in such stark contradiction to any sensible assessment of physical and human realities as there were in Flint, ought to be a huge blinking red light to alert us to precisely where the problem lies. The root is with the currencies themselves. The problem is traceable to the creation and issuance of "debt"-based currency by a private banking system, and the ensconcing of the dollar as the privileged "reserve currency" for the world.
We will continue our look into the lessons of Flint, Michigan in tomorrow's column.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites:
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Monday, September 1, 2008
Column #31 SOLUTION TO THE "BALANCE OF TRADE DEFICIT"
(Week 6 - Monday Sept. 1)
The "balance of trade deficit" is a net outflow of money caused by this country buying more goods from foreign nations than we sell. Like the Federal "deficit" and "debt," it has its root in the private-bank-loan transaction by which our money is created, but to trace out how it works takes a longer explanation. The reader is urged to follow this thread of thought carefully.
The "interest" payments that must be continuously made in order to maintain a money supply borrowed from a private banking system cause, from the perspective of the consumer, a net loss of purchasing power, because he does not receive anything of value in exchange for it. The result is that not all the money that is paid to people who produce the goods in the domestic economy shows up as buying power on the consumer side of the production-balances-consumption market equation (I am using a very broad definition of "goods" here that includes all goods and services).
This causes goods to pile up as unsold inventory in the marketplace, which means that orders for more goods will decrease and workers will be laid off. Those still employed will experience the same cycle of having part of the money from their paychecks being siphoned off for "interest" payments, which, in turn, causes a deficiency of purchasing power, that results in still more goods piling up as unsold inventory, even at the reduced rate of production. More workers will be laid off. If this vicious cycle is allowed to continue unchecked, the country will enter an economic "recession," or even "depression."
This winding down of the physical economy parallels the contraction of the money supply described in previous columns, both of which are the result of the requirement to make "interest" payments on the private bank loans.
The apparent answer to both the physical and financial shortfalls would seem to be the same; that is, find a way to bring more money into the circulation. The option that has been talked about in these columns so far (short of making the transition to a public monetary system) is for masses of people to borrow ever greater quantities of money into circulation from the banking system. There is, however, one other possibility that I have not yet talked about; that is, achieve a "positive trade balance" with other nations.
One way that unsold inventory piling up in the domestic marketplace can be disposed of is to sell it to foreigners. What is more, such sales would bring money into the domestic money supply that has been lost to "interest" charges. It looks like a win-win solution, except for one factor. That is that virtually all other currencies around the world are also borrowed into existence from private banks, so the domestic economy of every other nation exhibits the same problem, and, therefore, the same need for a "positive trade balance."
Ideally, world trade is a zero-sum game. Everyone can't have a "positive trade balance" with everyone else. The "positive balances" must of a mathematical certainty equal the "negative balances." For the last few decades, the U.S. has been losing in the balance-of-trade competition. Therefore it has been running up a huge "balance of trade deficit" that can only be made up for by taking on more "debt," particularly in the form of the selling of bonds backing the "Federal debt" to other nations.
We have gotten away with this so far because the U.S. dollar is the "reserved currency" for the world. This means that it is the currency that every other nation has to hold a quantity of to back up their own currency (which is why it is sometimes called "paper gold"), as well as insure their own buying power in the international marketplace (e.g. trade for oil is conducted only in dollars).
If the dollar became publicly-issued, the rest of the world's currencies would be obliged to follow suit and become publicly-issued as well. If that happened, the people of every nation would have the ability to redeem the full value of everything they produced in their own domestic marketplace, because to maintain their money supply they would no longer be losing the buying power that is currently leaking away due to having to pay "interest" to the banks.
What is more, it would also be possible to calculate an equitable trading value for every currency in the world such that balance of trade surpluses and deficits would disappear. All trade is essentially goods-for-goods, and there is no reason why that could not be reflected in equitable exchange rates between the currencies that facilitate their exchange.
What stops this equitable exchange from happening now is the "debt" that attends the creation of all major currencies, and renders any hope for a just, stable and sustainable world impossible. This opens up a whole new area of discourse that there is not room to do justice to here (will be explored in future columns), but I hope it gives the reader at least a glimpse of what is possible if we were to return to sound monetary practices.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites: http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
The "balance of trade deficit" is a net outflow of money caused by this country buying more goods from foreign nations than we sell. Like the Federal "deficit" and "debt," it has its root in the private-bank-loan transaction by which our money is created, but to trace out how it works takes a longer explanation. The reader is urged to follow this thread of thought carefully.
The "interest" payments that must be continuously made in order to maintain a money supply borrowed from a private banking system cause, from the perspective of the consumer, a net loss of purchasing power, because he does not receive anything of value in exchange for it. The result is that not all the money that is paid to people who produce the goods in the domestic economy shows up as buying power on the consumer side of the production-balances-consumption market equation (I am using a very broad definition of "goods" here that includes all goods and services).
This causes goods to pile up as unsold inventory in the marketplace, which means that orders for more goods will decrease and workers will be laid off. Those still employed will experience the same cycle of having part of the money from their paychecks being siphoned off for "interest" payments, which, in turn, causes a deficiency of purchasing power, that results in still more goods piling up as unsold inventory, even at the reduced rate of production. More workers will be laid off. If this vicious cycle is allowed to continue unchecked, the country will enter an economic "recession," or even "depression."
This winding down of the physical economy parallels the contraction of the money supply described in previous columns, both of which are the result of the requirement to make "interest" payments on the private bank loans.
The apparent answer to both the physical and financial shortfalls would seem to be the same; that is, find a way to bring more money into the circulation. The option that has been talked about in these columns so far (short of making the transition to a public monetary system) is for masses of people to borrow ever greater quantities of money into circulation from the banking system. There is, however, one other possibility that I have not yet talked about; that is, achieve a "positive trade balance" with other nations.
One way that unsold inventory piling up in the domestic marketplace can be disposed of is to sell it to foreigners. What is more, such sales would bring money into the domestic money supply that has been lost to "interest" charges. It looks like a win-win solution, except for one factor. That is that virtually all other currencies around the world are also borrowed into existence from private banks, so the domestic economy of every other nation exhibits the same problem, and, therefore, the same need for a "positive trade balance."
Ideally, world trade is a zero-sum game. Everyone can't have a "positive trade balance" with everyone else. The "positive balances" must of a mathematical certainty equal the "negative balances." For the last few decades, the U.S. has been losing in the balance-of-trade competition. Therefore it has been running up a huge "balance of trade deficit" that can only be made up for by taking on more "debt," particularly in the form of the selling of bonds backing the "Federal debt" to other nations.
We have gotten away with this so far because the U.S. dollar is the "reserved currency" for the world. This means that it is the currency that every other nation has to hold a quantity of to back up their own currency (which is why it is sometimes called "paper gold"), as well as insure their own buying power in the international marketplace (e.g. trade for oil is conducted only in dollars).
If the dollar became publicly-issued, the rest of the world's currencies would be obliged to follow suit and become publicly-issued as well. If that happened, the people of every nation would have the ability to redeem the full value of everything they produced in their own domestic marketplace, because to maintain their money supply they would no longer be losing the buying power that is currently leaking away due to having to pay "interest" to the banks.
What is more, it would also be possible to calculate an equitable trading value for every currency in the world such that balance of trade surpluses and deficits would disappear. All trade is essentially goods-for-goods, and there is no reason why that could not be reflected in equitable exchange rates between the currencies that facilitate their exchange.
What stops this equitable exchange from happening now is the "debt" that attends the creation of all major currencies, and renders any hope for a just, stable and sustainable world impossible. This opens up a whole new area of discourse that there is not room to do justice to here (will be explored in future columns), but I hope it gives the reader at least a glimpse of what is possible if we were to return to sound monetary practices.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites: http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Saturday, August 30, 2008
Column #30 WHAT IS THE SOLUTION TO THE "NATIONAL DEBT"?
(Week 5 - Saturday Aug. 30)
In Monday's column I described the four forms by which the "national debt" manifests at present: the Federal deficit, Federal debt, balance of trade deficit (with foreign countries) and money supply. By tracing the emergence of the so-called the "national debt" from the private-bank-loan transaction by which our money is created, I tried to show that it is not a genuine "debt." It is, rather, a fee in the guise of a compounding "interest" charge attached to our money at its point of creation. It was never anything "loaned," and it cannot therefore be "repaid." It can, however, be eliminated in an orderly manner by changing the basis on which the monetary system operates.
(1) – The "Federal deficit" is the amount of money borrowed by the Federal government in a given year to make up for the deficiency in tax revenues collected. If it simply issued the additional money it needed through the U.S. Treasury there would be no need for borrowing, and therefore no "deficit."
(2) - The "Federal debt" is the ongoing sum of yearly "Federal deficits." With a yearly "deficit" no longer being added to its total, the "Federal debt" would obviously cease to grow, but what would happen to the "debt" already on the books?
This "debt" is in the form of bonds that are being held by the public, both domestically and around the world. They will, at their date of maturity, have to be redeemed at a value that is greater than the amount of money the government got for selling them originally. The difference is due to the "interest" charge attached to the bonds.
Since the Treasury is only borrowing (not issuing) money at present, its only option is to pay the "debt" represented by these old bonds by printing and selling yet more bonds that, in turn, represent an even greater "debt" that will have to be paid when they are redeemed in the future.
If, on the other hand, the Treasury were allowed to issue money, then these old bonds could be redeemed with new money (not more bonds), and the cycle of compounding "debt" would be broken. Over time (about three decades) all outstanding bonds backing the "Federal debt" would be turned in for redemption with public money, and the "Federal debt" itself would cease to exist.
Perhaps the last great champion of a free public currency in our national government was Congressman Wright Patman from Texas. He was member of the House Committee on Banking and Currency for forty-seven years, and its chairman for twelve. Among his pronouncements on the subject of "Federal debt" are:
"The dollar represents a one dollar debt to the Federal Reserve System. The Federal Reserve Banks create money out of thin air to buy Government Bonds from the U.S. Treasury . . . and has created out of nothing a . . . debt which the American People are obliged to pay with interest."
"In many years of questioning high experts on the matter, I have yet to hear even one plausible answer to the question (of) why the Government should extend money-creating powers to the private commercial banks to be used, without cost, to create money which is lent to the Government at interest."
As far as I know, Congressman Patman's question remains unanswered.
In the next column I will move on to the solution to the "balance of trade deficit."
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
In Monday's column I described the four forms by which the "national debt" manifests at present: the Federal deficit, Federal debt, balance of trade deficit (with foreign countries) and money supply. By tracing the emergence of the so-called the "national debt" from the private-bank-loan transaction by which our money is created, I tried to show that it is not a genuine "debt." It is, rather, a fee in the guise of a compounding "interest" charge attached to our money at its point of creation. It was never anything "loaned," and it cannot therefore be "repaid." It can, however, be eliminated in an orderly manner by changing the basis on which the monetary system operates.
(1) – The "Federal deficit" is the amount of money borrowed by the Federal government in a given year to make up for the deficiency in tax revenues collected. If it simply issued the additional money it needed through the U.S. Treasury there would be no need for borrowing, and therefore no "deficit."
(2) - The "Federal debt" is the ongoing sum of yearly "Federal deficits." With a yearly "deficit" no longer being added to its total, the "Federal debt" would obviously cease to grow, but what would happen to the "debt" already on the books?
This "debt" is in the form of bonds that are being held by the public, both domestically and around the world. They will, at their date of maturity, have to be redeemed at a value that is greater than the amount of money the government got for selling them originally. The difference is due to the "interest" charge attached to the bonds.
Since the Treasury is only borrowing (not issuing) money at present, its only option is to pay the "debt" represented by these old bonds by printing and selling yet more bonds that, in turn, represent an even greater "debt" that will have to be paid when they are redeemed in the future.
If, on the other hand, the Treasury were allowed to issue money, then these old bonds could be redeemed with new money (not more bonds), and the cycle of compounding "debt" would be broken. Over time (about three decades) all outstanding bonds backing the "Federal debt" would be turned in for redemption with public money, and the "Federal debt" itself would cease to exist.
Perhaps the last great champion of a free public currency in our national government was Congressman Wright Patman from Texas. He was member of the House Committee on Banking and Currency for forty-seven years, and its chairman for twelve. Among his pronouncements on the subject of "Federal debt" are:
"The dollar represents a one dollar debt to the Federal Reserve System. The Federal Reserve Banks create money out of thin air to buy Government Bonds from the U.S. Treasury . . . and has created out of nothing a . . . debt which the American People are obliged to pay with interest."
"In many years of questioning high experts on the matter, I have yet to hear even one plausible answer to the question (of) why the Government should extend money-creating powers to the private commercial banks to be used, without cost, to create money which is lent to the Government at interest."
As far as I know, Congressman Patman's question remains unanswered.
In the next column I will move on to the solution to the "balance of trade deficit."
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Friday, August 29, 2008
Column #29 CAN THE "NATIONAL DEBT" EVER BE "REPAID"?
(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
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
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
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Thursday, August 28, 2008
Column #28 IS THE “NATIONAL DEBT” A REAL DEBT?
(Week 5 - Thursday, Aug. 28)
When we talk about a “national debt,” does this expression refer to money that actually exists, is loaned out for a time, and is then paid back? Is it “real” in the dictionary or common-sense use of the term “debt”? I would offer a description of two outwardly similar loan transactions, and perhaps through them we can discern the answer to the question.
(1) – A Loan from a Friend:
Suppose I needed to borrow some money, say $1,000. I might approach a personal friend and ask for a loan. He checks his bank account to see if he has the money to lend, and makes an assessment of whether I am likely to pay him back. Let us suppose that he has the money and is willing to lend it, but on one condition; that I agree to pay him more than I borrow (i.e. interest on the loan). After all, is he not foregoing the use of that money for a year, and is there not a risk that I might not pay it back?
We agree that he will lend me $1,000, and I will pay him back the $1,000 principal of the loan, plus a $200 interest charge (for a total of $1,200) at the end of a year. He writes up an I.O.U. on a slip of paper, and I sign it. He then writes a check for $1,000 out of his account, and hands it to me.
At the end of the year when I give him the $1,200, he marks the I.O.U. “paid,” and the loan is deemed by both of us to be satisfied.
(2) – A Loan from a Bank:
Now suppose that instead of borrowing the $1,000 from my friend, I decide to go to a bank. After all, is that not what banks are for? I approach the banker and ask for a loan. Like my friend, he checks what he has in his accounts, but not because he is planning to loan me any of that money. Instead, his intention is to create the money he will “loan” to me out of “thin air” by virtue of his authority as a banker. The reason he checks his accounts is to make sure that he has enough money “on reserve” to create the new money according to the “fractional reserve formula” by which he is governed.
He makes an assessment of my “creditworthiness,” and the loan is “approved.” We agree that he will lend me $1,000, and after a year I will pay back the $1,000 principal amount of the loan, plus a 20% interest charge ($200). He writes up a contract which states that I promise to pay back the loan, and I sign it. He then writes a check for $1,000 out of his authority to create money, and hands it to me.
At the end of the year when I pay him the $1,200, he marks the loan contract “paid,” and the loan is assumed by us, and deemed by the legal authorities, to be “satisfied.”
On the surface there are many similarities between these two transactions. In fact, the operative words of the discussion (“loan,” “interest,” “debt,” “payback” and “satisfaction”) are used in what appears to be identical ways. If one filmed each session, except for the incidental settings (one across a kitchen table and the other a banker’s desk), one would be hard pressed to detect any substantive difference between the transactions.
My experience has shown that when people go into a bank and borrow money, they generally assume that they are involved in an upfront common-sense transaction (like with their friend), whereby the banker is loaning them some money that he will no longer have on deposit in his bank for a time, and that he therefore needs the interest charge to compensate for the risk that he will not be paid back, and further, that when he is paid back all the conditions of the loan will have been satisfied without any residual debt to the borrower, banker or society as a whole. This is mistaken all counts.
If we carefully track the steps of the bank loan transaction we can see that:
● It was not essentially a process to “loan” money, but to create it.
● The banker did not charge “interest” on the “loan” because he was “at risk” of losing something substantial that he had entrusted to the “borrower.” Rather, the compounding “interest” charge was a fee that he was privileged to attach to the principal of the “loan” as the agent of a private banking system that had acquired the power to control the terms by which society would gain the use of its own money.
● This “loan” at “interest” is not a “debt” in any true meaning of the word. The money created and issued was done so out of a prerogative of sovereignty that was unlawfully (in my view) appropriated from the social order of which the borrower is a part. How can we the people be “in debt” for borrowing something that rightfully belongs to us, with an attached compounding “interest” charge to boot?
By logical extension then, the “national debt” is not a real debt.
I would hasten to stipulate that I am not in any way advocating the tearing down of the banking system, or even defaulting on the “national debt.” Rather, I would redeem it, the banks, and the nation’s financial life, by returning the way this country creates, issues and regulates money to sound principle. This, I can imagine, may sound strange now, but the idea will be fleshed out as we go.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
When we talk about a “national debt,” does this expression refer to money that actually exists, is loaned out for a time, and is then paid back? Is it “real” in the dictionary or common-sense use of the term “debt”? I would offer a description of two outwardly similar loan transactions, and perhaps through them we can discern the answer to the question.
(1) – A Loan from a Friend:
Suppose I needed to borrow some money, say $1,000. I might approach a personal friend and ask for a loan. He checks his bank account to see if he has the money to lend, and makes an assessment of whether I am likely to pay him back. Let us suppose that he has the money and is willing to lend it, but on one condition; that I agree to pay him more than I borrow (i.e. interest on the loan). After all, is he not foregoing the use of that money for a year, and is there not a risk that I might not pay it back?
We agree that he will lend me $1,000, and I will pay him back the $1,000 principal of the loan, plus a $200 interest charge (for a total of $1,200) at the end of a year. He writes up an I.O.U. on a slip of paper, and I sign it. He then writes a check for $1,000 out of his account, and hands it to me.
At the end of the year when I give him the $1,200, he marks the I.O.U. “paid,” and the loan is deemed by both of us to be satisfied.
(2) – A Loan from a Bank:
Now suppose that instead of borrowing the $1,000 from my friend, I decide to go to a bank. After all, is that not what banks are for? I approach the banker and ask for a loan. Like my friend, he checks what he has in his accounts, but not because he is planning to loan me any of that money. Instead, his intention is to create the money he will “loan” to me out of “thin air” by virtue of his authority as a banker. The reason he checks his accounts is to make sure that he has enough money “on reserve” to create the new money according to the “fractional reserve formula” by which he is governed.
He makes an assessment of my “creditworthiness,” and the loan is “approved.” We agree that he will lend me $1,000, and after a year I will pay back the $1,000 principal amount of the loan, plus a 20% interest charge ($200). He writes up a contract which states that I promise to pay back the loan, and I sign it. He then writes a check for $1,000 out of his authority to create money, and hands it to me.
At the end of the year when I pay him the $1,200, he marks the loan contract “paid,” and the loan is assumed by us, and deemed by the legal authorities, to be “satisfied.”
On the surface there are many similarities between these two transactions. In fact, the operative words of the discussion (“loan,” “interest,” “debt,” “payback” and “satisfaction”) are used in what appears to be identical ways. If one filmed each session, except for the incidental settings (one across a kitchen table and the other a banker’s desk), one would be hard pressed to detect any substantive difference between the transactions.
My experience has shown that when people go into a bank and borrow money, they generally assume that they are involved in an upfront common-sense transaction (like with their friend), whereby the banker is loaning them some money that he will no longer have on deposit in his bank for a time, and that he therefore needs the interest charge to compensate for the risk that he will not be paid back, and further, that when he is paid back all the conditions of the loan will have been satisfied without any residual debt to the borrower, banker or society as a whole. This is mistaken all counts.
If we carefully track the steps of the bank loan transaction we can see that:
● It was not essentially a process to “loan” money, but to create it.
● The banker did not charge “interest” on the “loan” because he was “at risk” of losing something substantial that he had entrusted to the “borrower.” Rather, the compounding “interest” charge was a fee that he was privileged to attach to the principal of the “loan” as the agent of a private banking system that had acquired the power to control the terms by which society would gain the use of its own money.
● This “loan” at “interest” is not a “debt” in any true meaning of the word. The money created and issued was done so out of a prerogative of sovereignty that was unlawfully (in my view) appropriated from the social order of which the borrower is a part. How can we the people be “in debt” for borrowing something that rightfully belongs to us, with an attached compounding “interest” charge to boot?
By logical extension then, the “national debt” is not a real debt.
I would hasten to stipulate that I am not in any way advocating the tearing down of the banking system, or even defaulting on the “national debt.” Rather, I would redeem it, the banks, and the nation’s financial life, by returning the way this country creates, issues and regulates money to sound principle. This, I can imagine, may sound strange now, but the idea will be fleshed out as we go.
Richard Kotlarz
richkotlarz@gmail.com
The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm
Subscribe to:
Posts (Atom)