Chapter 6:   A Real New Deal

 
 
 
 
 I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of 
funding, is but swindling futurity on a large scale.

Thomas Jefferson, in an 1816 letter to John Taylor.
 
         It may be difficult for many Americans today to realize what fractional reserve banking has done to our economy. Many even seem indifferent to the mountain of debt that we have fastened around the necks of future generations of Americans. This situation is perhaps not so strange when we consider that generations of our most highly regarded historians have told us that the industrial revolution was made possible by the miracle of fractional reserve banking while economics teachers never seem to tire of telling their students that the national debt is not a real debt since it is money we owe to ourselves. The latter contention is an outright falsehood because the national debt is a debt owed by all Americans to a few Americans. The funding Jefferson referred to was of course the spending of borrowed money by the government.
        Jefferson offered a plan to eliminate fractional reserve banking but few Americans paid any attention to it. This was probably because eliminating it in the early 18th century would have involved a very great immediate sacrifice by the population although the long term benefits would have been enormous. By the late 19th century eliminating fractional reserve banking would have been nearly impossible. Today we could eliminate fractional reserve banking with no sacrifice at all and a great immediate benefit followed by a great long term benefit. To do this the Congress would have to pass legislation similar to the following proposal:
1. Congress creates an agency to be charged with maintaining stable prices by increasing or decreasing the money supply immediately in response to detectable changes in the aggregate price of a large number of commonly traded commodities including all important raw materials. This agency will be known as the Monetary Control Agency. The aggregate price of these commodities on the day the MCA assumes responsibility for the nation's money supply will represent zero on the index of these prices so that an increase in prices will be designated as a positive value and a decrease as a negative value, with both of them expressed in dollars.
2. Congress names a joint committee consisting of three senators and three congressmen who will be responsible for overseeing the formation and operation of the MCA. The committee members from each house will be chosen by a roll call vote in each house with the three members receiving the greatest number of votes being named to the committee. From the time the committee members are selected this committee will have one hundred and twenty days in which to select an administrator and a deputy administrator for the MCA. From the time the committee submits to the Congress the names selected, the Senate and the House will have thirty days in which to either approve these selections by a majority vote in each house or approve, by a majority vote in each house, nominees submitted from the floor. If Congress does not approve either the committee's selections or its own selections in thirty days the two people selected by the committee will be appointed to their respective offices.
 3. The AMCA (Administrator of the Monetary Control Agency) will be allowed one year from the time of his appointment in which to create the organization he will need to perform his assigned function. The AMCA will have full authority to hire assistants of his choice and organize the agency in the manner he deems advisable. He will be required to advise the DMCA (Deputy Administrator of the Monetary Control Agency) of every aspect of his activity during this year and after the agency begins performing its functions. The DMCA will also receive a copy of all reports, instructions, and communications exchanged between the AMCA and any of his subordinates, or between the AMCA and the Congress as long as the agency continues to exist.
4. One year after the appointment of the AMCA the agency will begin operating. The following year will be designated as year one of the agency's operation. At the beginning of this year the MCA will assume the responsibility for controlling the monetary system of the nation within the parameters of the act that created it. These will include the following stipulations:
A. When the MCA assumes the management of the nation's money the Board of Governors of the Fed will be eliminated. The federal government will buy out the interests of the original stockholders of the Fed, other than member banks, by paying them an amount equal to their original investment. The Fed will continue to function as it did previously but under the control of the AMCA.
B. The DMCA will perform any reasonable duties assigned to him by the AMCA but will also have access to all information relating to the operation of the agency that is available to the AMCA.
C. The AMCA will be responsible for determining that the price index at the end of the first year of the MCA's actual operation is within the range designated by the act that originated the agency.This should probably be on the order of two or three percent positive or negative. If the variation at the end of the first year of operation exceeds the specified limit, the congressional MCA committee will be required by the terms of the act to terminate the employment of the AMCA and appoint the DMCA to replace him. The committee will then be responsible for appointing a new DMCA in accordance with the same terms that governed the selection of the original DMCA except that the committee in this case will have only fifteen days in which to make their selection. In this case time will be of the essence and the committee will always have a selection picked in the event that it becomes necessary to appoint a new DMCA.
D. After the end of the first year the AMCA will be required to keep the price index within the allowable limits at each interval of ninety days. If at the end of any 90 day period the price index is not within these limits the AMCA will be replaced in accordance with the procedures previously  specified. If the AMCA is replaced under the terms of this provision, the new AMCA will be allowed 90 days to halt the rate of inflation, or deflation, and an additional 180 days to return the rate to a point within the original parameter. The prices that represent point zero on the scale will never be changed.
E.  When the MCA assumes the operation of the Fed the FICA contributions of employees will be reduced by 100%. Beginning in that year and continuing until the reserve requirement of banks reaches 100% the federal government will create $240 billion that will be paid to the social security trust funds in 12 equal installments. The reserve requirement for member banks will be increased by an amount that the AMCA calculates to be sufficient to offset the addition to the money supply caused by the creation of this money.  The AMCA will be required to maintain the aggregate level of the price index by varying the reserve requirement, the discount rate, or by sales or purchases of government securities at his discretion.
F. The act will specify that no business other than a bank, a chartered Savings and Loan, or a chartered credit union will be permitted to accept demand deposits from the public. It will further specify that all banks that are not Federal Reserve member banks and all credit unions and S&Ls will be subject to a 90% tax on their total income if they do not maintain a reserve at least equal to that required of member banks.
G.  At the end of the first year of the MCA's operation each member bank will receive a partial payment of the shares it was required to purchase in the Fed. This payment will be the same percentage of their total shares that the initial increase in required reserves represents to the difference between the previously required reserve and a 100% reserve. For example, if the previous requirement was 20% and the new requirement is 40% the increase would be 20%. The difference between the original requirement and 100% is 80%. The increase of 20% therefore represents represents one fourth or 25% of the 80% difference and the member banks would be paid for 25% of their stock. In the first year of these payments and every succeeding year the MCA would also create money to cover these payments.
H. In the second year the payment of employee contributions would again be waived and the corporate income tax would be eliminated. If the elimination of this tax results in a decrease in the government's revenue the shortfall will be made up by creating money to replace it. Money needed for Social Security payments will also be created and the reserve requirements for banks will again be  raised to offset the effect of the created money.
I. In the third year and every year thereafter the process stipulated for the first year will be repeated until the required reserve of banks reaches 100%. At this point 20% of the employee contribution to FICA will be reinstated in the first year and 20% in each succeeding year until the entire requirement is reinstated. During these years all additional money needed for Social Security payments will be paid from the general fund. The total amount of income subject to the FICA tax will remain unchanged in the future but the tax rate will change as stipulated in paragraph 8. The benefits paid by Social Security will be frozen at the level that existed when the MCA took control of the Fed.

J.

  When the banks are required to maintain a 100% reserve the Federal Reserve System will be essentially dismantled. If the banks want to continue the clearinghouse operations of the Fed they will have to do this on their own. The  MCA will, of course, continue open market operations as one of the tools it will use to maintain the price index. If the MCA finds it necessary to buy securities it will create money for this purpose. The Federal Deposit Insurance Corporation would be eliminated but a branch of the MCA would be created to insure that banks comply with the 100% reserve requirement.

5.

The first AMCA selected will serve a ten year term unless his employment is terminated for non-performance. His salary will be $4 million per year for the first two years and will increase by 10% for the third year and an additional 10% for each year thereafter as long as he holds the position. If he is removed for non-performance at the end of his first year he will receive a lifetime pension of $80,000 per year. If he serves his full term he will receive a pension of $300,000 per year. If he resigns voluntarily before completing his full term he will receive a pension of $80,000 plus $15,000 for each full year of service. Successive AMCAs will receive the same pension except that the maximum pension on completion of the full five year term will be $200,000. Regardless of the manner in which his first term is terminated no AMCA will ever be elegible for reappointment.

6.

If the AMCA serves his full term the DMCA will automatically become the AMCA and will be appointed for a five year term. All succeeding AMCAs will also be appointed for a five year term.

7.

 The first DMCA would be appointed for a ten year term and all succeeding DMCAs would be appointed for a five year term. The DMCA's salary will be $1 million per year and if he resigns before becoming the AMCA he will receive an annual pension of $20,000 per year for each year of service.

8.

 The value of the dollar would be maintained, after all banks are operating on a 100% reserve, by sales and purchases of government securities on the open market, or by varying the amount of employee contributions to FICA. The rate of employee contributions to FICA would be set at intervals of 90 days. The rate would be publicized by the MCA 15 days in advance of the effective date and would apply to all wages paid after that date, regardless of when the wages were earned. Sales and purchases of securities would be used as necessary to influence the price index within the 90 days between changes in the rate of employee contributions to FICA.

9.

 Beginning no later than 180 days after the passage of this legislation all companies offering credit cards to the public will be required to make their services available to any merchant who desires to use them at no charge, provided that the merchant conforms to the terms specified by the card company. The card company will be allowed to refuse its service to a retailer who habitually disregards the terms of his contract with the company but the company will not be allowed to assess a financial penalty against any retailer or make any charge for its services to retailers. The card company will be permitted to collect from consumers a charge for its services in any amount and in any form that the company may prescribe provided that all charges are fully revealed to every individual who applies for a card and changes are fully explained to all card holders at least 30 days before such charges are assessed.
        This has been a fairly lengthy explanation but I felt that a rather comprehensive explanation was necessary so that the whole plan could not be lightly dismissed on the basis of it being too vague.
        The method by which the MCA could stabilize the value of the dollar did not originate with me. It was suggested by F.A. Hayek as a means by which a bank could stabilize the value of its money in connection with Hayek's proposal to privatize money. Hayek's plan would have given a few banks, possibly only two or three in the whole nation, control of our money supply. The reason for his proposal was not to benefit these banks but to benefit the nation by eliminating inflation.
        Under my proposal the government would be responsible for creating any new money needed by the economy but it would be strictly limited as to the amount of money it could create. It is true that Congress could, in the future, decide to adopt an inflationary policy but once the people of the U.S. had a chance to experience the benefits of a stable currency Congress would probably find it difficult to do so. With our present monetary system the only way the Fed can maintain a zero rate of inflation and deflation is by indirectly influencing the operations of thousands of banks across the nation, even if the Fed sincerely wanted to do this. The difficulty of doing this provides the Fed with a good excuse for failure whenever the Fed actually wants slow but continuous inflation. Under my proposal it would be easy to maintain a zero rate of inflation and deflation and the banking industry would no longer control the value of our money.
        If this proposal were implemented the money created to replace the money that banks could no longer create, would go primarily to the lower and middle income classes. The purchasing power of the population would thus be substantially increased and the nation would experience great economic expansion with no inflation, in other words unprecedented prosperity. When the banks are no longer capable of creating money, continuing economic expansion would eventually eliminate the great surplus of capital that presently exists and the value of saved money would not be diminished by a surplus of factitious money.
        On the level of the individual citizen, most of the population, and especially those in the middle and lower income brackets, would experience a substantial increase in their income. They would pay more for checking accounts and they would probably pay somewhat lower nominal interest rates on borrowed money because inflation would be eliminated. At the present time interest rates represent the total of two components. One of these is the actual interest, the rent being charged for the use of money. The other is an amount by which the actual interest rate is increased to offset the effect of inflation. The latter component would be eliminated with the elimination of inflation. The actual rate of interest would probably increase because all of the money being lent would be real money, as opposed to factitious money created by banks. It is possible that this increase in the actual rate of interest would be great enough to more than offset the elimination of the inflation factor in which case interest rates might rise. The extra income enjoyed by most Americans would decrease the demand for loans, however, and this would tend to lower interest rates.
        The last provision in my proposal is one that should be adopted even if the whole of the proposal is not adopted. At the present time retailers pay the credit card company a percentage of all credit card sales. Most retailers sell the same item at the same price regardless of whether payment is in cash, check, or credit card. To the retailer the percentage paid to the card company is a cost of doing business and is added to the price he charges for his goods or services. Thus cash customers pay a part of the charge incurred by those customers who use credit cards.
        This is obviously unfair to those who pay cash but if my proposal is adopted it would be a much more serious matter. If my proposal were adopted checking account charges would rise. This would make the use of credit cards more attractive and the increase in the use of credit cards would force retailers to raise prices. The MCA would reduce the money supply in response to this price rise and this would dampen the economy. In this scenario the credit card companies would collect from all Americans a charge for providing money used by some of them. Of course, they are doing this now but if my proposal were implemented it would be done on a much greater scale. If credit card charges were paid by the people who use them there would be no effect on prices and no hidden "tax" on the whole of the population.
        The increase in the actual interest rate, combined with the elimination of inflation and its effect on increases in stock market prices, would make consumer lending more attractive to those who control pension plans and other large pools of capital. Many of them would probably, in one way or another, get into the business of making home and auto loans. The money they would invest in this way would thus contribute to the prosperity of the nation instead of to the prosperity of the sharpest Wall Street speculators.
        Briefly stated this proposal would yield incalculable benefits to the vast majority of Americans. The only people who would lose would be those who have been profiting from the manipulation of our monetary system and our government. Logically one would expect that it would be enthusiastically supported by politicians who claim to have the best interests of the people at heart and I have never seen a politician who did not make this claim. In actuality I would be very surprised if even one member of our present Congress would support this proposal. Does this leave any doubt as to whose interests our legislators actually represent?
Continue with Chapter 7 The Educators