Powell Gammill
Letters to the Editor • Federal Reserve
If the government can ‘print’ interest-bearing bonds it can ‘print’ its own legal tender
The point is, if the government can ‘print’ interest-bearing bonds which trade like legal tender, it can ‘print’ its own legal tender and eliminate the accumulation of debt to a privately owned banking cartel! Fiat money holds negative connotations for lots of people. However, like a tally system of notched sticks, or shells, or a system of community currency traded as work hours, or like postage stamps or coupons, fiat money (money not backed by silver or gold) is what we use right now, for the simple reason that we believe it is a trade tool of worth. As we’ve all heard, during war times, cigarettes, chocolate and other things were traded for other goods. The faith of the people trading is what gives money its usefulness or worth. Fiat money, printed as easily as bonds by the government, would continue to be used by the people as ‘receipts’ for trade. The difference is WHO is creating the fiat money that makes the fiat currency a tool for private fraud and theft or a tool for a nation’s prosperity. A debt-backed fiat currency is what the Federal Reserve system has produced for 96 years. The federal debt has grown to some $12 Trillion dollars! The Fed has not provided financial stability in those 96 years, which is why its proponents claimed it was needed in the first place. Instead, the privately owned central banking system has siphoned the wealth of the nation to the hands of a very few, very rich people. What, oh what is the interest on $12 Trillion dollars? The Fed and the government know that The People cannot ever pay this back. Fiat currency produced by the government of The People, For The People and By The People would have no debt attached, and would facilitate commerce between The People. Without the “Federal” Reserve interest to pay, there would be no further need for the tax on income. Technically, the government could mint one coin with the entire federal debt/interest stamped on it, to pay off the debt to the federal reserve. If you didn’t already know, a report issued by the Grace Commission during the Reagan Administration concluded that most federal income tax revenues go just to pay the interest on the government’s burgeoning debt. When the federal income tax was instituted in 1913 (same year as the Federal Reserve Act), all income tax collections were forwarded directly to the Federal Reserve. In 2005, the government spent $352 billion just to service the government’s debt. That is one-third of the total individual income tax revenues that year, which totaled $927 billion. A cover letter addressed to President Reagan stated that one-third of all income taxes were consumed by waste and inefficiency in the federal government, and yet another third of any taxes actually paid went to make up for the taxes not paid by tax evaders and by the burgeoning underground economy, a phenomenon that had blossomed in direct proportion to tax increases. The report concluded: “With two-thirds of everyone’s personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the federal debt and by federal government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their government.” The U.S. Treasury itself in January 2004, demonstrated the simplicity of the procedure to buy back its own bonds when it "called" (or redeemed) a 30-year bond issue before the bond was due. The Treasury announced on January 15, 2004: TREASURY CALLS 9-1/8 PERCENT BONDS OF 2004-09 The Treasury today announced the call for redemption at par on May 15, 2004, of the 9-1/8% Treasury Bonds of 2004-09, originally issued May 15, 1979, due May 15, 2009 (CUSIP No. 9112810CG1). There are $4,606 million of these bonds outstanding, of which $3,109 million are held by private investors. Securities not redeemed on May 15, 2004 will stop earning interest. These bonds are being called to reduce the cost of debt financing. The 9-1/8% interest rate is significantly above the current cost of securing financing for the five years remaining to their maturity. In current market conditions, Treasury estimates that interest savings from the call and refinancing will be about $544 million. Payment will be made automatically by the Treasury for bonds in book-entry form, whether held on the books of the Federal Reserve Banks or in Treasury Direct accounts. The provision for payment "in book entry form" meant that no dollar bills, checks or other paper currencies would be exchanged. Numbers would just be entered into the Treasury\'s direct online money market fund ("Treasury Direct"). The securities would merely change character - from interest-bearing to non-interest-bearing, from a debt owed to a debt paid. Bondholders failing to redeem their securities by May 15, 2004 could still collect the face amount of the bonds in cash. They would just not receive interest on the bonds. The Treasury\'s announcement generated some controversy, since government bonds are usually considered good until maturity; but early redemption was actually allowed in the fine print on the bonds. Provisions for early redemption are routinely written into corporate and municipal bonds, so that when interest rates drop, the issuer can refinance the debt at a lower rate. How did the Treasury plan to refinance this $4 billion bond issue at a lower rate? Any bonds not bought by the public would no doubt be bought by the banks. Recall the testimony of Federal Reserve Board Chairman Marriner Eccles: When the banks buy a billion dollars of Government bonds as they are offered . . . they actually create, by a bookkeeping entry, a billion dollars. If the Treasury can cancel its promise to pay interest on a bond issue simply by announcing its intention to do so, and if it can refinance the principal with bookkeeping entries, it can pay off the entire federal debt in that way. It just has to announce that it is calling its bonds and other securities, and that they will be paid "in book-entry form." No cash needs to change hands. The funds can remain in the accounts where the bonds were held, to be reinvested somewhere else. The Treasury did it that time using money from the Fed; it could have done it with its own legal tender. Indeed, at this point the only way to fend off national bankruptcy may be for the government to simply issue fiat money, buy back its own bonds, and void them out. That is the conclusion of G. Edward Griffin in The Creature from Jekyll Island, as well as of Stephen Zarlenga in model legislation called the American Monetary Act. Zarlenga notes that the federal debt needn\'t be paid off all at once. The government\'s debts extend several decades into the future and could be paid gradually as the securities came due. PAYING OFF BONDS WITH THE FULL FAITH AND CREDIT NOTES OF THE UNITED STATES WITHOUT CAUSING MASSIVE INFLATION The idea that the federal debt could be liquidated by simply printing up money and buying back the government\'s bonds with it is dismissed out of hand by economists and politicians, on the ground that it would produce Weimar-style runaway inflation. But would it? Inflation results when the money supply increases faster than goods and services, and replacing government securities with cash would not change the size of the money supply. If the government were to buy back its own securities with cash, these instruments representing financial value would merely be converted from interest-bearing into non-interest-bearing financial assets. The funds would move from M2 and M3 into Ml (cash and checks), but the total money supply would remain the same. That would be true if the government were to buy back its securities with cash, but that is very different from what is happening today. When the Federal Reserve uses newly-issued Federal Reserve Notes to buy back federal bonds, it does not void out the bonds. Rather, they become the "reserves" for issuing many times their value in new loans; and the new cash created to buy these securities is added to the money supply as well. That highly inflationary result could be avoided if the government were to buy back its own bonds and take them out of circulation. The Fed way of buying securities greatly increases the money supply and so causes de-valuation of the dollar, the hidden taxation funneling inconceivable wealth to those who create and control the money supply. From 1913 until now inflation of the dollar has been 2950%. A 1913 dollar would now be worth $.034. A wage earner in 1950 could buy a full breakfast, eggs, sausage, hashbrowns, shortstack, juice, and coffee for $.39. This morning I paid $9.60 for the same, an inflation of 2460%. Solving the Social Security Crisis In March 2005, the federal debt clocked in at $7.713 trillion. Of that sum, $3.169 trillion, or 41 percent, was in "intragovernmental holdings" - government trust funds, revolving funds, and special funds. Chief among them was the Social Security trust fund, which held $1.705 trillion of the government\'s debt. The 59 percent owned by the public was also held largely by institutional investors - U.S. and foreign banks, investment funds, and so forth. Dire warnings ensued that Social Security was going bankrupt, since its holdings were invested in federal securities that the government could not afford to redeem. Defenders of the system countered that Social Security could not actually go bankrupt, because it is a pay-as-you-go system. Today\'s retirees are paid with withdrawals from the paychecks of today\'s working people. It is only the fund\'s excess holdings that are at risk; and it is the government, not Social Security, that is teetering on bankruptcy, because it is the government that lacks the money to pay off its bonds. The issue here, however, is what would happen if the Social Security crisis were resolved by simply cashing out its federal bond holdings with newly-issued U.S. Notes? Would dangerous inflation result? The likely answer is that it would not, because the Social Security fund would have no more money than it had before. The government would just be returning to the fund what the taxpayers thought was in it all along. The bonds would be turned into cash, which would stay in the fund where it belonged, to be used for future baby-boomer pay-outs as intended. Cashing Out the Federal Securities of the Federal Reserve Another institution holding a major chunk of the federal debt is the Federal Reserve itself. The Fed owns about ten percent of the government\'s outstanding securities. If the government were to buy back these securities with cash, that money too would no doubt stay where it is, where it would continue to serve as the reserves against which loans were made. The cash would just replace the bonds, which would be liquidated and taken out of circulation. Again, consumer prices would not go up, because there would be no more money in circulation than there was before. That is one way to deal with the Federal Reserve\'s Treasury securities, but an even neater solution has been proposed: the government could just void out the bonds. Recall that the Federal Reserve acquired its government securities without consideration, and that a contract without consideration is void. The legal definition of consideration is “a value that can be objectively determined.” What would the Federal Reserve use in that case for reserves? Article 30 of the Federal Reserve Act of 1913 gave Congress the right to rescind or alter the Act at any time. If the Act were modified to make the Federal Reserve a truly federal agency, it would not need to keep reserves. It could issue "the full faith and credit of the United States" directly, without having to back its dollars with government bonds. Cashing Out the Holdings of Foreign Central Banks Other major institutional holders of U.S. government debt are foreign central banks. At the end of 2004, foreign holdings of U.S. Treasury debt came to about $1.9 trillion, roughly comparable to the $1.7 trillion held in the Social Security trust fund. Of that sum, foreign central banks owned 64 percent, or $1.2 trillion. What would cashing out those securities do to the money supply? Again, probably not much. Foreign central banks have no use for consumer goods, and they do not invest in real estate. They keep U.S. dollars in reserve to support their own currencies in global markets and to have the dollars available to buy oil as required under a 1974 agreement with OPEC. They keep dollars in reserve either as cash or as U.S. securities. Holding U.S. securities is considered to be the equivalent of holding dollars that pay interest. If these securities were turned into cash, the banks would probably just keep the cash in reserve in place of the bonds - and count themselves lucky to have their dollars back, on what is turning out to be a rather risky investment. Fears have been voiced that the U.S. government may soon be unable to pay even the interest on the federal debt. When that happens, the U.S. can either declare bankruptcy and walk away, or it can buy back the bonds with newly-issued fiat money. Given the choice, foreign investors would probably be happy to accept the fiat money, which they could spend on real goods and services in the economy. And if they complained, the U.S. government could argue that turnabout is fair play. John Succo is a hedge fund manager who writes on the Internet as "Mr. Practical." He estimates that as much as 90 percent of foreign money used to buy U.S. securities comes from foreign central banks, which print their own local currencies, buy U.S. dollars with them, and then use the dollars to buy U.S. securities. The U.S. government would just be giving them their fiat currency back. Market commentators worry that as foreign central banks cash in their U.S. securities, U.S. dollars will come flooding back into U.S. markets, hyperinflating the money supply and driving up consumer prices. But we\'ve seen that this predicted result has not materialized in China, although foreign money has been flooding its economy for thousands of years. American factories and industries are now laying off workers because they lack customers. A return of U.S. dollars to U.S. shores could prime the pump, giving lagging American industries the boost they need to again become competitive with the rest of the world. We are continually being urged to "shop" for the good of the economy. What would be so bad about having our dollars returned to us by some foreigners who wanted to do a little shopping? The American economy may particularly need a boost after the housing bubble collapses. In the boom years, home refinancings have been a major source of consumer spending dollars. If the money supply shrinks by $2 trillion in the next housing correction, as some analysts have predicted, a supply of spending dollars from abroad could be just the quick fix the economy needs to ward off a deflationary crisis. There is the concern that U.S. assets could wind up in the hands of foreign owners, but there is not much we can do about that short of imposing high tariffs or making foreign ownership illegal. We sold them the bonds and we owe them the cash. But that is a completely different issue from the effects of cashing out foreign-held bonds with fiat dollars, which would give foreigners no more claim to our assets than they have with the bonds. In the long run, they would have less claim to U.S. assets, since their dollar investments would no longer be accruing additional dollars in interest. Foreign central banks are reducing their reserves of U.S. securities whether we like it or not. The tide is rolling out, and U.S. bonds will be flooding back to U.S. shores. The question for the U.S. government is simply who will take up the slack when foreign creditors quit rolling over U.S. debt. Today, when no one else wants the bonds sold at auction, the Fed and its affiliated banks step in and buy them with dollars created for the occasion, creating two sets of securities (the bonds and the cash) where before there was only one. This inflationary duplication could be avoided if the Treasury were to buy back its bonds itself and just void them out. Congress could then avoid the debt problem in the future by simply refusing to go into debt. Rather than issuing bonds to meet its costs, it could issue dollars directly. Prelude to a Dangerous Stock Market Bubble? Even if cashing out the government\'s bonds did not inflate consumer prices, would it not trigger dangerous inflation in the stock market, the bond market and the real estate market, the likely targets of the freed-up money? Let\'s see .... In December 2005, the market value of all publicly traded companies in the United States was reported at $15.8 trillion. Assume that fully half the $8 trillion then invested in government securing got reinvested in the stock market. If the government\'s securities paid off gradually as they came due, new money would enter markets only gradually, moderating any inflationary effects; and eventually, the level of stock market investment would have increased by 25 percent. Too much? Not really. The S&P 500 (a stock index tracking 500 companies in leading industries) actually tripled from 1995 to 2000, and no great disaster resulted. Much of that rise was due to the technology bubble which later broke; but by 2006, the S&P had gained back most of its losses. High stock prices are actually good for investors, who make money across the board. Stocks are not household necessities that shoot out of reach for ordinary consumers when prices go up. The stock market is the casino of people with money to invest. Anyone with any amount of money can jump in at any time, at any level. If the market continues to go up, investors will make money on resale. Although this may look like a Ponzi scheme, it really isn\'t so long as the stocks are bought with cash rather than debt. Like with the inflated values of prized works of art, stock prices would go up due to increased demand; and as long as the demand remained strong, the stocks would maintain their value. The stock market crash of 1929 resulted because investors were buying stock largely on credit – money that didn’t actually exist except as debt. In the scenario considered here, the market would not be pumped up with borrowed money but would be infused with cold hard cash, the permanent money received by bondholders for their government bonds. The market would go up and stay up. At some point, investors would realize that their shares were overpriced relative to the company\'s assets and would find something else to invest in; but that correction would be a normal one, not the sudden collapse of a bubble built on credit with no "real" money in it. As for the real estate market, cashing out the federal debt would probably have little effect on it. Foreign central banks, Social Security and other trust funds do not buy real estate; and individual investors would not be likely to make that leap either, since cashing out their bonds would give them no more money than they had before. Their ability to buy a house would therefore not have changed. People generally hold short-term T-bills as a convenient way to "bank" money at a modest interest while keeping it liquid. They hold longer-term Treasury .notes and bonds, on the other hand, for a safe and reliable income stream that is hassle-free. Neither purpose would be served by jumping into real estate, which is a very illiquid investment that does not return profits until the property is sold, except through the laborious process of trying to keep it rented. People wanting to keep their funds liquid would probably just move the cash into bank savings or checking accounts; while people wanting a hassle-free income stream would move it into corporate bonds, certificates of deposit and the like. That just leaves the corporate bond market, which would hardly be hurt by an influx of new money either. Fresh young companies would have easier access to startup capital; promising inventions could be developed; new products would burst onto the market; jobs would be created; markets would be stimulated. New capital could only be good for productivity. A final objection that has been raised to paying off the federal debt with newly-issued fiat money is that foreign lenders would be discouraged from purchasing U.S. government bonds in the future. …… "So what?" Once the government reclaims the power to create money from the banks, it will no longer need to sell its bonds to investors. It will not even need to levy income taxes. It will be able to exercise its sovereign right to issue its own money, debt-free. That is what British monarchs did until the end of the seventeenth century, what the American colonists did in the eighteenth century, and what Abraham Lincoln did in the nineteenth century. It has also been proposed in the twenty-first century, not just by "cranks and crackpots" in the money reform camp but by none other than Federal Reserve Chairman Ben Bernanke himself. At least, that is what he appears to have proposed. The suggestion was made several years before he became Chairman of the Federal Reserve, in a speech that earned him the nickname "Helicopter Ben". . . . …..The solution of Greenspan\'s successor Ben Bernanke is not entirely clear, since like his predecessors he has been playing his cards close to the chest. Being tight-lipped actually appears to be part of the job description. When he tried to be transparent, he was roundly criticized for spooking the market. But in a speech he delivered when he had to be less cautious about his utterances, Dr. Bernanke advocated what appeared to be a modern-day version of Lincoln\'s Greenback solution: instead of filling the balloon with more debt, it could be filled with money issued debt-free by the government. The speech was made in Washington in 2002 and was titled "Deflation: Making Sure \'It\' Doesn\'t Happen Here." Dr. Bernanke stated that the Fed would not be "out of ammunition" to" counteract deflation just because the federal funds rate had fallen to 0 percent. Lowering interest rates was not the only way to get new money into the economy. He said, "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." He added, "One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies." If the government was inexperienced with the policies, they were not the usual "open market operations," in which the government prints bonds and the Fed prints dollars, leaving the government in debt for money created by the Fed. Dr. Bernanke said that the government could print money, and that it could do this at essentially no cost. The implication was that the government could create money without paying interest, and without having to pay it back to the Fed or the banks. Later in the speech he said, "A money-financed tax cut is essentially equivalent to Milton Friedman\'s famous \'helicopter drop\' of money." Dropping money from helicopters was Professor Friedman\'s hypothetical cure for deflation. The "money-financed tax cut" recommended by Dr. Bernanke was evidently one in which taxes would be replaced with money that was simply printed up by the government and spent into the economy. He added, "[I]n lieu of tax cuts, the government could increase spending on current goods and services or even acquire existing real or financial assets." The government could reflate the economy by printing money and buying hard assets with it - assets such as real estate and corporate stock! That is what the earlier Populists had proposed: the government could buy whole industries and operate them at a profit. The Populists proposed nationalizing essential industries that had been monopolized by giant private cartels, including the railroads, steel — and the banks. The profits generated by these industries would return to the government, to be used in place of taxes. - - The Japanese Experiment Dr. Bernanke went further than merely suggesting the "helicopter-money" solution. He evidently carried it out, and on a massive scale. More accurately, the Japanese carried it out at his behest. During a visit to Japan in May 2003, he said in a speech to the Japanese: My thesis here is that cooperation between the monetary and fiscal authorities in Japan [the central bank and the government] could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ [Bank of Japan] purchases of government debt - so that the tax cut is in effect financed by money creation. Dr. Bernanke was advising the Japanese government that it could finance a tax cut by creating money! (Note that this is easier to do in Japan than in the United States, since the Japanese government actually owns its central bank, the Bank of Japan.) The same month, the Japanese embarked on what British economist Richard Duncan called "the most aggressive experiment in monetary policy ever conducted."5 In a May 2005 article titled "How Japan Financed Global Reflation," Duncan wrote: In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy - remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created $35 trillion . . . approximately 1% of the world\'s annual economic output. $35 trillion . . . would amount to $50 per person if distributed equally among the entire population of the planet. In short, it was money creation on a scale never before attempted during peacetime. Why did this occur? There is no shortage of yen in Japan. Japanese banks have far more deposits than there is demand for loans .... So, what motivated the Bank of Japan to print so much more money when the country is already flooded with excess liquidity? Duncan explained that the shortage of money was not actually in Japan. It was in the United States, where the threat of deflation had appeared for the first time since the Great Depression. The technology bubble of the late 1990s had popped in 2000, leading to a serious global economic slowdown in 2001. Before that, the Fed had been bent on curbing inflation; but now it had suddenly switched gears and was focusing on reflation - the intentional reversal of deflation through government intervention. Duncan wrote: Deflation is a central bank\'s worst nightmare. When prices begin to fall, interest rates follow them down. Once interest rates fall to zero, as is the case in Japan at present, central banks become powerless to provide any further stimulus to the economy through conventional means and monetary policy becomes powerless. The extent of the US Federal Reserve\'s concern over the threat of deflation is demonstrated in Fed staff research papers and the speeches delivered by Fed governors at that time. For example, in June 2002, the Board of Governors of the Federal Reserve System published a Discussion Paper entitled, "Preventing Deflation: Lessons from Japan\'s Experience in 1990s." The abstract of that paper concluded ". . . we draw general lessons from Japan\'s experience that when inflation interest rates have fallen close to zero, and the risk of deflation is high, stimulus - both monetary and fiscal - should go beyond the levels conventionally implied by baseline forecasts of future inflation and economic activity." Just how far beyond the conventional the Federal Reserve was prepared to go was demonstrated in the Japanese experiment, in which the Bank of Japan created $35 trillion yen over the course of the following year. The yen were then traded with the government\'s Ministry of Finance (MOF) for Japanese government securities, which paid virtually no interest. The MOF used the yen to buy approximately $320 billion in U.S. dollars from private parties, which were then used to buy U.S. government bonds. Duncan wrote, "It is not certain how much of the $320 billion the MOF did invest into US Treasury bonds, but judging by their past behavior it is fair to assume that it was the vast majority of that amount." Assuming all the dollars were so used, the funds were sufficient to float 77 percent of the U.S. budget deficit in the fiscal year ending September 30, 2004. The effect of this unprecedented experiment, said Duncan, was to finance a broad-based tax cut in the United States with newly-created money. The tax cuts were made in America, but the money was made in Japan. Three large tax cuts took the US. budget from a surplus of $127 billion in 2001 to a deficit of $413 billion in 2004. The difference was a deficit of $540 billion, and it was largely "monetized" by the Japanese. Duncan asked rhetorically, "Was the BOJ/MOF conducting Governor Bernanke\'s Unorthodox Monetary Policy on behalf of the Fed? . .. Was the BOJ simply serving as a branch of the Fed, as the Federal Reserve Bank of Tokyo, if you will?" If so, Duncan said, "it worked beautifully” The Bush tax cuts and the BOJ money creation that helped finance them at very low interest rates were the two most important elements driving the strong global economic expansion during 2003 and 2004. Combined, they produced a very global reflation.... US tax cuts and low interest rates fuelled consumption in the United States. In turn, growing US consumption shifted Asia\'s export-oriented economies into overdrive. China played a very important part in that process. . . . China used its large trade surpluses with the US to pay for its large trade deficits with most of its Asian neighbors, including Japan. The recycling of China\'s US Dollar export earnings explains the incredibly rapid "reflation" that began across Asia in 2003 and that was still underway at the end of 2004. Even Japan\'s moribund economy began to reflate. In 2004, the global economy grew at the fastest rate in 30 years. Money creation by the Bank of Japan on an unprecedented scale was perhaps the most important factor responsible for that growth. In fact, 35 trillion could have made the difference between global reflation and global deflation. How odd that it went unnoticed. many excerpts from "Web Of Debt" by Ellen Hodgson Brown
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