Debt-Based Monetary Systems: Why Government Debt Can Never Be Paid Off

By Philip Szlyk

11/11/2011

It is simple arithmetic: U.S. Government can NEVER pay off all its debts.

1.) In 1913 the U.S. adopted the Federal Reserve System to issue all of its money. Despite the deceptive name, the Federal Reserve (or FED) is a private corporation composed of 12 large private banks and their associates, whose names the U.S. public is not allowed to know. The FED, by buying government bonds, issues all U.S. currency (paper and digitized) to the U.S. government as a LOAN, to be repaid with interest.

2.) Where does the FED get its money to loan to the government through these bond purchases? Do the FED banks sell off gold, silver, real estate or some other form of assets to obtain this money? Not at all. The answer, shocking to most people, is that it simply prints or digitizes this money out of thin air. The FED banks “purchase” these government bonds with new money it creates from nothing!

3.) The debt owed to the FED private banks can NEVER be paid off. It is simple arithmetic. When the FED lends "money" to the government, that is the "principal" or P. However, the government must pay back the FED both the principal (P) and interest (I); or P + I. Since the total of all U.S. money in existence is by definition P; and P + I will always be greater than P; the debt owed to the FED will always exceed the amount of U.S. money in existence. As FED Chairman Bernard Bernanke recently testified during a U.S. Senate hearing, "If all the debt to the FED disappeared, there would be no U.S. money." Put another way, since the total amount of U.S. money in existence equals the amount of U.S. government debt principal (P) owed to the FED private banks, if this debt principal (P) “magically” was paid off in full, there would be no U.S. money in existence to pay off the interest still owed to the FED. None! Think about it: no U.S. money would exist, yet the government would still owe the FED private banks the interest (I) on the money previously borrowed! Therefore, while it is theoretically possible to pay off the loan principal (P) by paying to the FED all U.S. money in existence, it is mathematically impossible to pay off the total debt (P +I ) owed to the FED private banks. The money literally does not exist.

4.) If the government (and its citizen taxpayers) mathematically can never pay off the total debt (principal + interest) owed to the FED private banks, what can the government do? Government can and does tax people to pay off some of the interest and, very rarely, even some of the principal. But, remember, even if the government somehow seized ALL U.S. money in existence, it could not pay the principal and interest (P + I) owed to the FED private banks. Government’s only option is to borrow even more money from the FED, which the FED again simply creates out of thin air. Now, instead of the government owing P + I to the FED, it now owes, for example, 2P + 2I to the FED. Since the amount now owed (2P + 2I) mathematically will ALWAYS exceed the total amount the government borrowed (2P), the cycle must repeat itself endlessly or the government will not be able to make its loan repayments to the FED private banks.

5.) Who wins? The few large, private banks comprising the Federal Reserve System – and their owners and stockholders, of course. They lend money to the government and get paid interest – and do it simply by creating this new paper money out of thin air! The cost to the FED banks is nothing – they transfer nothing of value. As Congressman Wright Patman stated in the Congressional Record, Sept 30, 1941, "The Federal Reserve bank buys government bonds without one penny..." (What a great business to be in ! ! ! ) And since the amount of new money MUST continue to increase to prevent “bankruptcy” by the government, so will the FED’s profits forever increase.

6.) Who loses? The people. When the FED creates more money out of thin air, the purchasing power (“real value”) of existing money decreases – what some call “inflation”. The goods that one could purchase in 1913 for 3 cents now cost 1 dollar. Why? When the production of new goods cannot keep pace with the increase in the money supply, more dollars compete for the same goods and the purchasing power of each dollar must decrease – that is, the cost in dollars of goods increases.  The loaf of bread has not increased in value: the money has lost some of its purchasing power, so you need more money to pay for the bread (aka, inflation). The more new money pumped into the economy, the greater the decrease in the dollar's REAL purchasing power (that is, the greater the inflation). If too much new money is created, then run-away inflation (called "hyperinflation" results, as occurred in 1930's Germany under the Weimar Republic)

7.) Now, let us think the unthinkable. Suppose that the U.S. government (or any other government, such as Greece) decided NOT to make any further debt repayments to the FED, the European Central Bank (ECF) or its equivalent central bank. The big banks and their spokesmen would claim the government is “defaulting” on its debt and will become “bankrupt”. The big question now becomes: “So what?” The big banks would scream that the “government owes them the money”! But where did the FED private banks get this money in the first place? The FED paid absolutely nothing for the money they lent out – they created this money out of nothing. In fact, while there would be some financial turbulence for a brief time, only the FED private banks would lose money, since the U.S. government could always simply print its own money without using the FED – just as it did until 1913. The same result would occur if Greece defaulted on its debt – only the big central banks (which created the money out of nothing) would lose. Greece could then create its own money (and pay no interest!), with the value of that new money determined by the production of Greece.

8.) Why would any SANE government, having the constitutional power to create and issue its own money, decide instead to borrow money with interest from a small group of private banks, who simply create this new money out of thin air, backed by nothing?  [“The few who understand the system, will either be so interested from its profits or so dependent on its favors, that there will be no opposition from that class.”  -Rothschild Brothers of London, 1863]

Before 1913, with a few brief interruptions, the U.S. Treasury (in accordance with Article 1, Section 8 of the U.S. Constitution) issued all U.S. money. The U.S. Treasury possessed all the powers of the FED, except that the government paid no interest on the money it created. Thomas Jefferson, James Madison, Benjamin Franklin, Patrick Henry and many others warned of the dangers of a private central bank. During the Civil War Abraham Lincoln resisted pressure to create a private central bank, stating, “the creation of the original issue of money should be maintained as the exclusive monopoly of national Government.” Lincoln continued, “The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at my rear is my greatest foe.”

Even President Woodrow Wilson, who signed the Federal Reserve Act of 1913, later wrote in regret, "A great industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world--no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men." Finally, there was President John F. Kennedy who on June 4, 1963 signed Executive Order No. 11110 that returned to the U.S. government the power to issue currency, without going through the Federal Reserve. President Kennedy's order gave the Treasury the power "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.", which eventually would have put the Federal Reserve Bank out of business. After Kennedy’s death this executive order was ignored and all silver certificates were withdrawn from circulation.