Download Multiphase Monetary Reform Transition Planning

Multiphase Monetary Reform Transition Planning:
Transforming the Federal Reserve System into the United States Central Bank.
Ronald E Davis, PhD MonetaryReform-TaskForce.net
There are a number of fundamental flaws in the structure of the Federal Reserve System (FRS) as it is
currently constituted. The one we wish to focus on at the outset is that the FRS represents the
privatization of money creation and monetary policy responsibilities that rightly belong in the hands of a
transparent public interest organization accountable directly to Congress. Consider these analogies.
What would people say if defense policy were handed over to a consortium of private industry defense
contractors, who met in private to determine American defense policy, with a summary of the
determinations provided to the Defense Department officials after the fact, with none present during
the deliberations? Obviously there would be a huge outcry about the obvious conflict of interest in such
an arrangement. To delegate the national defense decision making power to a body dominated by
industry executives who are motivated by private profits rather than public interest would be
unthinkable, a total outrage. The same would be true for formulation of Energy policy, Education policy,
and so forth. Would it make sense to delegate energy policy to the energy producing corporations?
Would it make sense to delegate Education policy to the book publishing industry? Of course not. But
why is it that the American people cannot see that it makes no sense to delegate monetary policy to an
organization that is owned and controlled by the corporations in our economy who profit from money
creation, that is the banks, both commercial and Federal? The Federal Reserve System is a blatant
conflict of interest that is allowed, while such conflict of interest is not allowed in any other area. This
double think must come to an end. It is a form of collective mental illness that will bring the nation to
ruin unless people can be brought to their senses so that they can see the contradiction in time.
Thomas Jefferson (or someone speaking on his behalf) foretold this situation with remarkable clarity of
vision:
“I believe that banking institutions are more dangerous to our liberties than standing armies.
Already they have raised a money aristocracy that has set the Government at defiance. The issuing
power should be taken from the banks and restored to the people to whom it properly belongs.”
“If the American people ever allow private banks to control the issue of currency, first by
inflation, then by deflation, the banks and the corporations that will grow up around them will deprive
the people of all property until their children will wake up homeless on the continent their fathers
conquered.”
Whoever said these words, even if it was not actually Thomas Jefferson, these statements were
remarkably prophetic. The Bernie Sanders political revolution is based on the belief that the money
aristocracy and the corporations that have grown up around them HAVE ALREADY TAKEN OVER THE US
GOVERNMENT to a very large degree. Reversing this trend, by diminishing bank and corporate control
over the electoral process and of the Congress itself, is by far the main point of his candidacy. Hence,
he may be the best qualified of the 2016 presidential candidate field to carry out the reclamation of
power mandated in the words attributed to Thomas Jefferson. One hopes that Hillary Clinton will be
second best.
A key point to be clear about here is that private decision making criteria and public decision making
criteria are totally different. Therefore, they may lead to diametrically opposite or conflicting results.
Private decision making criteria puts emphasis on “the bottom line” and the wealth of the corporate
stockholders, whereas public decision making criteria is multidimensional and largely nonmonetary,
includes impacts on all sectors of the population or economy, and is largely independent of industry
profits. For public interest decision making, the “general welfare” is paramount, not profits to private
corporations. And since the “general welfare” is a multidimensional concept, there will be multiple
criteria that have to be brought to bear, many of which are not measured in monetary terms. There is a
place for private decision making, and there is a place for public decision making, but when private
entities take over public decision making functions, then it becomes fascism. The establishment of the
Federal Reserve System, and at the same time the IRS, was the beginning of fascism in America, a trend
that, with the Citizens United Supreme Court decision, is continuing and accelerating at the present
time. For an awesome presentation of this trend, Aaron Russo’s “From Freedom to Fascism” is a must
see. Russo presents the interesting and credible thesis that the main purpose of the IRS income tax was
to collect the money that must be used to pay the interest on the national debt as a result of the banks
expropriation of money creation powers embodied in the Federal Reserve Act of 1913.
Public outrage at the corporate takeover of America’s decision making processes, manifested in the
American Legislative Exchange Council (ALEC), is seen in the Occupy Wall Street movement and others
like it, and can be seen also in the Presidential Campaigns of more than one candidate in the primaries
at the present time, although Bernie Sanders clearly stands out as the prime mover.
Passage of the Federal Reserve System was a mistake. Woodrow Wilson, the president on December 23,
1913 when he signed the act, admitted this before he died. He said towards the end of his life,
“A great industrial nation is controlled by its system of credit. Our system of credit is
concentrated. The growth of the nation and all our activities are in the hands of a few men. We have
become 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.”
One wonders if that is how it was in his day, what he would say about the current post-Citizens-United
situation about 100 years later. Clearly, fascism is upon us.
This white paper is devoted to laying out a multiphase plan for undoing the FRS mistake. But not by a
repeal-and-replace process so popular with republicans these days. The American Monetary Institute
takes this impractical one-bill-does-it-all approach, trying to repair the damage in one disruptive step.
The risks of a crash occurring in response to such gargantuan changes rapidly made are just too high for
Congress to contemplate. For this reason their NEED ACT will never get out of committee. In sharp
contrast, our approach is one of smooth transformation through a four phase process of non-disruptive
adjustments. We morph the Federal Reserve System into the US Central Bank without closing down any
of the branch banks, without firing any of the employees of the branch banks, without moving any of
the equipment, furniture or office supplies at the branch banks. The decision making body at the top
will be restructured, to be sure, to insure that it represents the public interest, including but not limited
to the corporate banking interests. And the ownership of the branch banks will change, to be sure. But
to the extent possible, the day to day operation of the banks, and the valuable research and data
collection activities of the FRS banks, will be left intact and largely unchanged.
THE 4-PHASE PLAN IN A NUTSHELL
We now lay out the broad outlines of each phase in a relatively brief survey format, followed by a more
detailed description of each phase.
PHASE I: Deficit Reduction through creation of debt free ELECTRONIC Sovereign Money (ESM) to replace
bond selling by the Treasury Department; Setting aside of the Budget Sequestration cuts mandated by
the Budget Control Act of 2011; Creation of the MONETARY CREATION and CONTROL AUTHORITY
(MCCA) as a public interest body dealing with the monetary aggregate targeting portion of monetary
policy; targeted GAO audits of Surplus Account transactions and stockholder names and amounts at the
branch banks of the Federal Reserve System; Studies leading to Monetary Histories of the Canadian
(1930-1980) and Guernsey/Jersey Island (1815-present) experiences with debt free government issued
money; initiation of an interest free student loan program for qualified students funded entirely with
newly created ESM.
PHASE II: Debt Reduction through creation of debt free ELECTRONIC Sovereign Money (ESM) to buy
back bonds in the portfolio of the FRS. Reserve requirements are increased gradually to 15%.
PHASE III: The FRS branch banks are converted into Benefit Corporations (B-Corps) through
restructuring to meet the transparency, accountability, and public service requirements for B-Corps.
The stock is split in such a way as to enable the US Government to buy a minimum 51% share of the
stock issued by each of the 12 branch banks. The name is changed from Federal Reserve System to US
Central Bank. US Notes replace FRS Notes as paper currency in circulation. The Open Market Committee
will be melded into the Monetary Creation and Control Authority, so that all monetary policy issues are
handled within the purview of the MCCA. Reserve requirements are gradually increased to 35%.
PHASE IV: All other integration and transformation steps taken to complete the transition from private
control to public control, that is, from the Federal Reserve System to the US Central Bank. Reserve
requirements are gradually increased to 51%.
The end result of these transformations will be a transparent, audited, accountable US CENTRAL BANK
that is owned jointly by public and private entities, with majority control in the hands of the
government. It will preside over a money supply that is roughly split 51-49 between government
created debt free money issued on the basis of growth in the real output of the economy and
commercial bank credit issued daily on the basis of new loans created as debt under the fractional
reserve system. Thus money creation becomes a shared public-private responsibility, in which a
majority of the money supply is issued debt free by the government, and a smaller minority issued by
the private banks as loans with an interest charge attached. Monetary policy will be conducted by the
Monetary Creation and Control Authority, an agency of the US Central Bank, which is constituted to
make decisions based on public interest criteria, to promote the general welfare.
From this multiphase perspective, it is clear that the reissuing of US Notes does not need to come into
play until Phase III, when equity shares of the Federal Reserve banks are bought by the Treasury
department and the name is changed from Federal Reserve System to US Central Bank. Since paper
money plays such a small part of the money supply (roughly 10% of M2), the objectives of the Phase I
and II transformations can be achieved without any new US Notes at all. Printing and recirculation of US
Notes would constitute a disruptive change in the first two phases, but are quite natural in the third
phase. For the first two phases, it is ELECTRONIC SOVEREIGN MONEY (ESM) that is needed, not US
Notes.
HOW IS ESM CREATED?
The beauty of ESM is that the creation process is a few lines of code, and therefore zero cost, and there
is no perceptive change to anyone in the public or in the banking sector, that is, they are invisible. At
12:01am every night the principal balance of the US Treasury Department (that resides at the New York
Federal Reserve Bank?) will be augmented by an amount ∆M that is set by the Monetary Creation and
Control Authority. For example if ∆M were set to $1Billion then in a year, the money supply would have
been increased by $365Billion in government money (monetary base) and some additional amount that
the banks create based on the reserves thus generated through the operation of the fractional reserve
system. So if the M2/M1 ratio is about 5.5 (See chart at …), $365Billion of ESM would become about
$2Trillion increase in M2 over the year. However, only the original $365Billion would be available to the
US Treasury to spend on budget items in the federal budget, and in particular, it could be used to reduce
the budget deficit by exactly that amount, which would mean a deficit reduction of $365 (i.e. the sale of
US Bonds could be reduced by $365Billion because of the inflow of ESM during the year). This amount
of budget deficit reduction over a ten year period is over three times the amount needed to set aside
the harmful “budget sequestration” cuts mandated by the Budget Control Act of 2011. This means that
2/3 of the ESM injection could be used for infrastructure, military, and other budgets hurting from
budget sequestration at present, and still have enough budget reduction to set aside the sequestration
cuts. This is the main purpose of Phase I of the transition plan. If the Monetary Creation and Control
Authority meets quarterly, the size of ∆M could be adjusted quarterly in response to current economic
data.
WHERE DOES ESM COME FROM?
In thinking about this question, which is bound to come up from grade school and high school students,
the following explanation can be given. The simple answer is that it comes from a few lines of code that
a programmer writes that adds ∆M to the Treasury Department balance at 12:01am every day. Hence it
is “created out of nothing” by the computer controlling the account that holds the government balance.
But to give a deeper understanding of the process, I like to describe this “balance augmentation” as a
DEPOSIT BY UNCLE SAM which serves as a GROWTH DIVIDEND for the American people based on the
increased REAL OUTPUT of the economy that they labor in. As population increases, and productivity
increases as well, the total real output of the economy grows over time. This requires a commensurate
increase in the money supply in order to support the increased volume of economic buy/sell
transactions that are made in the economy at the same price levels. Hence the source of the new ESM
injections is really the output of the people themselves, that is to say, the people, through their
increased production, create the conditions which enable Uncle Sam to reward them through a debt
free, interest free, expansion of the money supply (the “growth dividend”), which is sized at a level
which will have a zero impact on the CPI, the Consumer Price Index. A formula for determining the size
of the Growth Dividend “deposits” is derived in appendix 2 by means of some elementary operations on
the Money Exchange Equation of Professor Irving Fisher, one of America’s greatest Mathematical
Economists of the 20th century. We call this the INFLATION PREVENTION INEQUALITY because it
provides an upper bound on ∆M that is consistent with keeping the CPI constant. This is how the value
of the dollar is preserved, by keeping the CPI constant. When the constitution speaks of “regulating the
value thereof” in modern terms that means regulating CPI. And if it is desired to keep the value of the
dollar constant, that means keeping CPI constant. It will be the job of the MCCA to apply the Inflation
Prevention Inequality to current economic data to find out what the upper bound on ∆M is, and to
adjust that quarterly in the computer program that creates ESM daily throughout the next quarter.
By these means, ESM can become a constant or gradually changing flow of income to the US Treasury
which can be used for any and all budget items in the federal budget allocation. The question of how to
allocate it is separate and distinct from the question about how large ∆M should be. As we have seen,
the size of ∆M is determined on the basis of how fast the economic output is growing. The allocation of
the accumulation of those “growth dividends” is a budgetary question that can be treated the same as if
the increased Treasury income had come from increased taxes. The sizing of ∆M is determined by the
MCCA, the budget allocation is determined by Congress with inputs from the CBO and other related
agencies.
PROCESS FLOW IN THE MULTISTAGE TRANSITION PLAN
A big advantage of the multistage approach to monetary reform is that it allows for learning to take
place from the results of each phase before the next phased is fully defined. Since there is some
uncertainty about how the economy will respond to these changes, each phase is like an experiment in
social engineering. The results of each experiment will lead to insights and understandings that will be
used in the framing of the next phase. This process is illustrated in the following diagram.
Phase I approved by
Congress ---------
Phase II approved by
Congress --------
Phase III approved by
Congress --------
Phase IV approved by
Congress --------
Phase I Results
observed ---------
Phase II Results
observed --------
Phase III Results
observed ---------
Phase IV Results
observed ---------
Learning from observed
results -----------
Learning from observed
results -----------
Learning from observed
results -----------
Learning from observed
results -----------
Refine next Phase
legislation ----
Refine next Phase
legislation ----
Refine next Phase
legislation ----
Refine next Phase
legislation ----
Progress is made by moving from left to right in each row of the table, row by row, from top to bottom
of the table. So even though there are only four phases, there are actually 16 stages in the transition
process, which make it much more likely to succeed than the One Phase, One step process the AMI
promotes. Any errors made in one Phase can be corrected in the next. And the last row of the table for
Phase IV would lead logically to a final US Central Bank Act which integrate the transformations
described in the first four phases, and clean up any loose ends not previously treated.
The need for these learning stages is a direct result of the secrecy that surrounds the operation of the
FRS. They have managed to kill every general and complete audit by the GAO since the system was
founded in 1913. It is a very large and complex organization. It will take time to do partial audits and
gradually uncover the full scope of activities in which the FRS is engaged. By breaking the discovery
process down into four stages, we can gradually discover more and more about the FRS and what needs
to be changed to transform it into and honest, accountable US Central Bank. Hence the initial
formulation of Phase II, III, and IV legislation is only tentative, because refinements will be necessary
based on the learning that results from Phase I. Then Phase III and Phase IV will be revised again based
on the learning that results from Phase II. And so forth. By repeatedly enhancing the formulation of
later Phases based on the learning from earlier phases, we maximize the probability of a smooth
transition to a better system that works in a stable way, without causing any major disruptions along the
way that might cause adverse market reactions.
More details on Phase I
The main task of the Phase I reforms is to get Uncle Sam off his duff and have him start doing his money
creation job nightly at 12:01am. Since it will take a while to populate the Monetary Creation and
Control Authority, it will be necessary in this bill to stipulate that the ESM injections be counterbalanced
by reductions in the sale of US BONDS so that the net inflationary impact will be reasonably close to 0.
The impact of ESM issues and US Bond issues on the money supply are not the same, but there will be
some multiplier b such that $1 ESM is equivalent to $b in US Bond sales, so in order to have zero impact
on inflation, each billion $ESM issued must be counter balanced by $b billion in US Bonds NOT SOLD.
That is as ESM issues ramps up, US Bond sales must be ramped down proportionately so as to remain
inflation neutral. Determining the value of b would require a research project beyond the scope of this
draft proposal, so we make the simplifying assumption that a one-for-one substitution (b=1) will have
negligible net inflationary pressure. The draft legislation is easily modified should it be found that b
should be someone larger than 1.
Once the MCCA is populated and up and running, the members, based on expert analysis and advice and
input from the ex-officio members, would take over the control of these two rates (ESM creation and US
Bond sales). But by using a simple well-chosen rule of proportionality in the first year, the ESM flow can
begin immediately upon passage of the Phase I legislation, without fear of inflation pressures, even
before the MCCA is set up to carry the ball forward.
A draft of the Phase I legislation is attached as Appendix 1 to this paper. It will be seen there that there
are several important provisions that are specified to lay the foundation for the subsequent phases.





ESM creation for the purpose of reducing federal budget deficits so as to cancel the budget
sequestration resulting from the Budget Control Act of 2011;
Commissioning of two monetary histories of countries that have had favorable experience
with debt free Sovereign Money: one for Guernsey/Jersey Island experience from 1815 to
2015, and the other for Canada from 1940 to1980; (let’s learn from experience where the
Sovereign Money experience has been successful in the past);
Utilization of newly created ESM to redeem matured or maturing bonds and securities held
in the portfolios of the Federal Reserve Banks
Partial audit of the Fed banks focusing on two particular issues: complete listing of stock
holders and amount of holdings by the stockholders of the 12 Federal Reserve Banks, and a
complete accounting of income and expense of the Surplus Account provided to the Fed to
hold its “profits” or accumulated earnings.
Provision of interest free loans for all qualified students
Although the main purpose of the Phase I legislation is to set aside the harmful budget sequestration
requirements of the Budget Control Act of 2011, an important secondary purpose is to slow down the
growth of the national debt, and put it on a distinctly downward trajectory. In this regard, it is
important to note that when new ESM is sent over to the Fed to “buy back” bonds that have matured,
or are near maturity, those bond redemption payments will constitute “excess income” to the Fed (since
the Fed has way more bonds than it needs to cover its operating expenses). Hence those payments will
have to be returned to the US Treasury as they do on a weekly (?) basis at the present time. Once back
in the US Treasury account that ESM money is then available to use on budget items so that new bonds
do not have to be issued to cover the budget items.
Hence the new ESM is used to reduce debt in two separate ways. First, by paying off the bond debt at
the Fed with newly created ESM, the national debt is decreased by exactly the amount of bond
redemptions made (those debts being extinguished with the payments to the Fed from the US
Treasury). Then, after being returned to the US Treasury from whence they came, when used a second
time to cover budgeted expenditures, they reduce the debt again by obviating the necessity to borrow
money for the budget items covered by ESM. Hence the impact of new ESM on the national debt is
TWICE the amount of ESM created. When this double impact is taken into account, it is found that the
ESM creation schedules in the accompanying proposed legislation have exactly the desired effect. Buy
computing a daily growth rate from the historical record from the last 365 days (see the Treasury Direct
page for The National Debt to the Penny, http://www.treasurydirect.gov/NP/debt/current), a
projection of future debts growing in an exponential fashion can be made for the next one or two years.
In comparison to this “do nothing” forecast, a projection can be made showing the impact of the daily
ESM creation amounts shown in the draft legislation when counted twice, not once. The result is the
following chart.
2 yr National Debt Projection Comparison
July 1, 2016 to June 30, 2018
22,000,000,000,000.00
NO
ESM
21,500,000,000,000.00
21,000,000,000,000.00
20,500,000,000,000.00
20,000,000,000,000.00
19,500,000,000,000.00
WITH
ESM
19,000,000,000,000.00
18,500,000,000,000.00
18,000,000,000,000.00
0
100
200
300
No ESM
400
With ESM
500
600
700
800
The horizontal axis shows number of days after June 30, 2016, from 1 to 730 representing 2years of
time. The vertical axis shows the total national debt as given by the TreasuryDirect page for National
Debt to the Penny. The blue line shows the default future without any ESM creation by the government,
projected on the basis a continuation of the national debt growth rate from July 1, 2015 to June 30,
2016. But with ESM creation following the progressive schedule given in the draft legislation, the
growth rate of national growth decreases during the first six months until it’s maximum value is
obtained on December 31, 2016 at $ 19,409,637,744,527.90 Then, starting on January 1, 2017 the
national debt starts on its downward path at ever increasing rates of decrease until on July 23, 2017 it
returns to the level of debt that it had on July 1, 2016, just a little over a year into the program. Then
the national debt continues to drop at ever increasing rates until on June 30, 2017 the national debt has
dropped to $ 18,446,258,824,847.90 which is approximately the same as the debt level as for November
2, 2015.
More details on Phase II
For more than 100 years now, money has been created by the Federal Reserve buying US Bonds rather
than by the government based on economic output. The purpose of Phase II is to “undo” the damage by
reversing the process. The US Bonds in the portfolio of the FRS should be bought back by the Treasury
department over a period of time and replaced by newly created ESM paid to the credit of the FRS. This
eliminates part of the national debit, and it also gives the FRS more income than it needs to operate. So,
given the partial audit of the Surplus Account from Phase I, the Fed will have to turn around and give the
Bond sale income right back to the Treasury department again, giving the ESM a second use, either as
expenditures in the federal budget, grants to the states, or as payment towards the national debt held
by non-bank entities, such as foreign governments and individuals. This may not mean “No More Debt”
but it will mean “no more debt limit increases.” And due to the increases in economic output that
result from government investments in infrastructure, social welfare and clean energy programs, tax
receipts will rise to the point that budget deficits will shrink to virtually zero, so that increasing debt will
be a thing of the past, and national debt can be put on a downward path towards zero, which would be
the ideal even if not totally reached in reality.
This is not to say that government borrowing would necessarily be brought to a complete halt, just that
when borrowing was done in the past, the ESM alternative in the future would enable the amount of
borrowing to be greatly reduced, to the point where the national debt could be paid off gradually over a
period of 10 to 12 years or so.
More details on Phase III
The Federal Reserve banks are charged with monitoring and regulating the commercial banks, but are
themselves owned by the very banks they are supposed to be policing. This cozy situation is such a
blatant conflict of interest that it boggles the mind when thought of in the abstract. The regulators are
owned by the entities being regulated! How on earth has this situation been allowed so long?
To rectify this situation, the Federal Reserve Banks must be transformed into public interest entities that
are not beholden to the banking industry. One solution would be to have the Treasury Department buy
up ALL of the stock in the Federal Reserve Banks (with newly created ESM of course) and turn them into
government agencies that are an extension of the Treasury Department. But this runs totally counter to
the “small government” tendency of those who call themselves “conservative,” and therefore might be
hard to pass through Congress. Instead we propose here to think in terms of transforming the Federal
Reserve Bank Corporations into Benefit Corporations in which the federal government is the majority
stockholder. This leaves a corporate structure in place for these banks, in which the banking
corporations continue to participate as shareholders, but by morphing them into the public interest BCorp format with majority ownership in the hands of the government, the conflict of interest embedded
in the current system can be greatly reduced. This will be indicated by the name change from Federal
Reserve System to US Central Bank, and the resurgence of the US Notes in place of Federal Reserve
Notes.
More details on Phase IV
This remains to be determined on the basis of the learning from the results of Phase I, II, and III.
Article 1, Section 8, Clause 5
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights
and Measures;
This is the time history of the value of the dollar under the Federal Reserve System. The dollar now buys
what cost 4.14 cents in 1913. The value of the dollar has been cut by almost 25 times. Given their
recent experience with Continental Currency, we believe the intent of the cited clause of the US
Constitution is and should be that the value of the dollar be regulated in such a way as to preserve its
buying power at a nearly constant level. This can best be done with a public interest group empowered
with the tools and technology developed by NASA and others for the exploration of space, including but
not limited to the mathematical theory of stochastic optimal control. Preserving the buying power of
the dollar will be one of the chief responsibilities of the new Monetary Creation and Control Authority
under the US Central Bank transition plan presented here. Building a control system to regulate the
value of the dollar should be vastly simpler than getting men to the moon and back. Obviously, setting a
2% inflation rate target is not the way to preserve the value of the dollar. The new Monetary Creation
and Control Authority will do better, very much better.
DRAFT LEGISLATION
ELECTRONIC SOVEREIGN MONEY DEFICIT REDUCTION ACT of 2016
By Ronald E Davis, PhD (Stanford 1980, Mathematics)
http://monetaryreform-taskforce.net
Whereas, the federal budget deficits have remained high for the last decade, exceeding $1
Trillion in at least four previous years and several more forecasted years;
Whereas, the January 1 Fiscal Cliff Tax deal achieved only half of the desired deficit reductions
required by the Budget Control Act of 2011, causing the indiscriminate budget sequestration cuts
to kick in on March 1, 2013;
Whereas, the US national debt has been growing since 2000 exponentially at about 8% per year
to an alarming $19 Trillion with no end in sight;
Whereas, the interest payments on the national debt have been growing exponentially at the same
rate to approximately $0.4 Trillion per year;
Whereas, Abraham Lincoln’s Legal Tender (Greenback) money issues were declared
constitutional three times by the Supreme Court and circulated successfully for over 100 years;
Whereas, the Central Bank of Canada successfully issued government money debt-free from its
opening in March 1935 until it mistakenly switched to government funding from private banks in
1975;
Whereas, Guernsey Island has issued debt-free money for its economy successfully for almost
200 years up until the present time, which circulates in parallel with British pounds.
Therefore, in order to set aside sequestration budget cuts, provide reliable funding for
government programs, avoid a national debt default, to bring unemployment down rapidly, and
to put the American economy on a stable path to debt free status with full employment and stable
prices, it is resolved as follows:
Title I: Authorization for Government Money Creation
Section (a) The US government shall resume the practice of issuing its own money, debt and
interest free, as President Abraham Lincoln did to win the Civil War with paper money called
“greenbacks” or US notes. The term US Money shall be used to refer to government issued coin
and paper money, the latter being called US Notes, and their electronic equivalents, called
Electronic Sovereign Money (ESM). All are issued without debt or interest obligation. US Notes
will have United States Note rather than Federal Reserve Note as their title. ESM will be
credited periodically to the principal US Government account (at 12:01am every morning for
example). They shall be known as growth dividend deposits by Uncle Sam, and are based on the
growth in real output of the American Economy.
Section (b) Government issued money will circulate through the economy alongside of bank
issued money (Federal Reserve Notes, Federal Reserve Bank Credit, and Commercial Bank
Credit) and shall be legal tender for all debts, public and private.
Section (c) The backing for this money shall be the real output of the economy, and hence as a
general rule, the money supply shall increase at a rate that parallels the growth in the real output
of the economy, with exceptions due to changing velocity of money. See the inflation
prevention inequality derivation appendix to this Act.
Title II: The Deficit Reduction Plan for cancellation of sequestration budget cuts
Section (a): During the year following passage of this act (starting on the first day of the quarter
beginning after passage of this act, i.e. either Jan 1, Apr 1, July 1, or Oct 1), henceforth referred
to as the “ramp up year”, the monthly budget deficits will be financed in part by newly created
ESM, to be issued INSTEAD OF US Treasury Bonds, according to the following schedule. ESM
creation rises from about $1Billion to about $2Billion per day over the ramp up year, and up to
about $3Billion per day at the end of the second year. These rates are chosen to cut the growth
rate of total national debt to zero in six months, return to the June 30, 2016 level in a little over a
year, and then continue on down to Nov 2,2015 level at the end of two years.
Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11
Month 12
Monthly ESM Created
and Issued
$30 Billion
$33 Billion
$36 Billion
$39 Billion
$42 Billion
$45 Billion
$48 Billion
$51 Billion
$54 Billion
$57 Billion
$60 Billion
$63 Billion
Reduction in US Bonds
Sold
$30 Billion
$33 Billion
$36 Billion
$39 Billion
$42 Billion
$45 Billion
$48 Billion
$51 Billion
$54 Billion
$57 Billion
$60 Billion
$63 Billion
Cumulative US Money
Created and Issued
$30 Billion
$63 Billion
$99 Billion
$138 Billion
$180 Billion
$225 Billion
$273 Billion
$324 Billion
$378 Billion
$435 Billion
$495 Billion
$558 Billion
Month 13
Month 14
Month 15
Month 16
Month 17
Month 18
Month 19
Month 20
Month 21
Month 22
Month 23
Month 24
$66 Billion
$69 Billion
$72 Billion
$75 Billion
$78 Billion
$81 Billion
$84 Billion
$87 Billion
$90 Billion
$93 Billion
$96 Billion
$99 Billion
$66 Billion
$69 Billion
$72 Billion
$75 Billion
$78 Billion
$81 Billion
$84 Billion
$87 Billion
$90 Billion
$93 Billion
$96 Billion
$99 Billion
$624 Billion
$693 Billion
$765 Billion
$840 Billion
$918 Billion
$999 Billion
$1,083 Billion
$1,170 Billion
$1,260 Billion
$1,353 Billion
$1,449 Billion
$1,548 Billion
On a quarterly basis, the aggregated quarterly schedule then becomes
Ramp-up Year Schedule of ESM Creation
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Quarter 5
Quarter 6
Quarter 7
Quarter 8
ESM created
US Bonds not sold
$99Billion
$126Billion
$153Billion
$180Billion
$207 Billion
$$234 Billion
$261 Billion
288 Billion
$99Billion
$126Billion
$153Billion
$180Billion
$207 Billion
$234 Billion
$261 Billion
$288 Billion
Cumulative ESM
Created
$99B
$225B
$378B
$558B
$765B
$999B
$1,260B
$1,548B
Section (b): The US Money issues provided for in Section (a) above shall be treated as
replacements for an equal amount of US Bond selling by the Treasure Department. That is, the
US bond sales shall be reduced from their current levels in each quarter by the amount of US
Money that is issued in that quarter.
Section (c): Following the ramp up year, US Money will be used instead of US Bonds at rates to
be determined by the new Monetary Creation and Control Authority created for this purpose per
Title IV below. For the 12 months following ramp up year, the ESM creation rate shall not drop
below $200 Billion per quarter. New US Money issues will be itemized as a new income source
in the federal budget and in budget legislation to be submitted and approved by Congress. This
income may be used for any and all purposes that other income sources are used for.
Section (d): Estimated deficit (i.e. borrowing) reduction during the ramp-up year is $558 Billion,
and the deficit reductions in the following two years (assuming a constant $63Billion per month
ESM creation rate) would be about $756 Billion each, for a total of $2.070 trillion in the first
three years. Hence the deficit reduction requirements of the Budget Control Act of 2011 will be
met in about 2 to 3 years instead of 10 years. Hence the sequestration budget cuts are hereby
canceled. and new US Money issues will be used first and foremost to redeem US Bonds
and Securities held by the Federal Reserve Banks, and secondarily to restore money to cut
budgets that have suffered due to the sequestration cuts that have occurred since March
2013.
Title III: Debt Reduction Plan for Maturing US Treasury Securities held by the FRS
Section (a) US Treasury Securities that mature in the portfolio of the Federal Reserve System
shall be redeemed by the US Treasury with newly created ESM.
Section (b) the income that the Federal Reserve System derives from the redemption of matured
US securities shall be deemed as “excess income” to the Fed, and shall be returned in full to the
Treasury Department in accordance with existing schedules of payments of this type from the
FRS to the US Treasury Department.
Section © the ESM that the US Treasury creates to redeem its matured securities in the Fed
portfolio shall be included in the ESM creation schedule provided in Title II above, since it is all
returned to the US Treasury a few days after it is created.
Title IV: Monetary Creation and Control Authority
Section (a) In order to coordinate government created money with bank created money to
achieve monetary growth rates consistent with the triple goal of full employment and stable
prices with low interest rates, a new Monetary Creation and Control Authority will be created. It
shall consist of seven members appointed by the President, approved by the Senate, for seven
year terms, one renewal or replacement taking place each year. In addition, non-voting exofficio members from existing branches of government who may participate in the policy
deliberations of the Monetary Creation and Control Authority, shall include the following
persons:
i.
The Federal Reserve System
a. Board Chairman
b.
President of the New York Federal Reserve Bank
c. Director, Division of Research and Statistics
ii.
The Executive Office of the President
a. Director, Office of Management and Budget
b. Council of Economic Advisers
b.i. Chair
b.ii. Chief Economist
b.iii. Director of Macroeconomic Forecasting
iii.
US Department of the Treasury
a. Secretary
b. Comptroller of the Currency
iv.
US Congress
a. Chair, House Budget Committee
b. Chair, House Financial Services Committee
c. Chair, House Ways and Means Committee
d. Chair and Ranking Member, Senate Finance Committee
e. Chair and Ranking Member, Senate Committee on Banking, Housing and
Urban Affairs
f. Chair, Joint Economic Committee
g. Director, Congressional Budget Office
Section (b) The President of the United States shall, within 120 days of the enactment of this
legislation, recommend seven qualified individuals for the MCCA to the Senate for approval by
the Senate. These individuals shall be free of any prior employment for bank or federal
government assignments.
Section (c) The seven voting committee members shall, within 240 days of the enactment of this
legislation, recommend an independent chairperson to the President, who will be independent of
government and banking industry involvements, both prior to and during his/her term of office,
which shall be for seven (7) years. The other six initial members will self-select which will serve
for 1, 2, 3, 4, 5, and 6 years so that subsequently one member will be replaced each year.
Section (d) The Monetary Creation and Control Authority shall prepare quarterly schedules of
monetary aggregate targets, US Money issues, and high powered money reserve requirements
(separately for checking and savings accounts) for each fiscal year, subject to approval of
Congress. These shall be developed using the best available macroeconomic computer models
available at the time that include the inflation prevention inequality. Interest rate and other
policy issues shall remain in the hands of the Federal Reserve Board to be implemented through
the Federal Reserve System.
Section (d) Staff and Consultants may be hired as needed to carry out administrative functions
and economic analysis related to monetary policy decisions.
Title V: Periodic Partial Federal Reserve Audits
Section (a) The General Accounting Office shall conduct annual audits of two aspects of the
Federal Reserve System: stock ownership of the 12 Federal Reserve Banks, and the income and
expenses to the FRS Surplus account(s).
Section (b) GAO audit reports shall be submitted to Congress once a year.
Section (c) The first audit report submitted based on this legislation shall include
i. a complete accounting of the stock holders of the Federal Reserve Banks, including
names and contact information for each together with their shareholdings;
ii. a complete accounting of the origin and disposition of funds mentioned in GAO-11696 on page 131 in Table 8 (Institutions with Largest Total Transaction Amounts (not TermAdjusted) across Broad-Based Emergency Programs, December 1, 2007 through July 21, 2010)
iii. a complete description of all macroeconomic models used by the Fed to perform
policy analysis; copies of software and documentation shall be made available to the Monetary
Creation and Control Authority provided for in Title III of this act.
Title VI: Monetary History Documentaries
Section (a) The US Treasury Department shall commission two monetary histories to be
prepared consisting of a book and a video in each case. The two locations and time frames are
selected as periods where debt free government issued money was successfully employed by the
respective governments.
i.
Guernsey/Jersey Islands in the period from 1815 to 2015
ii.
Canada in the period from 1930 to 1980
Section (b) Completed copies of the two documentaries shall be distributed to the US President
and all voting and ex-officio members of the Monetary Creation and Control Authority; They
shall be made available to the public through the US Government Publishing Office Bookstore.
END NOTES
This legislation accomplishes four important objectives.
(1) First it terminates the budget sequestration cuts that have been hampering growth and
services every year since their inception in March 2013.
(2) Secondly, it provides a steady stream of debt-free funding for government programs
which, if continued in the years ahead will enable gradual reduction of the national debt
without debt default. Moreover, use of borrowing as a funding source for the government
will diminish to the point that it is used for exceptional circumstances only, approved by
Congress on an exception basis.
(3) It prevents any increase in inflationary pressures by reducing US Treasury bond sales for
each dollar of new ESM created and spent into circulation.
(4) The ESM replacing US Treasury Bond sales may be used for public works projects,
education, basic and applied research, funding of the US Postal Service and the Office of
Technology Assessment, VA and social security benefits, health care, and grants to
failing states, thus stimulating the creation of jobs and increasing the growth rate of
national real output of the economy. It can also be used to pay interest on the national
debt, and pay off US Bonds and other US Securities at maturity. It is simply another
source of income to the government (from Uncle Sam) that can be used anywhere in the
budget that other sources of money can be used.
Title I (brief) history.
The constitution provides (in Article I, Section 8, clause 5) for governmental issue of
coins. The Legal Tender Acts (three of them) during the Lincoln Civil War era (18611865) and subsequent Supreme Court decisions (three of them) established (prior to
1887) that the government may issue debt-free and interest-free paper money as well (the
“greenbacks”). Title I of this act extends the governmental money creation power to also
include the modern electronic bank deposit form, which constitutes the primary form of
money at this time. The term US Money includes all three forms: coins, US paper money
(i.e. US Notes), and Electronic Sovereign Money in bank deposit form. US Money is
backed by real output, not debt.
Title II example.
The projected annual budget deficit for 2016 is approximately $600 Billion; so the deficit
to be financed in each quarter would be about $150 Billion. During the first quarter of
the ramp up year the US Money (ESM) creation will be $99 Billion, the second quarter
will see $126 Billion created, the third quarter will see $153 Billion created, and the
fourth quarter will see $180 Billion created. Hence the annual totals during the ramp up
year will be $558 Billion of US Money (ESM) created, and leaving $42 Billion to be
borrowed through the sale of US Bonds. When combined with the deficit reduction
accomplished by the Fiscal Cliff Tax Deal of Jan 1 2013, it is very close to being enough
of a deficit reduction to set aside the sequestration cuts and restore funding to the pre2013 levels. If EMS creation should be continued at a constant $189 Billion per quarter
rate in the year after the ramp up year, deficit reduction accomplished would enable the
budget sequestration cuts to be set aside permanently. US Money will be credited
electronically to the US Treasury Department account and spent into circulation on items
provided for in the Federal Budget.
Title III example
One important purpose for the debt free interest free ESM created nightly by Uncle Sam
is the redemption of US Treasury Securities held by the FRS. These securities were
purchased with money “created out of thin air” by “the stroke of a pen” buy the Fed
which had been given the money creation power by the government in 1913. This should
have not have happened in the first place and needs to be undone. But rather than just
declaring the securities null and void, it is better from an accounting and psychological
point of view to just go ahead and “pay them off” with newly created ESM so as to close
out those securities in the normal way.
However, this income to the Fed is derived from a debt that should not have occurred in
the first place, and hence the redemption money must be declared as “excess income” to
the Fed, which it is required under law to return to the US Treasury. So when this
happens, the Treasury Department has its ESM back again and can spend it on something
else.
The net result is that the debt represented by those securities in the Fed portfolio has been
extinguished without any net cost to the government. This is debt reduction
accomplished with new money, not money borrowed from other lenders.
An additional Title
Bernie Sanders talks of tuition free public community colleges and perhaps intends to
include 4 year public universities as well. This may be possible, but to many it may seem
a rather big step to take all at once. A less ambitious way to assist students to get a
college education would be for the government to institute a program in the Department
of Education of interest-free loans for qualified students. To encourage graduates to enter
public service careers, the loans could even be forgiven for those who go into public
service jobs immediately after graduation. Funding for the US Postal Service, and
refunding of the defunct but vitally important Office of Technology Assessment could
also be a part of this additional title.
DERIVATION OF THE INFLATION PREVENTION INEQUALITY
The fundamental money exchange equation (presented first by Professor Irving Fisher of Yale University)
states that MV= PQ where M = money supply, V = money velocity, P = consumer price index, and Q =
real GNP. The left side of the equation is the total money received in all transactions in the economy,
and the right had side is the GNP for the economy, or the total money spent in all transactions in the
economy, computed over the period of a year. Since the amount spent and the amount received is the
same in each individual transaction, the totals across the economy must be the same also.
Some authors have characterized this equation as being static without realizing that the year time frame
is actually a sliding window of time so that in fact all four of the included variable vary over time. One
can emphasize this fact by making each variable a function of time, in which case the equation becomes
M(t)V(t)=P(t)Q(t).
Taking natural logarithms converts products into sums, so one has ln(M(t))+ln(V(t))=ln(P(t))+ln(Q(t)).
..
.
.
.
Then differentiating each term with respect to time one has ( M / M )  (V / V )  ( P/ P)  (Q/ Q) where
the dot over the numerator of each ratio indicates the time derivative of the quantity in the
denominator of each ratio. Each ratio can be called a relative rate of change for each variable, and by
multiplying by 100, each term becomes the percentage rate of change in each variable. Hence we
define
m  100M / M
v  100V / V
p  100P / P
.
q  100 Q/ Q
In which case the dynamic money exchange equation becomes m + v = p + q. It is quite convenient for
analysis that this equation takes a linear form, and is stated in terms of percentage rates of change for
each variable. From this simple equation, the inflation prevention inequality follows from the following
elementary algebraic manipulations. Suppose the chosen tolerable rate of inflation, which we call the
inflation tolerance, is I0 (currently 2% although stable prices would imply 0%). Since p is the inflation
rate in percentage terms, we would have to control the money supply to grow in such a way that
p = m + v – q ≤ I0 or isolating m on the left hand side, we must have m ≤ q – v + I0 . This is the relationship
that we call the INFLATION PREVENTION INEQUALITY (IPI) since it gives the upper bound on money
supply growth rate that can be allowed without precipitating an inflation more than the inflation
tolerance I0. In the future, it is this relationship that will be used to prevent inflation under debt free
sovereign money, issued without debt into the economy, rather than the disincentive of debit with
interest obligation which is used to limit excessive monetary growth under debt based monetary
systems such as the Federal Reserve System. With this inequality firmly in hand, the government can
assume its money creation functions again without fear of inflation.
In order to impose a zero tolerance on inflation (CPI constant) under conditions of unchanging monetary
velocity, the IPI reduces to m ≤ q, which says that the money supply growth rate should not exceed the
growth rate of the real output of the economy. From this, one is led to see that the real and true
backing for the money in an economy is the real output of the economy itself, taken in an aggregative
sense, not based on any one or select few outputs like gold, silver, platinum and the like. The real
output of the economy includes ALL GOODS AND SERVICES produced and sold in an economy, and it is
this total measure of production (evaluated in constant dollars) that serves as the basis for or the
backing of the money supply. Hence the value of the money is based not on what can be obtained in
precious metals when turned in at the Treasury Department, rather it is based on what can be bought in
the open market with those dollars or whatever the unit might be, that is by its purchasing power. The
dollars spent at the grocery store are backed by the grocery bag taken home. The dollars spent on
electronic equipment are backed by the very electronics that are purchased. The dollars spent on a
haircut are backed by the improved appearance of one’s hair resulting from the cut. And so on including
all the transactions made everywhere throughout the economy. So when you sum it all up, you get the
new
REAL OUTPUT STANDARD FOR MONEY
THE BACKING FOR MONEY IS THE AGGREGATE OF ALL GOODS AND SERVICES PRODUCED AND SOLD
THROUGHOUT THE ENTIRE ECONOMY, that is to say, BY THE REAL OUTPUT OF THE ECONOMY. UNDER
CONDITIONS OF CONSTANT MONETARY VELOCITY, STABLE PRICES ARE MAINTAINED BY INSURING THAT
THE MONETARY GROWTH RATE EQUALS THE REAL OUTPUT GROWTH RATE. IF MONETARY VELOCITY IS
CHANGING OVER TIME, STABLE PRICES ARE MAINTAINED BY OBSERVING THE INFLATION PREVENTION
INEQUALITY.
It is this new standard for money, together with the IPI, that makes it feasible to restore to the
government its money creation role at this time as never before. This money creation function was
usurped from government by the private banking industry in 1913 and has been in private hands for
over 100 years now. It is time now for the government to assert its powers to create debt free interest
free money in substantial quantities with commensurate decreases in its borrowing activity using US
Bonds and carefully planned increases in reserve requirements. By doing so, it can save trillions of
dollars in unnecessary debt while pumping inflation proofed dollars into infrastructure , energy, and
education programs that will spur growth rates to double present levels while bringing unemployment
down to half their present levels. We will enter a new era of inflation-free economic expansion that will
have no end, unless we foolishly let the banks privatize the money creation function again as they did
before.
Task Force Assignment: Determine which parts of the above, if any, have previously appeared in the
works of Milton Friedman or other monetarists of the 19th century. Provide citations for those items
that have appeared previously. We want to provide credit where credit is due, but at the same time, we
are not too humble to take credit for what is in fact new.