"Money and Liberty"

By Adrian Kuzminski

The U.S. monetary system has been a scandal for a long time; whether it
can continue much longer without intolerable social, political, and
ecological consequences is an open question. Yet most Americans don't have
a clue about it. "It is well enough that people of the nation do not
understand our banking and monetary system," Henry Ford said, "for if they
did, I believe there would be a revolution before tomorrow morning." Our
current monetary system, to be blunt, is an unjustified monopoly granted to
private interests to create public money for their private profit. For this
they charge the public usurous (extortionary) rates of interest, creating an
economic system which unnecessarily transfers wealth from debtors to
creditors as it forces often needless and wasteful economic 'growth.'

The idea that a national currency should be a debt incurred by governments
(and therefore taxpayers) to private interests for their profit was first
institutionalized with the Bank of England at the end of the 17th century,
and subsequently developed in the United States by Alexander Hamilton and
his successors. Under this scheme, the power to 'create' money is granted as
a monopoly to a central bank, like the Federal Reserve, which then lends the
money so created back to the government at interest in return for government
bonds. These bonds are then sold to commercial banks, where they form the
collateral for loans to the public, at additional rates of interest.

As the agent of the major private banks, the Federal Reserve not only
regulates the economy by raising and lowering interest rates to control the
money supply and to protect creditors, but also guarantees the private
banks' monopoly over the further creation of money through fractional
reserve lending. This system, now triumphant worldwide under the rubric of
'globalization,' with the dollar as the world's reserve currency, has made
possible, perhaps more than any other factor, the relentless concentration
of wealth into fewer and fewer hands. Yet this money system is mostly
ignored by social critics.

Crucial to this system is the power given to the central banks and the
banking system in general to vary interest rates freely and without limit.
Interest charged beyond administrative and risk insurance costs is usurous.
Such usurous interest constitutes the income of the banking system, the
profit from from which goes to the private investors in that system, not to
the public. This institutionalization of usury allows the banking system to
skim off what is essentially a private tax in return for providing what
should be a free public service. It creates a system in which money is
scarce and available only at a steep price.

Most Americans believe the Federal Reserve is accountable to the public
interest, but nothing could be further from the truth. Although the
Governors of the Federal Reserve are presidential appointees confirmed by
Congress, when we consider their long 14 year terms, the byzantine and
secretive traditions of the Fed, its lack of any other public accountability
(apart from the Chairman's reports to Congress), and the strong Fed role
played by commercial banks (who sit both on the Federal Open Market
Committee which sets interest rates, and on the boards of regional Fed
branches), it is hardly surprising that the Fed has been able to enjoy a
gloss of public accountability while evading public control.

Economic inequality is rooted in a maldistribution of capital. The only
access to capital today for those without is to borrow money at interest.
Anyone with a mortgage, a car loan, a student loan, or a credit card, is
paying a hefty private tax to the banking and financial system for the right
to use capital, which, as a public resource, should be freely and fairly
available to the public. Being forced to borrow money at interest,
individuals and businesses must pay off significant interest charges as well
as the principal before they can see any of the fruits of their use of that
money.

Why should the banking system be allowed the monopolistic privilege not only
of creating money, but of charging excessive interest for the right to do
so? Should not the creation of money, essential to the public welfare, be a
proper matter for government, assuming democratic, publically accountable
governments (which we currently do not have)?

This burden of usurous interest is the real engine behind economic 'growth.'
Since borrowers must repay interest on top of principal before realizing any
benefit from a loan, they are forced to additional labor and production.
Money borrowed at 6 percent, compounded annually, will accumulate interest
equal to the principal in only twelve years. This is insignificant at small
amounts, but if I borrow $100,000 at 6 percent, it means I must pay my
creditor a total of $200,000 within 12 years, which amounts to $16,666 a
year. By contrast, at a nominal 1 percent interest rate, it would take 70
years before the interest burden equalled the principal, and it would cost
only $2857 a year over that period to repay the $100,000 loan.

There is no reason that interest must be charged for the creation of money.
There is no need to 'rent' money from private bankers when we could just as
easily create it ourselves at nominal cost. To do so would constitute a
political revolution of the first magnitude. Traditional attempts to meet
the challenges of social and ecological exploitation (socialism, communism,
environmentalism) have failed insofar as they have not understood the
underlying usurous monetary system which drives 'growth.' By contrast,
non-usurous monetary policies in the hands of democratically accountably
governments serving the public interest would be able, for the first time,
to correlate the use of money with social needs.

The challenge is clear. The Federal Reserve is enshrined at the core of the
national government, beyond any effective control. The Constitution
prohibits the states not only from coining money, but from emitting Bills of
Credit or making "anything but gold and silver Coin a Tender in Payment of
Debts." (Article I, Sec. 10) Given the failure of Federal monetary policy,
its ruinous effects in exploiting persons and nature, and its key role in
creating great relative wealth for a few and great relative poverty for
many, it is incumbent to insist upon a devolution of monetary policy to the
local level, whether this occur through reform of Federal monetary policy,
through Constitutional Amendment returning monetary policy to the various
states, or through the secession of various states from the Union.

It is essential to this end to understand how a non-usurous, publically
accountable currency might work. The most thorough-going and ingenous
system of such a currency was thought out before the Civil War by Edward
Kellogg (1790-1858), and is perhaps stated best in his posthumous work, A
NEW MONETARY SYSTEM (1861, reprint 1970).

Kellogg was a forefunner of free bankers and populists who mostly missed,
however, his central idea of a decentralized non (or nominal) interest
currency. He proposed to establish local public credit banks, one in each
county. These banks, Federally mandated but locally run, would offer
nominal (one percent) interest loans to resident citizens. Kellogg
envisioned land as collateral, but credit worthiness could be based, as it
is today, on one's potential earning power. Once lent out, Kellogg's public
credit dollars would flow into circulation, providing the basis of a new
currency, backed by the productive labor power of individual borrowers.
Individuals and private banks would be free to re-loan public credit money
at higher rates of interest, but the availability of nominal one percent
loans would undercut their ability to charge usurous rates.

The beauty of Kellogg's system is its decentralized self-regulating nature.
Instead of credit issued on a top-down basis from a central bank to national
banks, and then to regional and local banks, all charging usurous rates of
interest for the priviledge of borrowing money they create without effort,
credit would be issued by local banks directly to local citizens without
interest on the basis of the economic prospects of those citizens. These
prospects would vary considerably from place to place, with some areas
needing and creating more currency than others. But whatever currency is
created would be equivalent to any other. The solvency of local public
credit banks would be guaranteed by adequate reserve requirements, and the
money supply would be stabilized by repayment of loans as they came due.
The interchangability of public credit bank notes would ensure a wide
circulation for the new money. Kellogg's public credit banks are a form of
free banking, but done as an interest-free public service rather than as a
private for-profit enterprise.

Capital would become cheaply and widely available at local public credit
banks to anyone minimally credit-worthy. Students, for instance, could take
out public credit loans instead of student loans. Public credit banks could
offer no-interest credit cards. Homebuyers could take out public credit
loans instead of mortgages. Small business (sole proprietorships and
partnerships) could take out public credit loans instead of borrowing money
from commercial banks. Corporations, however, would not be able to borrow
from public credit banks, whose purpose is to serve the interest of
flesh-and-blood citizens, not corporate entities. The latter would have to
borrow on the secondary debt markets, at necessarily higher but still
reasonable interest rates.

No public credit currency would be issued at any other than the local level.
National standards would determine uniform rules of credit-worthiness,
minimum reserve requirements, local public management, and a fixed nominal
(one percent) rate of interest. A local public credit bank issueing too
many bad loans, or refusing loans to otherwise credit-worthy citizens, would
be subject to legal penalties, including closure and reorganization.

Notice the profound implications of Kellogg's money system. There would be
NO controlling central bank, no centrally controlled issuance of currency.
The banking system would be set on its head. A bottom-up system of capital
creation would replace the old top-down system. Most fundamentally, credit
would be made available to the general public at a nominal (one percent)
interest rate, instead of being made available selectively to large
commercial banks at high rates, who in turn lend it to others at even higher
or usurous rates.

With interest eliminated as a factor in monetary policy, the principle
engine of wasteful and compulsive economic growth would be eliminated.
There would be no need to labor frenetically to overcome the interest
burden. Economic investment would be possible on the merits of the
situation, not on an abnormally forced rate of return. A sustainable
economics would become possible, perhaps for the first time. And, not
least, the widespread availablity of capital to individuals (unknown since
the closing of the Western frontier in America in 1890) would do much to
overcome the vast and growing discrepencies of wealth which exist because of
usurous interest rates.

Kellogg's model of a decentralized but democratically regulated monetary
system is worth pondering not only for financial and economic reasons, but
for political ones as well. Democracy is necessarily a decentralized,
face-to-face affair, and it cannot be successful unless its citizens
personally enjoy relative economic independence in a relatively
decentralized economy. For only then can they come together as equals in a
free community. Most citizens today, however, are economic dependents,
having been forced into debt peonage by usurous interest rates for most of
the necessities of life (education, housing, transportation, etc.). Not
being free economic agents, they cannot oppose the harsh and destructive
economic system which oppresses them. A key step in developing such
opposition is the realization that a decentralized, self-regulating,
non-interest monetary system, of the sort outlined by Kellogg, can provide
the basis for widespread economic independence.