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“What We’ve Got Here Is — Failure to Communicate.”

The line by actor Strother Martin playing the Captain (warden) of a 1950s Florida chain gang, is delivered to Paul Newman, a new member of the chain gang in the 1967 iconic classic Cool Hand Luke. Luke infuriates the Captain by telling him as he is being shackled upon arrival, “I wish you’d stop being so good to me.” The Captain lays down the law, first with his blackjack, then with his unforgettable line. Luke repeats it at the end of the film before he is shot. The film is great and the line is one of the most memorable in film history.

“What we’ve got here is — failure to communicate” is also a modern day indictment of the Federal Reserve System and almost the entirety of the economics profession. Federal Reserve economists and the overall economics profession have shirked their duty by failing to communicate and explain to us, how our money is created by private banking corporations when they issue loans to us. This debt-money exists only while we are in debt. It is erased from the bank’s accounting as we repay the loans. We obviously need to have money for a modern society to function. The only way to have money using the debt-money system, is for us to be in debt. The debt-money system thus consigns us to eternal debt slavery, both as individuals and collectively through our government.

While individual debts can be repaid, it is only with money that was created by others going into debt. And money is not created with the loans for the substantial interest that we must pay over the life of the loans. This exacerbates the gulf between the larger total societal debt load and the smaller money supply. Reducing the overall debt load even by a modest 10% or so would reduce the supply of money by a like amount and cause a depression. Thus forcing us to remain perpetual debt slaves.

Please, do not take my word as gospel on money creation. I am not an economist or anything approaching one. How do I know that banks create our money? The UK’s Central Bank, the Bank of England, founded in 1694 and the model for our own Federal Reserve, tells us so in its landmark paper “Money Creation in the Modern Economy”:

This article explains how the majority of money in the modern economy is created by commercial banks making loans.

Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits …

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.i (bold in original)

If you believe that our society should be based on ethics, justice, law and being able to deliver a decent successful life for all our citizens, the present debt-money system may be extremely difficult to grasp. Do not let this deter you.  It is the duty of the economics profession to provide us with a money system that the public can understand or work to change the present system so that it is understandable. It is also the duty of the economics profession to provide us with a money system that is ethical, moral, Constitutional and “promotes the general Welfare” of society. If the present system is unable to do so, the economics profession has a duty to fight for change.

This paper is being written to specifically beseech the economics profession to explain to the American people how the present debt-money system actually functions in understandable language and then fight for change when the rottenness of the present system is exposed. Non academics are urged to proceed forward and not be intimidated by the inability of the apologists for the debt-money system to explain their dysfunctional system to us.

The Federal Reserve System employs directly hundreds of monetary economists. The Bank of England made the above statement in 2014. Yet after searching the internet I cannot find a Federal Reserve article agreeing with or critiquing the BoE’s “Money Creation in the Modern Economy”. Five years after the article came out, I did a Google search of ‘Federal Reserve money creation in the modern economy’. I looked at the first 100 results or articles. Most results were from citizens trying to make heads or tails of how our money is created. Some were spot on and some off base.

Federal Reserve articles came up in 9 of the first 100 results.ii I could find no mention of “Money Creation in the Modern Economy” in any of these 9 articles. Only one was about money creation at all “Everyday Economics: Money” by the Dallas Federal Reserve.iii Under the heading “The Money Multiplier” it explained money creation:

Multiple deposit expansion is the process of taking in deposits, withholding a portion in reserve and loaning the rest. This process is critical to financing purchases for both individuals and businesses.iv

The money multiplier is a reference to justifying and explaining fractional reserve lending in a convoluted manner. Fractional reserve lending was originally conceived because goldsmiths and banks could get away with issuing paper notes representing approximately ten times the amount of gold or precious metal coins that they kept in their vaults. Of course this is as ridiculous and fraudulent now as it was centuries ago when they started the practice.

[Federal Reserve out of print booklet “Modern Money Mechanics” quoted further below provides a better explanation of how the fractional reserve system began.]

But now our money or currency is all fiat currency without a precious metal commodity backing, so that the concept of increasing the money supply because centuries ago banks were able to get away with issuing notes for ten times the amount of gold or coins that they actually held in their vaults has no bearing on reality. Explaining money creation using the money multiplier is a thus a disingenuous exercise at best.v

Under a section “Bank Deposits as Electronic Money” the Dallas Fed said that bank deposits are money. But nowhere did they say that anything to the effect that “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”vi

Why have the hundreds of monetary economists at the Federal Reserve not agreed, disagreed or bothered to comment on “Money Creation in the Modern Economy”?

Indeed, “What We’ve Got Here Is — Failure to Communicate.”

Full Disclosure

The basic concept in the debt-money system, is that the banks create almost the entirety of what we use for money, out of thin air when they make loans. While this is certainly true, the system is much more convoluted. If we clearly understood it, we would never have settled for such an unfair system that enriches those at the top of the heap and indebts the rest of us. Complexity and subterfuge are thus hallmarks of the debt-money system. The textbooks explaining it are frequently incorrect.vii So it should not be surprising that many of the economists and bank executives are in the dark about how our money is created.

Our politicians remain blissfully ignorant about money creation. If confronted with a citizen’s request to examine the system and explore monetary reform, the politician is likely to ask, ‘what is the position of the Federal Reserve on money creation and monetary reform?’ As we will demonstrate the Federal Reserve economists basically have no position on how our money is created and will be quite happy to move on to another subject.

Last year I sent an email letter to eleven Federal Reserve Economists asking for the Federal Reserve’s position on the question “Who creates our money?” or more correctly “Who creates what we use for money?”   Only one of the eleven responded:

Dear Mr. Egnatz,

I will forward your inquiry to our public affairs office when I get back to …. next week. They would be best suited to point you to any official position policymakers may have taken on this issue.

As a researcher, I can tell you that the topics upon which your comment touches are important and that several people within the Fed system participate in this academic debate. On the issue of 100% reserve banking, an important reference is the following: . . .

The Federal Reserve Economist then referenced a couple of “quite technical” articles. I have kept his or her name and location confidential because I wish this person no career harm. After reading this paper, it will become quite evident that economists that choose to step outside the box of the debt-money system do literally risk career suicide. While this person did not step outside the box, I believe that any cooperation at all by a Fed economist with one who challenges the system must have its risk. I did try and develop further dialogue with the Fed economist, but to no avail. Also a year later and still no response from the Fed public affairs office.

I have had occasion several times to personally present a plea for monetary reform to one Congress member. Once I was accompanied by the late Director of the American Monetary Institute Stephen Zarlenga, the author of The Lost Science of Money.viii I think we were successful in being able to briefly explain the dysfunctional debt-money system and the NEED Actix that would reform it. But it is a big ask to request one person in Congress to lead the charge against the entrenched private money power. What is truly needed is education of our citizens about just and unjust money systems, that then becomes a grassroots people’s movement — taking the Fight for Just Money to all our members of Congress.

In 2014 British monetary reform organization Positive Money commissioned Dods Research to ask Members of Parliament about money creation. 100 MPs responded to the online interview request.

Seventy-one per cent of all respondents said that they believed that the Government alone was responsible for creating money, while only 12 per cent said that it was true that bank loans create new money which is then destroyed on repayment.x

There is no reason to believe that our Congress is any better informed about how our money is created than the woefully uniformed British Parliament. Unfortunately the pollsters in the U.S. have had no inclination to ask our Congress, our people, our bankers, or our economists, how our money is created. Although polling our politicians would be helpful and certainly revealing, I am quite sure that their monetary ignorance would be the last thing that they would want exposed. But almost all of us are ignorant about money creation, just and unjust money systems. The politicians will eventually do what the people tell them to do, if and when, we as a people become educated about our present system of debt-money and its replacement by a system of just money anchored in the NEED Act that is already written and waiting to be reintroduced into Congress.

Banks create almost the entirety of what we use for money (credit) out of thin air when they make loans. Debt-money exists only while we are in debt. We must therefore be in debt forever to keep the system functioning. It is absolutely necessary for society to have some sort of money. We can continue with debt-money and endless debt, or we can institute a monetary system based on money being a abstract social power of the state, in which money is created, debt-free, by the state and spent into existence for the needs of the state and its people as determined by our elected, representative Congress.

The philosophical underpinning of the debt-money system is the ancient practice of thinking that money was a commodity, such as gold or silver, instead of an abstract legal power of the people. This is what Aristotle meant when he said, “Money exists not by nature [commodity money], but by law.” (Nicomachean Ethics: 1133)

The Federal Reserve Bank of Chicago published a booklet Modern Money Mechanics from 1961 till 1994. It was revised in 1968, 1971, 1975, 1982 and 1992. The following quote explaining money creation was taken from the last publication in 1994.

Who Creates Money?

Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank.

The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.

In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.

It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

Then bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.

Transaction deposits are the modem counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could “spend” by writing checks, thereby “printing” their own money.xi

What the Federal Reserve explained above is called fractional reserve lending/money creation. A fraudulent system if there ever was one. Banks creating and issuing more money (banknotes) than they have in reserve or on account, and justifying the practice because most people normally don’t want to redeem their banknotes at the same time for the commodity (in this case gold) that they represent. The ancient bankers (goldsmiths) and the modern day Federal Reserve were not in the habit of informing their customers that they did not have the gold or funds to back up their notes. A rare exception being the Modern Money Mechanics pamphlet produced from 1961 to 1994 by the Federal Reserve.

A monetary system that requires society to be in debt bondage to the banking system is reprehensible and the antithesis of democracy. The people are kept unaware of how the system functions largely because of its complexity and the refusal of the economics profession, dominated by the Federal Reserve, to simply explain money creation. Justice and democracy require us to have an understandable system that “promotes the general welfare”xii of society and does not require us to be in debt. Money is the lifeblood of our society and the one absolute necessity for modern society’s existence. It is therefore imperative that the people have a basic understanding of the system and are allowed to junk it for a better system if they so desire.

Full Disclosure Continued

Please proceed at your own risk, because the debt-money system is convoluted and dysfunctional. Academic explanations of our debt-money system are beyond difficult to follow, because the system itself is intuitively contrary to justice and democracy. Incredulity is the only word that properly portrays the average person’s state of mind as he begins to understand the depravity of the debt-money system.

I have used harsh words in describing the debt-money system. How else can one describe a system that endlessly siphons off interest on the money that we need for society to function? And then gifts that siphoned interest money to the financial elite? The debt-money system attaches leaches to us, from birth to death sucking our lifeblood, with the knowledge that our children and grandchildren are sentenced to the same fate. Increasingly greater and greater inequality between the financial class and the rest of the heap is a direct result of the debt-money system.

The following explanation is distilled from Dr. Joseph Huber, a critic of the present system and advocate for a sovereign system of public money.

Dr. Huber explains that most money and banking textbooks describe the current system as a two-tier money system. The central bank being one tier and the banking sector being the other. This is true. But many of their other explanations are not true: that the central bank creates the money and loans it to the banks, who then loan it to the customers (not true), or that the central bank creates money and then loans it to the banks in multiplied amounts (not true).xiii

While the system is two-tier, most explanations fail to disclose that the money does not pass from one tier to the other. There are two separate money circuits. One circuit being the public circulation of bankmoney [debt-money created by banks] between banks and nonbanks in the economy. The interbank circulation of reserves within the Federal Reserve System is the other circuit.xiv

Reserve is the technical term for non-cash central bank money on a bank’s operational account with the central bank (see Figure 1). More precisely, the reserves referred to here are payment reserves, i.e. liquid excess reserves for making interbank payments, in contrast to basically illiquid minimum reserve requirements.

The two circuits are separate and never mingle; however, the public circuit is technically tied to the interbank circuit, whereas the interbank circuit is basically independent, even though it helps mediate the cashless payments among nonbanks.

Reserves and bankmoney [debt-money] represent two distinct classes of money that cannot be exchanged for one another. Customers never obtain reserves in their current accounts, and bankmoney cannot be transferred into a bank’s central bank account. Customer deposits (bankmoney) thus cannot be used by banks to make interbank payments, and cannot be lent by banks to whomsoever; only customers themselves can spend, or invest, or lend their deposits (bankmoney) to other nonbanks.xv

We are indebted to Dr. Joseph Huber for his above explanation in “Split-Circuit Reserve Banking: Functioning, Dysfunctions and Future Perspectives”. If you are trying to make heads or tails out of monetary system, I advise you to read Dr. Huber’s paper, but no need to do so immediately. Dr. Huber probably does a better job than anyone in explaining the inner workings of a dysfunctional monetary system. Dr. Huber provides the best technical insight into the present debt-money system and also a proposed public money system of sovereign money. But he is an academic. For the public to delve into the murky water and intricacies of the dysfunctional debt money system is a guaranteed headache. For more by Dr. Huber I invite you to his website or obtain his book Sovereign Money: Beyond Reserve Banking (2017, London: Palgrave Macmillan).

When I first met Dr. Huber I was completely intimidated. Certainly not because of anything he did or said, but because my monetary knowledge level was so far below his and I had trouble following much of what he said. That was several years ago and since then we have both attended several of the American Monetary Institute’s Annual Conference on Monetary Reform. Dr. Huber has given very technical presentations at the conferences, while my calling has always been to relate money to social justice in layman’s terms. On one occasion Dr. Huber made a very gentle correction to my presentation in the Q&A after my talk. I remain grateful to him for his kind consideration. Instead of attacking my ignorance, he just made a very helpful suggestion.

The simple fact is that the debt-money system we are presently saddled with is dysfunctional and a nearly incomprehensible mess. Whether or not this dysfunction and confusion is intentionally orchestrated by the Federal Reserve and the economics profession is not clear and does not matter. Democracy and social justice demand that we have a functional, intelligible money system that works for both people and planet.

A Lost Century in Economics

In 2016 the German economist and expert in central banking Richard A. Werner published a landmark paper titled “A Lost Century in Economics: Three Theories of Banking and the Conclusive Evidence.” Professor Werner is connected to the Centre for Banking, Finance and Sustainable Development at the Southampton Business School, which is part of the University of Southampton in the United Kingdom.

He has done the work that the Federal Reserve monetary economists should have been doing all along. His paper above explains the three theories of how the banking system creates money. And he provides an empirical test that proves that what he refers to as the “credit creation theory of banking” (debt-money created by banks system) is where our money comes from.

During the past century, three different theories of banking were dominant at different times:

(1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries.

(2) The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of ‘multiple deposit expansion’ (the ‘money multiplier’).

(3) The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan.

The theories differ in their accounting treatment of bank lending as well as in their policy implications. Since according to the dominant financial intermediation theory banks are virtually identical with other non-bank financial intermediaries, they are not usually included in the economic models used in economics or by central bankers. Moreover, the theory of banks as intermediaries provides the rationale for capital adequacy-based bank regulation. Should this theory not be correct, currently prevailing economics modeling and policy-making would be without empirical foundation. Despite the importance of this question, so far only one empirical test of the three theories has been reported in learned journals. This paper presents a second empirical test, using an alternative methodology, which allows control for all other factors. The financial intermediation and the fractional reserve theories of banking are rejected by the evidence. This finding throws doubt on the rationale for regulating bank capital adequacy to avoid banking crises, as the case study of Credit Suisse during the crisis illustrates. The finding indicates that advice to encourage developing countries to borrow from abroad is misguided. The question is considered why the economics profession has failed over most of the past century to make any progress concerning knowledge of the monetary system, and why it instead moved ever further away from the truth as already recognised by the credit creation theory well over a century ago. The role of conflicts of interest and interested parties in shaping the current bank-free academic consensus is discussed. A number of avenues for needed further research are indicated. xvi

Empirical Test of Money Creation

To test the veracity of the three theories, the balance sheet of a bank needs to be examined before and after the extension of a bank loan, ideally under fully controlled circumstances. If the bank loan increased the balance sheet, while no further reserve or deposit movement took place, then the credit creation theory would be shown to be consistent with the evidence, while the other two theories would be rejected. xvii

Werner postulated that an empirical test would confirm the credit creation of money theory, while disproving both the current financial intermediation theory and the older fractional reserve theory.

It would also prove the 1931 assertion of the prestigious Macmillan Committee, officially named The UK Committee on Finance and Industry. This committee included John Maynard Keynes, Professor T. Gregory, professor of Banking at the LSE, Treasury and Bank of England Representatives, senior bank executives, a union representative, a representative of the cooperative movement, a politician and was chaired by Scottish attorney Hugh Pattison Macmillan. The Macmillan Committee was formed after the stock market crash on 1929 that began the Great Depression. Over the course of the next two years, it met 49 times and interviewed 57 witnesses.

The Macmillan Committee‘s Final Report was released in June, 1931. Werner quotes Lord Macmillan informing witness Josiah Stamp what they were searching for, “You appreciate that our main preoccupation is the question of the basis of credit affecting industry and employment…”xviii

The Committee’s Final Report is reputed to have been largely drafted by John Maynard Keynes. Referring to bank accounting of an individual bank, he stated:

It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books, which is the equivalent of a deposit.xix

John Maynard Keynes is widely thought of as one of the most influential economists of the 20th Century and is considered the founder of modern macroeconomics. His ideas became known as Keynesian Economics.

During the Great Depression of the 1930s, Keynes spearheaded a revolution in economic thinking, challenging the ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. He instead argued that aggregate demand determined the overall level of economic activity and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. Keynes’s magnum opus, The General Theory of Employment, Interest and Money, was published in 1936.xx

John Maynard Keynes explained that actual money creation aligned with the credit creation theory of banking that we are presently saddled with, referred here as the debt-money system. At least he did in writing the Macmillan Committee Final Report. Yet Warner also cites Keynes as one who “supported all three mutually exclusive theories at one point or another.” Werner then presents “a new standard of ambiguity is set by the Bank of England, which currently appears to be supporting all three theories at the same time.”xxi

No wonder the Federal Reserve is now so careful to not even tell us how money is created. If both Keynes and the Bank of England cannot or will not clearly explain in one voice how our money is created, we can then either accept the official line that it is too complicated for us or that it is a fraudulent crooked system.

Werner Provides Empirical Proof that What We Use for Money Is Created Out of Thin Air by Banks When They Make Loans

Two empirical tests were arranged by Werner with the Raiffeisenbank Wildenberg e.G., a cooperative bank in Lower Bavaria, Germany, and its very cooperative Bank Director Marco Rebl. The first test was a “live test” and not a completely controlled experiment. With modern 24 hour banking it is very difficult to control all other transactions.

Bank Director Rebl suggested a way to completely control external transactions. There are two parallel IT systems in operation at all Bavarian cooperative banks. The first empirical test used the daily balance sheet and reporting software ‘BAP Agree’. A different software is used for the compilation of the formal annual accounts of the banks that are submitted to the bank auditors and the regulatory authorities, ‘HJAP’. The HJAP system contains all the bank accounting rules, functions and conforms with all the bank supervisory, prudential and legal requirements, regulations and procedures (which may not necessarily be relevant or enforceable on a daily basis as applied by BAP Agree in everyday use). HJAP conforms to the more stringent annual reporting requirements and has other functions useful for regulators.

All transactions are put into HJAP for the annual accounts at yearend. Transactions in BAP Agree automatically feed into HJAP. It is possible that a transaction–because of the holidays or for another reason–would not make it into the BAP Agree system in the calendar year. In such a case the bank directors can manually put the transaction into the HJAP software even after the end of the calendar year.

The empirical test involved manually adding a 200,000 Euro loan into the HJAP software for the year 2013 after the BAP Agree yearend report. Therefore there were no other transactions or externalities that could confuse the results.

The result was consistent with the credit creation of money theory (bank created debt- money system). The bank assets increased by 200,000 Euros as a result of the manual entry of the loan into the asset column. The bank liabilities also automatically increased by a like 200,000 Euros, although nothing was entered here. The bank software automatically created a deposit to balance the books, in effect creating 200,000 Euros that did not come from cash, reserves or any other asset of the bank.xxii

In other words, banks create what we use for money out of thin air when they make loans. There is only one reason why this is not common knowledge. The financial establishment does not want you and I to know their dirty fraudulent secret.

“Critical Remarks on R. Werner’s Typology of Banking Theories”

I believe that Dr. Werner’s empirical test is valid and compelling evidence in how our money is created. I also believe Dr. Huber’s critical remarks are equally important in providing the complete picture of how the debt-money system functions. Dr. Huber, while not critiquing the actual test and results, has provided an important critique, “including an explanation why bankmoney is separate, but not independent from central-bank money”.xxiii

Extending credit without the credit being used does not make sense, and in this regard credit creation ‘out of nothing’, if taken literally, is misleading. Money creation ‘out of nothing’ is a catchy metaphor regarding the nature of modern money. But this should not obscure the fact that creating money denominated in a specific currency, and ensuring the validity and value of that money, has many prerequisites which a bank cannot meet ‘out of nothing’. One of these many requirements is the availability of a fractional amount of reserves and cash on which the banks’ credit and deposit creation is still dependent. Bankmoney creation and fractional reserve circulation go hand in hand indeed, even if today’s bankmoney regime is bank-led and entirely determined by the banks’ pro-active primary credit and deposit creation, whereas the central banks have become anytime re-financers of the banks and their debt dealers of last resort, regularly under conditions of business as usual, and all the more so in times of crisis which inevitably occur in a bank-led reserve system. xxiv

Of course, Dr. Huber is correct, but let us look at this from a more understandable, non-technical perspective.

Do banks create money out of nothing or thin air?  Yes and no.

I remember a discussion at the American Monetary Institute’s Annual Conference on Monetary Reform a few years ago on this very question. An economist had made the argument for the negative position. After some back and forth, Stephen Zarlenga came to the rescue with the statement. “Banks don’t create money out of thin air, they create what we use for money out of thin air.”

It is not real money, it is credit on the bank’s books. But it is what we use for money. Because we do not have a system of legal, sovereign, debt-free money, we are thus forced to use debt-money from the debt-money system. It’s the only game in town.

Okay, so it is not real money, it is only what we use for money. But is it created out of thin air? Again, yes and no. This paper that you are reading, while addressed to the economics profession, is also written for the education of the rest of us.

Banks create money, or more correctly what we use for money, out of the ether of the atmosphere, thin air, nothing, ex nihilo. But they can only do so because they are a bank, in league with other banks doing the exact same thing and within the umbrella of the Federal Reserve or central bank, that holds a fractional amount of reserves for the banks, acting as a clearinghouse to facilitate the process of creation after the fact.

I’ll stand with my earlier description. In other words, once the debt-money system has been put in place, the banks create money (more correctly, what we use for money) out of thin air and the reserve bank is charged with handling the bookkeeping to legitimize the process.

How many monetary economists are employed at the Federal Reserve?

On the Federal Reserve Website we can read that “The Federal Reserve Board employs just over 400 Ph.D. economists.xxv Of those four hundred how many are monetary economists?

Merriam-Webster defines macroeconomics as “a study of economics in terms of whole systems especially with reference to general levels of output and income and to the interrelations among sectors of the economy.”xxvi Those that deal with whole economic systems would seem to fit the bill to educate the public on our monetary system. The Federal Reserve Board, under the category “macroeconomics”, listed at this writing 228 economists who specialize in macroeconomics.xxvii

But remember in addition to the Federal Reserve Board, the Fed also has 12 Federal Reserve Banks District Banks (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco), that employ economists, including macroeconomic economists. The Federal Reserve Bank of Chicago lists 10 macroeconomic economists.xxviii If we assume that that number is an average, then the 12 Fed District Banks would contribute another 120 or so macroeconomists to the 228 from the Fed Board, giving us a total of about 348 that should be supremely qualified to educate us on how our money is created.

Lawrence H. White, economist at the University of Missouri–St. Louis outlined the Fed’s dominance in the field of monetary economic research.

THE FEDERAL RESERVE SYSTEM IS NOT ONLY THE SUBJECT OF research by American monetary economists it is also a major sponsor of their research. The Fed (the Board of Governors plus the twelve regional Reserve Banks) employed about 495 full-time staff economists in 2002. That year it engaged more than 120 leading academic economists as consultants and visiting scholars, and conducted some 30 conferences that brought 300-plus academics to the podium alongside its own staff economists. It published more than 230 articles in its own research periodicals. Judging by the abstracts compiled by the December 2002 issue of the e-JEL, some 74 percent of the articles on monetary policy published by US-based economists in US-edited journals appear in Fed-published journals or are co-authored by Fed staff economists.1 Over the past five years, slightly more than 30 percent of the articles by US-based economists published in the Journal of Monetary Economics had at least one Fed-based co-author. Slightly more than 80 percent had at least one co-author with a Fed affiliation (current or prior Fed employment including visiting scholar appointments) listed in an online vita. The corresponding percentages for the Journal of Money Credit and Banking were 39 percent and 75 percent. The editorial boards (editors and associate editors) of these journals are even more heavily weighted with Fed-affiliated economists (9 of 11, and 40 of 46, respectively). xxix

Dr. White is referring to articles on monetary policy. Hundreds of articles being largely written about the minute changes in the interest rate and other fragile calculations set by the Fed. In others words, hundreds of articles about the slightest fraction of difference in the present dysfunctional, fraudulent debt-money system. Not a single article about effects of the debt-money system on the American people and the possibility of using a non-debt based money system. Hundreds of monetary economists, painstakingly writing hundreds of articles about rearranging the deck chairs of our dysfunctional, fraudulent Titanic of a debt-money system, while millions of people were about to be cast into the freezing water of debt, as the Great Recession approached, and nary a peep from those in charge of the ship.

Searching the internet with Google for “federal reserve money creation”, I came up with 26 million entries, but nary a single one from the first several pages was an article or paper from the Federal Reserve explaining money creation. The Dallas Fed piece “Everyday Economics: Money”, referred to above, while touching upon money creation, certainly does not do so in an easily understandable manner. If the BoE’s “Money Creation in the Modern Economy”, Dr. Werner’s “A Lost Century in Economics” and Dr. Huber’s extensive writing in support of Sovereign Money are correct, the Dallas Fed article is incorrect in its portrayal of how our money is created.

The Fed employs 348 macroeconomists trained on whole systems of economics, and not a single one can scribble off an understandable paper explaining how the most necessary component of modern life, our money or more correctly what we use for money, is created?

Why is it important for the Federal Reserve to educate us on how our money is created?

Money is the one absolute necessity for existence in modern If we are to have a democracy, we the people need to be the ones that make the decision on how our money is created and what it is created for. To do so we need to be educated on the subject.

Merriam-Webster defines fraud as “intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right; an act of deceiving or misrepresenting.”

Most Americans think:

  1. Our federal government creates our money or what we use for money.

  2. Banks loan money that already exists.

  3. The Federal Reserve is part of our government.

All of this should be true. None of it is and the fact that the Federal Reserve, with hundreds of monetary economists on the payroll, has not been able to clearly explain that this is not true, makes our present debt money system fraudulent.

“Priceless: How The Federal Reserve Bought The Economics Profession”

Ryan Grim wrote this article for the Huffington Post in 2009 and updated it in 2013.

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found. xxxi

Written in the aftermath of the 2008 economic crash, Grim calls the Fed on the carpet for failing to see the Great Recession train wreck coming largely because of its stranglehold on the economics profession. Former Fed economists almost completely control the editorial boards of the major economic, must-publish, journals and thus control what gets published. “A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.” xxxii

Grim also quotes James Galbraith. “Try to publish an article critical of the Fed with an editor who works for the Fed.” xxxiii

Publishing in these journals determines who gets tenure, who doesn’t, who is considered a respectable economist and who isn’t. Those economists, who choose independence and publish articles critical of the Fed, do so with the very real risk of committing career suicide. And of course they would not be considered serious articles, because they would only appear in less prominent venues and not in the Fed controlled must-publish journals.

The Fed also keeps many former employees and other prominent economists outside the Fed circle on their payroll by asking them to review occasional submissions or articles about the Fed.xxxiv All this has the chilling effect of silencing diverging views and opposition to the Fed.

500 economists is extremely unhealthy”

I am certainly no fan of the late Milton Friedman and his Chicago School of free market economic policies that eventually became known as the Washington Consensus (globalization, privatization, no tariffs, deregulation, tax cuts, float currency value in financial markets and make world one efficient financial market). xxxv xxxvi Author Naomi Klein likens the implementation of the Washington Consensus policies in the 70s, 80s and 90s, that brought stubborn nations into the US led Western capitalist empire, to the use of electroshock therapy used on the mentally ill. A natural disaster of economic crisis occurs and the US-led West rides to the rescue of the shocked victims with its policies of privatization of everything public and austerity for the people. Big changes are easy to implement when people are in a state of shock, such as after an earthquake or financial crash. Naomi Klein’s book The Shock Doctrine — the Rise of Disaster Capitalism is the definitive work on the subject and readers are urged to read it.xxxvii

Even though I do not agree with Nobel Laureate Milton Friedman’s theories and policies, he was arguably the most influential economist of the last half century, and certainly was an elite member of the economic profession’s intelligentsia. So his opinion on the employment of monetary economists by the Federal Reserve is worth noting.

Dr. Friedman agreed that the Federal Reserve’s employment of 500 economists was unhealthy and not conductive to independent, objective research. In a letter to former Fed Economist Robert D. Auerbach, Friedman wrote:

I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conductive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results. xxxviii

And Friedman expanded on that position in a 1993 interview with Reuters, stating that the relatively enhanced reputation of the Fed with the public was aided “by the fact that the Fed has always paid a great deal of attention to soothing the people in the media and buying up its most likely critics” and acknowledging that the Fed employs “probably half of the monetary economists in the U.S. and has visiting appointments for two-thirds of the rest,” Friedman saw few in academia who were in position to critique the Fed’s policies.xxxix

Dr. Friedman was certainly not bashful in promoting his Chicago School policy of free markets and shock therapy to President Ronald Reagan. It would have been helpful if he could have put the same effort into publicly critiquing the Fed’s employment and monopolization of monetary economists.

“The Tyranny of the Top Five Journals”

University of Chicago Economist James Heckman and Predoctoral Fellow Sidharth Moktan wrote in the Institute for New Economic Thinking, that young economists understand the career importance of publishing in the top five economic journals (T5).

We find strong evidence for the influence of the T5. Without doubt, publication in the T5 is a powerful determinant of tenure and promotion in academic economics…,

Anyone who talks with young economists entering academia about their career prospects and those of their peers cannot fail to note the importance they place on publication in the so-called Top Five journals of economics, henceforth T5: the American Economic Review (AER), Econometrica (ECMA), the Journal of Political Economy (JPE), the Quarterly Journal of Economics (QJE), and the Review of Economic Studies (ReStud)….

This finding of strong T5 influence is corroborated by results from a survey of current Assistant and Associate Professors hired by the top 50 U.S. economics departments. On average, junior faculty rank T5 publications as having the greatest influence on their tenure and promotion outcomes, outranking seven different areas of research and teaching performance.

Anecdotal evidence suggests that T5 publications have a strong influence on tenure and promotion decisions. However, actual evidence on the influence of the T5 is sparse. How strong is this influence? How do junior faculty perceive this influence? Is the discipline justified in its reliance on the T5 as a filter of quality? What are the consequences of this reliance for the health and advancement of economics? This paper answers these and other questions pertinent to the future and well-being of the discipline.

Relying on rankings rather than reading to promote and reward young economists subverts the essential process of assessing and rewarding original research. Using the T5 to screen the next generation of economists incentivizes professional incest and creates clientele effects whereby career-oriented authors appeal to the tastes of editors and biases of journals. It diverts their attention away from basic research toward blatant strategizing about lines of research and favored topics of journal editors with long tenures. It raises entry costs for new ideas and persons outside the orbits of the journals and their editors. An over-emphasis on T5 publications perversely incentivizes scholars to pursue follow-up and replication work at the expense of creative pioneering research since follow-up work is easy to judge, is more likely to result in clean publishable results, and hence is more likely to be published.[2] This behavior is consistent with basic common sense: you get what you incentivize.xl

And who dominates the editorial boards of the Top Five? None other that former Federal Reserve economists. Within this Fed dominated system, any criticism of Fed policies is very measured and consideration of an alternative monetary system is unthinkable.

“Seven Bad Ideas”xli, Jeff Madrick

Jeff Madrick is a former New York Times and Harper’s economic columnist. Since the 1970s, the economics profession has largely accepted The Seven Bad Ideas as the gospel truth. They all greatly contributed to the financial collapse of the banking system in 2008 and the Great Recession that followed.

Mr. Madrick’s critique of the economics profession is spot-on, with one glaring exception. Unfortunately Mr. Madrick did not include the debt-money system as one of his bad ideas. Perhaps it is because he is because he is unaware of the fact that almost all of what we use for money is created as debt by banks making loans, exists only while we are in debt, and that there is legislation already written in Congress, NEED Actxlii, that would fundamentally change us from the debt-money system to a system of sovereign, public money. Based on defining money as an abstract social power – an institution of the law that has value because government receives it in taxes, and acts as a final means of payment.xliii

The 7 Bad Ideas, universally accepted as gospel by mainstream economics are the following:

1. The Beautiful Idea: The Invisible Hand of the Market — the free market is all powerful and never wrong

Adam Smith’s theory is the foundation of modern economics. A beautiful idea explains a lot with a little. It can be either correct or not. The earth being the center of the solar system was such an idea and it was false. Copernicus’ idea that the sun was the center of the solar system was also beautiful, but more important it was also correct.

Just observing markets, they can function wonderfully sometimes and other times not so wonderfully. Markets failed miserably causing the Great Depression and likewise more recently resulting in the 2008 Great Recession. A study of American history clearly shows a regular pattern of panics, depressions and recessions. Discarding this evidence and giving the markets almighty power* is a fool’s errand. (*omnipotence — see Zarlenga below)

2. Say’s Law — and Austerity Economics:

The controversial austerity economics that dictated Western economic policy in the wake of the Great Recession of 2008 was based, usually unwittingly, on a two-hundred-year-old law attributed to Jean-Baptiste Say, a French economist of the early 1800s. Simply stated, Say’s law holds that supply creates its own demand…and economies will adjust on their own to a more prosperous level.xliv

With Say’s Law as their lodestar, contemporary economists pushed austerity policies in the wake of the Great Recession. Unfortunately, austerity exacerbated, rather than ameliorated, the crushing effects of the Great Recession on the poor and working class.

Early in his career John Maynard Keynes believed in Say’s Law, but he recognized that it couldn’t hold water during the Great Depression. Wages dramatically dropped, but businesses failed to rehire as Say’s Law said they would and the unemployment rate rose to 25% and stayed there. Say’s Law assumed that financial systems were efficient in facilitating the exchange of goods and trade in the real economy. There was nothing in the equation for money, finance and speculation that wrecked havoc upon Say’s idyllic vision of the economy. In 1936 when Keynes wrote his magnum opus The General Theory of Employment, Interest and Money, opposing Say’s Law became one of its central features.xlv

Keynes became the chief promoter of government intervention in an economy in crisis. Deficit spending was his major weapon to combat depression and recession. His critics have always believed, then and now, that the markets would naturally correct and heal themselves without government intervention. Deficit spending was certainly vastly better than doing nothing. But it is most unfortunate that Keynes did not have the vision to understand that sovereign government money creation for the public benefit was vastly superior to the government borrowing money for the same purpose and having to pay it back plus interest.

3. Government’s Limited Social Role: Friedman’s Folly

Mainstream orthodox economists believe that the government should be a bystander in the economy and intervene only when the market fails. They also believe the market works with the perfection of a jeweled watch movement or the movement of the celestial bodies around the sun. Why then would the government ever have to intervene?

Milton Friedman, the profession’s most rigorous defender of markets, believed that a free market without government interference provides, but for a few exceptions, all the governance and all the protection of liberty a nation needs. In economic theory, there is no true sense of government’s central role in a nation’s economy and in every aspect of citizens’ lives. I call this Friedman’s Folly.xlvi

…over the past forty years, wages and salaries have stagnated in the United States, with those in the bottom half of the income distribution experiencing very modest gains or losing ground. Since the 1970s, Social Security, unemployment insurance, food stamps, the earned income tax credit, and other forms of government assistance have provided more than half the income of these people, and a very high proportion of all the income in the lowest 25 percent. This suggests more than a mere market failure; it suggests a chronic problem with free markets that requires persistent government response.xlvii

These are just a few of the highlights, or lowlights, of the first three of Seven Bad Ideas. It is highly recommended reading for everyone, with special emphasis on members of the economics profession.

The other bad ideas Madrick addressed were:

4. Low Inflation Is All that Matters

5. There Are No Speculative Bubbles: Efficient Market Theory

6. Globalization; Friedman’s Folly Writ Large

7. Economics Is a Science

I hope that Mr. Madrick writes a sequel about the debt-money system and my suggested title would be: An All Time Bad Idea — Giving the Money Power to Private Banks and Creating a Nation of Debt Slaves.

Stephen Zarlenga on the Economics Profession

I have had the privilege to hear our late friend and mentor to the monetary reform movement, Stephen Zarlenga, give the talk titled “Economics: A Clandestine Religion Masquarading As A Science” in full or part many times.

It begins with Stephen referencing a comment by Zbignieuw Brezinski, the former National Security Advisor to President Carter. Brezinski said that the new world order was destined to fail because of a lack of a universal religious underpinning such as the old world order of the Roman Empire had with emperor worship and later Christianity. Stephen did agree with Brezinski that the new world order would most likely fail, but disagreed that it did not have a religion.

…now we focus on a more fundamental battle with the new clandestine
religion known as “economics!

…this new [world] order does have a universal religious belief system called Economics. It has its own god, the Market; its own priesthood of
Economists; its temples, Banks, until recently clothed in ancient
temple architecture.

An example of the religious nature of economics is its promotion of
market as god. We are warned:

  • Don’t try to legislate on the market; it is stronger than
    our puny laws. It is omnipotent [almighty]

  • Don’ try to regulate outcomes, the market with input from all of
    its participants always knows best. It is omniscient [possessed of universal or complete knowledge]

  • Do the right things and the market will reward you, the wrong
    things and you’ll be punished. It is beneficent [doing or producing good]

Omnipotence, omniscience and beneficence are the attributes of a god, not a mere device for buying, selling and exchanging. – A strange deity that abhors morality and where even the most atheistic libertarians have been suckered into believing in the market’s “invisible hands” like multiple Holy Ghosts. xlviii

Stephen goes on to enlighten us about actual monetary history. I’ve looked up curriculums at several universities for undergraduate and doctoral economics programs. I can’t find monetary history or history of money listed as a course. Money & Banking, Monetary Policy, Economic History, Macroeconomics are the closest they come to an actual course on the history of money.

U.S. News & World Report lists the best global universities for economics.

#1 Harvard lists 224 economics courses, not a single one on monetary history or the history of money.xlix

#2 Massachusetts Institute of Technology lists 118 courses, not a single course on monetary history of the history of money.l

#3 Stanford lists 147 economics courses, not a single course on monetary history or the history of

Stephen’s Lost Science of Money gives us 750 pages of monetary history covering 3,500 years.lii The bibliography lists more than 400 sources, with notations for those directly referenced in the book, those considered especially recommended and those of direct importance in developing elements of his thesis. Stephen was a great proponant of original sources, this after studying at University of Chicago during President Maynard Hutchins’ tenure. I have personally seen the voluminous handwritten notes Stephen used in writing his magnum opus on money, the one absolute necessity in modern society.liii Yet we are stuck with an economics profession lacking formal education on monetary history and unable to critically examine the debt-money system.

Stephen’s talk highlighted the period from 1100 to 1500 CE, when economics along with philosophy and religion were all studied together by a group of Catholic Church philosophers called the Scholastics, that included Thomas Aquinas and Albert the Great. They all based their thinking on morality. Commercial dealings were defined by morality. They focused on usury. The taking of interest was allowed, if there was real enterprise risk to the lender.

The term usury had always meant “the structural misuse of the society’s money mechanism.”liv Usury is precisely what we have today. In 1787 Jeremy Bentham wrote his book In Defence of Usury. He used that platform to completely mis-define usury. He changed the definition from a structural misuse of society’s money system to “the taking of greater interest than the law allows or the taking of greater interest than is usual.”lv

Stephen Zarlenga certainly did not suffer from a failure to communicate. The Lost Science of Money stands as a monument to his skill in bringing our monetary heritage to life. It should be required reading for the entire economics profession. A word of warning though: Don’t expect The Lost Science of Money to be theories, equations and economist-speak that are the hallmarks of your profession. Instead it is a primer on social justice, because a just monetary system is social justice. It allows society to flourish and prosper. The Lost Science of Money uncovers lost monetary principles from ancient Greece and Rome, the Scholastics or Moral Economists of the Middle Ages, Venice, Amsterdam, the Moslems, Templars, Jews, American Colonial Currency, American Continental Currency and American Greenbacks.

Imagine a Federal Reserve committed to educating the public

It would certainly, in no uncertain words:

  • Tell us in how our money is presently created as debt by banks when they make loans.

  • Tell us that within this debt money system we must remain in debt for there to be money for society to function.

  • Tell us that our overall level of debt, individual and government, must steadily increase to provide a growing society with an increasing supply of money.

  • Tell us that the fact that when the banks create money for loans, nothing is created for the substantial interest that we must pay over the life of our loans. Thus dramatically increasing the gulf between what we are forced to repay, debts plus interest, and the much smaller money supply from which we must get the money to repay it, money created as debt.

Imagine the 348 macroeconomists at the Fed educating and informing the public about a system of money, based not on debt, but based on the law, the industry of the people and the needs of the nation.

They would certainly, in no uncertain words, write papers critiquing, pro and con, the only comprehensive reform of our debt money monetary system that has been put into Congress — the National Emergency Employment Defense Act of 2011 formulated by Dennis Kucinich and co-sponsored with John Conyers.

The NEED Act

Since the NEED Act was put into Congress in 2011, the 348 macro-economists at the Fed have managed to completely ignore the NEED Act that would:

  1. Put all money creation back where the Constitution squarely calls for itlvi and where most people, intuitively and mistakenly, think it currently resides, with our Congress as representative of the will of the people.

  2. Decisively stop all bank creation of money, so that banks will be doing what people mistakenly believe they are doing now, i.e. loaning money that already exists.

  3. Strip the Federal Reserve down and put it into the Treasury Department, so that it becomes a part of our government, again what most people mistakenly think it is now.

The NEED Act would repay the federal debt as it comes due, which is an impossibility within the present debt money system. Our current debt money system repays old federal debt with new debt. Thus keeping us in debt and forcing us to accept austerity instead of funding vital programs that our people need.

The NEED Act would fund the Infrastructure Report Card of the American Society of Civil Engineers. 1 lvii lviii Estimates when the NEED Act was introduced in 2011 were that 7.2 million new, full-time, good-paying jobs would be created as a result of properly funding our nation’s infrastructure needs.lix There is no reason to believe that fully funding our current infrastructure needs with the NEED Act today would not create 7.2 million or more new, good-paying, full-time jobs.

Under the NEED Act, US Money created by the federal government could provide funds to cover unpaid portions of an all-inclusive national healthcare plan, such as the proposed New Improved Medicare for All.

Climate change and a myriad of other ecological crises confront humanity and only the NEED Act can provide the funds to properly take care of our Mother Earth.

The 2008 Great Recession was a disaster for the poor and the working class. Meanwhile the financial class was well taken care of:

  • Congress immediately passed $700 billion for the financial services industry.lx

  • The Federal Reserve loaned struggling big banks $7.7 trillion in secret loans.lxi

  • “Wall Street got a legal bailout too. Despite countless financial crimes, including making false statements regarding the creditworthiness of mortgage backed securities, only one major executive from the big banks or the rating agencies has been successfully prosecuted by the U.S. Department of Justice.”lxii

Meanwhile millions of poor and working class people, with scant assistance from the government, lost their jobs and homes with equal abandon.

Recovery from Great Recession = $166,000 Each???

U.S. wealth increased from $58.9 trillion 2008 yearendlxiii to $113.5 trillion 2019 second quarterlxiv, an increase of $54.6 trillion in 10 1/2 years. With a U.S. population of 329 million, the increase in wealth translates to $166,000 per person. That is the recovery from the Great Recession, $166,000 for every person in the country, almost a doubling of the existing wealth in 2008. $664,00 for the once typical American family of four. How much did you and your family get?

Don’t let anyone tell you that our federal government cannot legally create our own money, debt-free, and spend it into existence, thereby putting our people to work at good jobs; rebuilding our country’s infrastructure in an environmentally sustainable manner; educating our youth; providing all inclusive national healthcare; transitioning to clean sustainable energy; and addressing the myriad of other environmental crises that we face.

The banks got bailed out, the wealthy accumulated the vast majority of $54.6 trillion during the recovery, and the rest of us got little if anything. But immediately stopping bank creation of money will lead to deflation and depression without also directly infusing money into the system. As a result, the NEED Act calls for a substantial Citizen’s Dividend to be paid to each citizen. While no dollar amount is mentioned in the legislation, $10,000 per person seems to be a minimum fair amount and enough to stimulate the economy before infrastructure projects can begin to break ground.

With frank communication from the Federal Reserve and the economics profession we the people just might want to relegate the fraudulent debt-money system to the dustbin of history and replace it with a democratic public system of money based on Aristotle’s observation that “Money exists not by nature, but by law.”

One would think that the 348 macroeconomists directly on the Fed’s payroll would be able to put their heads together and simply explain how our money is created. Sadly that is not the case. With the exception of the (flawed) Dallas Fed’s “Everyday Economics: Money”, this author can find no Federal Reserve position papers on how our money is created, written after 1994 when Modern Money Mechanics stopped being published. Money is necessary for our survival, and the Federal Reserve, that has been put in charge of our money system, cannot simply explain how our money is created?

Lost Science of Money

After commenting on the NEED Act, the Federal Reserve’s 348 macroeconomists should examine and critique the American Monetary Institute’s late director Stephen Zarlenga’s The Lost Science of Money, the book which,

  • Traces the money power through three and a half millennia from barter to the Euro.

  • Draws fascinating, previously lost monetary principles from ancient Greece and Rome, from the experience of the Moslems, Venice, the Templars, the Jews, the Bank of Amsterdam and Bank of England, and the Federal Reserve System.

  • Shows that the question of usury is far from settled, and that monetary reform is more a matter of morality and law than economics.

  • Demonstrates that a good money system must be based in law, not in commodities.

  • Defines the essential elements needed to remove structural injustice from our money system. lxv

Breaking the Shackles of Debt Slavery

The Chicago Plan Revisitedlxvi is a 2012 International Monetary Fund Working Paper by Jaromir Benes and Michael Kumhof. Dr. Kumhof read Stephen Zarlenga’s Lost Science of Money and called it a “masterful work”lxvii. Kumhof and Benes then put the 1939 A Program for Monetary Reformlxviii (Chicago Plan) into their DSGE (dynamic stochastic general equilibrium) computer model. The Chicago Plan was a serious proposal by serious men from the depth of the Great Depression. Some of the then prominent economists involved were Paul H. Douglas, University of Chicago; Irving Fisher, Yale University; Frank D. Graham, Princeton University, Earl J. Hamilton, Duke University, Willford I King, New York University; Charles R. Whittlesey, Princeton University. The NEED Act is a descendent of the Chicago Plan.

The paper stated in the Abstract:

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan:

(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.

(2) Complete elimination of bank runs.

(3) Dramatic reduction of the (net) public debt.

(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.lxix

Much better control of business cycle fluctuations (recessions and depressions), complete elimination of bank runs, and dramatic reductions of both public and private debt are possible by stopping the cancer of debt-created money! Inflation can drop to zero without posing problems for the conduct of monetary policy. These conclusions were reached using the same type of DSGE modeling that the Federal Reserve uses.

The Constitution and a Just System of Money

The US Constitution clearly placed money creation with the people through our Congress. “The Congress shall have Power… To coin Money, regulate the Value thereof.” (Art. I, Sec. 8)

“The Constitution and a Just System of Money” argues that the Power to coin (create) money is given to the people through our elected Congress by the U.S. Constitution and cannot be given to banks and the Federal Reserve without amending the Constitution.lxx

The Constitution was a proposal put together for approval of the States to ratify. Only ratification made it law. The first standard to interpret ambiguous words or phrases should be the understanding of those that ratified the Constitution making it law, not those that wrote or proposed it. The second standard, if the understanding of the ratifiers’ is unclear, is the meaning of the words as they were meant at the end of the 18th Century.

Robert Natelson’s study “Paper Money and the Original Understanding of the Coinage Clause” provides numerous evidence that colonists in the late 18th Century had used all sorts of things for money, such as coins, furs, beads, wampum and, yes, paper money. The verb ‘to coin’, in addition to making a metal coin, also meant to create. Although most of the colonists were comfortable with paper money, even those that stood against it understood that paper was in fact used as money.lxxi

If the Constitution placed money creation with the Congress, it follows that all money creation belongs to the people through our elected government; be it coins, paper, accounting entries or electronic pulses in a computer’s memory.lxxii

The 348 macroeconomists at the Federal Reserve should be assured that putting the Money Power back with the people and Congress conforms to both the letter and spirit of our Constitution. It is the present debt-money system that fails on both counts.

Depression Era Economics Profession Overwhelmingly Supported Monetary Reform

The Chicago Plan was first proposed in 1933 and never implemented.  Other New Deal reforms were adopted and there was an initial partial recovery from the depths of the Great Depression. The Banking Act of 1935 instituted federal deposit insurance and separated commercial and investment banking. While these reforms were helpful, they neglected the structural problem of private money creation as debt. The Recession of 1937-39 followed. The authors of the Chicago Plan wrote a more detailed sequel in 1939 “A Program for Monetary Reform” which is what is now referred to as the Chicago Plan. From the Foreword:

The great task confronting us today is that of making our American system, which we call “democracy”, work…

The important objective, therefore, is to repair and rebuild our economic system so that it will again employ our productive resources to the fullest practicable extent. A high scale of living for our people will better protect our cherished American democracy than will all the speeches and writings in the world….

Throughout our history no economic problem has been more passionately discussed than the money problem. Probably none has had the distinction of suffering so much from the general misunderstanding — suffering from more heat than light. As a result, not only is our monetary system now wholly inadequate and, in fact, unable to fulfill its function; but the few reforms which have been adopted during the past three decades have been patchwork, leaving the basic structure still unsound.”

The major “patchwork” reforms of the “past three decades” were none other than beginning the Federal Reserve System in 1913 and in 1935 the creation of federal deposit insurance and the separation of commercial and investment banking. The 1939 reforms, while helpful, were unable to keep us from entering into recession just two years later. The Foreword continues:

In analyzing this problem, we concluded that it is preeminently the responsibility of American economists to present constructive proposals for its solution. But, before organizing a movement for monetary reform, we wished to determine how many of our colleagues agree with us.  For this purpose we drew up “A Program for Monetary Reform” and sent this to the completest available list of academic economists which, we believe, comprise the essential features of what needs to be done in order to put our monetary system into working condition. Up to date of writing (July, 1939) 235 economists from 157 universities and colleges have expressed their general approval of this “Program”; 40 more have approved it with reservations; 43 have expressed disapproval. The remainder have not yet replied.

We want the American people to know where we stand in this important matter. The following is the first draft of an exposition of our “Program”, and the part it may play in reconstructing America.lxxiii

The manuscript was signed July 1939 by Paul H. Douglas, Irving Fisher, Frank D. Graham, Earl J. Hamilton , Willford I. King, Charles R. Whittlesey

On the question of monetary reform similar to the 2011 NEED Act, a significant sampling of 1939 academic economists expressed approval:

· 86% expressed general approval or approval with reservations

· 74% expressed general approval

· 14% disapproved

Fast forward eighty years later and we have an economics profession that either does not understand how what we use for money is created or understands and prefers to keep this knowledge concealed from the citizens of our country whose duty is to approve or disapprove of policy at the voting booth.  We the people are thus ignorant on the most crucial of issues — how money our very lifeblood is created and by whom. 

Maastricht University Economics Students Question How Money Creation Is Presented and Taught in Their Textbooks

In 2019 economics students at the Maastricht University in the Netherlands posted “An Open Letter to the Dean of SBE and all Economics Professors Maastricht University (UM)”. The letter opens with:

We are a student-driven initiative at Maastricht University that is eager to improve the economics curriculum. With this open letter, we want to raise your awareness that what is currently taught in economics at UM on how banks work and how money is created is contrary to existing evidence and does not fit with the high-quality education that UM offers. Professors and textbooks at UM teach the mainstream but faulty view of “loanable funds” and “money multiplier”, even though central banks and commercial banks openly admit that those concepts are misleading.

We’d like to present convincing peer-reviewed evidence to demonstrate that both the approaches of “loanable funds” and “money multiplier” are incorrect and unproven, and that teaching these concepts has implications for UM’s education in economics.lxxiv

The letter then goes on to show examples from their textbooks that back up their premise that they are not being taught how money is actually being created. This is a great initiative on the part of the Maastricht University students and they are to be thanked and congratulated for their effort in speaking truth to the Monetary Power. I believe the letter was written early in 2019 and now in October, 2019 I am unable to discover whether or not their concerns were addressed.


We cannot have democracy without a system of sovereign, debt-free, money that enables all Americans to have a good life, not just those fortunate enough to find themselves at the top of the heap. We the people need to bring that message to our elected representatives at all levels.

Education is a huge part of fixing the problem. While monetary history needs to be taught in our schools, that is hardly enough. It should be discussed over the dinner table with our families, in the break room at work and wherever we meet with our friends. Economists first duty should be to support the best monetary system for the people that conforms to our Constitution. Their responsibility as citizens is to people and Constitution, not the dysfunctional and fraudulent debt-money system.

The economics profession needs to break free from the present regimented group think that has stifled free independent thought and debate within their profession. They should never allow themselves to be held hostage to a debt-money system that requires blind obedience from their disciples. Nothing less than the future of our country is dependent on them breaking free of their present deference to the debt-money system.

Concerned citizens have been researching and advocating for comprehensive monetary reform. Stephen Zarlenga’s 2002 The Lost Science of Money was a huge step towards monetary reform. The American Monetary Institute’s American Monetary Act that was put into Congressional legislative language in 2011 by Dennis Kucinich and John Conyers as the NEED Act was the next huge step. In 2018 monetary reformers formed The Alliance for Just Money as an educational and advocacy citizens group for comprehensive monetary reform.

At present there are no big corporate or institutional financial supporters of monetary reform. The Alliance for Just Money (AFJM) and the American Monetary Institute need your support. While funding support of all sizes is needed, even more necessary is your involvement as a citizen. Former Supreme Court Justice Louis Brandeis wisely counseled us that “The most important political office is that of the private citizen.”lxxv Together we as private citizens must bring about the change.

Another Louis Brandeis quote, this directed to our economics professionals,

If we would guide by the light of reason we must let our minds be bold.lxxvi

Yes, please, let your minds be bold and guided by reason to examine the debt-money system we are saddled with and the sovereign public money system of the NEED Act, that is guided by historical exampleslxxvii, conforms to the spirit and letter of the Constitutionlxxviii and will allow the people and country to break the shackles of debt slavery.

People, country and planet need economics professionals of all stripes, especially Federal Reserve stripes, to examine and research alternatives to the debt-money system. Monetary reform is the cornerstone to a better future for all.


Auerbach, Robert D. 2008. Deception and Abuse at the Fed. University of Texas Press.

Benes, Jaromir & Kumhof, Mic hael. 2012. “The Chicago Plan Revisited.” IMF Working Papers 12/202. Washington: International Monetary Fund.

Board of Governors Federal Reserve System. 2018. “Household Net Worth and Growth of Domestic Nonfinancial Debt“. Federal Reserve Statistical Release, 20 Sept 2018.

Board of Governors Federal Reserve System. 2019. “Household Net Worth and Growth of Nonfinancial Debt“. Financial Accounts of the United States: Front Matter.

Board of Governors of the Federal Reserve System.”Meet the Economists“.

Clayton, Stephen. 2015. “Money“. Everyday Economics. Federal Reserve Bank of Dallas.

Das, Vijay and Singh Sethi, Arjun. 2016. “Tough Road for Great Recession Victims: USA Today, 17 March 2016.

Douglas, Paul H. & Fisher, Irving et al. 1939. A Program for Monetary Reform. MS.

Egnatz, Nick. 2019a. “The Necessity for Monetary Reform and a Just System of Money“. Alliance for Just Money, 26 May 2019.

Egnatz, Nick. 2019b. “The Constitution and a Just System of Money“. Alliance for Just Money, 17 July 2019.

Federal Reserve Bank of Chicago. 1992 (1962). “Modern Money Mechanics“. Chicago, IL: Public Information Center, The Federal Reserve Bank of Chicago.

Grim, Ryan, 2019. Priceless: How The Federal Reserve Bought The Economics Profession“. Huffington Post, October 23, updated May 13, 2013,

Heckman, James and Moktan, Sidharth. 2018. “The Tyranny of the Top Five Journals“. Institute for New Economic Thinking, 2 Oct 2018.

Huber, Joseph. 2014. “Modern Money Theory and New Currency Theory”. Real-World Economics Review, 66, (13 Jan 2014): 38-57.

Huber, Joseph. 2016b. “Critical Remarks on R. Werner’s Typology of Banking Theories: Including an explanation why bankmoney is separate, but not independent from central-bank money”. Sovereign Money: Website for New Currency Theory and Monetary Reform.

Huber, Joseph. 2017a. Sovereign Money. Beyond Reserve Banking. London: Palgrave Macmillan.

Huber, Joseph. 2017b. “Split-Circuit Reserve Banking: Functioning, Dysfunctions and Future Perspectives”. Sovereign Money: Website for New Currency Theory and Monetary Reform. Jan 2017. And in: Real-World Economics Review, 80: 63-84.

Johnson, M. Alex. 2008. “Bush signs $700 billion financial bailout bill“. NBC News, 3 Oct 2008

Klein, Naomi. 2007. The Shock Doctrine: The Rise of Disaster Capitalism. New York: Henry Holt.

Madrick, Jeff. 2014. Seven Bad Ideas. New York: Alfred A. Knopf.

McLeay, Michael & Radia, Amar & Thomas, Ryland. 2014a. Money Creation in the Modern Economy”. Monetary Analysis Directorate. Bank of England Quarterly Bulletin (Q1, 2014): 14-27.

McLeay, Michael & Radia, Amar & Thomas, Ryland. 2014b. “Money in the modern economy: an introduction”. Monetary Analysis Directorate. Bank of England Quarterly Bulletin (Q1 2014): 4-13.

Harvard University. “Search Courses“.

Natelson, Robert G. 2008. “Paper Money and the Original Understanding of the Coinage Clause.” Harvard Journal of Law & Public Policy, 31: 1017-81.

National Emergency Employment Defense Act of 2011 (NEED Act).  H.R.2990 – 112th US Congress (2011-2012).

Pluralism in Economics (PINE). 2019. “An Open Letter to the Dean of SBE and all Economics Professors Maastricht University (UM)“.

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The Week Staff. 2011. The Federal Reserve’s ‘breathtaking’ $7.7 trillion bank bailout“. The Week, 28 Nov 2011.

Werner, Richard A. 2016. “A lost century in economics: Three theories of banking and the conclusive evidence”. International Review of Financial Analysis, 46: 361-379.

White, Lawrence H. 2005. “The Federal Reserve System’s Influence on Research in Monetary Economics. Econ Journal Watch, 2/2: 325-354,

Zarlenga, Stephen. 2002. The Lost Science of Money. The Mythology of Money – the Story of Power. Valatie, NY: American Monetary Institute.

Zarlenga, Stephen. 2004. “Economics: A Clandestine Religion Masquerading as a Science“. School of Cooperative Individualism Library.


1 The ASCE Infrastructure Report Card comes out every 4 years. When the NEED Act was written the 2009 ASCE Report Card (Grade D) called for $2.2 trillion in spending to bring our infrastructure up to a B grade. The 2013 Report Card (Grade D+) called for $3.6 trillion in spending. The 2017 Report Card (Grade D+) calls for $4.6 trillion in spending over 10 years. The current or 2017 Report Card further estimates that our federal and state governments will invest or spend $2.5 trillion over 10 years, leaving a gap of $2.1 trillion in unfunded spending to bring our infrastructure up to a B grade.


i  McLeay et al, 2014.

ii  Google Search, “Federal Reserve money creation in the modern economy“.

iii  Clayton, 2015.

iv  Clayton, 2015:11.

v  Huber, 2014: 42.

vi  McLeay et al, 2014.

vii  Idem.

viii  Zarlenga, 2002.

ix  National Emergency Employment Defense Act of 2011.

x  Dods Research, July 2014, Parliamentary perceptions of the banking system

xi  Federal Reserve Bank of Chicago, 1994: 3.

xii  Preamble, U.S. Constitution

xiii  Huber, 2017b: 63-4.

xiv  Idem.

xv  Idem.

xvi  Werner, 2016.

xvii  Idem.

xviii  Quoted in Werner, 2016: 238.

xix  Quoted in Werner, 2016: 8. From Macmillan Committee (1931). British parliamentary reports on international finance: The report of the Macmillan committee. London: H.M. Stationery Office.

xxi  Werner, 2016.

xxii  Idem.

xxiii  Huber, 2016.

xxiv  Idem.

xxv  Board of Governors of the Federal Reserve System, “Meet the Economists“,

xxviMacro economics. Merriam Webster Dictionary.

xxviiBoard of Governors of the Federal Reserve System, “Meet the Economists“, Macroeconomics.

xxviii  Federal Reserve Bank of Chicago. “Person Listing.”

xxix  White, 2005.

xxx  Egnatz, 2019a.

xxxi  Grim, 2019.

xxxii  Idem.

xxxiii  Idem. Quoting University of Texas economist James Galbraith.

xxxiv  Idem.

xxxv  Klein, 2007: 204.

xxxvi  Madrick, 2014: 164-188.

xxxvii  Klein, 2007.

xxxviii  Auerbach, 2008: 142.

xxxix  Idem:142-143.

xl  Heckman, 2018.

xli  Madrick, 2014.

xlii  National Emergency Employment Defense Act of 2011.

xliii  Zarlenga, 2004.

xliv  Madrick, 2014: 45.

xlv  Idem: 51.

xlvi  Idem: 79.

xlvii  Idem: 81

xlviii  Zarlenga, 2004.

l  Massachusetts Institute of Technology. Department of Economics.

li  Stanford University. Courses in Economics.

lii  Zarlenga, 2002.

liii  Egnatz, 2019a.

liv  Zarlenga, 2002: 306.

lv  Zarlenga, 2002: 342.

lvi  Egnatz, 2019b.

lvii  American Society of Civil Engineers. 2017. Infrastructure Report Card, History.

lviii  American Society of Civil Engineers. 2017. Infrastructure Report Card, Economic Impact.

lix  NEED Act. 2011. Infrastructure Jobs Numbers. American Monetary Institute.

lx  Johnson, 2008.

lxi  The Week Staff, 2008.

lxii  Das, 2016.

lxiii  Board of Governors Federal Reserve System. 2018.

lxiv  Board of Governors Federal Reserve System. 2019

lxv  Zarlenga, 2002. Book jacket.

lxvi  Benes & Kumhof, 2012.

lxvii  Kumhof quoted in Wiki entry Stephen Zarlenga.

lxviii  Douglas, 1939.

lxix  Benes and Kumhof, 2012.

lxx  Egnatz, 2019b.

lxxi  Natelson, 2008.

lxxii  Egnatz, 2019b.

lxxiii  Douglas et al, 1939.

lxxiv  Pluralism in Economics (PINE). 2019.

lxxv  Great Thoughts Treasury, Louis D. Brandeis.

lxxvii  Zarlenga, 2002.

lxxviii  Egnatz, 2019b.


Updated on December 30, 2021

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Govert Schuller
Govert Schuller
3 years ago

Great article. Any response from bankers?