Today, the setting of interest rates is the major way the Federal Reserve has for carrying out its monetary task of regulating the nation’s money supply. The setting of interest rates serves to modulate the rate of money creation through bank lending. The money supply is a balance between the rate of money creation by bank lending and the rate of withdrawal of money through the repayment of bank loans.
Under monetary reform regulating the money supply will no longer be based on lending. The money supply will be the result of a balance between the rate of money creation by government and the rate at which money is withdrawn from circulation by taxation. Monetary policy should only regulate the money supply. With lending no longer being a tool of monetary policy, interest rates are no longer a matter of monetary policy.
Stephen Zarlenga may have understood this. It may be the reason why interest rates are only mentioned in the National Emergency Employment Defense Act (NEED Act) as an afterthought in Title 5, where interest rates are capped at 8% without explanation or justification for the choice of that number. Maybe it was inserted, not by Zarlenga, but during the legislative process that led to its introduction into Congress.
Perhaps Zarlenga’s idea was that under the NEED Act, the price of money would be set like prices are set for other things in the marketplace and that competition in the lending market would keep interest rates low. Competition in the pricing of other things serves to constrain prices, why should that not work with money?
Following this logic, perhaps interest rates should not be included at all in American Monetary Reform Act (AMRA).
However, interest rates are vitally important. They are important because they serve as a channel for wealth transfer from the many (the borrowers and users of money) to the few (the lenders). And that will be the case even after monetary reform. But the issue of interest rates will be separate from monetary policy because the money being lent will all be pre-existing money. It will not change the money supply.
Under monetary reform, the setting of interest rates becomes a market issue, not a monetary issue. It will have to be approached as such. There, the issues of the nearly unlimited power of large corporations must be dealt with. If lending under monetary reform is handled by large investment banks, it like other businesses will tend toward oligopoly; price gouging and wealth concentration through interest payments will continue. Can government effectively oppose this through anti-trust regulation when corporations have more resources than government and have the same rights as people?
Another question relating to interest is the role of government lending under monetary reform. Will the government be increasing the money supply both by spending and lending into circulation? There are good reasons why government might want to lend. It might want to stimulate economic activity toward renewable energy sources without permanently increasing the money supply. AMRA does specify that the Treasury Secretary may lend to banks out of the Revolving Fund simply for maintaining bank liquidity, especially during the transition to the new system. Without some form of credit guidance, that would not necessarily mean that bank lending would go for renewable energy or other projects that serve the public interest.
Any government lending puts the government in the position of setting interest rates, at least for its own lending, although not for monetary purposes, i.e., not for regulating the money supply. High rates charged to banks would tend to slow bank lending, but that would not affect the money supply, since bank lending under monetary reform will only be of pre-existing money loaned to the banks. It will not be influencing the money supply.
If government limits money creation to spending, then the money supply will be regulated by the balance between government spending and government revenue by taxation. It is interesting that, if one realizes that growth cannot continue unabated on a finite planet, then the money supply will have to move toward a steady state. That implies a move toward a “balanced budget” where government expenditures equal tax revenues.
One of the main reasons to advocate for monetary reform is to halt the concentration of wealth caused by the current system of money creation. But the current monetary system is not the only way in which wealth concentration occurs. It occurs in the marketplace when competition fails to restrain prices, as corporations buy one another out, effectively eliminating competition. Regressive taxation policies also aid wealth concentration. As Justice Brandeis said, “We can have democracy or we can have great wealth concentrated in the hands of the few, but we cannot have both.” Democracy is at stake with these issues.
All of this raises a question as to whether AFJM should stick with monetary reform or engage in some way in these other issues that also affect the just and sustainable society that monetary reform is trying to bring about. Our expertise lies in the monetary arena; that should be our focus. But these other issues are also of central importance to our goals.