A new understanding of Money – how it would radically improve Government Funding, and enhance our prosperity and freedom. We define our method as "maxation": replacing traditional modes of taxation with a monetary-policy-based funding.
Our solution is to replace the current Federal Reserve with a true democratic National Central Bank, and replace US Treasury debt with a new method of government funding which is similar but with a crucial difference; we further assert that this new method would also efficiently and fairly eliminate most kinds of taxation. We then propose a new 'e-Dollar' form of currency to enhance security, efficiency, and reasonable control of inflation.
The following proposal has a strategy rooted in The US Constitution (Article 1, Section 8) authorizing the power "To coin money, regulate the value thereof". We assert that much of this power has been 'privatized' to the disadvantage of "We the People"; and, by recovering that right and power, many aspects of the current financial crisis can be fixed, and future shocks avoided. Our plan combines features advocated variously by conservative Republicans and progressive Democrats, but with key new ideas. We'll begin with a brief historical review.
For our first hundred years, money was assumed to be backed by silver (or later, gold); but from the beginning, there was intense debate and conflict about who would have the control, the balance of power, regarding the 'money supply'. Some wanted it to be mainly public, via the US federal Treasury and a democratic National Bank; others wanted the British model favoring powerful private bankers. In 1913 an apparent 'compromise' was reached, creating the current Federal Reserve System of banking. Its publicly-stated goal was to prevent the periodic financial crises that plagued the 1800's; however, it failed to avert the 'Great Depression' of 1929 and significant crises since then, nor prevent inflationary loss of 90% of the dollar's real value. A study of this history reveals remarkable influence by wealthy private banking cartel families on the design and outcome of monetary legislation.
Although the government has some control by appointing its Board of Governors, and it's ostensibly 'not for private profit', the 'Fed' is a corporation whose stock is owned exclusively by privately-owned banks which elect 6/9 of the Directors, and which profit from it in two ways: directly via stock dividends, and more importantly the right to create money (and lend it at interest) via the 'fractional reserve' mechanism. For this reason it is designated 'quasi-governmental' or 'semi-private'; such a 'compromise' is perhaps 'the worst of both' rather than the best.
The importance of this private money-creation power accelerated with the end of the 'hard-money gold standard'. The central fact is that 'offering credit' (loaning) via 'fractional reserves' is de facto creation of money; and it is the historically huge 'boom-then-bust' cycle of credit, amplified by dubious private banking practices, that is at the heart of our current 'deflationary' crisis.
The decoupling of the US Dollar from gold that was begun by Franklin Roosevelt, progressed to the post-WWII adoption of the US Dollar as the de facto World Reserve Currency. This enabled the final step by Nixon when he completely removed the gold/silver redemption aspect of the US Dollar. This status was then bolstered by the informal but powerful international agreement to price ‘black gold’ – petroleum – primarily in US Dollars. It progressively strengthened as individuals, corporations, and governments worldwide became motivated consumers of the Dollar (both as suppliers of goods to US consumers, and as savers of US Treasury notes and bonds). In general, this status has been of enormous mutual benefit globally; and it matches (or exceeds) the importance of the US Military in defining the USA as the global superpower.
In conservative politics, it is common to decry the enormous USA “National Debt” and “Negative Balance of Trade” ‘deficits’ – without acknowledging the very positive aspects of both. We assert here that the worry is only ‘half right’. Our solution is to replace that debt with a new method of government funding which is similar but with a crucial difference; we further assert that this new method would also replace most kinds of taxation.
In practice over the past several decades, the proportion of federal government spending that is sourced from taxation has dramatically decreased, with increasing use both of direct Treasury Debt sales, and indirect ‘money-creation’ (commonly called ‘printing money’ but in practice much more which 'the Fed' calls 'quantitative easing') -- all forms of monetary inflation, ie, increase in the supply of money available to the national (and global) economy. This has escalated with the financing of the middle-east wars, and again with the present economic crisis. The 'Debt/Credit' twin now dwarfs its simple 'Real Money' brother.
We can now assert that most of the traditional forms of USA federal taxation are obsolete. Such taxation presupposes a ‘hard-money’ constraint that has not existed for many decades. Such taxation provably by its nature creates a drag on economic development, by competing with private productive enterprise for dollars. It exacerbates recessions and economic crises; it oppresses and intimidates us all.
Common sense and modern fiscal science indicate that some degree of inflation of the money supply is necessary for continued economic growth, and this controlled-inflation-in-moderation is a tenet of central banks globally, including our own Federal Reserve. We assert that uniquely for the USA, it is both efficient and generally fair to replace the current taxation structure with a controlled-monetary-inflation mechanism.
However, this depends upon a return of the right to create money exclusively to the federal government, a reasonable monopoly based on the US Constitution which assigned the right to mint coin and issue currency. Today, most money is created by the private banks (and the semi-private Federal Reserve) via fractional-reserve lending, with the attendant benefits (interest profits) flowing to their private shareholders. This is an outrageous form of 'corporate welfare', mandating massive transfers of wealth to the already-wealthy.
We must emphasize the fact that there is only a very elastic relation between such monetary inflation, and ‘price inflation’ (contrary to the conservative ‘hard-money’ advocates who assume a rigid fixed relation). Simply put, a carefully measured increase in money supply does not necessarily cause a general increase in price of goods and services. This fact is demonstrated by the past decade which has seen the US government vastly increase money supply, while experiencing only moderate price inflation in general.
The key FIRST PRINCIPLE then is:
Replace traditional forms of taxation with an increased but controlled rate of money creation.
This is an evolutionary change as noted, since in fact this has been occurring now over several decades. The main idea is simply that ‘money’ is a valuable service provided by the federal government, rather than an independent ‘hard’ goods that the government must compete for against private individuals and corporations. This service, called ‘money’, is a reliable medium of exchange for all buying and selling; it has only limited, short-term usefulness as a ‘store-of-value’. That admission is crucial and very realistic, because it directs long-term ‘savers’ to the reality that only a diversified investment in productive enterprises can hold and increase value indefinitely (the next section, on Treasury Debt, provides a mechanism for intermediate-term savers).
There are major simplification efficiencies and benefits gained by eliminating taxation in this manner:
1> ‘Taxation’ can be replaced by a much smaller effort: Congress will set a budget which does not exceed some reasonable % of our economic size (GDP); then the Treasury, via a new National Central Bank, just credits that amount to the US federal government account for spending.
2> The cost of government is distributed across all users of US Dollars (including foreigners) and only to the extent that some price-inflation occurs (otherwise is nearly cost-free).
3> The vast resources of public and private workers now devoted to taxation (making and enforcing laws, collecting; advising, evading, paying) will be dramatically freed for productive work.
4> Freed of the burden of taxation, our consumer-driven economy will immediately accelerate.
5> Freed of the burden of taxation, our businesses will have ample funds to invest productively.
6> Taxation is a form of oppression and involuntary 'partial enslavement'; its elimination enhances the quality of life for all of us-- freedom from intimidation is invaluable.
Note that in the transition, the current army of tax advisors will be put to work assisting state and local goverments with the needed adjustments to their own taxation systems after federal taxes are terminated.
The federal IRS could be retained during a 5-year trial period, taxing e.g. only multi-millionare incomes (as was the intention when the federal income tax was originally created in 1913).
A few forms of federal taxation, such as ‘use-based’ ones like that on vehicle fuels, still may make sense, if judiciously applied.
Of course, the enabling legislation must provide a decent mechanism of restraint to avoid hyper-inflation temptations (such as an independent ‘Quality Assurance Agency’, to calculate GDP and % for Federal Budget; super-majorities required to raise the limits; and even an explicit Constitutional Amendment defining Fiscal Responsibility).
A related SECOND PRINCIPLE is:
Replace the current system of Treasury Debt issuance with only non-interest-bearing forms.
Like taxation, the interest-bearing Treasury debt is obsolete (there is a successful historical precedent by the English Channel-Island jurisdictions). We assert that the primary motivation for most purchasers of Treasury Debt is the absolute security of the principle value of their investment; interest added is not essential (in the current crisis, short-term Treasuries are being auctioned at effectively zero interest rate, with buyer demand exceeding offered supply).
A simplified implementation would be to augment the National Central Bank founded for money-creation. This true democratic Bank would subsume the functions of the current semi-private Federal Reserve System. It would provide term-accounts with ‘Certificates of Deposit’ to replace the current T-Notes and Bonds.
Again this is best viewed as a valuable government service. The value of this service (providing a secure, un-repudiatable, efficient store of US-dollar-denominated money) will substitute for the value of interest-earned on the old bonds.
The national benefit is clear: no longer having the huge expense of interest-payments on the national debt. The debt principle itself will be re-paid over time, simply by the money-creation mechanism of the Central Bank.
All money deposited into the accounts will be used for government funding, reducing the net amount of money-creation needed; then later requests for withdrawal will be met by the deferred money-creation. Further control of cashflow may be helpful by requiring some advance-notification terms for withdrawal requests, issueing different lengths of term and charging lower fees on longer-term deposits, and higher fees for early withdrawals.
Existing US Treasury Debt can be forcibly retired on some reasonable schedule. Each existing holder of a debt instrument will be given the option to accept a direct face-value replacement (ie, a new Central Bank Certificate of Deposit, with same term but not interest-bearing); or be paid in dollars (the nominal face value, not including future interest) via the federal money-creation mechanism, into the private banking system.
This should render the current private-bank FDIC obsolete: those wishing guarantee of principle would necessarily use the National Central Bank; those wishing interest-income would take the risk of using private banking (a compromise would be to reduce the FDIC guarantee, such as from $100000 down to $10000, to still protect low-income citizens). Another option would be to give each US Citizen the right to purchase an inflation-protected CD (similar to the existing 'TIPS' but without additional interest payment beyond inflation), up to a generous $1,000,000 or so.
A related THIRD PRINCIPLE is:
The National Central Bank will be the 'Principal' Lender of Money,
(not just of 'Last Resort' as is described for the current 'Fed' ).
The principal focus of lending must be for enterprises and projects that enhance the national productive capacity and improve infrastructure in ecologically responsible ways. Amount and interest on loans can be managed to smooth the business cycle, to minimize 'boom-then-bust' extremes.
The scope of private banking would be reduced to 'retail' services, and perhaps some larger 'high-risk' forms of lending if properly regulated to prevent systemic failure. A 1%-2% 'use-tax' on private-bank loans would fund regulation agencies and insurance. We should also consider a similar nationalization of the major 'financial market' mechanisms-- the stock exchanges and commondity exchanges, including a universal replacement of the ancient and easily-corrupted 'open-outcry'-dominated-by-market-makers system, with NASDAQ-like electronic bidding systems.
Significant federal government funding thus can be provided by the interest on loans made to the private sector by the National Central Bank; and the rest of the federal budget paid for by direct federal spending of created money as noted above. 'Counter-business-cycle' fiscal policy could include adjustments to the interest rates. Another option that should be investigated is a form of 'use tax': a very small (0.1% - 1.0% ?) fee on each bank transaction; this would be the most efficient, unobtrusive tax.
Final (optional) FOURTH PRINCIPLE is:
Eliminate 'Cash'; replace it with 'e-Dollar'.
An efficient modern 'computerized' analog of an inflation-limiting 'gold standard' of currency.
The establishment of a true democratic National Central Bank would also provide a good opportunity for the modernization of the form of our money. Instead of coinage and currency (metal and paper dollars), make all money 'electronic'. The Central Bank would have monopoly on creation of money; over the course of some transition period, require that all old forms of dollar be exchanged for the new 'e-Dollar'.
An e-Dollar is created as a new 'serial number' in the Central Bank database (a 64-bit binary number should be adequate: ~ $20'Quintillion'='Million Trillion'=(10**18)). This ensures that every US dollar will be identifiable, permanent and traceable.
Each account in all banks (the public National Central Bank, and all private retail banks) would use a new accounting system, whereby the serial number of every dollar in the account is maintained. Representation could be efficient as a list of 'Dollar Sequence's [ (CNT,SNUM) where SNUM is the first Serial Number in the sequence and CNT is the count, the total number of dollars in that sequence ]. The Central Bank would create new money in the form of very large DollarSequences; as the money is spent into the economy, the sequences get broken down and distributed [ until finally, a typical individual bank account would have a long list of (CNT=1,SNUM=x)].
Retail commerce will be conducted entirely with cards, like the current Credit- and Debit-Cards linked to bank accounts, and possibly a partially-anonymous 'E-Dollar Card' similar to them but independent of bank account, and rechargeable at any bank. This 'E-Dollar Card' would provide more privacy than other cards, but still be traceable ultimately, because of the new universal accounting in all banks of each dollar by its serial number.
Fractions of Dollar will be noted in a single
'VirtualFractionalDollar Datum' ('VFD') in each account. Payers of Fractions will forfeit one real e-dollar back to the Central Bank each time they deplete/replenish their VFD (0.00->1.00); Payees will get one new e-dollar from the Central Bank each time their VFD reaches 1.00. [So there will be a 'float' of maximum X virtual dollars, where X is the total number of bank accounts.]
The National Central Bank e-Dollar Relational Database would maintain a record (relation) with primary key = the eDollar serial#, and include auditing data such as the current bank & account owning this eDollar, and the previous account, and a timestamp indicating the last transaction (transfer from previous to current account). All member banks would maintain full transaction records to enable historical tracing of each e-Dollar.
The new e-dollar scheme would have several benefits:
1) each dollar costs nothing to create (unlike minting/printing coin/currency).
2) each dollar is permanent (not destructable like coins/currency).
3) each dollar is unique, self-identifying, and thus fully traceable.
4) the rate of money-creation will be easily auditable at the Central Bank; just as the historical 'gold standard' limited monetary inflation, so would a Constitutional / super-majority control limiting the growth rate of e-Dollars created in the Treasury Database (but without the inflexibility, cost, and ecological damage of gold-mining).
5) counterfeiting dollars will be very difficult, in the sense that duplicate serial numbers will be easily detected [the Federal Government Treasury Department will have the authority to do a daily scan of all accounts and transaction records in all US Banks; no non-US Bank will be permitted to hold e-Dollars (a foreign 'virtual' USDollar account will just be a reference to total dollars held in a domestic bank account)].
6) it eliminates the justification for egregious 'money-laundering' regulations. After a court hearing and conviction for a real crime, e-Dollars acquired from illegal transactions could be traced and refunded to any innocent parties -- whether by liquidation of the criminal's assets, or by compensatory money-creation from the US Treasury (Financial activities now criminalized by 'money-laundering' laws are not real crimes in themselves, but simply mechanisms to more easily catch persons who might be committing real crimes; these mechanisms tend to entrap innocents also).