Comparison of Three Monetary Systems

Comparison of Three Monetary Systems
Thomas Allen

The Foundation to Restore an Educated Electorate (F.R.E.E.) has put out a pamphlet titled “Time to End the Fraud.” It promotes the fiat monetary reforms of Theodore Thoren and Richard Warner. This pamphlet has a table taken from Thoren and Warner’s book The Truth in Money Book comparing Thoren and Warner’s “Treasury Credit Money System” to the current “Federal Reserve System.” I am comparing Thoren and Warner’s Treasury Credit Money System and their description of the current Federal Reserve System with the “People’s Money System.” Occasionally, I comment on the Treasury Credit Money System and the Federal Reserve System to identify misleading statements in the table. My comments are in parentheses.

First, I give a brief description of the People’s Money System. Under the People’s Money System, the people directly control the quantity of money in circulation. They do this in two ways. They control the quantity of gold and silver coins in circulation by the quantity of gold and silver bullion that they convert to coins and by the quantity of coins that they convert to bullion for nonmonetary uses. Also, they control the quantity of commercial money (real bills of exchanges) in circulation through their productivity. For a more detail description of commercial money see Reconstruction of America’s Monetary and Banking System, “There Is Enough Gold,” “Response to Dale’s Analysis of ‘There Is Enough Gold,’” “Analysis of Byron Dale’s Monetary Reforms as Presented in Bashed by the Bankers,” “Analysis of the American Monetary Institute’s American Monetary Act,” and “Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths.” The People’s Money System does not require legal tender laws, banks, or governmental management of the monetary system.

Now for the comparison of the fifteen items in the pamphlet’s table.

1. Treasury Credit Money System: “Money created debt-free by the Treasury.” (But it is still debt.)
Federal Reserve System: “Money created as debt by private commercial banks (and Investment banks and Savings Banks since repeal of Glass-Steagall Act).”
People’s Money System: The people themselves create money debt-free as described above.

2. Treasury Credit Money System: “Money spent into circulation for Federal expenditures.”
Federal Reserve System: “Money spent into circulation only for expenses of Federal Reserve and commercial banks.”
People’s Money System: Money is spent into circulation by the people themselves for their own expenses.

3. Treasury Credit Money System: “Treasury never borrows.” (This statement is not true. With its notes the Treasury is forcing government loans on everyone. Unlike conventional government loans, these loans bear no interest. Moreover, the government never intends to pay them unless it pays them with more debt.)
Federal Reserve System: “Treasury collects insufficient taxes and borrows from private banks and others (individuals and foreign governments) to cover Federal deficit expenditures.” (This system does not force the Treasury to collect insufficient taxes and borrow the rest. Banks do not hold the weapons of coercion; the government does.)
People’s Money System: The government may borrow at interest from banks, private individuals, and perhaps other governments. However, it greatly restricts the size of the government and inhibits its expansion; borrowing is minimal.

4. Treasury Credit Money System: “Treasury lends money to banks.”
Federal Reserve System: “Treasury borrows money from private banks.” (The Treasury also borrows from individuals as noted under No. 3.)
People’s Money System: The people lend money to banks, mostly as savings deposits and certificates of deposits. The Treasury never lends to banks; it keeps the government’s money in government vaults.

5. Treasury Credit Money System: “Interest rates (mathematically) set by Treasury to balance interest receipts with Treasury expenditures.”
Federal Reserve System: “Interest rates set by New York banks according to secret policy decisions.”
People’s Money System: Interest rates are primarily set by savers and secondarily by investors, i.e., the markets set interest rates.

6. Treasury Credit Money System: “Banks operate as savings and loan associations (as they did before Glass-Steagall repeal) — lend from depositor’s savings and their own borrowings from Treasury.”
Federal Reserve System: “Banks create money through fractional reserve deposit expansion (commercial banks do not lend their depositor’s savings).”
People’s Money System: Banks do not create money. Fractional reserve banking does not exist. Two types of banks (or banking activities) exist: issuing banks and lending banks. Issuing banks convert commercial money (real bills of exchange) into bank money (bank notes and checkbook money) by buying real bills. Issuing banks do not lend. Money in checking accounts is fully backed by deposited gold or silver or real bills, which can quickly be converted into gold and silver coins. (Real bills always appreciate until they mature; then they are paid in specie.) Lending banks lend savings. No loans are made for periods greater than the time that the bank has complete control of the money being lent. That is, a depositor cannot demand the return of his savings during the time of the loan. Thus, lending banks do not borrow short and lend long. Checking accounts at lending banks are fully backed by gold or silver that the account holder has deposited or that the bank has transferred to the account from savings accounts via a loan.

7. Treasury Credit Money System: “Checks are cleared through a department of the Treasury.”
Federal Reserve System: “Banks clear their own checks.”
People’s Money System: Checks clear through clearing house associations, which member banks own.

8. Treasury Credit Money System: “System is inflation-proof and depression-proof.” (Like all fiat monetary reformers, Thoren and Warner claim that their system is inflation proof and depression proof. They are wrong. Money issuance under their system is not and cannot be based on economic needs. Because fiat money is a political creation, it is always based on politics and political needs. The supply of fiat money tends to grow, i.e., inflation. Inflation distorts the economy, which leads to economic contraction that can result in a depression.)
Federal Reserve System: “System causes inflation-depression cycles.”
People’s Money System: The business cycle is smoothed, and inflation and deflation are greatly mollified. Unlike fiat monetary systems, this system quickly and automatically increases and decreases the money supply as the demand and the economy’s need for money increase and decrease. Economics and not politics, as occurs with fiat monetary systems, drives the expansion and contraction of money supply.

9. Treasury Credit Money System: “Money maintains constant purchasing power.” (As discussed above, this statement is false. Money under this system will lose its purchasing power. Being irredeemable paper money, it is extremely low quality money. Low quality money cannot maintain a constant purchasing power. It always declines in value. History shows that money issued directly by government typically inflates, depreciates, faster than that issued by banks.)
Federal Reserve System: “Money loses purchasing power until it causes depression.”
People’s Money System: Being gold and silver, money is of the highest quality. Its purchasing power gradually increases over time. Unlike the other two systems, it results in the standard of living of the common man actually rising.

10. Treasury Credit Money System: “Money supply expands or contracts according to needs of society.” (Perhaps Thoren and Warner explain in their book how this is accomplished. However, I do not see how it is possible without saintly divine beings being in charge of the monetary system. I have yet encountered a fiat monetary system that, in spite of assurance of its proponents that it can, can manipulate the money supply to meet the needs of the economy. I guess that Thoren and Warner’s out is adjusting the money supply to meet the needs of “society” instead of the “economy.” Society includes both the political and economic. As fiat money is a political creation, it can be expanded and contracted to meet the political needs of society as those in power construe these needs.)
Federal Reserve System: “Money supply expands or contracts according to secret policies.”
People’s Money System: As discussed above, the money supply expands and contracts to meet the economic needs or needs of the economy. It accomplishes these adjustments automatically and quickly without any governmental intervention.

11. Treasury Credit Money System: “Taxes kept at a minimum.” (By substituting printing press money for taxation.)
Federal Reserve System: “Taxes kept at a maximum.”
People’s Money System: Taxes are kept at a minimum.

12. Treasury Credit Money System: “No personal income tax.”
Federal Reserve System: “Maximum politically acceptable income tax.”
People’s Money System: It does not necessarily eliminate personal income taxes. However, because it keeps the government small and lean, personal income taxes become unnecessary.

13. Treasury Credit Money System: “No national debt.” (This is another false statement. The U.S. government note, which is the form of money under this system, is a form of debt. It is a governmental debt forced on everyone. The national debt is not eliminated. It is merely transformed into noninterest bearing, nonpayable debt.)
Federal Reserve System: “National debt grows exponentially.”
People’s Money System: It does not necessarily eliminate national debt, but it keeps it small. To the extent that it encourages frugal government, it makes debt unnecessary.

14. Treasury Credit Money System: “All debts are totally payable.” (This statement is misleading and false. It is misleading when it claims that debts are totally payable. Debts paid with debt [government notes] may be discharged, but they can never be extinguished. Debt is paid by transferring it to another. This statement is false because government notes are debt, and the government never pays them off.)
Federal Reserve System: “Never enough money in the system to pay all debt (principal and interest).” (This is not quite accurate. Bankruptcy leaves money to pay the interest.)
People’s Money System: Unlike the other two systems, debt is not money. As all debts are eventually paid with that which is no one else’s obligation, gold and silver, this system truly does extinguish all debt.

15. Treasury Credit Money System: “Interest collections on treasury-held debt never exceed supply of debt-free money in circulation.”
Federal Reserve System: “Bank interest collections deplete the money supply forcing escalation of debt, interest and prices.” (If interest depletes the money supply, how can it force prices up? If people have less money to spend, merchants have to cut their prices if they want to sell their products.)
People’s Money System: As interest is paid in real money that remains in use as long as a need or demand for that money remains, this is a nonissue.

The following eight items are comparisons not in the pamphlet’s chart. Most likely, they were not considered because they show how much alike are the Treasury Credit Money System and Federal Reserve System.

1. Treasury Credit Money System: Produces low quality money.
Federal Reserve System: Produces low quality money.
People’s Money System: Produces high quality money.

2. Treasury Credit Money System: Leads to, or at least facilities, ever expanding, ever more powerful government; increases the government’s power over the people.
Federal Reserve System: Leads to, or at least facilities, ever expanding, ever more powerful government; increases the government’s power over the people.
People’s Money System: Leads to smaller, more limited government; decreases the power of the government over the people.

3. Treasury Credit Money System: Trusts politicians and bureaucrats; distrusts the people and bankers.
Federal Reserve System: Trusts politicians, bureaucrats, and bankers; distrusts the people.
People’s Money System: Trusts the people; distrusts politicians, bureaucrats, and bankers.

4. Treasury Credit Money System: Trusts promises and paper; distrusts that which is no one else’s obligation, especially gold.
Federal Reserve System: Trusts promises and paper; distrusts that which is no one else’s obligation, especially gold.
People’s Money System: Trusts that which is no one else’s obligation, including gold; distrusts promises and paper.

5. Treasury Credit Money System: Depends on legal tender laws, the military might of the government to force the people to accept the money. Its money cannot stand on its own merit.
Federal Reserve System: Depends on legal tender laws, the military might of the government to force the people to accept the money. Its money cannot stand on its own merit.
People’s Money System: Depends on the merit of the money to get the people to accept it. Legal tender laws are unnecessary.

6. Treasury Credit Money System: Money dies with the issuing government or sooner if the government abolishes it. Its type of money seldom survives a generation.
Federal Reserve System: Money dies with the issuing government or sooner if the government abolishes it. Its type of money seldom survives a generation.
People’s Money System: Money outlives the issuing government and even the country. It survives for millennia. Although the government may outlaw it, the government cannot kill or abolish it.

7. Treasury Credit Money System: Monetary unit is an intangible legal abstraction, which has no intrinsic value[1] that can store, measure, and transfer value and wealth.
Federal Reserve System: Monetary unit is an intangible legal abstraction, which has no intrinsic value that can store, measure, and transfer value and wealth.
People’s Money System: Monetary unit is a tangible specific measurable quantity of a commodity, e.g., as a specific weight of gold. As the monetary unit has intrinsic value, it can store, measure, and transfer value and wealth.

8. Treasury Credit Money System: Governmental policies are necessary to the management of the country’s money. Thus, the monetary system is politically managed.
Federal Reserve System: An “independent” central bank, the Federal Reserve, can best mange the country’s monetary system. As the creation and existence of the central bank is political, the central bank is guided by politics instead of economics in managing the country’s money. Besides, it is as ignorant as the government in knowing how much money is needed, when it is needed, and where it is needed. It is as incompetent as the government in getting the right quantity at the right time to the right place.
People’s Money System: The people through their market activities can best control the country’s money; monetary policies of the government and its central banks only hamper the management of the country’s money. The best monetary system is a market managed system. Thus, it is vastly superior to the government or its central bank at getting the right quantity of money to the right place at the right time.

Endnote
1. Intrinsic value is the value of the monetary material in its nonmonetary use. Commodity money such as gold has high value in its nonmonetary use. If the impressions were removed from a gold coin, the coin would still have the same value. Moreover, a double eagle is worth twice as much as an eagle even without any impression on it. A small piece of paper with the picture of a dead president on it has no more value than a square of stiff toilet paper — practically none. If the engraving were removed, a $100 bill would have no more value than a $1 bill.

A commodity’s utility in its nonmonetary use is what originally gave it value as money. With free coinage under the true gold standard, the monetary value and nonmonetary value of the commodity are kept in equilibrium. Originally, paper money obtained its value from the commodity money with which it was connected. As the distance from its connection with commodity money lengthens, its monetary value declines and eventually equals its nonmonetary value of nearly zero.


Copyright © 2010 by Thomas Coley Allen.

More articles on money.