[P2P-F] Fwd: Monetary Plan Overview - Monetary Trust Initiative

Thu Jul 14 19:08:40 CEST 2016

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From: Monetary Trust Initiative <uli at global-partners.com>
Date: Fri, Jul 15, 2016 at 12:05 AM
Subject: Monetary Plan Overview - Monetary Trust Initiative
To: Michel <michel at p2pfoundation.net>

Monetary Plan Overview
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Monetary Plan Overview

There is an increasing but vaguely defined malaise in the general public
that all is not as it should be with our banking and monetary system.
First we had the Great Recession of 2007/2008, then followed by various
attempts at stabilization and stimulation, including bouts of Quantitative
Easing, Zero Interest Rate Policies, and now, in what can be perceived as
almost panic, many countries experimenting with Negative Interest Rate
Policies.  Experts around the world are starting to look at structural
alternatives, as it seems that the “silver bullet” no longer exists – if it
ever did.

The shortcomings of the fractional reserve banking system have been known
for a long time, and various implementations of reforms continue to be
proposed.  Among others, former Governor of the Bank of England [Lord
Mervyn King, 2010] has called it the worst of all possible monetary systems
and has called for urgent reforms.  Lord Adair Turner, the former chairman
of the UK’s Financial Services Authority, agrees, although he has not
stated it as strongly.

For the generally accepted properties of money (medium of exchange, unit of
account, store of value, and standard of deferred payments to function
properly, the monetary system in which money is issued and circulates
through the economy must adhere to the fundamental principles of honesty,
integrity, and justice. Such a system creates trust between the people
using the system and those administering it.  It provides a foundation upon
which prosperity is available to all and inter-generational savings can be
built and sustained.

The problem is that we have a money system that is debt-based instead of
value-based.  When a private bank makes a loan to an individual or company,
the money constituting that loan does not come from previous savers but
instead is created ex nihilo by the bank for that particular loan.  This
process is called “deposit creation”.  Conversely, when a loan is repaid,
money does not remain on the bank’s balance sheet, it disappears.  As
counterintuitive as it seems, loan repayments (as also defaults) are the
antithesis of money creation.  Just as banks punch numbers into computers
to create money, they do the same to destroy it when loans are repaid.  As
Robert Hemphill of the Atlanta Federal Reserve observed in the 1930s: *“We
are completely dependent on the commercial banks. Someone has to borrow
every dollar we have in circulation, cash or credit.  If the banks create
ample synthetic money, we are prosperous; if not, we starve.”  *The fact
that the general population does not understand this, but instead thinks
that banks simply intermediate funds from savers to borrowers, creates
deception among the general populace and routine misdiagnoses among
legislators.

Because in our present system debt creates money, the increase in the money
supply needed for price stability (or to generate the mild inflation the
Fed claims to want) always demands an increase in debt. This means
therefore that a country that has a larger money supply must also have more
total debt (i.e., governmental and private combined).  Excess debt has
been, and always will be, a drain on the productive capacity of individuals
as well as nations, as it has to be serviced out of funds that otherwise
would be available for purchases of real goods and services.  Our present
system thus requires the perpetuation of debt on such a scale that it
threatens the very fabric of society.  It therefore stands in direct
opposition to the principles that should be inherent in any monetary
system.

To have continuing price stability the amount of new money creation needs
to be in a rough equilibrium with the increase or decrease in our total
production of goods and services.  This is currently controlled through a
number of factors, the largest of which during normal times is the
management of interest rates by the national central bank, in the US case
the Federal Reserve Bank.  A decrease in interest rates tends to stimulate
the economy by encouraging the issuing of more loans, because the price of
the lent money (in terms of interest payments) decreases.  This increase in
loan volume increases our money supply.  As the economy comes close to
overheating, the opposite is achieved through an increase in interest
rates, slowing the economy down.

We routinely find ourselves in unsustainable situations, as the fractional
reserve banking system inherent in its functioning triggers and/or
amplifies business cycles both in the expansionary and contractionary
phases.  For instance, in order to create banking stability and forestall
runs on banks, collateral is demanded for loans, some of which is rated
better than others from a regulatory perspective.  One of the more highly
rated types of collateral is real estate, and therefore banks lend
extensively by way of mortgages.  The difficulty is that in the business
cycle upswing house values increase, leading to higher levels of mortgage
borrowing against the same properties, which in turn implies additional
money creation and higher prices, leading to yet higher mortgage debt,
leading to yet higher prices and so on in a continuous spiral until the
debt payments become unsustainable.  As banks sense this, they pull back on
the mortgage levels they are willing to fund, tighten the credit criteria,
and thereby cause a decrease in mortgage funding liquidity.  Although this
process is completely rational from an individual bank’s perspective, in
the aggregate the resultant shock tends to become systemic leading to sharp
drops in house prices, foreclosures, bankruptcies, and general economic
mayhem.

Our goal is to see the monetary and banking system changed so that the
system of money creation harnesses the value of a nation’s production and
minimizes human manipulation of our money supply. This methodology was
first proposed by Frank Knight, Henry Simons, Irving Fisher and others
during the Great Depression, and supported by almost 100% of all American
economists.  Recent academic literature exists to mold this into our modern
framework.  It can be shown to result in lower taxes, higher productivity,
lower aggregate debt, shallower business cycles, and greater wealth
equality.  How would this work and has it ever been done before?

In short, money creation would become value-based instead of debt-based.
Value-based money is also often called “sovereign money” in the
literature.  Based broadly on an objective of price stability (and as
explained further below, controlled by a Monetary Commission), Treasury
would issue money for deposit into its account at the Fed, which would be
used for part or all of the following: payment toward the federal budget,
payment for per-capita-based transfers to states, and payments directly to
citizens (e.g., a negative income tax could be used).   As Thomas Edison
famously observed in an interview reported in The New York Times in 1921: *“If
the Nation can issue a dollar bond it can issue a dollar bill.  The element
that makes the bond good makes the bill good also.  The difference between
the bond and the bill is that the bond lets the money broker collect twice
the amount of the bond and an additional 20%.  Whereas the currency, the
honest sort provided by the Constitution pays nobody but those who
contribute in some useful way.  It is absurd to say our Country can issue
bonds and cannot issue currency. Both are promises to pay, but one fattens
the usurer and the other helps the People.”*

Our proposed solution is a Trust Banking System, under which the creation
of money would be safeguarded by a transparent entity, the Monetary
Commission.  Although independent, it would be operated by the Federal
Reserve Bank but owned by Treasury (which is equal to being owned by the
citizens).  In essence, the creation of money would be democratized.  The
money created by it would be injected into the economy as broadly as
possible.  This means that rather than pull the public and country further
into debt, that money would work in the public interest to create jobs and
fuel the “real economy,” which is the part of the economy that is concerned
with producing goods and services, as opposed to the part of the economy
that is concerned with buying and selling on the financial markets.

In a Trust Banking System, when a deposit is made at a deposit bank into
the depositor's account, through the Depository Window, the funds continue
to belong to the depositor (rather than becoming an IOU of the bank as
under the current system).  This would all be covered under the standard
depository agreement between the bank and the customer.  100% of the
depository base will at all times be covered by cash in the vault or
deposits at the Fed.  The only source of income for a bank from the
Depository Window would be for payment services.  No deposit creation would
exist in this system and thus no new money could be created by private
banks.  Further, because all deposits would at all times be fully covered,
the needed oversight would be minimized as the system is autonomously
stable and ruinous bank runs would be impossible, as cash would always be
available for withdrawal.

Additionally, under the Trust Banking System, lending banks would be
separate institutions from deposit banks. They would be true intermediaries
(as most think that banks are today) that offer investment products to
those with cash wishing to have it invested, and then invest this cash, by
lending it out or purchasing securities.  This would be done through the
Credit Window of banks but none of the funds under the Depository Window
would be available for this purpose.  Instead, savers and investors would
subscribe to a series of offered mutual funds in say, car loans, or
mortgages, or commercial loans of various kinds, and so on.  These could be
open or close-ended funds as desired with maturities, risk levels, and
expected return levels published by the bank in advance.  Thus credit would
now be driven by savings rather than by deposit creation.  Savers would
again be rewarded for savings and interest rates would be controlled by the
market rather than largely by Fed edict and actions as they are now.  Has
this been done before?

Early into the American Civil War President Lincoln realized that the costs
associated with that war would be unsustainable if funds were to be
borrowed through the issuance of federal government bonds.  In looking for
alternatives legal under the Constitution, the government enacted the Legal
Tender Act of 1862
<http://ulikortsch.us10.list-manage.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=803f9d2c65&e=1ed4dc5028>.
This created $150 million of non-redeemable and non-interest bearing
notes.  There were a number of additional acts increasing the issuance to
about $450 million and several to withdraw them as private banks increased
money in circulation.  It is interesting to note that this represented
about 40% of the monetary aggregates at the time, which would make it
equivalent to the Treasury creating about $5 trillion today.  According to
the Federal Reserve Bank, there are still about $240 million in circulation
today as worn notes were replaced by the Fed until 1971.  They were
identical in purchasing power once in circulation and were distinguishable
only in that the serial numbers were in red.

This type of currency called US Notes (USN) came to be colloquially known
as “Greenbacks”.  As debt represents the acquisition of current purchasing
power in exchange for future liabilities, USNs are seen as “notes of
credit” as they do not create any future liability.  They are quite
distinct from Federal Reserve Notes (FRN) in that FRNs are created through
the issuance of debt (personal, corporate, or governmental), and create
more of the same as the underlying debt demands interest payments.  USNs on
the other hand are issued directly by the Treasury (through the Federal
Reserve) and although they are legally listed as debt (there is no formal
equity accounting with the government) they are not redeemable by anything
other than themselves and accrue no interest payments.  They are in a
category one could call "no-debt debt" as they create no future
obligation.  This is acknowledged by today's federal debt legislation which
explicitly exempts them.

USNs were tested in a Supreme Court decision, Knox v. Lee, May 1, 1871,
which established that the federal government through the Department of the
Treasury had the right to issue money as legal tender for the payment of
all debts and that this did not conflict with the Constitution.  This has
never been overturned.  See 79 US 457
<http://ulikortsch.us10.list-manage.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=0035be8eba&e=1ed4dc5028>.
Some have argued that the Constitution's Coinage clause (Article 1, Section
8, Clause 5) only applies to physical coins in spite of this Supreme Court
decision.  A lengthy historical review of that debate was published in the
Harvard Business Review, volume 31 called “Understanding the Coinage Clause
<http://ulikortsch.us10.list-manage2.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=1c35a89b96&e=1ed4dc5028>”
by Robert G. Natelson which comes to the conclusion that Treasury was meant
to have the right to create (paper) money.  The history of US Note
emissions is well documented in* A Monetary History of the United States,
1867-1960* by Milton Friedman and Anna Schwarz, considered to be the
definitive book on the era.

How to do this?  Once all factors are planned in advance, the transition
from our current system would occur over a weekend.  The value of the bank
top-up needed to convert from a 10% reserve system to a full trust system
could cover much of the federal and state debt without creating any
inflation.  Without today’s interest payment on federal debt, plus the
increase in government income through the Monetary Commission, about $850
billion per annum would be available, reducing or eliminating deficits.
Although this would significantly ease our country’s debt, it is by no
means a panacea.  This transition would bring us to a state of financial
stability, but measures would have to be taken to maintain that state.  It
would mean that as a country we would have to accept and live in financial
responsibility.  The flexibility granted by the Fractional Reserve Banking
System would no longer exist under a Trust Banking System, but it is this
flexibility and untenable system that has led us to this state of crisis,
time and time again.

The result would be a banking system that functions as a structure
sustaining the whole of society.  In conjunction with the mores of a
democratic society, the power previously held by the banks would belong to
the people and would be held within a far more accountable and transparent
framework with full disclosure.  In contrast to the Fractional Reserve
Banking System, a Trust Banking System would be innately stable because all
deposits would be covered by *real money* within a *real economy*.  Money
creation through new monetary policy would become steady, predictable,
accountable, and effective; investments would be driven by savings and not
by money creation, and it would result in an overall enhancement of
economic performance.

1 Bank of England: Money Creation in the Modern Economy
<http://ulikortsch.us10.list-manage1.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=0378ae572b&e=1ed4dc5028>
2  We are well aware that the velocity of money is an integral part of this
equilibrium, but because velocity is mean reverting, we are leaving it out
of this discussion for sake of simplicity.
3  Among others, see Kumhof, Michael and Benes, Jaromir
https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
<http://ulikortsch.us10.list-manage.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=8cc97f89f4&e=1ed4dc5028>
4  As per Limited Purpose Banking, Dr. Laurence Kotlikoff, see
https://www.aeaweb.org/aea/2012conference/program/retrieve.php?pdfid=568
<http://ulikortsch.us10.list-manage.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=9c2678a98d&e=1ed4dc5028>
5  See the FRED information from the Federal Reserve Bank of St. Louis
Economic Research here: https://research.stlouisfed.org/fred2/series/M2/
<http://ulikortsch.us10.list-manage1.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=fbf3848014&e=1ed4dc5028>
6  The Congressional Research Service states that US Notes are not part of
current debt limitation legislation.  See The Debt Limit – History and
Recent Increases
<http://ulikortsch.us10.list-manage1.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=ee6fe5307f&e=1ed4dc5028>
which states in page 1, Note 1 "Approximately 0.5% of total debt is
excluded from debt limit coverage. The Treasury defines “Total Public
Debt Subject to Limit” as “the Total Public Debt Outstanding less ...and
... United States Notes, as well as ..." The debt limit is codified as 31
U.S.C. §3101.
Uli Kortsch has been an international leader in high-level management,
corporate growth and restructuring, and led successful financings in both
for-profit and not-for-profit enterprises over the last three decades.  He
has worked in over 50 countries, both in C-Level executive management
positions as an Officer or Director and/or as consultant with enterprises
such as Toyota Motor Corporation, the University of the Nations,
International Trade Finance Corporation, etc.  He has an MBA in finance,
and his specialty is involving international markets and banking.  He is on
the Board of Directors of several entities including Mass Metal, a precious
metals savings and investment company and the Dialogue Institute based in
Philadelphia, PA., a leading inter-faith and economic initiative involving
Heads of State and other key international leaders.

Uli is conversant in several languages and has a strong administrative and
financial acumen.  He is a passionate aviator and pilot of multi-engine
aircraft.
Uli Kortsch is a member of the New Horizon Council
<http://ulikortsch.us10.list-manage.com/track/click?u=ea8be5c5a50154f78cb40e42c&id=f33dec26b8&e=1ed4dc5028>
*Copyright © 2016 Uli Kortsch, All rights reserved.*
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