In her excellent book, "Web of Debt," Ellen Brown questions the whole notion that governments, whether they be the US or the Eurozone, should have to go into debt to private bankers such as Goldman Sachs and Deutsche Bank to get the money they need to finance their operations. Consider the Federal Reserve which is the primary creator of the money supply in the US. It is neither Federal nor is it a reserve. It is a private bank which creates money as an accounting entry on a computer screen. Recently, it loaned over $7 trillion to private banks at a ridiculously low .01% interest rate. That wasn't money it held in reserve; it was money that was "printed" or rather created out of whole cloth. And who do you think sits on the Board of the privately owned Federal Reserve? Jamie Dimon, CEO of JPMorgan Chase! Do you think that the Federal Reserve acts in the interest of anyone other than the large, too big to fail, banks? The banking system prints or creates money all the time, and not only central banks do it. It has been a longstanding practice of banks everywhere to loan out more money than they hold in deposits. This is called "fractional reserve" banking. For example, when a bank takes in $100 in deposits, it will loan out $1000 figuring that that will be sufficient for depositors who wish to redeem their deposits. Unless there's a run on the bank, that usually is sufficient. So money is created by the private banking system all the time and on a daily basis. Many multiples of the banks' deposits are then loaned out at interest.
Individuals, businesses, corporations and governments then borrow money from private banks to meet their needs for expansion and simply to pay their bills. The US government, for example, borrows the money it needs to function essentially from Goldman Sachs and other large banks and then pays interest to those banks. This happens because the US sells Treasury bonds to those large institutions in return for money to fund its wars and pay social security and medicare recipients among other things. The taxpayers are then on the hook for paying the interest on these bonds. Goldman Sachs got the money in the first place from the Federal Reserve so that by means of a little bit of subterfuge (the Federal Reserve cannot by law loan money directly to the US government), money is transferred from the privately owned Federal Reserve bank, which it created out of thin air, to the US government with interest to be paid by the taxpayers to private banking interests. This begs the question that Ms. Brown makes a central point of her book: if a private central bank can increase the money supply by creating money out of thin air as an accounting entry on a computer screen, why can't the government itself create the money to fund its needs? In particular, if the government created the money instead of the private banking system, taxpayers wouldn't be on the hook for the interest payments which are rapidly eating up an ever increasing share of the Federal budget. Interest on the national debt is projected to be $241.6 billion in FY 2012; it will only increase every year as the national debt goes up. The question is why should US taxpayers pay interest to private bankers on the money loaned to the US government which was created by private bankers when the US government itself could just as well have created the money interest free?
The same line of reasoning holds for the Eurozone which is caught up in a debt crisis in which the private banking system is raising interest rates for countries that it considers weak. The rising interest rates make countries such as Spain and Italy even weaker and all this is being fueled by speculators who are shorting the bonds of these countries. Derivative trading such as shorting drives up interest rates since it makes it seem that investors are selling rather than buying the bonds of those countries.
The process of shorting can be simply explained as follows. Suppose my neighbor buys a lawnmower for $500. I then ask to borrow my neighbor's lawnmower to mow my yard. As I'm mowing, another neighbor drives by and offers to buy the mower for $450. As it happens, I know about a sale at the local Sears where I can buy the same exact lawnmower for $400. So I sell the lawnmower for $450., rush down to Sears and buy another one for $400., return the mower to the neighbor I originally borrowed it from and then pocket the $50. profit. Now in the dark world of derivatives markets it's not even necessary to borrow anything from a preexisting owner in order to short sell. These trades are called "naked shorts." The whole effect will drive up interest rates in Greece and Italy making their borrowing costs to turn over their loans even more expensive and hasten the day when these countries will default. Speculators stand to make big money if and when a Eurozone country does default because they have placed large bets on this outcome. It is to be noted that the European Central Bank (ECB) has the same deal that the US Federal Reserve has in that it can't give money directly to one of its member countries. Monies have to be funneled through banks. This means that they are subject to the machinations of the bond market and speculators. If the ECB created the money directly and then loaned it to member countries, the interest rate could be maintained constant as speculators would be eliminated and it would be lower as the private bankers would not be getting their cut.
If the whole notion of a central government creating the money supply as opposed to a private central bank creating it seems radical to you, please bear in mind that this is exactly what Abraham Lincoln did to fund the Civil War and the economic expansion following it including the transcontinental railroad, the land grant colleges and the Homestead Act which gave away free land to settlers in the west. Greenbacks were government created currency which was spent into the market. Today Federal Reserve notes are created by the privately owned Federal Reserve and are the official US currency. Ellen Brown maintains that any government can create a fiat currency. This simply means that the government created currency is declared to be the legal currency of that government. It doesn't have to be backed by gold or anything else. It is the official currency just because the government says it is. Ellen Brown characterizes the Greenback era as follows:
How was all this accomplished with a Treasury that was completely broke and a Congress that hadn't been paid themselves? ... Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. Officially called United States notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war.
The Greenback system was not actually Lincoln's idea. but when pressure grew in Congress for the plan, he was quick to endorse it. The South had seceded from the Union soon after his election in 1860. To fund the War between the States, these Eastern banks had offered a loan package that was little short of extortion - $150 million advanced at interest rates of 24 to 36 percent. Lincoln knew the loan would be impossible to pay off. He took the revolutionary approach because he had no other real choice. The government could either print its own money or succumb to debt slavery to the bankers.
So the war and the economic development following it were financed with goverment created fiat money, the Greenback. This would be perfect today for funding the $2 trillion in infrastructure repair and rebuilding that the IEEE claims is needed - in other words an infrastructure bank. This would solve a lot of the US' unemployment problems as well as bringing the US infrastructure up to par with China and other countries which are modernizing their infrastructure at rates far exceeding the US. The Eurozone ECB could also print or create euros without borrowing or funneling them through private bankers and subjecting the economies of certain countries to the whims of speculators. For the US it would be simple to move the Federal Reserve into the Treasury Department, transfer ownership to the public sector and keep the fact that the chairman would be appointed by the President. To keep its autonomy, Congress should not have the ability to interfere with the newly created Federal Reserve just as the situation exists now. So what would change? Only that the money created would be the equivlent of Greenbacks which would be non-interest bearing notes. Government created money would not be money that the government would have to pay interest on to private sector banks. These Greenbacks could coexist with Federal Reserve notes so that there would be two forms of currency in circulation both of which would be legal tender. Therefore, Federal Reserve notes would not have to be recalled. The new system could be created overnight with a minimum of disruption to commerce.
The Eurozone probably operates the same way. I'm not an expert but I surmise that the large European banks such as Deutsche bank, Societe Generale and ING loan money to Eurozone countries at interest. Even Goldman Sachs, since it is an international bank, probably has its finger in the pie of Eurozone money creation. Even money created by the ECB needs to be funneled through these banks before it gets into the coffers of the respective Eurozone countries. This means that not only are countries such as Greece and Italy paying interest to the large European and international banks but the interest rates they are paying are subject to market speculation which drives them up even more. If the ECB issued euros directly instead of letting the large banks do it, the interest rate could be carefully controlled, the rates wouldn't be subject to speculation and the interest paid would go into the coffers of the ECB instead of into the coffers of large private banks.
Individuals and families in the US and throughbout the world are increasingly indebted to private banks for mortgage debt, student loan debt and credit card debt. Easy credit and low initial interest rates as well as declining wages have induced much of the population to go into debt in the same way that countries have gone into debt. Ultimately, these levels of debt are unsustainable especially if today's historical low interest rates start to rise. Of course the banks' major goal is to have everyone in debt paying interest money to them as a major part of their expenditures. If everyone is a debt slave, the banks are in the position of owning most of society's assets. Ellen Brown's ideas about taking money creation out of private bankers' hands and putting it into the hands of central governments strikes at the core of capitalist economics which assumes that money creation remains entirely privatized. However, other countries such as China have shown that government owned large banks can be a boon to economic development and growth.
Also in the US state owned banks such as the Bank of North Dakota maintain that state in a healthy economic condition compared to the US as a whole. Interest collected on loans goes back into state coffers defraying taxpayer expenses. So lower taxes are the result of a state owned rather than a privately owned bank. The same could be true for countries as well. Also loans can be more carefully controlled so that they go for socially useful purposes rather than fueling speculative investment. Finally, many countries including China and Norway have sovereign wealth funds which act to make those countries more creditworthy than countries which have no assets and only debts. As any banker knows, an individual's creditworthiness represents the difference between his assets and his debts. The same holds true also for countries. If governments created their own money, it could be loaned directly to families that are being foreclosed on instead of relying on private bankers to work out deals with them which they have been reluctant to do thus exacerbating the foreclosure crisis. Greater leniency could also be granted to student loan debtors than is the case now.
Lincoln saved the US an incredible amount of interest repayments by issuing Greenbacks instead of borrowing the money:
In 1972, the United States Treasury Department was asked to compute the amount of interest that would have been paid if the $400 million in Greenbacks had been borrowed from the banks instead. According to the Treasury Department's calculations, in his short tenure Lincoln saved the government a total of $4 billion in interest, just by avoiding this $400 million loan.
Finally, a quote from Thomas Edison from an interview in the 1921 New York Times:
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 noboldy but those who contribute in some useful way. It is absurd to say that 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.
Therefore, the "full faith and credit" of the US government and the ECB could apply to currency as well as bonds, and private bankers and speculators could be eliminated from the loop.
