Keeping Systems that No Longer Work

by Wayne Spencer - February 11, 2009

This is a continuation of an article that I wrote called "Can We Have a Better Economic System." After writing that article I realized that perhaps I had put the proverbial cart before the horse. Having spent more than twenty years as a computer programmer, I should have realized that many things that we think about as complex are really quite simple. Take accounting for example. When I took accounting in college I had a great deal of trouble trying to understand how it worked. The problem was that I was trying to learn the subject of accounting from a book written in English. Accounting is very objective, structured, ordered and logical. English is subjective, unstructured, disordered and anything but logical. Suffice to say, I never got a real handle on how an accounting system worked even though I passed the course.

Then one day in 1979 I decided that I was going to try my hand at computer programming. I looked at the source code for an accounting system and within days I understood how an accounting system works to a point that I was able to construct my own accounting system using a standard programming language.

Since then I find that most systems can be understood by using a step by step approach in a structured, ordered and logical fashion in the same way a programmer has to address a programming task.

The problem that I am addressing now is to understand how a domestic monetary system works and then to understand how an international monetary system works. And finally, where are the problems and how can they be best remedied.

I want to start at the beginning of the monetary system that I know the most about, namely the American system.

At the dawn of the United States of America, we as a nation had very little of what other nations called wealth or gold. As a matter of fact as I read about the beginnings of our country we had literally no recognized wealth at all. I do not know if it was an original idea or not, probably not, but Alexander Hamilton based the nations paper currency on debt. Each dollar of currency was in fact an I.O.U. I believe that with the exception of a period of time when the U.S. government was helping to support the silver mines in the west with silver certificates, our country's currency was mostly a debt instrument or a treasury note.

There was nothing to prevent the U.S. Government from printing as much currency as it needed if authorized by Congress.

Skipping forward to our present system. The entire process of printing currency and making loans to other banks is all handled exclusively by the Federal Reserve System. Banks are allowed to loan more money than they actually have on deposit (reserves). The Federal Reserve regulates the ratio of loans to bank reserves. In effect the banking system can and does create money. The currency is now a Federal Reserve Note backed by the United States Government.

The United States Government is actually restrained by the Federal Reserve System to the extent that the Government must pay interest on the "money" that it "borrows" from the bank. Since the Government is the guarantor of the "currency" in the first place it seems strange (1) that it has to borrow the money and (2) that it has to pay interest on that "debt."

This debt described above is domestic debt and that by the will of Congress these rules of the game can be changed. In other words, the domestic debt is little more than a bookkeeping function.

In 1950's the United States had no net foreign debt. That did not mean that we didn't know the difference between domestic debt and foreign debt. Big difference!

In the case of foreign debt, this is more akin to our own personal debt. Foreign countries holding American "money" can exchange their dollars for American goods and services, real estate or American corporations. As a result many of our largest real estate developments and corporations are actually owned or partially owned by foreign interests.

The fact that foreigners hold American debt (currency) does limit the amount of flexibility that the United States Government has on monetary and fiscal policy. Inflation or deflation of our currency with respect to other foreign currencies can have an adverse or a favorable effect upon our domestic business climate depending upon whether the business is importing or exporting.

Currency exchanges track the trading of currencies which allow currencies of each country to fluctuate continually during the trading day based upon supply and demand. All currencies except for the Chinese currency which the Chinese government has "pegged" to the U.S. Dollar. Unfortunately, this method of valuation of the Chinese currency is artificial and not subject to the normal law of supply and demand. I suspect that the Chinese government is keeping their currency value low to make their products cheaper in foreign countries. I do not understand why other governments, including our own do not insist upon a floating Chinese currency. I believe it is detrimental to the world economy as a whole. One comedian mentioned that in the present financial crisis it is fair: we get faulty Chinese goods and in return the Chinese get worthless American securities.

The international currency system seems a bit awkward and not very transparent. When the international monetary system is added to the rather bazaar American domestic monetary system one does have to question its stability. It seems like a prescription for financial disaster. If the present monetary system were a computer program it would be bound to crash.

As Americans living in a free society that we govern by our elections cannot control our country's economic system then are we really free? And are we really in control? Does it make sense that our entire monetary system is controlled by private, for-profit bankers?

Our understanding of the present international monetary system needs to begin at some arbitrary place. During WW-II the allied nations, meeting in Bretton Woods, New Hampshire, set up an international monetary system. The system was designed around gold. At that time the United States supposedly held 60% of all of the gold in the world. By 1950 it became clear that the amount of gold in the world could not keep pace with the increase in world trade. Since that time to the present, the world monetary system has gone through a number of changes. So as not to be redundant, I invite you now to read the following sections indexed at Wikipedia: Bretton Woods System

You need not read all of the sections in the index to get an understanding that we are working with a cobbled up system that has undergone many changes. It is clear to me that we now need a completely new international monetary system before we can completely revise our domestic system. Times of crisis have historically been the best times to get every ones attention to solving the problems. Now is that watershed time.

I was hoping that the Obama economic team could do much more than just prop up the old framework. Unfortunately both Bernaki and Geithner are products of the present monetary system and the Federal Reserve System. Their mind set seems to be walled in by the gravity of the present banking interests. How else could we explain Bernaki's $2 trillion bank bailout by the Federal Reserve and Geithner's proposed additional $2.5 trillion bank bailout on top or the $700 billion bailout already spent or allocated. According to Bloombergs's financial reporters the total including the $850 billion stimulus bill passed yesterday amounts to $9.7 trillion. If we add Geithner's proposed $2.5 trillion we have a total bailout of $12.2 trillion. That would be enough to pay off every ones home mortgage in the United States. See: Bloomberg Article

If this were a game of Monopoly, it would be "game over." Now would be a good time to look at an alternative that would allow the present banks that are already bankrupt to fail and start a new national bank. It wouldn't cost taxpayers anywhere near $12.2 trillion and we taxpayers would finally own the banking system. Can anyone tell me please why we should put our entire economy at risk and put ordinary American through the economic devastation that lies ahead for the sake of saving a corrupt and bankrupt system which crumbled due to its own greed and excess?

The greed in our banking system has gotten worse. In spite of the fact that the economy is in a tailspin and the banks have been the recipients of so much taxpayer money they still insist on foreclosures freezing credit even to the most credit worthy Americans. As a matter of fact they have devised ways to make our credit system even worse for us taxpayers and credit card holders.

The banks are now centering in on credit card holders who make payments as prescribed in their banks rules. The banks are arbitrarily drastically raising their interest rates and cutting their credit lines based upon nothing but fear and greed. I am talking here about Americans who are paying their bills on time. The banks' new policies are actually forcing defaults.

Let's do the prudent and "conservative" thing. Nationalize the banks and call for another Bretton Woods type international conference of all countries to put a new rational system in place. Sooner would be better than later. The best economic minds ever are now available together with our ability to verify through simulation economic systems programmed into a computer. See Business Week article: What's Missing in Geithner's Bank Plan

The only thing stopping us is the greed and corruption of vested interests and their hold on Congress and the media. Has anyone noticed how easy it is for the government to spend trillions to bail out banks and financial institutions and how stingy that same government becomes when it needs to help state and local governments or build infrostructure, provide healthcare, fund education, etc.

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Copyright © 2009 by Wayne Spencer - This article may be freely distributed in its entirety with this copyright notice attached.