This essay covers my position on the reform of our monetary system, including the elimination of the Federal Reserve and the dispersal of its various powers across various governmental branches and departments. My monetary reform proposal is tightly related to my overall vision for financial reform covered in separate articles. This includes my proposals for a National Credit Union, a National Credit Bureau, a National Insurance Fund. All of these various reforms are also closely related to my views on inherent natural monopoly industries and the crucial need to operate such sectors of the economy as transparent bureaucracies with strict democratic oversight in order to ensure a fair and level field for all other businesses and consumers. There are only a handful of such natural monopolies, but if we continue to allow them to be run by private for-profit oligarchs, we will continue to watch our democracy fade away.

Benefits of Reform

  • Clearly separates our monetary system from our financial system by requiring 100% reserves on checking accounts and thus creates greater monetary stability and economic stability.
  • Transfers tens of billions of dollars or more in seignorage income from private for-profit banks and Wall Street to the public treasury thus lifting a burden off of taxpayers.
  • Eliminates the debt seignorage system which creates a permanent and infinite burden on society for each dollar of money originated. Instead newly originated dollars are spent into existence as directed by Congress.
  • Establishes equal access to the electronic money system allowing any two persons to transfer money between themselves without paying. exorbitant fees or needing excessive middlemen to intervene in the transaction.
  • Gives individuals complete and unprecedented control over transaction authorization including recurring transaction authorization.
  • Potentially eliminates over $1 trillion from the National Debt simply from the transition to 100% reserves. While the Federal Reserve does receive regular audits of its banking operations, their money origination operations remain cloaked. What we might be interested to learn is precisely how much newly originated money has been created out of thin air and how much has been used to by Treasury securities at the treasury auction. The difference between those two numbers is the sum of newly originated money the Federal Reserve has pocketed for itself and its close partners.

Currently our monetary system is operated by the Federal Reserve System: a banking cartel controlled largely by the too-big-to-fail banks that declared themselves too-big-to-fail. The monetary system they devised for themselves basically serves as a system of welfare for the super-rich. The Federal Reserve has been granted by Congress – through the Federal Reserve Act – the power to give itself any amount of newly originated money it desires. While it does limit the creation of new money to avoid galloping inflation, the Federal Reserve does try to originate as much money as it can without causing rampant inflation problems because it and its members and primary dealers all receive incomes from new money origination. During its tenure, the Federal Reserve System has originated enough money to induce inflation of nearly 1,800% so that a single dollar in 1913 bought the same amount of products that today requires $18.

Moreover when the federal reserve system originates new money, it does so invariably as a credit instrument and as a debt for US workers. This is in contrast to the historical method of money creation where newly originated money is used to buy products of industry. When originating new money typically the government enjoys an income without participating in production. However, the income enjoyed is finite and limited to the equivalent of the sum of newly originated money. On the other hand when the Federal Reserve System originates new money it does so as a credit/debt instrument that is entitled to receive a stream of interest payments indefinitely. This means the finite and limited burden on society for the creation of new money is replaced – in the case of the Federal Reserve System – by a permanent and infinite burden on society to continually produce for the bankers and traders within the financial system. As these credit instruments accumulate the debt burden likewise accumulates.

100% Reserves on checking accounts

Currently our monetary systems consists of coins, paper notes, and electronic ledger checking deposits. However, the latter – the electronic ledger checking deposits – are also muddled up with our financial system since banks readily use our checking deposits (money) as if they are savings deposits (financial instruments). This may seem like a subtle and esoteric distinction, but it has profound impacts. First it is important to understand that savings accounts cannot easily be used as money (as a means of payment or means of purchase). Checking accounts however are constantly used as money to settle debts and make purchases. However, the size of all checking accounts can diminish rapidly in a crisis because the banks use our checking deposits to create new money and thus create more checking deposits. In an economic downturn as bank lending diminishes so too does the quantity of money in circulation. Less money in circulation means that fewer products and financial instruments can be bought and sold and the economy declines still further. If, on the other hand, the checking deposits require a 100% reserve, then in an economic downturn the quantity of money remains constant. Lending may dry up and so economic expansion becomes difficult, but the current scale of transactions can still be supported by the current stock of money. So 100% reserves on our checking accounts is a crucial step towards economic stability. Though loaning our deposits is indeed a central function of any bank, that does not mean they must loan out our checking deposits. Banks should instead induce depositors to move their funds from checking accounts to savings accounts by offering favorable interest rates or other inducements.

With a requirement for 100% reserves on checking account, there is no longer any incentive for banks and other financial institutions to offer checking accounts. There is no longer any profit to be made in checking accounts. While banks could charge monthly maintenance fees to offer checking accounts, the monthly maintenance fees reflect the privileged monopoly position of the banks in relation to the central electronic money system. Therefore, that scenario, the bank enjoys the benefits of the economies of scale provided by the central electronic transaction system while gaining profits by interfering with the access to the central electronic transaction system for everyone else.

So 100% reserves for checking, combined with equal access to the electronic transaction system implies that we no longer need banks to serve the role as a middle-man between depositors and the electronic transaction system. Just as we do not need banks to transact using paper money and coin, we will no longer need banks to transact using the most common form of money: electronic ledger deposits. Banks might continue to serve other functions. For example there is a need for localized processing of paper checks. Banks might also serve as a local place to deposit and withdraw paper notes and coins for those who still need to make use of these legacy money systems. Banks would also continue to offer safe deposit boxes for valuables and archival purposes. Finally, consumer banks would continue to offer advice to investors for managing their financial portfolios.

With this new decentralized monetary system, banks, retailers, community groups, and other might also serve a role providing technical support and budgetary advice. For those with limited computer skills or those without access to computers at home, they would find ample support from these various providers to help initiate transaction authorization, establish authorizations for recurring transaction, and manage sweeps which move funds between a users various accounts and originate, sell, or buy overdraft protection and other financial instruments.

Breaking apart the Federal Reserve system

Even if we impose a new requirement upon banks that they must keep 100% of the funds deposited into checking accounts on hand and not loan out those funds, The Federal Reserve board of governors can still originate money whenever it wants. The Federal Reserve has been vested with all sorts of power that rightly belongs to democratic institutions within the United States. We must therefore pick apart the powers granted to the Federal Reserve and vest those powers with democratic and transparent institutions answerable to the people.

The Federal Reserve System is a perfect example of how not to structure a bureaucracy in a democracy. It is operated by a small group of oligarchs completely out of touch with the people. What they know of ordinary Americans comes from their publicists advisors who learn all they know about America from conducting focus groups. Add to this general disconnect from the people of America the fact that they conduct most of their operations behind closed doors and paternalistically claim it is in our best interest to not know what they do with our monetary system, and the situation is even more troubling. We have instilled in the Federal Reserve immense powers over our economy, over our government, over our businesses, and over our communities, yet we do not know what they do even after the fact. We must therefore separate all of these powerful functions and make them serve the needs of the people.

The six primary powers of the Federal Reserve
The six primary powers of the Federal Reserve

The Federal Reserve System is a member based cartel of over 2,500 of the largest banks. Strangely we have given the Federal Reserve the power to regulate the banks which are the members of this cartel. This would be like asking criminals to punish and incarcerate themselves. It makes no sense whatsoever. So we must establish a bureau with cabinet level oversight whose role it is to regulate banks and other financial institutions.

Even more important, the Federal Reserve currently operates the core centerpiece of our monetary transaction system: the Automated Clearing House or ACH. The US Treasury currently handles the other two parts of our monetary system: the US Mint for coins and the US Bureau of Engraving and Printing for paper Federal Reserve notes. However the larger part of our monetary system now involves electronic ledger money handled mostly through the  Federal Reserve’s Automated Clearing House. The Federal Reserve cartel uses their privileged monopoly position to grant special access to their members and deny all other Americans equal access to this electronic money system. This is both unfair and also inefficient since the Federal Reserve basically encourages the widespread use of the less efficient forms of money: paper notes and coin.

Third the Federal Reserve’s Open Market Committee currently decides how much money to originate or withdraw from circulation. This is a powerful privilege that allows the Federal Reserve to arbitrarily manipulate economic activity. However combining this decision making over monetary growth with the power of seignorage, and we have a highly unethical if not properly criminal arrangement. With these two powers together, the Federal Reserve has both the privilege of enjoying the income from newly originated money and the power to decide how much money to originate. Obviously the Federal Reserve must exercise some restraint or the power would be taken away quickly, but over the nearly century long tenure of the Federal Reserve, the money supply has increased so much that inflation over the period has reached nearly 1,800% so that the value of a dollar today is one-eighteenth what it was in 1913. My proposal returns the power “to [originate] money and set the value thereof”  to Congress as the US Constitution requires. When the Federal Reserve began in 1913, we might be able to claim that Congress still had the powers granted it by the Constitution because Congress still set the value of the dollar with respect to gold. However, today we have long ago left the gold standard and the Federal Reserve has thus usurped powers the Constitution does not allow except with Congress. Allowing the Federal Reserve to continue to operate in this manner would be like giving over the power to declare war to a mercenary military contractor.

The Federal Reserve also has the power to gather and analyze statistics to determine how quickly the money supply should grow. In fact much of the over $2 billion the Federal Reserve spends is related to this functional power.

Finally, the Federal Reserve is the lender of last resort. In most cases this means the Federal Reserve will originate money out of thin air for lending to its cartel members when the member has reached a threshold of insolvency. Such a power is made crucial because of the fractional reserve lending previously discussed, where banks find themselves on the edge of insolvency because they have lent out the money that belongs to their depositors. End this fractional reserve lending by requiring 100% reserves on checking accounts and much of the need for a lender of last resort disappears as well.

Depicts the proposed hierarchical organization of new departments and bureaus added to the Federal government including the US Department of Market Clearing, the US Department of Financial Integrity, and the Congressional Monetary Office

As the above organizational chart shows, my proposal takes all of these immense economic powers – currently all vested in the Federal Reserve – and disburses them across various departments and bureaus in both the Congress and the Executive branch of the Federal government. Moreover, the Federal Reserve currently wields these powers in an opaque fashion, completely insulated from the will of the people, and through a board of seven governors who serve 14 year terms. The Federal Reserve System is thus the pinnacle of anti-democratic and anti-social. In place of the Federal Reserve, my monetary and financial reform proposal establishes a democratic and transparently operated structure with the same equal access to the electronic ledger money we currently enjoy for paper notes and coins.

My monetary reform proposal consolidates financial regulation into a single Bureau of Financial Regulation (1). The Federal Reserve’s electronic clearing operations are moved into a new cabinet level US Department of Market Clearing (2). The decision making process regarding monetary policy and the size of the stock of money in circulation are moved to the US Congress as the US Constitution requires (3). Moreover the Congress will also be empowered to determine which public fund enjoys the immense income benefits from issuing new money (4): seignorage.  Currently those immense income benefits are enjoyed by the Federal Reserve itself, the Federal Reserve’s cartel member banks, Wall Street, and the over 8,500 banks throughout the United States. Some of it does make its way to the US Treasury, but the actual numbers are treated as a trade secret by the Federal Reserve. The statistical gathering and analysis that guides the monetary decisions of the Federal Reserve is transferred to a new Congressional Monetary Office (5). Finally, the lender of last resort power (6) is no longer needed for monetary stabilization since the new 100% reserve requirement largely guarantees monetary stabilization. Credit stabilization might still be necessary in unusual circumstances and in such times of crisis, Congress could choose to inject newly originated money into making loans to keep interest rates from skyrocketing out of control. While such credit stabilization policy might still be needed for economic stabilization, under the new monetary and credit reforms, it would involve the Federal government issuing credit instruments where the public treasury receives interest income from the debtors rather than the current backwards approach where the Federal government issues debt instruments placing a greater burden on taxpayers in the process and transferring income from US taxpayers generally to the banks and Wall Street.

The New US Department of Market Clearing

My proposal moves the US Mint and the Bureau of Engraving and Printing from the oversight of the US Treasury to a newly created department: the US Department of Market Clearing. This department also includes a new Bureau of Check Processing to establish a central repository for paper checks and establish procedures and certification standards for decentralized processing of  paper checks. The Department of Market Clearing also transfers the power of the Federal Reserve’s Automated Clearing House and FedWire systems into a new bureau: the Bureau of Electronic Clearing. While this new bureau initially serves the same function as the current Automated Clearing House and FedWire system, the bureau will quickly transition to an electronic money system with direct and equal access for all depositors. Eventually all checking accounts will simply be accounts at the Bureau of Electronic Clearing. Some may ask whether this could be more decentralized but this electronic ledger money system carries quite substantial economies of scale so that duplication at local levels would simply waste resources without any benefit. However, this centralization should not concern us too much since the functions of the bureau are quite limited and as long as access to the electronic money system is equalized with equitable user fees, the system will be far from anything we might tag as bureaucratic in the negative sense of the term. Prior to the computer age the electronic ledger money system was a straight paper and pencil ledger money system where operations necessarily needed to be dispersed and hierarchically arranged. Each local or regional bank would perform its ledger entries and send those upstream to a clearing house which did its ledger entries and so forth. Today, this has all been replaced by a integrated and streamlined computer systems where decentralized administration simply adds to the bureaucracy without any benefits to the public. This is part of the reasons banks insist that anti-trust regulation is a burden upon them because they understand that ideally this function would simply be handled by one central service provider: but anti-trust and financial regulation permits such an arrangement for a private for-profit bank and so they get by with what they have.

The new equal-access electronic money will provide a centralized system of electronic ledger checking accounts with very low overhead. Anyone will be invited to hold a free account on the system and the system will support diverse money and financial holdings so a depositor can have not only a money account balance, but also an official balance for any number of various portfolio assets from various independent financial service providers including foreign currencies, credit pool balances, derivatives, insurance shares, equities, etc. Therefore this unified platform will provide every depositor / investor an infrastructure for managing a rich array of monetary and financial assets. This infrastructure also provides all of the software and server-side support for theNational Credit Union and National Insurance Fund.

Initial accounts will be completely free of maintenance fees. The electronic money system will be completely funded by a small fraction of a cent charge on each transaction. This small fraction of a cent charge is levied on each transaction to cover the costs of the system. So transfer $20 from to a friend and the friend receives $19.99 or more. The costs cover the overhead including the centrally operated computer hardware and software infrastructure supporting the accounts and transactions as well as some expense to deal with fraud. Fraud in the system constitutes the fraudulent use of another person’s credentials to falsely authorize a transaction. Such fraud would be treated as criminal behavior, and internally, the Bureau of Electronic Clearing would cooperate with local law enforcement, receiving reports of fraud, investigating fraud and seeing those investigations through to prosecution. The Bureau would also accumulate a small fund to insure no one loses any value due to such fraud. Such fraud insurance might be lightly experience rated to encourage personal responsibility for fraud avoidance.

The maintenance-fee-free nature of the accounts means that low-income Americans can freely participate in the electronic money system without the undue penalties they currently face. No monthly fees to participate. No overdraft fees since electronic money authorizations can automatically ensure sufficient account balances before proceeding with authorization. No overdrafts and so no overdraft fees. For paper check processing, there will still be a need to impose penalties on insufficient funds, but the revenues from those penalties will accrue to the public treasury and lower the burden on Federal taxpayers rather than accrue arbitrarily to the banking sector which suffers no significant damage from these NSF checks (in other words, the fees are punitive and not to pay damages). To be sure there is some monetary damage from such checks, but the penalties typically far outweigh the damage because they are meant primarily as a deterrent to writing bad checks and only partially meant to compensate the bank for associated losses. While it makes sense to use penalty fees to discourage this bad behavior, it makes far more sense that the revenues from these penalty fees should accrue to the public treasury than to the oligopoly banks who just happen to enjoy the privileged position as the processor of these checks.

Account Types

The Bureau of Electronic clearing will provide several different types of accounts supporting the various needs of depositors:

  • Anonymous personal account: An account where the identity of the depositor is completely unknown to the system. The account is merely identified by the one or more public key security certificates attached to the account. These accounts cannot engage in loans from the National Credit Union since borrowers require clear identification and credit history. However, such anonymous account can lend fund into the National Credit Union.
  • Re-certifiable personal account: An account where the depositor shares, not only a public key security certificate, but all the information necessary to re-certify the depositor in the event of lost private key credentials.
  • Re-certifiable organization account: for partnerships, corporations, and other collective entities and functioning similarly to the Re-certifiable personal account.
  • Financial Merchant Account: These accounts are meant for persons or organizations that buy, sell, and originate financial securities. These accounts involve additional disclosure of information about the depositor, but also provide privileges such as engaging in financial brokering and the ability to offer dispute resolution insurance to the counter-parties to their transactions.
  • Merchant Account: These accounts are meant for persons or organizations that buy, and sell products (not financial securities, but genuine products and services). These accounts involve additional disclosure of information about the depositor, but also provide privileges such as the ability to offer dispute resolution insurance to the counter-parties to their transactions. Such insurance is experience rated for the merchant and the merchant pays an additional percentage discount fee on all transactions to cover the dispute resolution insurance.
  • Exchange Account: These accounts are provided for the large exchanges such as the New York Stock Exchange and the Chicago Board of Trade.
  • US Federal Agency Account: Various US Treasury, Social Security Administration, Highway Trust Fund, and other such accounts.
  • Foreign Central Bank Account: These accounts are provided for foreign central banks to hold dollar deposits and maintain their international current account.

Open Source Personal Banking and Device Software

With my proposal, the Department of Market Clearing and the Department of Financial Integrity would both be charged with cooperating on the creation of consumer-end open source software along with both a software and hardware reference platform to allow businesses and consumers to fully manage their monetary and financial transactions and holdings. Ease of use would be important, but for those insufficiently skilled with computers to handle their own transactions, friends, families, community groups, and retail establishments could provide the necessary technical, budgetary, and financial assistance to see them through their own banking operations.

The open source software would provide a basis for easily creating systems to interact with the Bureau of Electronic Clearing’s central services. The software could be adapted to run on desktop and laptop computers, mobile phones, handled computers, thumb-devices, ATMs, cash registers, monetary card authorization units, and so forth.

Self-banking: Everyone becomes their own banker

With the Federal Reserve’s monopoly automated clearing reconfigured to provide dedicated equal access to all Americans we all become capable of being our own banker. While still available for those who want these services, the need is eliminated to use paper notes, paper checks, and coins. Instead any person can authorize an electronic payment to any other person for a fraction of a cent. This authorization involves public key encryption (PKE) so that the only information needed from an individual to participate in the system is their own personally generated public key security certificate. An individual can elect to secure the corresponding private key using their own personal password, personal identification number, biometric data and so forth. However the only thing the individual is required  to share with the central authority is their security certificate.

If you need to lend some money to you sister, you simply logon to your computer and authorize the transaction. When you sister repays you she uses her mobile phone to authorize a repayment of the funds. In every instance, the payor remains in complete control of their own funds. Payors can even authorize recurring transactions to pay monthly bills but the payors remains in complete control to end such recurring transactions whenever they want.

What role remains for private banks?

Many roles remain for community groups and private enterprise to fulfill. The difference is now private enterprise is charged with finding ways of interfacing with the new National Money, Credit, and Insurance systems to provide even greater service to their customers.

For private banks many crucial legacy and permanent roles remain. First the typical bank role remains important of  storing, transporting, counting and otherwise processing paper money and coins. While the new electronic money system will largely eliminate the need to use paper money and coins, there will no doubt still be many who prefer to make use of these forms of money. The use of these money forms involves greater cost than the use of electronic money, so banks would be free to charge whatever fees necessary to recoup their costs and earn a profit on these legacy money services. However, the very option of a low cost electronic money system would keep banks from leveraging any local monopoly powers to gouge customers on such fees. In order to cover the greater cost to the monetary system for minting coins and engraving and printing paper money, a small fee would be charged for withdrawals of paper money and coins which covered the costs when amortized over the life of the paper notes and coins.

Despite these fees that largely cover the cost of maintaining these legacy money systems, the option would remain to use only electronic money and avoid even these modest fees for paper money and coin.

Another role for private for-profit businesses or even non-profit and community groups is to serve as a authorized check payment processor. Since all electronic balances are held with the Bureau of Electronic Clearing, depositors no longer have to find their own bank to deposit checks. Instead any retailer, bank, or community group could obtain the credentials to be an authorized check processor. Authorized check processors provide a nodal point to receive paper checks and facilitates an electronic transfer as authorized by the paper check. The authorized processor verifies the identity of the depositor to ensure the name on the check matches the depositor or alternatively verifies the account number payee on the check and ensures the funds are transferred from the check issuer’s account to the check depositor’s account. The funds are available immediately and then the check processor marks the check as cancelled, scans the check for electronic delivery to the Bureau of Check Processing, and sends the physical check to the bureau as well for physical archival storage. The paper check serves as a less secure paper form of the same electronic authorizations that are cheaply available to all payors and payees in the system. Since the processing of checks requires more resources and more opportunities for fraud, the fees are slightly higher than the straight electronic transfer of funds.

Finally, private banks would continue to offer safe deposit boxes to customers. Therefore a bank would serve the core role a bank has always served: a safe place to bank valuables. The added role would be in the processing of electronic deposits and withdrawals as the bank receives and dispenses paper money and coin, and banks and others could also become authorized paper check processors to fill that role too. Under my plan, most government regulation could be eliminated. Very little regulation would be necessary since the option of the public electronic money system would provide a check against rampant price gouging.

Other roles

In addition to these roles related to the monetary system, banks would also play reconfigured roles relevant to the new national credit system. For example borrowers, investors, and depositors would still need to invest and banks and other consumer service providers could serve an essential role in advising consumers on investment decisions. Moreover, although moderately skilled consumers could perform all monetary, and credit operations on their own, banks and other retailers would be important places for consumers to turn who needed investment advice or merely technical support with interacting with the monetary and credit system software. Family members, friends and community groups could also fill this role of providing financial and software support advice but I expect retailers, banks and other for-profit concerns would continue to provide these services either for a fee or as a complimentary service to sell other products.

For those banks who focussed on business banking operations such as debt and equity instrument underwriting, they would be welcome to provide financial advice either complimentary or for a fee so long as the fee was not a commission fee tied to the value of the instruments. Such service pricing is inappropriate for the buying end of financial instruments where the purchaser suffers from higher financial instrument prices. Another common service provided by private for-profit or non-profit corporations includes investment fund management  such as that provided today by Charles Scwabb, TIAA-CREF, and many others.

Community Microlending Re-lenders (Community Micro-re-lenders or CMRs)

In addition, my proposal has a key role for community microlending re-lenders (CMRs). These CMRs enable communities to come together to build better credit-worthiness than their constituents can otherwise do on their own isolated credit experience history. Essentially the CMRs build better credit histories through helping one another and can borrow from the National Credit Union for rates far better than any one can achieve for borrowing on their own. So the CRMs use their stellar credit rating, acquired by guaranteeing loans, to make more informed loans where they can acquire funds from the National Financial Exchange for more efficient and informed lending

Certificate Authority and Re-certifier

The minimum information a depositor must supply to the Bureau of Electronic Clearing to hold an electronic money account is merely a public key security certificate. However providing only this information means that any loss of the private credentials also implies the loss of access to the account and therefore loss of the funds in the account. However, banks, merchants are required and others may optionally provide much more extensive personal information that allows them to be re-certified in the event of lost private key credentials. Therefore there is an opportunity for private parties – whether banks, merchants, or community groups, family members or friends – to serve as  a  certificate authority to re-certify users of the monetary system who have lost their credentials.

Hardware and Software

While the Bureau of Electronic Clearing will host and oversee the development of an open source software project and corresponding hardware and  software reference platforms, there remains ample opportunity for private enterprise to create and market enhancements to the software and to independently produce hardware and software to interface with the monetary system. Such hardware and software can be marketed for consumers, merchants, banks, financial advisors, exchanges, investment funds and so forth.

Business Services

Many other private enterprise opportunities exist in the financial services sector directed at businesses. For example, the traditional role of investment banking will continue under monetary and financial reform so some businesses will continue to provide services such as:

  • initial public offering and underwriting
  • bond and commercial paper underwriting
  • assistance with originating other financial instruments

Similarly the many private exchanges operating around the United States would still operate much as they do today. The New York Stock Exchange, the Chicago Board of Trade and so forth, would all continue to offer a place to provide collective liquidity of various securities and commodities.