For better or worse, central banking has become a cornerstone of modern developed economies. In the last 100 years since the origin of central banking, the practice has become ubiquitous globally. Central banks represent the inversion of the production of capital from labor into a debt instrument that commits an obligate burden of future labor. While our modern economic system is often referred to as capitalism, capitalism is the private ownership of the means of production. The classic definition of capitalism says nothing about how capital is produced. With central banks, capital is not produced by performing labor, but by printing money based on debt. The debt is then placed on the obligation of the tax paying public for repayment. This inverts capital production from post-labor-performance to pre-labor-performance.
While not specifically conflicting with the Adam Smith definition of capitalism, it represents a significant departure from the traditional nature of capital. As such, to represent the inversion of the capital production cycle that puts the production of money as the first step, I propose identifying this economic system as “monetarism”. Monetarism represents the social obligation of taxation combined with the private benefit of capital production, reflecting the common saying about modern economics is to “Socialize the costs, privatize the benefits.” That is literally what monetarism does.
Through the spread of central banks, monetarism has become the dominant economic form. As it is likely impossible to revert 100 years of economic evolution and displace monetarism, I propose an alternative: that the structures of monetarism are seized by the public, such that the benefits of the monetaristic system can be recovered by the same parties that are indebted and obligated to it. In this way, the obligators are also the beneficiaries, and as such their role switches from oppression to consenting participation.
Central banks separate the production of capital instruments from the performance of labor, and abstract that labor to some future event while producing the money now based on the commitment of future performance. Central banks have used the ability to pull money from thin air, assign the ability to spend the money to one party, and the burden of repayment to another party. This ability to externalize the burden to the public while privatizing the gain to the member banks is very economically powerful, even if its use and beneficiaries have imposed great harm on the public.
Now, central banks, having spent 100 years establishing their imposition on society, are planning the next step: central bank digital currencies. A denomination that can be used to impose even greater levels of centralized control, and ever-more-escalating burdens onto the public and into the future.
Commonly throughout history the means of oppression have been seized by the underclass and converted from swords to plowshares, from a method of harm to one of benefit. Corporate ownership structures and the tools of government have most recently been the methods of abuse, but now we can turn these from methods of torture to produce.
Now is the time to reform the Federal Reserve Bank. The Bank issues Federal Reserve Notes, which are the Legal Tender of the United States of America. The Federal Reserve Bank issues Federal Reserve Notes in exchange for United States Treasury Bills. Treasury Bills pay a fixed percentage of interest until maturity when their principal is repaid. The Treasury issues Treasury Bills to raise Federal Reserve Notes to pay for government operations. Many nations and private parties buy Treasury Bills as an investment in exchange for existing in-circulation Federal Reserve Notes.
All Federal Reserve Notes in circulation as a printed, serial-numbered bill, are printed by the Federal Reserve at presses in Denver, San Francisco, and [Delaware?]. Most money is now digital entries in dual-entry accounting software programs and never actually exists as a printed bill.
The government of the United States voluntarily relies on Federal Reserve Notes to finance its Treasury operations, and gladly issues Treasury Bills that indebt the citizens of the United States for each dollar produced. Because Federal Reserve Notes are only issued in exchange for interest-bearing Treasury Bills, the Federal Reserve takes as an asset the principal and interest of the Treasury Bills, purchased only for something it produced for effectively free: printed fabric-paper, and digital bookkeeping entries. On top of the tbill asset are the incomes from the interest for each tbill.
The only way to pay the interest and principal of tbills is Notes, which are only issued in exchange for tbills, which are interest bearing. It’s impossible to pay off the balance, even if every dollar on the planet were rounded up and paid through its obligations. Interest expenses would always require the issuance of new TBills for new Notes. The only way to ever reduce the total indebtedness is to use negative interest rates, or private capital investment returns to overgrow the Notes as a percentage of the total money supply.
The Treasury receives the Notes and pays the Treasury obligations. The Treasury pays the tbill interest and principal payments from tax collections by the IRS. The banks hold the deposit and transfer accounts at every step of the way: government agency accounts, payroll accounts, corporate payments from government services, employees of that corporation, on and on. The banks are the shareholders of the Fed, and receive the dividends from the Treasury payments to the Fed for the Fed’s TBill holdings.
The Fed is owned by banks. In order to be a bank, you have to deposit a minimum amount at the local Federal Reserve, and pass certain other requirements. The Fed is wholly owned by the member banks. The Fed receives all the Treasury interest and principal payments for its TBill holdings. In more recent times, the Fed also holds other equities and securities to stabilize the markets. Largely this is used to prevent specific economic activities from collapsing, like banking share values or real estate prices.
The Fed currently has a single share class shareholder structure. The Fed’s shareholders – banks, and exclusively banks, by definition and law – own all the capital shares of the organization. The obtain capital shares by making a deposit at the local Fed to be licensed and recognized as a bank. The Fed consumes a certain amount of money for its operations – overhead, staffing, facilities, printing, etc. whatever. This is typically 3% to 7% of its total cash flow. Historically, the remainder is repaid back to the Treasury, where it contributes to the governments’ budget. However, since the Global Financial Crisis led to the Central Bank holding Equities and Securities, the Fed now pays these funds to the banks as interest payments. In fact, the Fed is now losing money, as its interest obligation for securities is now greater than its income from TBills, despite the Fed printing money at-will and at zero cost, because of these new obligations to banks.
In the current model, banks receive around 93% to 97% of TBill interest payments against the securities held by the Fed. This is roughly seen as 3% to 7% less than the Fed’s rate proportional to their capitalization, to oversimplify. This is unearned income to the shareholders. Recently, the Fed’s interest receipts have topped $1T annually. This means that around $930b to $970b was paid as interest to bank securities held by the Fed.
In a new, two-class shareholder structure, the Fed is reorganized to incorporate best practices for corporate ownership shares. Preferred shareholders receive an interest payment against their capital shares, do not have voting power, and do not (usually) receive dividends. Common shareholders do not receive an interest payment, have voting power, and do receive dividends, if and when dividends are available to be paid. Bank depositors current ownership is shifted to interest-bearing Preferred shares, which receive an interest payment but not dividends and cannot vote. This is essentially identical to their current status, except the banks lose the voting control, and the citizens gain the voting rights and receive dividends.
In this two-share-class reform, all recognized citizens of the United States (e.g. anyone with a valid SSN) receive one common share, the common shares are issued upon birth and cancelled upon death. The share count is automatically updated based on the population of the USA and anyone who receives a SSN receives a single common share. No persons can own more than 1 common share. Persons cannot purchase or trade shares, or permanently assign economic benefits. This is a balance sheet asset, not a tradeable asset.
With n common shareholders, and $x dividends, each shareholder receives $x/n payment. For an example of $1t and 350m citizens, this is $2900 per citizen in annual dividend payment from their common share.
As shareholders of the Fed, all citizens are now banks. Banks can create new cash through balance sheet operations. For example, a bank issues someone a loan. It doesn’t take money from a depositor and give it to the debtor. The bank records the debit of the principal and the credit for the principal plus interest. The recipient can then spend the principal and has to repay the principal plus interest over the term of the loan. The bank literally “makes money” by producing the difference between the principal and the principal plus interest as new capital value for its own balance sheet while allowing the debtor to withdraw the principal.
Before central banks, most currency was produced by individual banks deposit and lending activities, enable through balance sheet operations as described. With the creation of central banks, governments guaranteeing that payments would be made in central bank denominations, and the guarantee of future payments from Treasuries imposing taxes, central banks overtook private banking activity as the primary denominator of currency production in an economy.
With all citizens now also central bank shareholders and therefore banks themselves, citizens can now produce currency through balance sheet operations of borrowing and lending in the same way corporate banks do. Corporate banks receive fixed interest payments, while the citizen “banks” receive the dividends and vote. Citizens, now recognized as banks due to their status as shareholders of the Fed, can also issue debt in the same way a bank can, through balance sheet operations that produce new capital balances.
Currently citizens without bank recognition tend to have home mortgages, auto mortgages, and education debt, among revolving lines and other common forms. For citizens that have bank recognition, they could engage in the balance-sheet activities that create modern digital currencies as a bank does, but without an intermediary bank. This includes using digital accounting systems to issue debt for themselves and their friends, family, and colleagues, in the same way that a 3rd party bank can.
In this reform, the central bank no longer sets the interest rate by fiat, but debt origination costs are set algorithmically for each origination transaction based on the actuarial risk of default for its loan profile as an inverse to its return rate to keep the value of capital units (dollars) flat. The actual algorithm to produce this interest rate is beyond the topic of this paper, but deserves intense study.
If the Treasury is paying the Fed $1t per quarter that represents a dividend payment per citizen, then concurrently the Treasury is collecting the same amount per citizen in taxes. However while the Treasury is collecting that amount per citizen, it doesn’t mean the collection is from the citizen themselves. If the Treasury has a current balance per citizen of $1m and a quarterly increase of $3,000, then each citizen receives approximately $3,000 per quarter and can independently create approximately $1m in debt in total through their own education, auto loan, home mortgage, and pension-investment.
Citizens can access differing levels of their total Treasury balance through their return history. As a person’s issue of credit outperformed government baseline returns, that person’s access to credit increases up to their personal limit. For example if the Fed rate is 4% and the citizen’s credit history shows a 7% average return, the citizen can increase their access. Depending on algorithm specifics, after a certain point (for example, if the person’s investment profile returns outperform the government investment profile over a period of time) a person has access to both their “half” of their Treasury indebtedness, and the government’s “half” as well. Through incorporative actions with other persons, access to capital production can improve further.
This provides a fixed income to each citizen from their Fed share, collateral income for loans, the ability to create debt from balance sheet operations, and the ability to guarantee debt from Treasury obligations. With the citizens having equal footing to corporate banks on the use of balance sheet accounting to literally “make money”, citizens can collaborate on financing for homes, autos, capital investments, asset development, anything that they choose. Democratizing banking so that every citizen has the power of a bank will massively expand the capacity of society to invest in citizen-driven initiatives, devolving power from central banks and their bank-industry-shareholders, democratizing the production of currency, diversifying risk, and reducing systemic risks of “too big to fail” structures.
As part of the reform, citizens gain a pro rata capacity to burden the Treasury with debts in the same way that the Treasury now burdens citizens with debts. Just as the Treasury can obligate the citizen to pay government indebtedness through tax collection, citizens can transfer their obligations to the Treasury, which assumes the obligation to pay the citizen’s defaulted obligations through bankruptcy.
At the Treasury, a running account is kept of per citizen indebtedness, total public debt divided by the population. Each citizen may tap a mirror account of the per citizen indebtedness for their own investment activities – the purchase of capital assets, capital investment in a business, or any other professional and financial acquisitions. Capital lines may not be tapped for personal expenses, consumables, or non-capital acquisitions. This is basically a government-backed line of credit for citizen investment in assets.
Citizens may pledge the value of their capital shares as collateral for non-Treasury loans, or take Treasury loans directly. Citizens may tap an increasing proportion of their mirror account as they indebt and repay from prior transactions, essentially a credit risk rating based on prior performance, not arbitrary bill-payment activities. Citizens may prefer non-Treasury loans as their terms can be more convenient and they may access larger amounts of cash faster, but prefer Treasury loans for low rates and extended repayment terms.
As an example, on the first transaction the citizen may tap the average annual income of a citizen as the loan balance. Upon issuance, a fixed portion of the citizens income is garnished to repay the debt. As the debt is repaid, a proportional amount of new debt may be taken, and an increasing apportionment of their total mirror debt. The intent is that after a series of transactions are repaid, evidence is shown that the citizen can responsibly invest, and has access to more of their mirror debt.
If the citizen defaults, their other assets can be recovered to repay the debt (similar to bankruptcy) or other citizens can pledge their own Treasury lines to make the debt whole (and in doing so, burden themselves in repayment of the debt for another).
Citizens can combine their Treasury debt lines to access more capital, for example, team pools their Treasury debt to capitalize a startup. Citizens may draw against their own debt maturity model, so if one founder has access to larger debt lines, they can draw that capital and invest it in the business even if the other founders haven’t matured their credit yet.
Citizens may go bankrupt and void their mirror debt, however their wages are garnished until the debt is repaid, they can’t access Treasury debt for 3 years after bankruptcy, and their debt maturity is reset.
As all citizens are now depositors at the Fed, and as such are banks, citizens now have traditional bank liberties – the issuance of debt, mortgages, and lines of credit, the structuring, sale, and purchase of financial instruments, acceptance and management of deposit accounts, and the issuance of bank scrip (alternate currencies, such as crypto). All deposits and other capital instruments held as assets are insured, with rates based on the amount of capital insured. Payment of capital insurance is mandatory and cannot be waived. Capital insurance is paid to the central bank retainer account based on the proportion of capital insurance expected to be consumed on a rolling 30-year basis, and unused payments, once the retainer account is filled, are paid as dividends to citizens.
This approach ensures that citizens are in financial and economic control of the central bank. It ensures that citizens have a direct, explicit, and overwhelming benefit to permitting the issuance of currency by indebting the public. The citizens receive dividends from any proceeds of the operation of the bank. They can also use their share of the total balance sheet of the bank (based on their capital ownership share, and the central bank’s balance sheet assets) to improve their own capacity to collateralize a financial instrument. Citizens can access Treasury debt at essentially equivalent terms to banks, and receive the ability to engage in bank activity.
This reformation of the governance and ownership of the central bank transforms a tool of exploitation of citizens into a means of the financial and economic liberation of the people of the United States, and if used broadly, the world.
This resolves the problems of monetarism and central banking, but does not adequately address the risks of central bank digital currencies.
Prior to the establishment of central banks, most currencies were regional or local. The proliferation of currencies meant that the relative changes in value and availability of currencies were local or regional concerns. This helped to isolate local economic concerns to the area experiencing the issue, and minimized the transference of economic issues in one location to another.
Once central bank currencies were introduced and banks lost their capacity to print alternatives, local and regional economic issues were subsumed into a broader economy backed by the currency. While this helped smooth local issues, it also meant that local and regional issues were able to propagate nationwide or worldwide, for example the unsoundness of New York or San Francisco banks now creates systemic risks globally.
While having a single legal tender nationwide did promote national economic unity, it has also transformed local economic problems into national economic problems. To resolve this tension, I propose we accept the adoption of a new central bank digital currency (under the reformed central bank regime described previously), and use it not as a transaction currency, but as a (relatively) stable peg of equivalent value. The majority of transactions would occur in alternative currencies, isolating any inflationary, deflationary, or default risks within those currencies to that currency and the organizations trading in it. This approach creates firewalls between industries, where the different users of a currency act as a bulwark against the spread of local (whether geographical or industry/market) concerns into the global economy.
In this case, transactions may be denominated in the US Dollar, but only as a stable value reference. The actual transaction would occur in an alternate currency indexed to its current exchange value to the Dollar. This would provide price stability and the ability to compare pricing and costs across industries, while preserving the industry/market and geographical firewalls to local and regional (geographic or industry/market) currency issues. The use of diverse currencies would allow economic intervention into specific spaces that use that currency while limiting those interventions capability to spread to other markets.
For example, immediately after the global financial crisis, the Fed massively inflated bank asset values to stabilize banks. The argument was the velocity of that capital was essentially zero, so as long as it was retained inside the bank, it wouldn’t cause inflation. This was true for a time, except the currency was identical to the currency used to denominate the banks profits, which meant that leakage out of the banks and into the broader economy would, in fact, create inflation, even though the initial zero-velocity issuance may not have.
Over time, as the bank was expected to continue increasing its profitability while holding inflated capital account values, the banks had a tendency to inflate assets and security purchase prices, as the banks not only had excess capital availability that made it easier to pay higher prices, but they needed asset value inflation to maintain their appearance of profitability. Thus despite the banks not explicitly spending the new capital from the Fed, it still resulted in inflation through the use of the same denomination to account for two different capital activities (bank assets on deposit to keep the banks solvent, and banks transacting in assets and securities using the same denomination). This created a leakage from the “zero velocity” capital that inflated demand for assets and securities, which in turn inflated prices.
By isolating different types of transactions to different application-specific currencies, and only linking them abstractly through the ForEx activity using a US Dollar equivalent value filter, the leakage between the types of capital used by different industries for different purposes can be reduced. In such case, the situation would have to deteriorate sufficiently that the organizations using the alternative currency would see the real value of their enterprise fall as the value of their alternate currency holdings fell, modifying their corporate enterprise value as mediated by the transaction denomination filter (the US Dollar) but without directly resulting in a loss of value of the US Dollar itself.
This approach would then permit anyone holding USD to exchange it for large amounts of the alternate currency, making it relatively less expensive to engage in market-specific economic intervention while preventing that interference from spreading across the market (as the loss of value in one alternative currency does not directly effect the value of the USD as a whole).
While USD would act as the reference value of every cross-currency transaction, the average person would only require USD to pay their taxes. Thus they may receive their payment entirely in USD, and convert to other currencies as they chose, or they may take a portion in USD and the remainder in some other currency or basket of currencies, as agreed upon with their employer, with the actual payment value denominated in the USD equivalent (even though it’s not paid in USD). This would not only ensure that employed citizens, and anyone with access to the financial system, would be able to comply with tax obligations, but also ensures a constant buying pressure on US Treasuries to produce new USD for acquisition for transactions and tax compliance.