How the Economists Facilitated the Crisis and Must Now Be Held Accountable Part I & Part II

By Stephen Zarlenga American Monetary Institute Part I The ongoing financial crisis presents a rare opportunity for monetary and banking reform. There's no denying that the present "Economics Regime" has been a key cause of the pain, suffering, illness and even death inflicted on America's less affluent; and of the worldwide economic destruction. It's important that the economics profession be held to account for its part in this crisis. This was well expressed by economist James K. Galbraith in his testimony to the Senate Crime Subcommittee on May 4th, 2010: "I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis." With rare exceptions, those in control of the world's monetary/economic agenda and the theories supporting it have helped bring the world to its knees. Shouldn't they and their theories be held accountable? False "monetary" beliefs have misdirected public policy decisions for decades with devastating effect! Errors of concept, methodology and even factual errors have led to disastrous outcomes for our nation and now have the potential to gradually take America down into an unprecedented abyss of lawlessness and deprivation. Consider the present insane calls for austerity. Economists have allowed the idea to generally prevail that a government has to be run the way a shopkeeper runs his store! But methods that promote virtue and success at a shopkeeper or family level lead to stagnation and disaster when used at a national level. For example, they ignore that our government has both the responsibility and the power to provide the nation's money supply in an effective way. Delegating that power to private interests such as the banking system has always failed, and will continue to fail. Haven't we learned that by now? These times call for greater care and heroism among economists; and cowardice is not tolerable among those who do understand. Which particular monetary error is most responsible for the tragedies? In our view, the most glaring error is that economists have not understood or appreciated the difference between money and credit. Using credit (which is also debt) for money is dangerous, harmful and unnecessary. They can't read

and grasp Knapp's State Theory of Money, available in English since 1924, to understand credit is just one type of money system, and not a good one at that! Even a superior economist like Minsky, who pointed out that such a credit/debtbased system always collapses, regarded that as a problem inherent in Capitalism, and didn't consider eradicating it but merely called for government to provide jobs when the credit structure was in collapse. A solution that one of AMI's researchers described as "trimming poison ivy!" Too many economists have falsely concluded that "all money is debt," because most of what we use for money in our poorly structured system is debt, coming into circulation when banks make loans. This attitude ignores the possibility and necessity to define a better system based on government money, not private debt. To justify this erroneous attitude some economists actually insist that government money is also debt! But that is truly a lack of clarity in definitions that should correctly distinguish between money and debt. This failure to understand the concept of government money as opposed to private credit/debt has had immense and deadly repercussions. The Great Henry Simons summed it up in one magnificent sentence: "The mistake ... lies in fearing money and trusting debt." Henry Simons, (Economic Policy for a Free Society, 1948, P.199) This fundamental error has allowed the most egregious banking and money system based on private credit/debt to dominate our society for a century, repeatedly causing immense damage, even leading to warfare. The privatization of our monetary system has placed control over public policy into unelected hands, for whoever controls the money system, over time will control the nation. Are we then surprised that they have used that power to benefit themselves, not our society? Observe how they have abused the money power: They have given special privilege to create money to some, and resulting disadvantage to others. This has led to an obscene concentration of wealth and the consequent poverty! It has encouraged lawlessness and corruption among the privileged; pushing them to diseased excesses for acquisition, and ignoring crucial elements of our culture such as infrastructure, health care, education and those among us in great need. They have turned economics into a primitive religion, and worshiped the "market" as a god, despite all evidence to the contrary. They denigrate and ignore inconvenient evidence. "Anecdotal" was the description that the charlatan Greenspan used for real evidence that challenges their theories; a fundamental

sin of poor methodology. (See the excellent documentaries The Warning and Inside Job.) Under present leadership, the administration has done practically nothing to bring to justice the multitude of lawbreakers who caused the present disaster. They have placed an unnecessary ball and chain on the leg of every producer by having the money supply itself bear an unnecessary interest cost to society. In 2010 our government paid $414 billion in unnecessary interest costs! They have foisted a "fractional reserve" banking system on us prone to abuse and periodic collapse. Credit will collapse during a crisis. Government money does not collapse. Credit collapses in a crisis; money does not collapse. Government money does not collapse! We'll see in parts II and III how to use money, not debt, as the basis of our money system, just as Dennis Kucinich proposed with his groundbreaking bill, HR 6550, that changes the way money in our nation is created and issued to reduce our nation's deficit and debt, creating millions of vital jobs to transform our economy.

Part II Part I stressed that those in control of the world's monetary/economic agenda and the theories supporting it have helped bring the world to its knees. They and their theories must be held accountable! Economists' most glaring error is not understanding or appreciating the difference between money and credit. Using credit (which is also debt) for money is dangerous, harmful and unnecessary. Unfortunately, in our present badly structured monetary system -- a "fractional reserve" banking system -most of what we use for money comes into existence as an interest bearing debt, when banks make loans. While people think the banks are loaning money they have, in fact most of what they loan has been created out of thin air as accounting entries. In that sense, most money in our fractional reserve banking system is debt. But economists can't grasp that those rules can and must be changed. Perhaps afraid to confront their paymasters, who are benefiting from the injustice, most economists can't conceive of practical ways we can use real government-issued money instead of private debt. The economists ignore previous attempts such as the Chicago Plan of the 1930s; and smear prior periods when such money was used successfully.

What's so wrong with using private credit/debt for money? Look how it unfairly concentrates power and wealth with little or no regard for productive work -- for justice. Watch how it emphasizes destructive speculation. See how it has ignored our infrastructure, education and health care systems! Observe how prone to collapse such credit money is during any crisis! Remember credit collapses and disappears during a crisis, thereby greatly aggravating the crisis. Credit collapses, but government money does not collapse. The economists mangle definitions to re-define government-issued money as a form of debt! To do this, economists also had to mangle some monetary history. A hundred years ago, the great monetary historian Alexander Del Mar wrote: "As a rule political economists do not take the trouble to study the history of money. It is much easier to imagine it and to deduce the principles of this imaginary knowledge!" This has led to the silliest errors of principle and fact, regarding important monetary history. For example, economists are generally:

Unaware of the American colonial periods' good experience with government fiat money and how it built real colonial infrastructure. Unaware the Continental Currency was destroyed by the British counterfeiting billions of them. And they ignore that the Continentals gave us a nation! Unaware the Greenbacks ultimately exchanged one for one with gold and have allowed them to be characterized as worthless paper money. Unaware of the British counterfeiting of the French Assignats, and have enshrined the propaganda book Fiat Money Inflation in France, written by Andrew Dickson White, a banking heir, as unbiased fact! Unaware that the German Hyperinflation occurred under a privately owned and privately controlled German Reich bank with no government involvement. Have generally allowed the Federal Reserve to be regarded as part of our government! Have allowed a level of economic ignorance to prevail such that political leadership can now threaten to close down our government with impunity; for supposed economic reasons, without being branded as morons or traitors!

While economists deserve much of the blame for their dysfunctional "theories," politicians, who still "rely" on those theories, should know better by now and are as responsible for our monetary and economic problems. Jamie Galbraith concluded his testimony to Subcommittee on May 4th, 2010 with this warning: the Senate's Crime

But you have to act... let me suggest, the country faces an existential threat. Either the legal system must do its work, or the market system cannot be restored... [We need a thorough] cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law... [emphasis added]

The American Monetary Institute agrees and warns that regulation isn't enough in a money system that obscenely concentrates wealth, because that concentration of power will overcome the regulators. This is what's been happening. The Carter and Reagan administrations deregulated airlines, trucking, and savings and loans, leading to the Savings and Loan Crisis. It accelerated under Clinton when Gramm-Leach-Bliley repealed part of Glass-Steagall; and the Gramm Commodity Futures Act of 2000 exempted over-the-counter derivatives from regulation. The great and heroic American, Brooksley Born, was forced out of the Commodity Futures Trading Commission (CFTC) Chairmanship, replaced by the wife of anti-regulator Senator Phil Gramm! NAFTA led the attack on American jobs. Clinton signed The Telecommunications Act of 1996 allowing media concentration, which has kept any reasonable discussion of the monetary and economic travesties off the airwaves until the banker's malfeasance broke onto the front pages! Concentrated media ownership promotes a divisive, even treasonous politics of hatred. These events can all be viewed as a slow moving "Coup d'tat" that reached the US Supreme Court when it installed a president who twice could not be elected; who then appointed hack justices who engineered an obscene decision allowing corporations to dominate our electoral process. (Legal scholars can and must show how to reverse this particular madness. The obvious starting point is Franklin Roosevelt's well-designed proposals to reform a Supreme Court run amok in his presidency.) Our next article, Part III, will show how to use money, not debt, as the basis of our money system, just as Dennis Kucinich proposed with his groundbreaking bill, HR 6550, that changes the way money in our nation is created and issued to reduce our nation's deficit and debt and create millions of vital jobs to transform our economy.