Real Change Step Two: Replacing the Federal Reserve

Our thinking about the fair tax approach has reminded us of the fact that in our society money is a commodity generally distributed throughout the land, not in the first instance pooled in the hands of a few. The contrary impression has been created by the centralized banking system, which along with the income tax obscures the simple fact that goods and services (and therefore the money that represents their value) start life as widely distributed as the individuals who actually produce and perform them. The first economic question therefore is not about the distribution of money (the false pretense of socialist and communist thinking) but about the mechanism for gathering it. Just as the income tax gathers money for government without regard to the choice of the people making it, the centralized banking system absorbs money from people that is then used (circulated in channels) without regard for choices they should make based on the actual circumstances of their lives. By disconnecting bankers' choices from the real life conditions of the people whose money they employ, the centralized banking system encourages the existence of the seemingly lucrative, but illusory assets whose corrupting weaknesses have caused its present crisis.

We're told that some banks and other financial institutions are too big to fail. But like a mass of cells growing in a way that burdens and harms the body (we call it a cancer), the question is, what allows the existence of something that continues to grow without regard for any contribution it makes to the real health and strength of the body (in this case the community or society in which it exists)? When the body must tax itself to exhaustion to maintain a tumor, we don't generally rush to rescue the tumor, or re-enforce the processes that encourage its growth. No, we seek to stop and reverse its growth, or by other means to kill it or remove it from the body. Even when dealing with the body's cancers we are finding that the real answer lies in re-discovering and strengthening the healthy functions and processes that respect the organic nature of the whole, rather than, at its expense, nourishing unproductive cancerous growths.

What we need is a fair banking system that, like the fair tax system, would make the flow of money more dependent on the choices of the individuals (and private associations) that produce its value in the first place. Step by step, let's try to envisage it. Private individuals make money. At first they may store it away about their persons, or in their homes, but experience teaches them that as the amount increases their individual ability to ward off thieves can't keep pace with the incentive others have to steal it away. Let's suppose that a family with a very large store of money has built a safe house for it. The neighbors approach them, asking whether, on some terms of mutual advantage and trust they could deposit their money in the safe house. They agree to share the burden of defending it (the cost of its security). Naturally, just as the store of money attracts interest from people willing to steal it, it attracts interest from others who, averse to stealing, are willing to ask for a loan. The owners of the store of money see the advantage of making such loans, on terms that help to defray the cost of its security, and eventually generate a profit. They agree to share in the profits in some way commensurate with the contribution each makes to the store. They also agree to let someone (perhaps the original owner of the safe house) make decisions about the amount and terms of lending, provided always that they make sure enough is available to meet the needs of the depositors as they arise.

Clearly, everyone involves can benefit from these arrangements, so long as sufficient care is taken to keep the lending practice strictly in line with the needs and interests of the depositors. If for example the depositors are farmers, the person in charge of the lending will make sure more reserves are on hand before planting season, when withdrawals will have to be made to buy seed, refurbish equipment and so forth; or at harvest time when more hands may be needed to bring in a particularly abundant yield. Of course those are also times when the demand for loans may rise. Therefore, loans have to be carefully prioritized to help the original depositors maintain their productive capacity, provided they're doing what's needed to make a good harvest more likely. The properly responsive local bank, tied to local needs and realities, has few opportunities to outgrow the health of the community in which it arises. By and large those temptations will be kept within bounds by due regard for the survival of the depositors whose productivity is the mainstay of its existence. Such a bank is like a healthy organ, interacting with the body whose health it reflects and helps to maintain.

A society whose financial life rests on a base composed of such institutions (independent local banks, sanely integrated with the communities they serve) has no special charm to avoid all calamities. Harvests will fail, lending decisions prove wrong, the occasional crooked professional bank schemers more dangerous than thieves in the night. But the impact of failures will be more localized, their effects more contained and transitory. This kind of bank failure was fairly common in nineteenth and early twentieth century America, before the creation of the Federal Reserve set up the conditions for a far more generalized and longer lasting form of failure.

I'm not willing to argue that some more centralized financial institutions are intolerable. In fact, when the realities of life lead to the amassing of very large fortunes (as the discovery of large gold and silver deposits did in the U.S.) the community based banking model proves inadequate. Where one or a few individuals largely capitalize a bank (fill the store with their money), its practices will be driven by their desire for a good (and often a quick) return on their money. But there needs to be a sign marking the region occupied by such banks that says "enter at your own risk". Anyone who deals with them should have to live with that warning, including enterprises willing to depend on them for working capital. Moreover, this region should be hedged about in ways that prevent individuals and families from much involvement with them. People whose lives depend on their income (they live on a paycheck) need banks that keep an eye on conditions close to home. Properly understood, such individuals include business enterprises (including the affiliates of large, diversified corporations) located in a community and structuring a labor force that depends upon their operations. Such locally rooted enterprises should have to store their operating capital and reserves where they live, and get a return for it related to the health of their immediate environment.

In practice such a hedge might involve restricting certain banks to individual depositors above a specified deposit threshold, or to dealings with the corporate entities that float above and tie together locally based outlets and production units. The money available for such investments would be limited to the net profits (after seasonally adjusted local reserves are met) sent on to such corporate entities in return for the services they provide to their affiliates.

Instead of setting conditions that allow banks (or other enterprises) that are too big to fail, we need to structure the system purposefully so that failure is the natural consequence of bad decisions and actions, but no failure is catastrophic for people not directly involved with the institutions whose management decisions occasioned it. We need to structure it so that local communities benefit from the healthy result of their own efforts, rather than seeing those results siphoned off for uses that have little or no regard for their needs and interests. We need to structure it so that the folks who live at the grassroots deal with banks that rise or fall on the strength of the community, and which therefore have a vital interest in making responsible decisions that contribute to its strength. Finally we need to structure it so that the investments available to people who live on their income mainly take the form of equity in the enterprises they themselves depend on, so that they not only profit from their work but from the overall success of the business that makes use of it.

As we consider this kind of banking structure, one question looms: what about the large deposits and flows of money the national government requires to perform its functions. Well, if we think about the reasons people have for putting their money in the bank, instead of keeping it at home, none of those reasons apply to government. The Federal government has the wherewithal to safeguard and manage its own money. It also has a functional imperative (service to the people and national community as a whole) different than the more narrow, profit-oriented perspective of the private banking system. Government money should therefore be placed in a government bank, staffed and run like any other government department or agency. The hybrid monstrosity that is the Federal Reserve (a private system capitalized with public money) is a contradiction in terms that invites the kind of crack-up we're currently witnessing.

The problem of course is that the indebtedness of the Federal government conjures the hybrid monster into existence. At the end of the day, the government ends up being like the house many people live in- because you owe more than you own, the bank owns the house, not you. Unless you can service what you owe, the bank owns the house, not you. This means that unless the American people have a government that lives on the revenues generated by their activities, they don't' own the government, its creditors do. In generations past political leaders who cared about preserving liberty (that is, government of, by and for the people) hated and feared large government indebtedness. Politicians today pretend that they can spend without regard for the indebtedness which results. They seem content to lead the American people into permanent debt slavery, effectively overthrowing the form of government based upon their freedom. Having quietly turned control over to creditors (including potentially hostile foreign governments) they are no longer free to act as representatives of the people.

By abolishing the income tax, we give people back control of the money they make. By restoring a locally based banking system, we give communities back control of the money the people of those communities supply. By establishing a properly public bank for public monies, we restore to the American people institutional control of and responsibility for monies intended for public use. But we will not restore the real liberty all these steps envisage until we discard the notion that the national government must be the servant of all our aspirations. Instead we must limit its activities to those functions directly relation to its true purpose. According to our Constitution, the U.S. government's job is to secure (make safe) the blessings of liberty. It cannot produce them. That's our work. The Federal government is somewhat like the security team at a factory. The fact that its activities are vital to the operation of every shop in the factory doesn't mean that the head of security should make decisions best left to the people responsible for those shops. Even where centralization makes sense, it isn't sensible to make the national government the focus of centralization except in those areas (for example, border security, military preparedness, and international relations) where the Federal government rightly claims responsibility based on the provisions of the U.S. Constitution.

I conclude therefore that the current economic crisis requires these bold steps:

1. Abolish the income tax and replace it with a fair tax system such as that proposed in the Linder bill;
2. Abolish the Federal Reserve and replace it with a) a locally rooted banking system for people who live off their wage or salary income and for locally rooted enterprises b) a private, at your own risk banking system for rootless corporate investors and individual depositors who live off their wealth, not their income; c) a U.S. government bank for managing the government's money.
3. Thoroughly restructure the Federal government's activities so as to eliminate every activity, department and agency not strictly related to its specifically mandated Constitutional responsibilities. We must end, not extend the failed socialist experiments of the last century.

This is not a prescription for populist hand-outs and other lying policy delusions. It implies a return to individual, family and local responsibility. It implies restoration of the central role of private business, and religious and charitable associations. It implies an end to the pretense that government makes money, or progress or prosperity. It implies, in a word, a return to liberty- with all the hard work, risks and challenges liberty entails. But we all know that in many ways the present trends of our political and social life undermine the disposition and virtues people must have to accept these challenges. Therefore, economic restoration cannot occur unless our political system and moral identity are restored at the same time. Otherwise, real change will not come about, and would not be sustainable if it did. We must discard the political system that has failed and betrayed our liberty. We must reclaim the moral character that can produce energy and courage enough for the new politics that must replace it. No more manipulative, so-called Republicans. No more insidiously delusional Democrats. Just Americans striving as best we can to be decent human beings. Strong enough to be independent. Wise enough to stand united. Good enough to be free. Obviously, we've got a lot more to think through. Stay with me.

Keyes is an absolutely brilliant guy; probably a genuine genius. And, he really incubates some great ideas.

It's a shame that he has said some mildly controversial things that have been blown way out of proportion.

The national media has completely marginalized him as a crack-pot.

The “possibly forever” dominant political left doesn’t care at all for the Fair Tax, and they will never vote for it! Why even bring up the idea of the Fair Tax when the entire U.S. is really moving in the exact opposite direction when it comes to tax issues? The U.S. is really moving towards third world socialism forever, and some conservatives are still giddy about the Fair Tax! Unfortunately, this is a moot issue!

"Let us raise a standard to which the wise and honest can repair; the rest is in the hands of God."

George Washington

"Let us raise a standard to which the wise and honest can repair; the rest is in the hands of God."

George Washington

"Change change change, equal outcome regardless of of effort, hope hope, fair. 57 states. Above my pay grade." - Barry Soetoro.

The national media has completely marginalized him as a crack-pot.

Name a patriot that has NOT be destroyed by the MSM. Name just one. You cannot. For 40 years running we have taken this crap.

Why do we continue to allow it? Why do we not declare war on the MSM commie vampires?

Badabing.

I thought Satan was supposed to appear as an Angel of Light, not a Bookmark of The Yammering Void...

It’s a moot point for fatalists like you due to absence of conviction who’d rather roll over.

Thank goodness George Washington didn’t feel that way when facing King George’s army and navy fleet.

Sell fatalism somewhere else.

It's a shame that he has said some mildly controversial things that have been blown way out of proportion.

I'm not clear on the controversy with Keyes. Do you know any specifics?

does anyone know who the last 2 people that tried to abolish the federal reserve system? and what happend to them?

"I'm not clear on the controversy with Keyes. Do you know any specifics? "

The second isn't so much contextual, but style. Keyes had a few moments in the debates where he was very passionate. Of course, the MSM characterized this as Keyes being too "fringe" and "extreme right wing" and hinted that he came unglued. In other, par the MSM course.

does anyone know who the last 2 people that tried to abolish the federal reserve system? and what happend to them?

Wasn't JFK interested in getting rid of the federal reserve system?

But at this point, given how tightly bound our treasury is to the federal reserve, plus the ties to other government banks, would it even be economically possible, if someone were to come up with the political will to do so?

It seems that if it were successful, it could cause a world wide currency crash.

Mark

Two things come to mind immediately. When his daughter "came out" as a lesbian, Keyes made the comment (or at least it was attributed to him) that she was no longer welcome in his home. I'm not sure how or if that was ever resolved. But, you can imagine the feeding frenzy over that.
The second isn't so much contextual, but style. Keyes had a few moments in the debates where he was very passionate. Of course, the MSM characterized this as Keyes being too "fringe" and "extreme right wing" and hinted that he came unglued. In other, par the MSM course.

Thanks Big. Many times smart people make the mistake of speaking too honestly. I'm thinking here of Robert Bork and "an intellectual feast."

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