Multiphase Monetary Reform Transition Planning: Transforming the Federal Reserve System into the United States Central Bank. Ronald e davis, Phd monetaryReform-TaskForce net

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Multiphase Monetary Reform Transition Planning:

Transforming the Federal Reserve System into the United States Central Bank.

Ronald E Davis, PhD

There are a number of fundamental flaws in the structure of the Federal Reserve System (FRS) as it is currently constituted. The one we wish to focus on at the outset is that the FRS represents the privatization of money creation and monetary policy responsibilities that rightly belong in the hands of a transparent public interest organization accountable directly to Congress. Consider these analogies. What would people say if defense policy were handed over to a consortium of private industry defense contractors, who met in private to determine American defense policy, with a summary of the determinations provided to the Defense Department officials after the fact, with none present during the deliberations? Obviously there would be a huge outcry about the obvious conflict of interest in such an arrangement. To delegate the national defense decision making power to a body dominated by industry executives who are motivated by private profits rather than public interest would be unthinkable, a total outrage. The same would be true for formulation of Energy policy, Education policy, and so forth. Would it make sense to delegate energy policy to the energy producing corporations? Would it make sense to delegate Education policy to the book publishing industry? Of course not. But why is it that the American people cannot see that it makes no sense to delegate monetary policy to an organization that is owned and controlled by the corporations in our economy who profit from money creation, that is the banks, both commercial and Federal? The Federal Reserve System is a blatant conflict of interest that is allowed, while such conflict of interest is not allowed in any other area. This double think must come to an end. It is a form of collective mental illness that will bring the nation to ruin unless people can be brought to their senses so that they can see the contradiction in time.

Thomas Jefferson (or someone speaking on his behalf) foretold this situation with remarkable clarity of vision:

“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised a money aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”

“If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.”

Whoever said these words, even if it was not actually Thomas Jefferson, these statements were remarkably prophetic. The Bernie Sanders political revolution is based on the belief that the money aristocracy and the corporations that have grown up around them HAVE ALREADY TAKEN OVER THE US GOVERNMENT to a very large degree. Reversing this trend, by diminishing bank and corporate control over the electoral process and of the Congress itself, is by far the main point of his candidacy. Hence, he may be the best qualified of the 2016 presidential candidate field to carry out the reclamation of power mandated in the words attributed to Thomas Jefferson. One hopes that Hillary Clinton will be second best.

A key point to be clear about here is that private decision making criteria and public decision making criteria are totally different. Therefore, they may lead to diametrically opposite or conflicting results. Private decision making criteria puts emphasis on “the bottom line” and the wealth of the corporate stockholders, whereas public decision making criteria is multidimensional and largely nonmonetary, includes impacts on all sectors of the population or economy, and is largely independent of industry profits. For public interest decision making, the “general welfare” is paramount, not profits to private corporations. And since the “general welfare” is a multidimensional concept, there will be multiple criteria that have to be brought to bear, many of which are not measured in monetary terms. There is a place for private decision making, and there is a place for public decision making, but when private entities take over public decision making functions, then it becomes fascism. The establishment of the Federal Reserve System, and at the same time the IRS, was the beginning of fascism in America, a trend that, with the Citizens United Supreme Court decision, is continuing and accelerating at the present time. For an awesome presentation of this trend, Aaron Russo’s “From Freedom to Fascism” is a must see. Russo presents the interesting and credible thesis that the main purpose of the IRS income tax was to collect the money that must be used to pay the interest on the national debt as a result of the banks expropriation of money creation powers embodied in the Federal Reserve Act of 1913.

Public outrage at the corporate takeover of America’s decision making processes, manifested in the American Legislative Exchange Council (ALEC), is seen in the Occupy Wall Street movement and others like it, and can be seen also in the Presidential Campaigns of more than one candidate in the primaries at the present time, although Bernie Sanders clearly stands out as the prime mover.

Passage of the Federal Reserve System was a mistake. Woodrow Wilson, the president on December 23, 1913 when he signed the act, admitted this before he died. He said towards the end of his life,

“A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation and all our activities are in the hands of a few men. We have become one of the worst ruled, one of the most completely controlled and dominated governments in the world – no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men.”

One wonders if that is how it was in his day, what he would say about the current post-Citizens-United situation about 100 years later. Clearly, fascism is upon us.

This white paper is devoted to laying out a multiphase plan for undoing the FRS mistake. But not by a repeal-and-replace process so popular with republicans these days. The American Monetary Institute takes this impractical one-bill-does-it-all approach, trying to repair the damage in one disruptive step. The risks of a crash occurring in response to such gargantuan changes rapidly made are just too high for Congress to contemplate. For this reason their NEED ACT will never get out of committee. In sharp contrast, our approach is one of smooth transformation through a four phase process of non-disruptive adjustments. We morph the Federal Reserve System into the US Central Bank without closing down any of the branch banks, without firing any of the employees of the branch banks, without moving any of the equipment, furniture or office supplies at the branch banks. The decision making body at the top will be restructured, to be sure, to insure that it represents the public interest, including but not limited to the corporate banking interests. And the ownership of the branch banks will change, to be sure. But to the extent possible, the day to day operation of the banks, and the valuable research and data collection activities of the FRS banks, will be left intact and largely unchanged.


We now lay out the broad outlines of each phase in a relatively brief survey format, followed by a more detailed description of each phase.

PHASE I: Deficit Reduction through creation of debt free ELECTRONIC Sovereign Money (ESM) to replace bond selling by the Treasury Department; Setting aside of the Budget Sequestration cuts mandated by the Budget Control Act of 2011; Creation of the MONETARY CREATION and CONTROL AUTHORITY (MCCA) as a public interest body dealing with the monetary aggregate targeting portion of monetary policy; targeted GAO audits of Surplus Account transactions and stockholder names and amounts at the branch banks of the Federal Reserve System; Studies leading to Monetary Histories of the Canadian (1930-1980) and Guernsey/Jersey Island (1815-present) experiences with debt free government issued money; initiation of an interest free student loan program for qualified students funded entirely with newly created ESM.

PHASE II: Debt Reduction through creation of debt free ELECTRONIC Sovereign Money (ESM) to buy back bonds in the portfolio of the FRS. Reserve requirements are increased gradually to 15%.

PHASE III: The FRS branch banks are converted into Benefit Corporations (B-Corps) through restructuring to meet the transparency, accountability, and public service requirements for B-Corps. The stock is split in such a way as to enable the US Government to buy a minimum 51% share of the stock issued by each of the 12 branch banks. The name is changed from Federal Reserve System to US Central Bank. US Notes replace FRS Notes as paper currency in circulation. The Open Market Committee will be melded into the Monetary Creation and Control Authority, so that all monetary policy issues are handled within the purview of the MCCA. Reserve requirements are gradually increased to 35%.

PHASE IV: All other integration and transformation steps taken to complete the transition from private control to public control, that is, from the Federal Reserve System to the US Central Bank. Reserve requirements are gradually increased to 51%.

The end result of these transformations will be a transparent, audited, accountable US CENTRAL BANK that is owned jointly by public and private entities, with majority control in the hands of the government. It will preside over a money supply that is roughly split 51-49 between government created debt free money issued on the basis of growth in the real output of the economy and commercial bank credit issued daily on the basis of new loans created as debt under the fractional reserve system. Thus money creation becomes a shared public-private responsibility, in which a majority of the money supply is issued debt free by the government, and a smaller minority issued by the private banks as loans with an interest charge attached. Monetary policy will be conducted by the Monetary Creation and Control Authority, an agency of the US Central Bank, which is constituted to make decisions based on public interest criteria, to promote the general welfare.

From this multiphase perspective, it is clear that the reissuing of US Notes does not need to come into play until Phase III, when equity shares of the Federal Reserve banks are bought by the Treasury department and the name is changed from Federal Reserve System to US Central Bank. Since paper money plays such a small part of the money supply (roughly 10% of M2), the objectives of the Phase I and II transformations can be achieved without any new US Notes at all. Printing and recirculation of US Notes would constitute a disruptive change in the first two phases, but are quite natural in the third phase. For the first two phases, it is ELECTRONIC SOVEREIGN MONEY (ESM) that is needed, not US Notes.


The beauty of ESM is that the creation process is a few lines of code, and therefore zero cost, and there is no perceptive change to anyone in the public or in the banking sector, that is, they are invisible. At 12:01am every night the principal balance of the US Treasury Department (that resides at the New York Federal Reserve Bank?) will be augmented by an amount ∆M that is set by the Monetary Creation and Control Authority. For example if ∆M were set to $1Billion then in a year, the money supply would have been increased by $365Billion in government money (monetary base) and some additional amount that the banks create based on the reserves thus generated through the operation of the fractional reserve system. So if the M2/M1 ratio is about 5.5 (See chart at …), $365Billion of ESM would become about $2Trillion increase in M2 over the year. However, only the original $365Billion would be available to the US Treasury to spend on budget items in the federal budget, and in particular, it could be used to reduce the budget deficit by exactly that amount, which would mean a deficit reduction of $365 (i.e. the sale of US Bonds could be reduced by $365Billion because of the inflow of ESM during the year). This amount of budget deficit reduction over a ten year period is over three times the amount needed to set aside the harmful “budget sequestration” cuts mandated by the Budget Control Act of 2011. This means that 2/3 of the ESM injection could be used for infrastructure, military, and other budgets hurting from budget sequestration at present, and still have enough budget reduction to set aside the sequestration cuts. This is the main purpose of Phase I of the transition plan. If the Monetary Creation and Control Authority meets quarterly, the size of ∆M could be adjusted quarterly in response to current economic data.


In thinking about this question, which is bound to come up from grade school and high school students, the following explanation can be given. The simple answer is that it comes from a few lines of code that a programmer writes that adds ∆M to the Treasury Department balance at 12:01am every day. Hence it is “created out of nothing” by the computer controlling the account that holds the government balance.

But to give a deeper understanding of the process, I like to describe this “balance augmentation” as a DEPOSIT BY UNCLE SAM which serves as a GROWTH DIVIDEND for the American people based on the increased real output of the economy that they labor in. As population increases, and productivity increases as well, the total real output of the economy grows over time. This requires a commensurate increase in the money supply in order to support the increased volume of economic buy/sell transactions that are made in the economy at the same price levels. Hence the source of the new ESM injections is really the output of the people themselves, that is to say, the people, through their increased production, create the conditions which enable Uncle Sam to reward them through a debt free, interest free, expansion of the money supply (the “growth dividend”), which is sized at a level which will have a zero impact on the CPI, the Consumer Price Index. A formula for determining the size of the Growth Dividend “deposits” is derived in appendix 1 by means of some elementary operations on the Money Exchange Equation of Professor Irving Fisher, one of America’s greatest Mathematical Economists of the 20th century. We call this the INFLATION PREVENTION INEQUALITY because it provides an upper bound on ∆M that is consistent with keeping the CPI constant. This is how the value of the dollar is preserved, by keeping the CPI constant. When the constitution speaks of “regulating the value thereof” in modern terms that means regulating CPI. And if it is desired to keep the value of the dollar constant, that means keeping CPI constant. It will be the job of the MCCA to apply the Inflation Prevention Inequality to current economic data to find out what the upper bound on ∆M is, and to adjust that quarterly in the computer program that creates ESM daily throughout the next quarter.

By these means, ESM can become a constant flow of income to the US Treasury which can be used for any and all budget items in the federal budget allocation. The question of how to allocate it is separate and distinct from the question about how large ∆M should be. As we have seen, the size of ∆M is determined on the basis of how fast the economic output is growing. The allocation of the accumulation of those “growth dividends” is a budgetary question that can be treated the same as if the increased Treasury income had come from increased taxes. The sizing of ∆M is determined by the MCCA, the budget allocation is determined by Congress with inputs from the CBO and other related


A big advantage of the multistage approach to monetary reform is that it allows for learning to take place from the results of each phase before the next phased is fully defined. Since there is some uncertainty about how the economy will respond to these changes, each phase is like an experiment in social engineering. The results of each experiment will lead to insights and understandings that will be used in the framing of the next phase. This process is illustrated in the following diagram.

Phase I approved by Congress ---------

Phase I Results observed ---------

Learning from observed results -----------

Refine next Phase legislation ----

Phase II approved by Congress --------

Phase II Results observed --------

Learning from observed results -----------

Refine next Phase legislation ----

Phase III approved by Congress --------

Phase III Results observed ---------

Learning from observed results -----------

Refine next Phase legislation ----

Phase IV approved by Congress --------

Phase IV Results observed ---------

Learning from observed results -----------

Refine next Phase legislation ----

Progress is made by moving from left to right in each row of the table, row by row, from top to bottom of the table. So even though there are only four phases, there are actually 16 stages in the transition process, which make it much more likely to succeed than the One Phase, One step process the AMI promotes. Any errors made in one Phase can be corrected in the next. And the last row of the table for Phase IV would lead logically to a final US Central Bank Act which integrate the transformations described in the first four phases, and clean up any loose ends not previously treated.

The need for these learning stages is a direct result of the secrecy that surrounds the operation of the FRS. They have managed to kill every general and complete audit by the GAO since the system was founded in 1913. It is a very large and complex organization. It will take time to do partial audits and gradually uncover the full scope of activities in which the FRS is engaged. By breaking the discovery process down into four stages, we can gradually discover more and more about the FRS and what needs to be changed to transform it into and honest, accountable US Central Bank. Hence the initial formulation of Phase II, III, and IV legislation is only tentative, because refinements will be necessary based on the learning that results from Phase I. Then Phase III and Phase IV will be revised again based on the learning that results from Phase II. And so forth. By repeatedly enhancing the formulation of later Phases based on the learning from earlier phases, we maximize the probability of a smooth transition to a better system that works in a stable way, without causing any major disruptions along the way that might cause adverse market reactions.

More details on Phase I

The main task of the Phase I reforms is to get Uncle Sam off his duff and have him start doing his money creation job nightly at 12:01am. Since it will take a while to populate the Monetary Creation and Control Authority, it will be necessary in this bill to stipulate that the ESM injections be counterbalanced by reductions in the sale of US BONDS so that the net inflationary impact will be 0. The impact of ESM issues and US Bond issues on the money supply are not the same, but there will be some multiplier b such that $1 ESM is equivalent to $b in US Bond sales, so in order to have zero impact on inflation, each billion $ESM issued must be counter balanced by $b billion in US Bonds NOT SOLD. That is as ESM issues ramps up, US Bond sales must be ramped down proportionately so as to remain inflation neutral. Since only 13.5% of the US Bonds sold wind up in a Fed Bank portfolio, initial preliminary calculations show that a value of b=7 would be about right (this will be refined by further analysis by economists familiar with the money multiplier formulas). Hence each $1billion in ESM deposited nightly by Uncle Sam would be compensated for by roughly $7billion reduction in US Bond sales by the Treasury department. As the rate of ESM creation increases over time, the rate of US Bond sales by the Treasury department declines proportionately over time.

Once the MCCA is populated and up and running, the members, based on expert analysis and advice and input from the ex-officio members, would take over the control of these two rates (ESM creation and US Bond sales). But by using a simple well-chosen rule of proportionality in the first year, the ESM flow can begin immediately upon passage of the Phase I legislation, without fear of inflation pressures, even before the MCCA is set up to carry the ball forward.

A draft of the Phase I legislation is attached as Appendix 2 to this paper. It will be seen there that there are several important provisions that are specified to lay the foundation for the subsequent three or four phases.

  • ESM creation for the purpose of reducing deficits so as to cancel the budget sequestration resulting from the Budget Control Act of 2011;

  • Commissioning of two monetary histories of countries that have had favorable experience with debt free Sovereign Money: one for Guernsey/Jersey Island experience from 1815 to 2015, and the other for Canada from 1940 to1980; (let’s learn from experience where the Sovereign Money experience has been successful in the past);

  • Partial audit of the Fed banks focusing on two particular issues: complete listing of stock holders and amount of holdings by the stockholders of the 12 Federal Reserve Banks, and a complete accounting of income and expense of the Surplus Account provided to the Fed to hold its “profits” or accumulated earnings.

  • Provision of interest free loans for all qualified students

More details on Phase II

For more than 100 years now, money has been created by the Federal Reserve buying US Bonds rather than by the government based on economic output. The purpose of Phase II is to “undo” the damage by reversing the process. The US Bonds in the portfolio of the FRS should be bought back by the Treasury department over a period of time and replaced by newly created ESM paid to the credit of the FRS. This eliminates part of the national debit, and it also gives the FRS more income than it needs to operate. So, given the partial audit of the Surplus Account from Phase I, the Fed will have to turn around and give the Bond sale income right back to the Treasury department again, giving the ESM a second use, either as expenditures in the federal budget, grants to the states, or as payment towards the national debt held by non-bank entities, such as foreign governments and individuals. This may not mean “No More Debt” but it will mean “no more debt limit increases.” And due to the increases in economic output that result from government investments in infrastructure, social welfare and clean energy programs, tax receipts will rise to the point that budget deficits will shrink to virtually zero, so that increasing debt will be a thing of the past, and national debt can be put on a downward path towards zero, which would be the ideal even if not totally reached in reality.

This is not to say that government borrowing would necessarily be brought to a complete halt, just that when borrowing was done in the past, the ESM alternative in the future would enable the amount of borrowing to be greatly reduced, to the point where the national debt could be paid off gradually over a period of 10 to 12 years or so.

More details on Phase III

The Federal Reserve banks are charged with monitoring and regulating the commercial banks, but are themselves owned by the very banks they are supposed to be policing. This cozy situation is such a blatant conflict of interest that it boggles the mind when thought of in the abstract. The regulators are owned by the entities being regulated! How on earth has this situation been allowed so long?

To rectify this situation, the Federal Reserve Banks must be transformed into public interest entities that are not beholden to the banking industry. One solution would be to have the Treasury Department buy up ALL of the stock in the Federal Reserve Banks (with newly created ESM of course) and turn them into government agencies that are an extension of the Treasury Department. But this runs totally counter to the “small government” tendency of those who call themselves “conservative,” and therefore might be hard to pass through Congress. Instead we propose here to think in terms of transforming the Federal Reserve Bank Corporations into Benefit Corporations in which the federal government is the majority stockholder. This leaves a corporate structure in place for these banks, in which the banking corporations continue to participate as shareholders, but by morphing them into the public interest B-Corp format with majority ownership in the hands of the government, the conflict of interest embedded in the current system can be greatly reduced. This will be indicated by the name change from Federal Reserve System to US Central Bank, and the resurgence of the US Note in place of Federal Reserve Notes.

More details on Phase IV

This remains to be determined on the basis of the learning from the results of Phase I, II, and III.

Article 1, Section 8, Clause 5

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

This is the time history of the value of the dollar under the Federal Reserve System. The dollar now buys what cost 4.14 cents in 1913. The value of the dollar has been cut by almost 25 times. Given their recent experience with Continental Currency, we believe the intent of the cited clause of the US Constitution is and should be that the value of the dollar be regulated in such a way as to preserve its buying power at a nearly constant level. This can best be done with a public interest group empowered with the tools and technology developed by NASA and others for the exploration of space, including but not limited to the mathematical theory of stochastic optimal control. Preserving the buying power of the dollar will be one of the chief responsibilities of the new Monetary Creation and Control Authority under the US Central Bank transition plan presented here. Building a control system to regulate the value of the dollar should be vastly simpler than getting men to the moon and back. Obviously, setting a 2% inflation rate target is not the way to preserve the value of the dollar. The new Monetary Creation and Control Authority will do better, very much better.


By Ronald E Davis, PhD (Stanford 1980, Mathematics)

Whereas, the federal budget deficits have remained high for the last decade, exceeding $1 Trillion in at least four previous years and several more forecasted years;

Whereas, the January 1 Fiscal Cliff Tax deal achieved only half of the desired deficit reductions required by the Budget Control Act of 2011, causing the indiscriminate budget sequestration cuts to kick in on March 1, 2013;

Whereas, the US national debt has been growing since 2000 exponentially at about 8% per year to an alarming $19 Trillion with no end in sight;

Whereas, the interest payments on the national debt have been growing exponentially at the same rate to approximately $0.4 Trillion per year;

Whereas, Abraham Lincoln’s Legal Tender (Greenback) money issues were declared constitutional three times by the Supreme Court and circulated successfully for over 100 years;

Whereas, the Central Bank of Canada successfully issued government money debt-free from its opening in March 1935 until it mistakenly switched to government funding from private banks in 1975;

Whereas, Guernsey Island has issued debt-free money for its economy successfully for almost 200 years up until the present time, which circulates in parallel with British pounds.

Therefore, in order to set aside sequestration budget cuts, provide reliable funding for government programs, avoid a national debt default, to bring unemployment down rapidly, and to put the American economy on a stable path to debt free status with full employment and stable prices, it is resolved as follows:

Title I: Authorization for Government Money Creation

Section (a) The US government shall resume the practice of issuing its own money, debt and interest free, as President Abraham Lincoln did to win the Civil War with paper money called “greenbacks” or US notes. The term US Money shall be used to refer to government issued coin and paper money, the latter being called US Notes, and their electronic equivalents, called Electronic Sovereign Money (ESM). All are issued without debt or interest obligation. US Notes will have United States Note rather than Federal Reserve Note as their title. ESM will be credited periodically to the principal US Government account (at 12:01am every morning for example). They shall be known as growth dividend deposits by Uncle Sam, and are based on the growth in real output of the American Economy.

Section (b) Government issued money will circulate through the economy alongside of bank issued money (Federal Reserve Notes, Federal Reserve Bank Credit, and Commercial Bank Credit) and shall be legal tender for all debts, public and private.

Section (c) The backing for this money shall be the real output of the economy, and hence as a general rule, the money supply shall increase at a rate that parallels the growth in the real output of the economy, with exceptions due to changing velocity of money. See the inflation prevention inequality derivation appendix to this Act.

Title II: The Deficit Reduction Plan for cancellation of sequestration budget cuts

Section (a): During the year following passage of this act (starting on the first day of the quarter beginning after passage of this act, i.e. either Jan 1, Apr 1, July 1, or Oct 1), henceforth referred to as the “ramp up year”, the monthly budget deficits will be financed in part by newly created ESM, to be issued INSTEAD OF US Treasury Bonds, according to the following schedule. ESM creation rises from about $1Billion to about $2Billion per day over the ramp up year. These rates are chosen to cut the growth rate of total national debt roughly in half at the beginning of the year, and down to approximately zero at the end of the year.

Monthly ESM Created and Issued

Reduction in US Bonds Sold

Cumulative US Money

Created and Issued

Month 1

$30 Billion

$30 Billion

$30 Billion

Month 2

$33 Billion

$33 Billion

$63 Billion

Month 3

$36 Billion

$36 Billion

$99 Billion

Month 4

$39 Billion

$39 Billion

$138 Billion

Month 5

$42 Billion

$42 Billion

$180 Billion

Month 6

$45 Billion

$45 Billion

$225 Billion

Month 7

$48 Billion

$48 Billion

$273 Billion

Month 8

$51 Billion

$51 Billion

$324 Billion

Month 9

$54 Billion

$54 Billion

$378 Billion

Month 10

$57 Billion

$57 Billion

$435 Billion

Month 11

$60 Billion

$60 Billion

$495 Billion

Month 12

$63 Billion

$63 Billion

$558 Billion

On a quarterly basis, the aggregated quarterly schedule then becomes

Ramp-up Year Schedule of ESM Creation

ESM created

US Bonds not sold

Cumulative ESM Created

Quarter 1




Quarter 2




Quarter 3




Quarter 4




Section (b): The US Money issues provided for in Section (a) above shall be treated as replacements for an equal amount of US Bond selling by the Treasure Department. That is, the US bond sales shall be reduced from their current levels in each quarter by the amount of US Money that is issued in that quarter.

Section (c): Following the ramp up year, US Money will be used instead of US Bonds at rates to be determined by the new Monetary Creation and Control Authority created for this purpose per Title IV below. For the 12 months following ramp up year, the ESM creation rate shall not drop below $200 Billion per quarter. New US Money issues will be itemized as a new income source in the federal budget and in budget legislation to be submitted and approved by Congress. This income may be used for any and all purposes that other income sources are used for.

Section (d): Estimated deficit (i.e. borrowing) reduction during the ramp-up year is $558 Billion, and the deficit reductions in the following two years (assuming a constant $63Billion per month ESM creation rate) would be about $756 Billion each, for a total of $2.070 trillion in the first three years. Hence the deficit reduction requirements of the Budget Control Act of 2011 will be met in about 2 to 3 years instead of 10 years. Hence the sequestration budget cuts are hereby canceled and new US Money issues will be used first and foremost to restore money to cut budgets that have suffered due to the sequestration cuts that have occurred since March 2013.

Title III: Debt Reduction Plan for Maturing US Treasury Securities held by the FRS

Section (a) US Treasury Securities that mature in the portfolio of the Federal Reserve System shall be redeemed by the US Treasury with newly created ESM.

Section (b) the income that the Federal Reserve System derives from the redemption of matured US securities shall be deemed as “excess income” to the Fed, and shall be returned in full to the Treasury Department in accordance with existing schedules of payments of this type from the FRS to the US Treasury Department.

Section © the ESM that the US Treasury creates to redeem its matured securities in the Fed portfolio shall be included in the ESM creation schedule provided in Title II above, since it is all returned to the US Treasury a few days after it is created.

Title IV: Monetary Creation and Control Authority

Section (a) In order to coordinate government created money with bank created money to achieve monetary growth rates consistent with the triple goal of full employment and stable prices with low interest rates, a new Monetary Creation and Control Authority will be created. It shall consist of seven members appointed by the President, approved by the Senate, for seven year terms, one renewal or replacement taking place each year. In addition, non-voting ex-officio members from existing branches of government who may participate in the policy deliberations of the Monetary Creation and Control Authority, shall include the following persons:

  1. The Federal Reserve System

    1. Board Chairman

    2. President of the New York Federal Reserve Bank

    3. Director, Division of Research and Statistics

  2. The Executive Office of the President

    1. Director, Office of Management and Budget

    2. Council of Economic Advisers

      1. Chair

      2. Chief Economist

      3. Director of Macroeconomic Forecasting

  3. US Department of the Treasury

    1. Secretary

    2. Comptroller of the Currency

  4. US Congress

    1. Chair, House Budget Committee

    2. Chair, House Financial Services Committee

    3. Chair, House Ways and Means Committee

    4. Chair and Ranking Member, Senate Finance Committee

    5. Chair and Ranking Member, Senate Committee on Banking, Housing and Urban Affairs

    6. Chair, Joint Economic Committee

    7. Director, Congressional Budget Office

Section (b) The President of the United States shall, within 120 days of the enactment of this legislation, recommend seven qualified individuals for the MCCA to the Senate for approval by the Senate. These individuals shall be free of any prior employment for bank or federal government assignments.

Section (c) The seven voting committee members shall, within 240 days of the enactment of this legislation, recommend an independent chairperson to the President, who will be independent of government and banking industry involvements, both prior to and during his/her term of office, which shall be for seven (7) years. The other six initial members will self-select which will serve for 1, 2, 3, 4, 5, and 6 years so that subsequently one member will be replaced each year.

Section (d) The Monetary Creation and Control Authority shall prepare quarterly schedules of monetary aggregate targets, US Money issues, and high powered money reserve requirements (separately for checking and savings accounts) for each fiscal year, subject to approval of Congress. These shall be developed using the best available macroeconomic computer models available at the time that include the inflation prevention inequality. Interest rate and other policy issues shall remain in the hands of the Federal Reserve Board to be implemented through the Federal Reserve System.

Section (d) Staff and Consultants may be hired as needed to carry out administrative functions and economic analysis related to monetary policy decisions.

Title V: Periodic Partial Federal Reserve Audits

Section (a) The General Accounting Office shall conduct annual audits of two aspects of the Federal Reserve System: stock ownership of the 12 Federal Reserve Banks, and the income and expenses to the FRS Surplus account(s).

Section (b) GAO audit reports shall be submitted to Congress once a year.

Section (c) The first audit report submitted based on this legislation shall include

i. a complete accounting of the stock holders of the Federal Reserve Banks, including names and contact information for each together with their shareholdings;

ii. a complete accounting of the origin and disposition of funds mentioned in GAO-11-696 on page 131 in Table 8 (Institutions with Largest Total Transaction Amounts (not Term-Adjusted) across Broad-Based Emergency Programs, December 1, 2007 through July 21, 2010)

iii. a complete description of all macroeconomic models used by the Fed to perform policy analysis; copies of software and documentation shall be made available to the Monetary Creation and Control Authority provided for in Title III of this act.

Title VI: Monetary History Documentaries

Section (a) The US Treasury Department shall commission two monetary histories to be prepared consisting of a book and a video in each case. The two locations and time frames are selected as periods where debt free government issued money was successfully employed by the respective governments.

  1. Guernsey/Jersey Islands in the period from 1815 to 2015

  2. Canada in the period from 1930 to 1980

Section (b) Completed copies of the two documentaries shall be distributed to the US President and all voting and ex-officio members of the Monetary Creation and Control Authority; They shall be made available to the public through the US Government Publishing Office Bookstore.


This legislation accomplishes four important objectives.

  1. First it terminates the budget sequestration cuts that have been hampering growth and services every year since their inception in March 2013.

  2. Secondly, it provides a steady stream of debt-free funding for government programs which, if continued in the years ahead will enable gradual reduction of the national debt without debt default. Moreover, use of borrowing as a funding source for the government will diminish to the point that it is used for exceptional circumstances only, approved by Congress on an exception basis.

  3. It prevents any increase in inflationary pressures by reducing US Treasury bond sales for each dollar of new ESM created and spent into circulation.

  4. The ESM replacing US Treasury Bond sales may be used for public works projects, education, basic and applied research, funding of the US Postal Service and the Office of Technology Assessment, VA and social security benefits, health care, and grants to failing states, thus stimulating the creation of jobs and increasing the growth rate of national real output of the economy. It can also be used to pay interest on the national debt, and pay off US Bonds and other US Securities at maturity. It is simply another source of income to the government (from Uncle Sam) that can be used anywhere in the budget that other sources of money can be used.

Title I (brief) history.

The constitution provides (in Article I, Section 8, clause 5) for governmental issue of coins. The Legal Tender Acts (three of them) during the Lincoln Civil War era (1861-1865) and subsequent Supreme Court decisions (three of them) established (prior to 1887) that the government may issue debt-free and interest-free paper money as well (the “greenbacks”). Title I of this act extends the governmental money creation power to also include the modern electronic bank deposit form, which constitutes the primary form of money at this time. The term US Money includes all three forms: coins, US paper money (i.e. US Notes), and Electronic Sovereign Money in bank deposit form. US Money is backed by real output, not debt.

Title II example.

The projected annual budget deficit for 2016 is approximately $600 Billion; so the deficit to be financed in each quarter would be about $150 Billion. During the first quarter of the ramp up year the US Money (ESM) creation will be $99 Billion, the second quarter will see $126 Billion created, the third quarter will see $153 Billion created, and the fourth quarter will see $180 Billion created. Hence the annual totals during the ramp up year will be $558 Billion of US Money (ESM) created, and leaving $42 Billion to be borrowed through the sale of US Bonds. When combined with the deficit reduction accomplished by the Fiscal Cliff Tax Deal of Jan 1 2013, it is very close to being enough of a deficit reduction to set aside the sequestration cuts and restore funding to the pre-2013 levels. If EMS creation should be continued at a constant $189 Billion per quarter rate in the year after the ramp up year, deficit reduction accomplished would enable the budget sequestration cuts to be set aside permanently. US Money will be credited electronically to the US Treasury Department account and spent into circulation on items provided for in the Federal Budget.

Title III example

One important purpose for the debt free interest free ESM created nightly by Uncle Sam is the redemption of US Treasury Securities held by the FRS. These securities were purchased with money “created out of thin air” by “the stroke of a pen” buy the Fed which had been given the money creation power by the government in 1913. This should have not have happened in the first place and needs to be undone. But rather than just declaring the securities null and void, it is better from an accounting and psychological point of view to just go ahead and “pay them off” with newly created ESM so as to close out those securities in the normal way.

However, this income to the Fed is derived from a debt that should not have occurred in the first place, and hence the redemption money must be declared as “excess income” to the Fed, which it is required under law to return to the US Treasury. So when this happens, the Treasury Department has its ESM back again and can spend it on something else.

The net result is that the debt represented by those securities in the Fed portfolio has been extinguished without any net cost to the government. This is debt reduction accomplished with new money, not money borrowed from other lenders.

An additional Title

Bernie Sanders talks of tuition free public community colleges and perhaps intends to include 4 year public universities as well. This may be possible, but to many it may seem a rather big step to take all at once. A less ambitious way to assist students to get a college education would be for the government to institute a program in the Department of Education of interest-free loans for qualified students. To encourage graduates to enter public service careers, the loans could even be forgiven for those who go into public service jobs immediately after graduation. Funding for the US Postal Service, and refunding of the defunct but vitally important Office of Technology Assessment could also be a part of this additional title.


The fundamental money exchange equation (presented first by Professor Irving Fisher of Yale University) states that MV= PQ where M = money supply, V = money velocity, P = consumer price index, and Q = real GNP. The left side of the equation is the total money received in all transactions in the economy, and the right had side is the GNP for the economy, or the total money spent in all transactions in the economy, computed over the period of a year. Since the amount spent and the amount received is the same in each individual transaction, the totals across the economy must be the same also.

Some authors have characterized this equation as being static without realizing that the year time frame is actually a sliding window of time so that in fact all four of the included variable vary over time. One can emphasize this fact by making each variable a function of time, in which case the equation becomes M(t)V(t)=P(t)Q(t).

Taking natural logarithms converts products into sums, so one has ln(M(t))+ln(V(t))=ln(P(t))+ln(Q(t)). Then differentiating each term with respect to time one has where the dot over the numerator of each ratio indicates the time derivative of the quantity in the denominator of each ratio. Each ratio can be called a relative rate of change for each variable, and by multiplying by 100, each term becomes the percentage rate of change in each variable. Hence we define

In which case the dynamic money exchange equation becomes m + v = p + q. It is quite convenient for analysis that this equation takes a linear form, and is stated in terms of percentage rates of change for each variable. From this simple equation, the inflation prevention inequality follows from the following elementary algebraic manipulations. Suppose the chosen tolerable rate of inflation, which we call the inflation tolerance, is I0 (currently 2% although stable prices would imply 0%). Since p is the inflation rate in percentage terms, we would have to control the money supply to grow in such a way that

p = m + v – q ≤ I0 or isolating m on the left hand side, we must have m ≤ q – v + I0 . This is the relationship that we call the INFLATION PREVENTION INEQUALITY (IPI) since it gives the upper bound on money supply growth rate that can be allowed without precipitating an inflation more than the inflation tolerance I0. In the future, it is this relationship that will be used to prevent inflation under debt free sovereign money, issued without debt into the economy, rather than the disincentive of debit with interest obligation which is used to limit excessive monetary growth under debt based monetary systems such as the Federal Reserve System. With this inequality firmly in hand, the government can assume its money creation functions again without fear of inflation.

In order to impose a zero tolerance on inflation (CPI constant) under conditions of unchanging monetary velocity, the IPI reduces to m ≤ q, which says that the money supply growth rate should not exceed the growth rate of the real output of the economy. From this, one is led to see that the real and true backing for the money in an economy is the real output of the economy itself, taken in an aggregative sense, not based on any one or select few outputs like gold, silver, platinum and the like. The real output of the economy includes ALL GOODS AND SERVICES produced and sold in an economy, and it is this total measure of production (evaluated in constant dollars) that serves as the basis for or the backing of the money supply. Hence the value of the money is based not on what can be obtained in precious metals when turned in at the Treasury Department, rather it is based on what can be bought in the open market with those dollars or whatever the unit might be, that is by its purchasing power. The dollars spent at the grocery store are backed by the grocery bag taken home. The dollars spent on electronic equipment are backed by the very electronics that are purchased. The dollars spent on a haircut are backed by the improved appearance of one’s hair resulting from the cut. And so on including all the transactions made everywhere throughout the economy. So when you sum it all up, you get the new



It is this new standard for money, together with the IPI, that makes it feasible to restore to the government its money creation role at this time as never before. This money creation function was usurped from government by the private banking industry in 1913 and has been in private hands for over 100 years now. It is time now for the government to assert its powers to create debt free interest free money in substantial quantities with commensurate decreases in its borrowing activity using US Bonds and carefully planned increases in reserve requirements. By doing so, it can save trillions of dollars in unnecessary debt while pumping inflation proofed dollars into infrastructure , energy, and education programs that will spur growth rates to double present levels while bringing unemployment down to half their present levels. We will enter a new era of inflation-free economic expansion that will have no end, unless we foolishly let the banks privatize the money creation function again as they did before.

Task Force Assignment: Determine which parts of the above, if any, have previously appeared in the works of Milton Friedman or other monetarists of the 19th century. Provide citations for those items that have appeared previously. We want to provide credit where credit is due, but at the same time, we are not too humble to take credit for what is in fact new.

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