How Banks Create Money And Why Governments Should Too: Part 3

Written by Derryl Hermanutz

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Debt-Free Helicopter Money

Ben Franklin's Pennsylvania colony issued its own debt-free scrip money. The colonial government simply printed paper scrip and spent it paying for whatever the government needed. People and businesses who sold stuff to the government were paid the new money, which provided the private sector economy with a supply of debt-free government-issued money to use.

Nobody owed the money "back" to anybody else, because the money wasn't issued as loans, so it was not owed back to the money issuer as payment of borrowers' debts. The scrip circulated as debt-free, non-repayable payments money, which the colonists could spend, invest, or save. Saving - holding the money out of circulation - did not starve debtors of debt repayment money. Because banks didn't create the money as loans debtors didn't owe the money supply back to banks as payment for loan account debts.

The money-issuing government did not debt-financed its spending by issuing bond debts to borrow money that is created by banks (which saddles taxpayers with never-ending bond interest payments on their government's ever-growing debts). The government did not tax-fund its spending by taking money from its citizens and businesses. The government money-funded its spending by creating the money it spent. 

"The scrip circulated as debt-free, non-repayable payments money"

The colony's buy-sell economy flourished with its sufficient - but not excessive - supply of government-issued debt-free "helicopter money".

Civil War Money

Abraham Lincoln's Civil War government printed and spent $450 million of United States Notes - greenbacks: legal tender paper currency issued by the US Treasury. This prevented adding $450 million to the US National Debt which would have occurred if Lincoln had issued $450 million of US Treasury debt and sold it to commercial banks. Thus was reduced the borrowing of bank-issued money to fund the North's Civil War spending.

The South printed their own debt-free graybacks for the same reason: to avoid paying the banks' ruinous 24-36% interest for loans of bank deposits ("check-book money"). This bank money was created by printing numbers in accounting ledgers; and banknotes (paper cash money) that commercial banks used to print themselves. {Central banks now issue all the paper banknotes.}

$450 million was a lot of money and would have been a lot of additional debt in the 1860s. Total US Treasury debt before the Civil War was only $90 million. Even though Lincoln issued $450 million of debt-free "helicopter money" to fund some of the North's Civil War spending, total US Treasury debt after the Civil war was $2.7 billion. This was a 30X increase in US "public debt" over the 4 years of the Civil War (April 12, 1861 to May 9, 1865).

The debt is never paid down.

A permanent 5-10X increase in total "public debt" is typical of bond debt-financed War spending.

Total US Treasury debt has increased from $0 in 1835 when Andrew Jackson paid off the National Debt, to $90 million before the Civil War and $2.7 billion after the Civil War, to $24 billion during WWI, to $259 billion during WWII, to $1 trillion by 1981, to $9.5 trillion in 2006, to $19 trillion by 2017, to $22 trillion today in 2019. Total US Treasury debt has more than doubled in just the last 13 years.

If you had told Teddy Roosevelt in 1909 - after US Treasury debt had remained fairly stable at $2.7 billion since 1865 - that total US government bond debt would grow more than 8,000 times bigger over the next 110 years (from $2.7 billion in 1909 to $22 trillion in 2019): Roosevelt would have laughed you out of the Oval Office.

Yet, here we are.

And total US private sector debt has grown more than 10,000 times bigger over the same period.

"[Teddy] Roosevelt would have laughed you out of the Oval Office."

Trillions of government and private sector debt created trillions of deposit account money, which payees now have in our bank accounts. Paying down the loan account and bond debts un-creates the deposit account money.

Governments don't pay down their total bond debts.

Governments roll over their debts. When bonds mature and governments have to repay the bond face value amount to bondholders, the government doesn't tax-fund its debt payouts by taking money from people and businesses. The government debt-finances its bond redemption payouts.

The government gets the bond redemption money by selling new bonds to commercial banks who create new deposit account money to purchase the government's new interest-bearing debts. Every year the government issues more new bonds than it pays out old bonds, so the National Debt continues increasing year after year, decade after decade, century after century.

Government bond debt increases from $0 to millions to billions to trillions. ...then quadrillions, quintillions, sextillions...

"National Debt continues increasing year after year, decade after decade, century after century."

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