[This article was published in the Fall 2011 issue of The Journal of Social, Political and Economic Studies, pp. 277-300.]


Capitalism’s Deepening Crisis:

The Imperative of Monetary Reconstruction


Dwight D. Murphey


Wichita State University, retired


At one level, a world consensus has come to favor the market economy, and yet the recurrent economic crises to which such an economy is subject have again come to pose an ever-deepening threat to its legitimacy (i.e., its acceptance within a society).  The Great Recession that began in 2007 illustrates, as have many crises before it, the insufficient financial foundation that has long been questioned by thoughtful commentators from both Right and Left.  The insufficiency will become increasingly apparent as non-labor-intensive technology continues to move the world away from remunerated employment for many millions of people.  That is the context in which this article explores the author’s thinking about (1) the crisis just mentioned; (2) the proposals for monetary reconstruction set forth, especially by a number of prominent economists, in “the Chicago Plan” in 1939 and by the American Monetary Institute today, involving a move away from fractional reserve into full reserve banking and shifting money-creation from the banking system to a governmental Monetary Authority; and (3) why it is desirable, indeed vital, that the money that is created be used to establish a “shared market economy” that will both support a vigorous market economy and establish a system of broad income distribution.  Such a use would differ substantially from the uses (many of them highly desirable in themselves but geared toward governmental activism) proposed by the American Monetary Institute, which has been leading the way in support of the Plan.


Key Words: Crisis of capitalism, monetary reconstruction, Chicago Plan, American Monetary Authority, Irving Fisher, American Monetary Institute, Anthony Zarlenga, Dennis Kucinich, Shared Market Economy, fractional reserve banking, full reserve banking, government creation of money.


I.  Capitalism’s Expanding Crisis                                  

Since World War II, a world consensus has come into being in support of the market economy (i.e., “capitalism”) as by far the most innovative and productive economic system.  Democratic socialists in Europe abandoned their opposition to the private ownership of capital soon after the war, as we saw in Germany where in 1959 the Bad Godesberg Program made a sharp break with Marxism and public ownership. (Later, we will see how in 1960 F. A. Hayek noted this abandonment of strict socialism.) The collapse of the Soviet Union and its satellite empire, and the move of Chinese and Vietnamese Communism into market systems, contributed enormously to the world consensus.  (This is not to say, of course, that these are free markets as envisioned by laissez-faire philosophy, since there is most often considerable government involvement, especially at the “commanding heights.”)     

The Great Recession that began in 2007 has, however, served as a potent reminder of a fact that serious commentators on both the Right and the Left have long taken quite seriously, leading over the decades to an abundance of theories about what ought to be done.  This is that market economies are prone to recurrent “business cycle” crises – crises that always cause painful dislocations to individuals, families and firms, and that sometimes are so severe that they threaten the continued existence of a market system.  With the severity of the most recent collapse, it is apparent to many serious observers, as it was during the Great Depression, that “capitalism is in crisis.”[1]  In view of the world’s recent consensus in favor of the market economy, it is perhaps safe to say that such a situation is no longer tolerable to either the Left or the Right.

What we see is the old conundrum: dislocation, failure and much personal misfortune at the very same time that there is immense and increasing productive capacity.  The situation is not unlike that of a man who, in otherwise perfect health, is imperiled by a gushing artery.

On top of the long-standing problem of the business cycle, market economies (and indeed economies of any kind) are now confronted with a rapidly developing force that portends a displacement far beyond anything seen before.  The wondrous new technologies, many but not all driven by computerization, are capable of addressing human needs and wants at heretofore undreamt-of levels.  They are, however, essentially non-labor-intensive.  This means that in the future the return from economic effort will mostly go to the owners of the technology, not to hundreds of millions (more likely, billions) of people who provide labor.  This displacement of remunerated employment renews in heightened form the dilemma of misfortune in the midst of great productive capacity. 

It has become imperative, therefore, that the issue of “what makes the market economy, otherwise so innovative and productive, go so wrong?” be brought to a head.  As we will see, the United States came close to confronting the issue in the 1930s, only to let the moment slip away. The ideas existed for a sound, meaningful way to address the problem, and were supported by a considerable number of prominent economists (who included, as we will see, Irving Fisher, Henry Simons, Paul Douglas and others) – but were never acted upon.  Much of the near-despair felt in the United States today stems from intellectual failure.  There is a chaotic stew of conflicting and radically inappropriate ideas, leading to much stridency and posturing but little that truly meets the situation.  It is in that context, and further because of the deeper cause of displacement from advancing technology, that there is every reason to take advantage of the present heightened concern and to provide capitalism, at last, with a structural foundation conducive to its stability and long-term success.   

The economists who in the 1930s proposed a renovation of that foundation started with the insight that the monetary system is as vital to the health of the economy as the circulatory system is to the man who would bleed to death from the severed artery.  They saw that the United States suffered from a wildly inappropriate system of money-creation.  It was (and remains) the banking system that brings most of the economy’s money into existence through the mechanism of “fractional reserve” banking.  This money-creation is subject, through credit expansions and contractions. to wide and recurrent fluctuation.  Economic activity – and with it the fortunes of industries, firms and individuals – feeds off of that money supply, sometimes over-feeding and at other times going desperately hungry.

A leading economist of that time, Irving Fisher, wrote that “an underlying cause (or precondition) of great booms and depressions is the 10% system [by which he meant fractional reserve banking] itself.”[2]   He was one of six economists centered at the University of Chicago who in 1939 drafted “the Chicago Plan” called “A Program for Monetary Reform.”  In the Plan, it is said that “a chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits.  Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of our circulating medium by increasing or decreasing bank loans and investments.”  It went on to say, in unison with Fisher, that “this situation is a most important factor in booms and depressions.”[3]  (Fisher was circumspect in adding that the cycles might not altogether be done away with, since “little ripples” would still be possible.  But little ripples are hardly what threatens the legitimacy of the market economy.)[4]


“Fractional reserve” and “full reserve banking” explained. Because eliminating the fractional reserve system is such a critical element in the market economy’s structural renovation as envisioned by the Chicago Plan and its successors, it is important to start with an understanding of how the fractional reserve system creates and destroys money, and of how the “full reserve” alternative works.  Fisher explains it in detail, giving an example of a banking system that starts with $1 million in capital.  When this money is lent out, the borrowers don’t pocket it, but put it back into the system as depositors.  (In fact, when a loan is made, the borrower ordinarily doesn’t receive the cash as such, but is given a credit to his account for the amount of the loan, giving him a deposit of that amount.)  This gives the system the deposits upon which to lend the money out again, which it does, leading to more deposits and then more loans.  The cycle can continue until the banks reach the limit of the lending that is permitted by law under the law’s reserve requirement (of, say, 10%, which, if that’s the requirement, means that there has to be at least the $1 million to stand behind $10 million of deposits).  The result of this process is that the initial capital has had $10 million of spendable funds added to it.  This is the credit expansion.  The money evaporates to the extent that the banks at some point, in a credit contraction, shy away from making so many loans.  Under the fractional reserve system just illustrated, the primary source of money-creation in the economy is the banking system.[5]

The alternative favored by Fisher, by the Chicago Plan and others, is “full reserve banking.”  This requires the banks to keep all of the money on hand to match any demand deposit (i.e., one, such as a checking account, where the depositor retains the right of continued use of the money, to spend or give away).  In Fisher’s example, the banks can lend out their capital, but can’t re-use the deposits created by the loans to make further loans; they must keep the $1 million to match the $1 million of deposits. In effect, the banks hold the depositors’ money in trust for the depositors.  There is no money-creation through a multiplication of the deposits.  Time deposits, which are those that don’t give the depositor an ability to spend the money until an agreed term has expired, are very different from demand deposits.  With them, the banks are permitted to use the deposited money to make loans.  Doing so does not expand the money supply, because the depositor has no current use of the money.  Most people today are familiar with this primarily in the form of “certificates of deposit,” which represent loans for a specified period of time to the issuing bank to provide money for the bank to relend.[6] 


II.  The Proposals: To Establish a Functional Monetary Structure for a Market Economy

The Chicago Plan and that set forth recently by the American Monetary Institute consist of three main elements:

1.  Abolishing fractional reserve banking and installing a full reserve system in its place.

          2.  Establishing an independent governmental Monetary Authority (Fisher called this a “Currency Commission”) which will be the sole source of money-creation, acting under a legally defined standard about the extent of monetary issuance.  The creation of money will be done as an act of sovereignty, with the money defined by law as legal tender.  The banking system will no longer be the vehicle for money’s creation. 

3.  Putting the money into circulation through governmental expenditures and loans for a number of purposes that are thought to be desirable.   (It is here that the author of this article will have a suggestion that is more market- and individual choice-oriented than the expenditures,  many of which are highly desirable, proposed in the American Monetary Institute’s plan now before the U.S. Congress.  The latter plan of how the money is used would lead to an enormously active federal government and perhaps through that to a planned economy.)

We have already told in part the origin of the Chicago Plan, but further details are in order.  The concept was first put forward in a 6-page memorandum issued by six University of Chicago economists in March 1933.   This memo, signed by economist Frank Knight, was followed by a second memo, signed by economist Henry Simons, that November.  These beginnings came to more complete fruition in the draft proposal “A Program for Monetary Reform” that was circulated in July 1939.  The authors of this fleshed-out draft were economists Paul Douglas, Irving Fisher, Frank Graham, Earl Hamilton, Willford King and Charles Whittlesey.  The proposal was well received in the economics profession, with 235 economists from 157 universities and colleges approving it.  Even though the authors included such strong supporters of “free market” economics as Fisher, Knight and Simons, the Program’s supporters also included prominent names from the left side of the ideological spectrum, such as Rexford Tugwell and Gardiner Means.  Just the same, the Program was never published and did not result in legislation.  This should arguably be counted as one of the most fateful acts of omission in American history.  As the world rushed on into World War II, the 1930s crisis of capitalism receded as an object of immediate interest. 

More recently, the main impetus behind the plan has come from a dynamic advocate, Stephen Zarlenga, the author of an extended review of world monetary history, The Lost Science of Money, and founder of the American Monetary Institute, which has put the proposal into the form of  “the American Monetary and Financial Security Act” (which, despite the word “Act,” is not intended to suggest that it has thus far been enacted into law).[7]  For simplicity’s sake, it is sometimes referred to as simply  “The American Monetary Act.”  U.S. Congressman Dennis Kucinich (D-Ohio) has offered a “16-point plan for economic recovery” which incorporates the American Monetary Act as one of its central features.  Accordingly, Kucinich introduced an extensive bill into the House of Representatives, HR 6550, on December 17, 2010, and it was referred to the Committee on Financial Services, also known as the House Banking Committee.

In what follows in this section, we will elaborate further on the first two planks of the plan (full reserve banking and the government creation of money).  We will leave our discussion of the third plank (how the money is to be spent) for a separate section, since it deserves attention as raising issues of an entirely different kind.


The elimination of fractional reserve banking.  In the American Monetary Institute’s formulation, what we have referred to as “demand deposits” and Fisher called “check-book money” are given the name “transaction accounts.”  The money in such an account is held by the bank as a bailment, in trust for the depositor.  No interest is paid by the bank; in fact, the bank may charge a reasonable fee for handling the account.  The form this commonly takes today is checking accounts; the money can be withdrawn at will by the depositor, or transferred to a payee by a negotiable instrument.        

What we have referred to as “time deposits” (and Fisher called “savings deposits”) are called “U.S. Money Accounts” by the AMI.  The money is placed in the account for a specified period of time, or is subject to being withdrawn only upon the giving of adequate notice.  The money can’t be transferred to a third party. It is, in effect, out of circulation except for the bank’s ability to lend the money to borrowers.  Since the deposit is for the purpose of providing the bank money with which to make loans, the depositor will be paid interest.

In today’s system, people are accustomed to being allowed to draw their money out of savings accounts at will, in effect treating them as equivalent to checking accounts.  Under full reserve banking, this will no longer be the case, since the money must not be permitted to go into dual (or multiple) use (which, if allowed, would replicate fractional reserve banking).  Accordingly, the U.S. Money Accounts will be more akin to the “certificates of deposit” that people are familiar with today.

Considerable attention is given by Irving Fisher in his book 100% Money, by the Chicago Plan, and by the AMI plan to how the transition can be made from fractional to full reserve banking.[8]  The literature suggests various ways to do it, one of which is for the Monetary Authority to provide enough of its newly-issued money to the banks “to bring the reserves behind their demand deposits up to 100%.”  Fisher says the money can be provided by the Monetary Authority’s “buying some of the bonds, notes, or other assets of the banks or lending it to the banks on those assets as security.”  Stephen Zarlenga credits Oxford professor Frederick Soddy with having conceived this method of transition, which Soddy called “the 100% Reserve Solution.”  Zarlenga observes that if the law simply required banks to provide 100% reserves without providing them the money to do so, “as presently being advocated by some misguided monetary reformers,” the effect would be “a disastrous deflation, and [as a result] a repudiation of all monetary and banking reform.”[9]  In today’s economy, where banks have made so many bad loans, an issue that will need to be addressed is whether to purchase or loan against bank “assets” that are of dubious quality.  The transition to full reserve banking may need to be postponed until the banks’ loan portfolios are caused to be in much better shape.  

Would this pumping of money into the banks be inflationary?  The authors of the Chicago Plan pointed out in response that  it would not be, since doing so “would not inflate the volume of anything that can circulate.”  Fisher agreed.[10]

At the same time that money is provided to establish the full reserve for demand deposits, the Monetary Authority would gather in all Federal Reserve Notes (the United States’ present form of money) and exchange them for its own newly created money at equal face value.   The result, again, would not be an increase in the quantity of money.

It should be noted that the extent and intricacy of the world financial system has grown in recent years to the point at which many institutions other than traditional banks are involved in credit-creation.  To the extent their activity replicates that of fractional-reserve banking, they would need to be brought under the purview of the plan.  The manner of how that is to be done should perhaps be left to economists who have an intimate knowledge of the new institutions.


Establishing a Monetary Authority to create and issue money.   Zarlenga’s book argues strongly that money-creation is a prerogative of sovereignty, which he sees as unfortunately having been delegated to the banking system.  He says that “our review of Greek, Roman, Byzantine, Venetian, Dutch, and English money, until the formation of the Bank of England [in 1694], showed monetary control was generally either in government or religious hands and was inseparable from ultimate sovereignty.”[11]  Irving Fisher saw it the same way, asking: “Why continue virtually to farm out to the banks for nothing a prerogative of Government?”[12]

In his book, Zarlenga proposes “that ultimately the monetary power should be constituted as a fourth branch of government.”[13]  This would call for a Constitutional amendment (which the author of this article has considered desirable, in any case, as part of installing the “shared market economy” which will be explained later here).  We notice, however, that Congressman Kucinich’s bill, HR 6550, calls instead for establishing “the Monetary Authority as an authority within the Department of the Treasury.”  In either case, the intention is that the Monetary Authority be independent (and, under Kucinich’s version, not subject to control by the Treasury Secretary).  Under HR 6550, it would consist of “9 public members appointed by the president with the advice and consent of the Senate.”  They would serve 6-year terms, with the terms being staggered.  (The Federal Reserve would be retained as an agency called the “Bureau of the Federal Reserve” to administer the law, with one of its functions being to continue as the country’s check-clearing house.)

The government-created money is referred to in the AMI plan as “U.S. Money,” and by Fisher in his book as “Commission Currency.”  The domination as a “dollar” would continue.

An exceedingly important feature under any of the versions of the plan we have mentioned has been to have a “governing principle of monetary policy” defined by law, as distinct from broad powers lacking direction. The authors of the Chicago Plan wrote that “the criteria for monetary management adopted should be so clearly defined and safeguarded by law as to eliminate the need of permitting any wide discretion to our Monetary Authority.”[14]  The Monetary Authority would be charged with the responsibility of  acting within that governing principle.  Fisher suggested that it would be wise to make the Authority’s members subject to impeachment if they do not adhere to the legally-defined standard.[15]

There is bound to be much discussion by monetary experts of precisely how the legal standard should be worded.  The “governing principle” that is written into HR 6550 is that “the supply of money in circulation should not become inflationary or deflationary in and of itself, but will be sufficient to allow goods and services to move freely in trade in a balanced manner.  The Monetary Authority shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”[16] 

“Maximum employment” has quite naturally been a principal goal of monetary policy in the past, and continues to be seen as such in the present, because the great majority of people have always “earned their living” from jobs.  However, it is important to see that it will no longer be appropriate as technology continues its inexorable march toward job displacement, even during periods of boom.  We might expect that the “maximum employment” feature will  rather soon be recognized as obsolete, subject of course to the mental inertia that will cling to established expectations.    The rest of the governing principle just quoted would seem suitable, and fits well into the proposal for a “shared market economy” which we will examine in the next section.

The arguments pro and con.  The fact that so many leading economists in the 1930s favored the Chicago Plan may make it seem uncontroversial.  That impression would be seriously mistaken, however, since any proposal for monetary restructuring runs into at least three major obstacles: (1) the social, political momentum that is bound to come from people’s being accustomed to the existing banking system, which they will be inclined to see as immutable; (2) the opposition that may well come from the existing banks and financial system, whose members are likely (whether justified or not) to see the proposal as threatening their own interests; and (3) the presence of a number of passionately embraced economic theories that have different insights into what is needed and, as we will see, some highly significant concerns about the Plan .  Accordingly, the “pro’s and con’s” must be weighed carefully.

In recent years, the free-market Austrian School of Economics has surged into prominence in the context of world free trade, taking a leading role in today’s prevailing global economic ideology.  The Chicago/AMI plan fits well into one central aspect of the School’s thinking: its long-standing perception that the credit expansions and contractions arising out of fractional reserve banking are the principal cause of booms and busts.  The late Murray Rothbard, one of the pillars of the Austrian School, considered fractional reserve banking a form of fraud, and hence something that the law even in a laissez faire system should prohibit.[17]   The author of this article studied under Ludwig von Mises of the Austrian School in the mid-1950s, and did so (before going on to law school) primarily to satisfy his urgent need to know whether the proponents of a market economy knew of a satisfactory solution to the business cycle threat to its existence.  Although he heard of the 100% reserve idea, he didn’t become aware of the proposal to treat money-creation as an act of sovereignty properly placed in the hands of government.  The reason he didn’t, he supposes, is that the Austrian School has had an abiding distrust of government.  This has led the School down other avenues, such as to the gold standard and/or “free banking.”   The distrust of government trumped a fairly obvious solution to the monetary problem – so much so that for many years this author never heard of the Chicago Plan.  If anything, the distrust has heightened, so that it is a major feature of the thinking on the American Right.

  The reasons for doubting the trustworthiness of “political money” are summarized well by Kevin Dowd in his book The State and the Monetary System.[18]  He quotes Milton Friedman’s sensible observation that a reasonable commentator will suppose that “if only we tell them [the monetary authorities] what to do, then there’s no reason why able, well-meaning, well-intentioned people should not carry out those ideas.  But then we discover, over and over again, that well-intentioned, able people have passed laws, or have established institutions – and lo and behold, they don’t work the way able, well-intentioned people expected or believed they would work.  And it isn’t an accident that it happens.  It happens for very systematic, explicit reasons.”

Dowd sees these systematic reasons as including “an internal threat” that “there is no guarantee that the people controlling the central bank [i.e., the Monetary Authority] will promote the social interest.”  They may well “put their own interests first.”  We are struck by the possibility that this could very well happen, especially in our contemporary society; in the lead-up to the recent financial crisis, there was a well-nigh ubiquitous culture of self-serving venality in which “putting your own interests first” supplanted any sense of trusteeship or consciousness of systemic well-being.  We are not well positioned to have faith in the objectivity and public-spiritedness of even the most prominent people. Even the possibility of corruption is not entirely to be discounted. We should perhaps add that the members of the Monetary Authority will lack the spur of possible personal financial loss, which is something that is no doubt keenly felt by bankers who face bank failure.  If they perform poorly, the members will primarily face harm to their reputations.   Dowd also sees “external threats” that “come from politicians and interest groups seeking to use monetary policy for their own ends.”  He says “the historical tendency is for constraints against intervention to break down under the pressure of these vested interests.”  Again, contemporary American culture reinforces such concerns, since the political system seems almost entirely in the hands of money, pressure groups and special interests.  Unless the Monetary Authority is effectively insulated from such pressures, including the calls that often arise in a democracy for an inflationary policy, adherence to the statutorily defined principle will likely prove evanescent.  This suggests that full consideration must be given to how to assure such insulation.

Zarlenga, on the other hand, gives extended treatment in his book to the episodes in American history when government has done the money-creation.  He is stout in his defense of the Continental currency issued by the American colonies during the American Revolution: “We saw many examples of the colonial governments’ paper money working well… [T]he colonies never issued more currency than was authorized by their legislatures.”  What led to the expression “not worth a Continental,” he says, was egregious British counterfeiting, designed to destroy the American currency.[19]  Further, he points to the periods 1812-1817 and 1837-1857, periods of government-created money, as “excellent.”  Then in 1862 the U.S. Congress passed the “Legal Tender Act” providing for the issuance of fiat money that was declared to be legal tender.  The result was the “Greenback period” (the Greenbacks were also called “Legal Tender Notes”).  U.S. Congressman Ron Paul has criticized the Greenbacks because Congress expanded the initial issue considerably under the pressure of paying for the Civil War, thus depreciating it.  Zarlenga, however, points out that the Treasury held true to the amounts legislated by Congress, and that “the Greenbacks demonstrated that government-issued fiat money served the commercial, industrial and fiscal needs of the nation even in the middle of warfare.”[20]   In all, Zarlenga says “government has a far superior record in issuing and controlling money than the private issuers have had.”  He says a “false specter of inflation is always raised” against government-created money, observing that “inflation is avoided because real material wealth has been created in the process.”[21]  The runaway German inflation of 1923 is often cited in support of this “specter of inflation,” Zarlenga says, but “it was a privately owned and privately controlled central bank” [the Reichsbank] that fed “private speculators” as they “speculated against the nation’s currency.”  He observes that “currency speculation on a scale large enough to affect the currency’s value is still erroneously viewed as a legitimate activity,” and urges that limits be placed on currency speculation that exceeds what is needed to  serve normal business and trading needs (which are to have a hedge against risk).[22]

It is worth noting that the pull toward an abuse of government money-issuance to produce economic expansions will be far less if the money that is created goes toward funding a “shared market economy” than if it is spent directly on an array of public projects and social-welfare measures.  The latter will set up a continuing clamor for more, a clamor that anyone who wishes to succeed in politics will find almost impossible to resist.  If, on the other hand, the money goes into the purchase of index mutual fund shares to finance the broad array of economic enterprises, and the profits from those shares are used to underwrite the incomes of a population that can spend that income as the individual recipients choose, which is a brief description of the “shared market economy” concept, the result will not be the encouragement of countless benefit-seeking groups. 

The debate about whether a Monetary Authority can be trusted is bound to rage around any proposal such as that of the Chicago/AMI plan.  We can’t hope to exhaust it here.  Two things do seem apparent, however, and in this author’s opinion cast the weight, when taken on balance, in favor of the plan: 

(1) That there is indeed reason to keep a jealous eye on how the Monetary Authority performs (and although there will be pressures to cause it not to be faithful to its statutorily-defined governing principle, there will also be many who will give it critical scrutiny precisely to hold it to that standard).  What will be needed will be a strong ethos, indeed a consensus, that the governing principle be adhered to.  If the proposed plan is adopted, continuing efforts should be made to fashion and maintain such a consensus and to insulate the members of the Monetary Authority from extraneous pressures. 

(2) That, just the same, it has now been demonstrated for the umpteenth time that the alternative – the present system of fractional reserve banking with its bank creation of the money supply – is clearly not tenable as a foundation for a market economy. Those from any persuasion, Right or Left, who support a market economy must seek an alternative. Certainly, people who most passionately support capitalism should do so. This trumps the need to distrust government, especially if we realize that capitalism has never been wisely conceived as a lawless, institution-free system; sometimes those of a more “libertarian” bent don’t fully realize that a market economy requires a framework suitable to itself.  The needful functions of government are important, even essential; and concern about the abuse of government ought not to prevent the  performance of those functions.  And still another point deserves mention: some free-market advocates accept trade cycles as normal to the market, and give little emphasis to the misery they produce.  We would hope that libertarians will come to see that this view ill-serves the future prospects of the market economy, since it allows a recurrent falsification of the good-faith reliance that millions of people repose upon such an economy.

There is, of course, much more to say about the advantages and disadvantages.  One enormous advantage is that money would no longer represent debt owed by the government, but would simply be money in itself.  From the AMI: “As the late Congressman Wright Patman, Chairman of the House Committee on Banking and Currency for over 16 years, said, ‘I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money.’” It will be possible to retire all U.S. indebtedness, removing a major item from the federal government’s annual budget (in 2007, the AMI tells us, the interest cost on the national debt was $465 billion, 17% of the year’s budget).  The national debt has become a major focus in American domestic politics.

Another is that the political and financial power of banks and of other institutions performing bank-like functions will be vastly reduced.  This is saying a lot in the context of the recent financialization of the American economy and the role that money and interest groups play in the U.S. political system.  The long-existing centrality of “the money power’s” influence is a major reason the fractional reserve system has been kept in place.

An advantage of great importance is that a clear stabilization of the money/banking system will give other countries reason for renewed confidence in the dollar, and hence will strengthen the position of the dollar as the world’s reserve currency. 

A matter that deserves consideration is whether the plan would cause any adverse repercussions on the international scene.  It is perhaps significant that the many economists who favored the Chicago Plan did not think it necessary even to consider this possibility, apparently thinking it of negligible importance.  Indeed, it is difficult to see why a stable monetary/banking system would not better serve global finance than the present system of incredible leverage expansion and contraction.  There is, however, bound to be much future discussion of the implications of the plan, and such discussion is to be encouraged.    

 In 100% Money, Irving Fisher spent several pages listing the advantages and responding to objections.[23]  Among the advantages we have not mentioned so far are: “There would be practically no more runs on commercial banks.” “There would be far fewer bank failures.”   “Our monetary system would be simplified [and] banking would be simplified.”  When he addressed the objection that there would be a curtailment of lending,  he said that “in the long run, there would probably be much more money lent; for there would be more savings created.  The only limitation on bank loans would be… that no money could be lent unless there was money to lend.”  Rothbard responded to this objection along the same lines.[24]  Would bankers be injured?  No, Fisher said, because “they would share in the general benefits to the country resulting from a sounder monetary system and a returned prosperity…[and] they would be almost entirely freed from risk of future bank runs and failures.”  He anticipated that bankers would oppose the plan, but he argued that if they were to look at their interests dispassionately, they would find the plan conducive to their profession’s long-term well-being.  Would the plan constitute a nationalization?  Of money, yes; of banking, no. In his book-length discussion of the history of money, Zarlenga analyzes various concepts that have, in his view, led the world astray in understanding both money and banking.  He says that “the way one defines money will determine who controls the money system.”  One idea about the nature of money is that money should take the form of a commodity, such as gold.  This deviates substantially from Aristotle's observation, with which Zarlenga agrees, that “money exists not by nature, but by law,” being an attribute of sovereignty.  Another idea is that money is debt, in which case it will be controlled by bankers.  A third is Keynesianism, which sought to work within the system but in doing so failed to see the obvious advantages of returning money-creation to government.  And Zarlenga sees chronic weakness in the sort of “free banking” proposed by some libertarian economists, who believe that market discipline and concern for reputation will, in a laissez faire context toward banking, channel banking into sound operation.  [This expectation is the same as we saw before the Great Recession in the consensus supporting “efficient market” theory.]  Contrary to such an expectation, Zarlenga says that “they don’t consider that often in the short term the potential for loot is so great that it will be taken without regard to honesty.  They also ignore that reputation can be influenced by public relations expenditures and advertising.”[25]  As an attorney, the author of this article has for many years seen the countless abuses that occur in the home-construction industry (which is a model of virtually pure laissez faire, subject to almost no regulation), where the market definitely fails to weed out the crooks and incompetents.


III.  The Difference Between the AMI Plan and the “Shared Market Economy” Proposal

The idea of a “shared market economy” has been put forward by this author  in articles in this Journal and in his book The Shared Market Economy which has been published to his website.[26]  It is summarized,  perhaps most conveniently, in Chapter 17 of his book The Great Economic Debacle – and Beyond.[27]  (The idea is not original with this author, since others have thought of something quite similar.[28]) As indicated earlier, the proposal grows out of the realization that remunerated employment will continue to become less and less available as the way for people to receive their livelihood.  Even though the non-labor-intensive technology will offer splendid productive potential, that potential will (1) not be sustained by mass demand, and  (2) millions of people will suffer distress, inevitably (3) putting great stress on the political/social/economic system, unless there is a way both to keep the market economy vibrant and to distribute the immense productivity to the population.  The “shared market economy” accordingly proposes having a governmental monetary authority pump money into an independent agency that will invest the money in “index mutual funds” (i.e., private funds that in turn invest in firms according to their proportion in the market).  This would make the funds originating from government money-creation a principal, although not the only, source of money for business investment and operation; at the same time, the earnings from the fund shares that are realized by the independent agency would constitute the money that the agency would distribute to the population.  (These earnings would amount to much of the profit made by the firms in the market.)  It would not be a “guaranteed annual wage” system, since the incomes will grow with the advancing productivity of the technology.  (They could decrease, but that is unlikely in a system where booms and busts are greatly mitigated,  as they will be if the Chicago/AMI plan is implemented.)

Under this proposal, the money created by the Monetary Authority would mostly go toward the support of business and of earnings distribution, although it would be essential first to use the money to make the transition from fractional reserve to full reserve banking, and highly desirable then to pay off the national debt. 

This differs meaningfully, as we have said, from what is proposed by the AMI/Kucinich plan, which would have the money go toward a broad array of  projects, many of them very socially beneficial (although the desirability of a given project would be subject to debate, as it is today).   Among the projects mentioned are universal health care, universal pre-schooling and college education, funding for the states, covering the deficits in Social Security and the other entitlement programs, and rebuilding America’s physical infrastructure.  More broadly, the expenditures are to be for whatever Congress decides is “for the general welfare.”  Far from “starving the beast” (i.e., the federal government) as many limited-government proponents have sought, the plan would provide the federal government with abundant resources.  By contrast, the “shared market economy” plan would feed the newly created money to business in a neutral way through index mutual funds and to citizens to spend according to their own choices.  Spending by the federal and state governments would have to be funded, as they are today, by taxation.

What needs to be seen is that the “shared market economy” idea invokes market-originated productivity, on the one hand, and each citizen’s individual choice of expenditure of the income he receives, on the other.  It is very much a “libertarian” (although this author thinks of it more as a “classical liberal”) idea.   The AMI/Kucinich plan as now formulated places government at the heart of the money’s use.  Depending upon how American society evolves, doing so can be consistent with individual liberty – or lead to very serious violations of it.

Which of the tendencies just referred to would prevail? 

In his book The Constitution of Liberty, F. A. Hayek argued that “there is undeniably a wide field for non-coercive activities of government” and that “there is no reason why the volume of these pure service activities should not increase with the general growth of wealth.  There are common needs that can be satisfied only by collective action… We must recognize that, as a service agency, it [the state] may assist without harm in the achievement of desirable aims which perhaps could not be achieved otherwise.”  He makes an excellent discussion of the nuances of this in Chap. 17 of that book.[29]   Such consistency with individual liberty is possible if Congress simply provides money for various purposes that have little or very little of what we might call “directive” quality.  By this, we mean providing money while leaving it up to the recipient as to how it is spent.  For example, “funding of state governments” is consistent with true federalism if the federal government leaves it entirely to each state as to how it spends the money.  To the extent, on the other hand, that strings are attached and mandates made, the states become instrumentalities of the federal government.  A universal health plan that would provide money to individuals who could then decide how it was spent on health services would leave individual choice intact, and even unleash competitive market forces to attract people’s health-care dollars; but one that directed what services were to be performed, and/or by whom, would not.  (The same goes for education.)  One might think that spending for infrastructure improvement would be neutral, but that isn’t necessarily so, since decisions need to be made about what infrastructure is to be expanded.  Years after the Eisenhower interstate highway system was built, it has become apparent that it pointed American society in the direction of motor vehicle use rather than rails and public transportation.  This illustrates that even infrastructure spending has long-term society-forming choices built in.  That this is so does not itself point to infringements on personal liberty, but it does point to the central role that government may well assume.

Threats to individual liberty can come in several ways. 

The one that has most commonly worried the millions of Americans who have sought “limited government” has been that government, by its very nature, just “tends to expand.”  One thing piles on top of another, and the constituencies calling for more, both inside government and outside, become more powerful.  Moreover, the agenda of the past century’s American “liberalism” has been an ever-present call for additional government  The AMI/Kucinich plan, as it now stands, fits into that mold.

At one time there was a conscious socialist movement calling for the government ownership of the “means of production” and wanting “central planning.”  Hayek observed as early as his 1960 book, as mentioned above, that this had gone into disrepute.  It is, accordingly, not the threat to personal freedom that it was, say, in the 1930s when the pages of The New Republic, for one, trumpeted it.

What seems to this author to pose the greatest threat to personal freedom in American society today comes from another source – the propensity for ideological absolutism,  the most compelling of which comes from the main opinion-making academic-professional-business elite.  Once something is introduced as desirable, it is quite soon given the mantle of a moral truism.  Anyone who takes exception to it is, then, detestable as morally aberrant.  In Democracy in America, Alexis de Tocqueville wrote of the ubiquitous tyranny of the majority.  But today we see something rather different than that; it is a mental strait-jacket imposed from above and embraced by an acquiescent population.  When ideological or religious enthusiasms arise outside the elite we have referred to, such as we see in the opposition to abortion, their role may be significant, but they are nevertheless peripheral, almost never prevailing. 

If a vast program of federal governmental expenditure comes to be guided by the enforced-from-above consensus, which it almost certainly will be in today’s America, the effect can be disastrous to individual liberty.  This will be of little concern to those who understand the consensus to represent the highest morality,  and accordingly discount the very existence of those who dissent; but those who see their highest value in personal freedom will have much reason to prefer the “shared market economy” with its neutral funding of business and individual autonomy.  Even where there is such autonomy, the moral absolutes will continue to establish the public mindscape and thereby determine the direction that people’s personal choices take.  But at least those absolutes won’t be backed by hundreds of billions of dollars.                                 

 One can hope that these considerations will receive careful and perhaps sympathetic attention from Anthony Zarlenga, the American Monetary Institute, Dennis Kucinich and all those who otherwise come to see the wisdom of the Chicago/AMI plan.  Many of the public purposes they wish to see supported will certainly be possible under the “shared market economy” alternative, since a vibrant economy and general income distribution will make considerable resources available. 

Any legislation on this subject will, it is hoped, be preceded by much careful consideration of the concepts involved.  An article such as this one, in an academic journal, is intended to contribute to that discussion.  

No matter how well the plan is worked out, it would be less than realistic to suppose that there will not be much that will stand in its way.  The lethargy of what’s customary will be a sizeable obstacle, but that will in all likelihood not be as great an obstacle as the opposition of those within the world financial system who see themselves as profiting from the current system.  It may take a crisis far beyond the current one to spur action or even so much as serious thought about an alternative to the existing financial structure.  Let’s hope not.

[1]   Notice, for example, the reference to this crisis in the titles of some recent books: Richard Posner’s The Crisis of Capitalist Democracy, Pat Choate’s Saving Capitalism, and  John Bogle’s The Battle for the Soul of Capitalism.  These are all by commentators sympathetic to a market economy.

[2]   Irving Fisher, 100% Money (New York: Adelphi Company, 1936 revised edition), p. 120.

[3]   See the Wikipedia entry for “A Program for Monetary Reform,” at http://en.widipedia.org/wiki/A_Program_for_Monetary_Reform, pp. 5 and 14.

[4]   Fisher, 100% Money, 134.

[5]   See Fisher, 100% Money, pp. 36-41 for his more complete statement of the illustration..  The Austrian economist Murray Rothbard gives a similar illustration in his Man, Economy, and State (Princeton: D. Van Nostrand Company, Inc., 1962), pp. 705-709.  

[6]   The “full reserve system” is explained on pages 15 and 18-19 of  “A Program for Monetary Reform” (see footnote 3 here).

[7]   Extensive information about this entire subject and about the AMI proposal is available on the Web from the American Monetary Institute.

[8]   Irving Fisher, 100% Money, p. 9; Sections 301 and 302 of the AMI Plan that is available on the Web at the AMI site; and page 16 of the Chicago Plan as it appears in the copy referenced in Footnote 3 here.

[9]   Stephen A. Zarlenga, The Lost Science of Money: The Mythology of Money – The Story of Power (American Monetary Institute).

[10]    Fisher, 100% Money, p. 15.

[11]    Zarlenga, Lost Science of Money, p. 433.

[12]    Fisher, 100% Money, p. 19.

[13]    Zarlenga, Lost Science of Money, p. 657.

[14]    See pages 9 and 10 of the Chicago Plan as set out in the source cited in Footnote 3.

[15]    Fisher, 100% Money, p. 213.

[16]   See Sec. 302 of HR 6550.

[17]   Rothbard, Man, Economy, and State, p. 702.

[18]   Kevin Dowd, The State and the Monetary System (New York: St. Martin’s Press, 1989),  pp. 179-185.  The quote from Milton Friedman is on page 182.

[19]   Zarlenga, Lost Science of Money, Chap. 14, and page 434.

[20]   Zarlenga, Lost Science of Money, p. 477.

[21]   See the statement by Zarlenga in the AMI’s paper “Presenting the American Monetary Act,” p. 3.

[22]   Zarlenga, Lost Science of Money, Chap. 21, especially 575, 586, 587.

[23]   Fisher, 100% Money, pp. 11-18.

[24]   Rothbard, Man, Economy, and State, p. 708.

[25]   Zarlenga, Lost Science of Money, p. 444.

[26]   For a hyperlink to the book, see the first paragraph of the site at www.dwightmurphey-collectedwritings.info

[27]   Dwight D. Murphey, The Great Economic Debacle – and Beyond (Washington, D.C.: Council for Social and Economic Studies, 2011).  This book may be ordered through Amazon.com or from the publisher at 1133 13th Street, NW #C-2, Washington, D.C. 20005.

[28]   Most notable, perhaps, is Major Clifford Hugh Douglas in the early twentieth century; see page 156 of my book The Great Economic Debacle – and Beyond.   Jeff Gates’ book The Ownership Solution: Toward a Shared Capitalism for the 21st Century (Reading, MA: Addison-Wesley, 1998) proposes a plan similar to, but not identical to, that which the present author favors for a “shared market economy.”  Irving Fisher suggested a “social dividend.” The mention of these authors is by no means meant to be exhaustive.

[29]   F. A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), pp. 257-259, and all of Chap. 17.