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The American Monetary Institute is the world’s leading organization for understanding monetary history and how to reform monetary policy. These six articles reprint AMI’s principle information, available at AMI’s website, with their express permission to share widely: 

  1. Explaining the need for monetary reform: the heart of our economic crisis
  2. Monetary history: synopsis of Stephen Zarlenga’s The Lost Science of Money
  3. How to reform our monetary system: understanding the mechanics of creating money
  4. The American Monetary Act: monetary reform legislation for Congress
  5. FAQ of monetary reform
  6. What can Americans do for monetary reform?

This article is part 3. The other titles above will have live links as I add one each day. The following eight paragraphs are a common introduction that begins each article.

The Lost Science of Money (LSM) is a superlative accomplishment of historical analysis. It explains with academic professionalism how money has historically evolved and its capture by oligarchic corporate, political, and media “leaders” for their own use rather than public benefit. Stephen Zarlenga is an unsung hero for his years of work in reviewing nearly a thousand books on money, its creation, and its manipulation. LSM is the most historically authoritative, most comprehensively researched, and most important book on monetary reform available. It is clearly written for all readers to understand this topic of trillions of dollars of yearly benefits for the American public. 

As the founder and Director of AMI, Mr. Zarlenga draws on 35 years of experience in the world of finance, securities, insurance, mutual funds, real estate, and futures trading. He has published 20 books on money, banking, politics and philosophy (including The Anglo American Establishment, by Prof. Carrol Quigley). While in his mid 20s he incorporated the Athenian branch of an English life insurance company, earlier opening several European markets for the parent firm, IOS. He built the U.S. distribution network of the then leading American mutual fund concentrating in gold shares. As a member of the New York Futures Exchange (a subsidiary of the New York Stock Exchange) he specialized in trading the complex CRB futures index for several years.
Our “modern” banking system is a Robber Baron-era cartel, expert only in creating price bubbles, bursting them, consolidating power, using political control for taxpayer subsidization of trillions of our dollars (so-called “bailout”), and then repeating the process. It is an Orwellian comic-tragedy of economic management; fraud to consolidate money and power to an elite group of families and organizations.
My summary of leading economic professionals alert to these facts and communicating them to the American public, along with the obvious solutions, is here. The background paper I have for students to understand monetary reform is here. A summary of many of America’s brightest historical minds who have argued for monetary reform, here. The evidence that corporate media doesn’t report these obvious solutions because they are in collusion with the current power structure of government and money, here. Evidence that professional economic journals are controlled by the Federal Reserve to censor any information that would provide an alternative monetary system, here. A simple example is censoring the obvious alternative of paying the national debt rather than increasing it; that is, shifting from a government-created “debt supply” to an actual “money supply.” Corporate media near-absolute silence on these issues is revealing and stunning in its implications.
I also work with Ellen Brown, author of the outstanding Web of Debt, and other colleagues for states’ legislatures’ understanding of monetary reform, and in particular their legislative option to create state-owned banks. Under existing bank laws, states could issue their own credit to purchase their outstanding debt. If California were to do this, they would save $5 billion every year on their state debt interest cost. To put that number in perspective, California could rehire their 20,000 laid-off teachers (I am one) and still have $3.4 billion left.
The power of a two-pronged strategy to work for national monetary reform while educating state legislators of the advantage to their state of creating their own credit rather than going to banks is the education of over a thousand powerful law-making partners all across the US. As a professional educator, I can tell you that research agrees with our observation that education is greatly helped by linking what students (state legislators) already understand (their state economic crisis) to their interests (solving their state crises), and then to the broadest curricular objectives (national monetary reform).
A weakness in any monetary reform strategy is its “Catch-22” nature. The nation’s money supply (not the current debt supply) needs to be managed at a centralized national level. However, the current central national management are the criminal frauds keeping Americans as debt peons. The structural answer is simple, but requires honest management: transparency and public accountability. A probable scenario for Americans to achieve an honest and accountable monetary system is a Truth and Reconciliation process to uncover all the facts keeping our systemic fraud in place.
Mr. Zarlenga and I have discussed this political strategy; he currently disagrees. His view is that investing time for state use of the current non-public-serving system is a distraction from the real reforms required at the national level. His views are expressed in the following and on AMI’s website. I observe the lack of movement in Congress, the sterling example of North Dakota being one of only two currently solvent states in the US with their state-owned bank, and prefer the benefits of unleashing thousands of state lawmakers for national monetary reform step-by-step from seeing their state benefits first.

Reforming Our Monetary System *
Monetary reform is as old as money itself. And while Money plays such a crucial role in our lives and civilization that we couldn’t function without it, how few of us have given it the attention it deserves! Not just to make more – but to understand how the money system works; the institutions and regulations that determine what is money; how it’s introduced or removed from circulation; who controls these decisions for what purposes. Who benefits, who loses?
We want to live in a world of growing freedom and opportunity, but have we done enough to assure that society’s money system is operated to advance our civilization? Evidence grows that the money power instead has become oppressive. Lets see which changes are called for.
Why does reform become necessary? A century ago the great monetary historian Alexander Del Mar wrote: “The money system is society’s greatest dispenser of justice or injustice.” A good system functions fairly, helping to create values for life. A bad one, such as the present system, obstructs the creation of values; gives special privileges to some and disadvantage to others; causes unfair concentrations of wealth and power; leads to social strife and eventually warfare and a thousand unforeseen bad consequences.
Because great power is exercised through money, power-hungry elements from ancient times to the present pursued the political ambition to dominate through the Money Power. This requires societies to periodically reform corrupted systems. The main weapon in this battle has been the manipulation of language and thought, where definitions serve as heavy artillery. Those benefiting from the corruption fund university economics departments and finance “professionals” (we call them economists) to promote their viewpoint through economic theories. That’s why this corrupt system has continued for so long despite its abysmal performance.
Why is reform urgent now? Financial abuses of the world’s money systems are pervasive and self-evident. Dominant companies focus on usury instead of production. Globalization harms helpless third world nations – and even the Planet! Action on monetary reform has become urgent as we enter the 3rd millennium.
How does reform proceed? It must start with an understanding of the nature of money; that money is not a commodity; that money and credit are two very different things.
If society defines money as a commodity (as wealth) then the wealthy will control the system. In our system money and credit have been confused. If society defines money as credit, as the present system does, then the bankers will control the system. Define money in the proper Aristotelian sense as an abstract legal power, and control over money and society can then be under our constitutional system of checks and balances.
The Lost Science of Money book presents the historical chain of the concept of money from Aristotle forward to arrive at our concept of money:
“Money’s essence (apart from whatever is used to signify it) is an abstract social power embodied in law, as an unconditional means of payment.” (LSM, p. 657)
Confusion, Complexity and Dishonesty Serve to “Protect” America’s Nightmare Monetary System: Unfortunately explaining exactly how the credit circulating in our society is created is like walking into quicksand, because the process itself is so unjust and so counter intuitive and so harmful to good public policy, and full of poor banker terminology. We’ll present it here and see whether readers like this full explanation or instead would prefer a shorter summary, for the next printing.
Modern Money Mechanics – The Chicago Fed’s guidebook.
Modern Money Mechanics (published and republished 6 times from 1961 to 1994 by the Chicago Federal Reserve Bank) is the most reliable and readable description of the Fed’s money creation operation. This process is a “moving target,” with elements potentially superseded recently by the Bank for International Settlements so called Basel agreements, but it continues to be a system of fractional reserves as discussed below; and remember that this process and practices keep shifting with increasingly horrendous results.
*Special thanks for this section to Dick Distelhorst; Robert Poteat; Steven Walsh & Jamie Walton.
Money is a crucial part of modern society – But Where Does Our Money Come From?
Most people think our money is issued by our government and indeed money should be created and issued by government and used for the benefit of all by spending new money directly to promote the general welfare. That is what passage of the American Monetary Act will do. However, this does not happen. In our present system, the Federal Reserve Bank of New York, one of the 12 private Federal Reserve branch banks, begins the process by creating money out of thin air. Then using this money as a reserve base, the rest of the banks create about ten or more times that amount of money out of thin air by what’s called “fractional reserve banking.” The required “reserve” varies, ranging from 0% on the first few million loaned; then 3% and then to 10% for larger sums.
How Does the Federal Reserve System Create Money out of thin air?
This chart and its explanation are often used to explain fractional reserve banking because it was published on a number of occasions by the Federal Reserve Bank of Chicago. The following is an admittedly simplified description used for brevity. Besides giving an excellent graphic reference showing how the money supply expands, it also helps explain how money is created.
Source: Federal Reserve Bank of Chicago, “Modern Money Mechanics” (1962; rev. 1968; 1971; 1975; 1982; 1992; 1994)
There are really two stages in money creation; the first is by the Federal Reserve, the second by the various banks. Notice in the bottom left corner the “initial” deposit of $10,000. This deposit was made by the Federal Reserve itself. The Federal Reserve created this money as a liability onto itself. Or, in other words, it paid for it with its own bookkeeping entries. Its “checks” can’t bounce.
This first process involves the government borrowing money. Congress and the Executive need to spend more money on social security, health care, education, infrastructure and sadly, war, than they raise in taxes or other revenue streams. To acquire this money the Treasury sells ‘securities’. These Treasury IOUs come to maturity in three time periods; up to one year the security is called a “Bill,” from one year to 10 years it is called a “Note” and over ten years it is called a “Bond.”
Treasury securities are sold mostly to domestic and foreign banks, and thus Treasury gets its operating money for government expenditures. The money creation process starts with the Federal Reserve buying these securities, not usually from the government, but from Treasury securities dealers representing banks, and from banks themselves. The Fed pays for these securities by notifying the dealer’s bank to credit the dealer’s account for payment for the securities sold to the Fed. At the same time the Fed credits the same amount to the bank’s account at the Fed. That is simply recorded on an account ledger as a liability - an amount the Fed ‘owes’ that bank.
The following example shows this new Fed liability from an accounting perspective when the Fed purchases $10,000 in securities from Bank A.
Federal Reserve Bank                                  Bank A          
Assets                              Liabilities                       Assets                             Liabilities
Treasury Securities       Reserve Account          Reserve Account          Dealer’s Account
+$10,000                         +$10,000                       +$10,000                       +$10,000
This double-entry accounting system is described in Modern Money Mechanics. (That forty page, 8.5 x 11 booklet is available from the AMI at $25 per copy)
Under the Federal Reserve Bank, the Assets column has increased by $10,000 because the Federal Reserve now owns the actual Treasury securities with the face value of $10,000 (plus the interest it earns).
Under the Federal Reserve Bank, the Liabilities column has increased by $10,000, which was the cost of purchasing the security. The Federal Reserve is able to make these purchases with mere bookkeeping entries, only because of accounting rule privileges sanctioned by our government.
Under Bank A (the bank that has the Treasury securities dealer’s account), its Assets column is increased by $10,000. This is the first moment that this ‘reserve’ money has come into existence – while at the same time the Fed now holds the Treasury Security.
Under Bank A, the Liabilities column represents the payment by the Fed to the Treasury securities dealer of $10,000 (banks call their customer’s deposits liabilities).
Summarizing the above: The Federal Reserve at the time of purchase took those Treasury securities, IOUs, and gave securities dealer money and Bank A reserves. This money the Fed gave the securities dealer was simply done by creating a liability on paper, and by doing this the Fed created money. Now that we have an understanding of the initial creation of money by the Fed, we are ready to learn about the second stage – fractional reserve banking.
The Second Stage – How Fractional Reserve Banking Then Creates Money out of thin air:
Let’s assume for illustration purposes that the $10,000 deposited into Bank A, received for the account of the dealer, for the sale to the Federal Reserve, stays in Bank A’s accounts. Using the account ledger from earlier, under Bank A’s liabilities is the $10,000 in the dealers’ account, balanced by assets of $10,000 in Bank A’s reserve account at the Fed.
As an asset, Bank A can use those reserves of $10,000 to create new money in the form of loans or investments up to at least 90% of that amount (with the accounting rules now in effect). Therefore, about $9,000 of new money can be created and lent out by Bank A. If Bank A loans Arthur $9,000 to buy a used tractor from Bill and Bill deposits the $9,000 in Bank A (or any other bank), the fractional reserve lending can continue. After Arthur’s loan, Bank A can see that its asset column has just increased by $9,000. After Bill’s deposit, the bank receiving the deposit (if not Bank A) can see that its liability column and asset column has just increased by $9,000. The second bank can now create 90% of that amount, or $8,100 of additional money, and loan it out to Carl to build a porch onto his house. The contractor who gets this job deposits the $8,100 into some other bank and that bank can now loan out 90% of that amount, or $7,290. Banks call the money they receive from other banks when a customer from one bank makes a payment to a customer of another bank “reserves” and the amount of this which they can loan or invest “excess reserves.” What’s important is that the original deposit by the Fed of $10,000 can expand: $10,000 + $9,000 + $8,100 + $7,290 + $6,561 … with each addition being a new loan of 90% of the previous loan (after it gets deposited somewhere). The original reserve of $10,000 (the new money the Fed initially created) can continue to expand deposits with each new bank loan, to eventually become $100,000, or ten times the original deposit. This is graphically presented in the diagram from the Chicago Fed.
The above are some wholesome loan examples. But most of the loaning went into overpriced real estate transactions, and stock market gambling and takeovers!
The interest earned on $90,000 of this new money goes to the banks. Morally, the first use of this money should belong to everyone through our government for there to be justice. If the bank does not receive the interest plus any principal payments, from its borrowers, the bank can foreclose and take any collateral that the borrower has pledged.
Here are Three Problems with Fractional Reserve Banking:
First, it’s immoral. It takes from the whole society and gives to a privileged few, apart from their not doing anything to deserve it. They get it for cleverly manipulating accounts, without creating any values useful for life. This has concentrated wealth to obscene levels in our society.
Second, the interest on money created along with debt creates an unnecessary initial cost on all money in circulation. This is like a ball-and-chain on the leg of every person working to create values for living.
Third, whoever controls the money system controls the direction of society; if it’s government, then in a democracy citizens can decide what to do with it, and it will function under our constitutional system of checks and balances. If it’s banks, then only bankers will decide what to do with it, most likely in their own interest.
In practice this has funded ridiculous bubbles on Wall Street, or incredible real estate bubbles. They did not fund the levee repairs around New Orleans or bridge repairs in Minneapolis, or the $2.2 trillion the engineers tell us is needed to make our infrastructure safe!
The American Monetary Act corrects and reforms the system with three elements:
First, the Federal Reserve system becomes incorporated into the U.S. Treasury. This nationalizes the money system, not the banking system. Banking is not a proper function of government, but control and oversight of the money system must be done by government.
Second, the accounting privilege banks now have of creating money through fractional reserve lending of their credit is stopped entirely, once and for all. Banks remain private companies and are encouraged to act as intermediaries between their clients who want a return on their savings and those clients willing to pay for borrowing those savings, but they may no longer create any part of the nation’s money supply.
Third, new money is introduced into circulation by government spending it into circulation starting with the $2.2 trillion the engineers tell us is needed for infrastructure repair and renewal. In addition, health care and education are included as human infrastructure. Everyone supports the infrastructure, but they worry how to pay for it. That becomes possible with passage of the American Monetary Act.
History shows that all three elements must be done, and done together, for the reforms to work. This is clear in the pages of The Lost Science of Money book, by Stephen Zarlenga.
The system has again shifted in the present crisis. The Federal Reserve itself purchased about $1.5 trillion bonds direct from the U.S. Treasury and has credited the government’s account, creating the money as a bookkeeping entry. This is actually better than the more complicated process described above that’s been operating for decades, because the Federal Reserve has to turn over its net earnings to the Treasury.
But this doesn’t represent reform. The simpler process, used in financing WW2, evolved into the more complex one because the financiers could then grab more money and power. For while the Fed turns over its earnings on money creation to the Treasury, the various banks keep the net interest they earn in the fractional reserve money creation process. That fractional reserve accounting feature is still in effect and at an opportune moment the system will obviously shift back to the more complex, more profitable one for banks.
The above descriptions may seem difficult – the system’s main “protection” is the confusion it generates. Just keep in mind that the power to create our nation’s money has been usurped and privatized. Those in control promote their interests rather than the general welfare; destructively manipulating accounting rules; unfairly concentrating wealth and misdirecting society’s resources into various gambling activities instead of creating values for living. That must change once and for all. We must demand and act for that change.