American Monetary Institute


Careful Newt And Bill – The National Debt Can’t Stand Too Much Scrutiny!

Copyright 1997 by Stephen Zarlenga.

The 1997 stampede to pass balanced budget legislation is a political wonder to behold. With such a full bi-partisan head of steam behind it, surely these initiatives must have been thought through very carefully – right? Well no -wrong!

At bottom, the thrust to balance the federal budget is cynically “feeding” off a deep concern by the citizenry over the size of the national debt and the monumental interest payments on it, which now consume about 14% of the federal budget each year. These payments are correctly seen as taking money from much needed programs, without giving the nation anything valuable in return.

However, what is not generally understood is that this debt arises mainly from the way our money system is structured to benefit special interests over national interests; and from the way essential new money is added to the system.

Since the national debt, and the budget deficits stem mainly from structural monetary problems, not merely fiscal problems, to seek their solution in stringent budgeting, or national parsimony is doomed to failure. Getting the government to “pinch pennies” as candidate Dole moralistically proposed, with President Clinton acquiescing, is likely to do much more harm than good, in both the short and long term.

In the stampede to pass a balanced budget amendment, there is just one small glimmer of hope. Newt and Bill and the moneyed interest behind them are risking that Americans might look more closely into the debt, and discover how our money system operates against the common interest.

People might start to ask questions about the real nature of the debt – how and why it comes into existence? Who benefits and who loses? They might ask if there are better alternatives for our government besides borrowing, or cutting spending. They might even stumble onto the ultimate question of American politics – Why can’t our government create its own money supply instead of borrowing paper money which the banking system is allowed to create?

You see fellows, a close inspection of the national debt will not only show that its more of a monetary system problem than a budgetary one; it will show that a significant portion of the U.S. debt – (now close to $500 billion) – was issued to banks which gave nothing of value in return for it and therefore don’t have to be repaid. It will highlight the debt as one of the largest mechanisms for transferring wealth and power from the society as a whole, to its most affluent members; making it a hidden instrument of class warfare.

It will show that we’re being pushed into a false decision when we’re being told we can no longer afford to act as human beings – that we must either become mean and heartless, or go bankrupt!

Most of all it will demonstrate that the best results in the past have been obtained when the U.S. government created and controlled its own money, rather than begging to borrow money that the banks create; thereby running up a 5 trillion dollar national debt, along with interest payments on it that now deprive the nation of much needed funds.

Yes, you fellows risk re-opening debate on the great question, historically, of American politics, a debate on which some wrong turns in the past, have landed us at the present monetary dead end.

The question? Who should hold the power to create and regulate the nation’s money supply – the people through elected (and appointed) officials, with public, well defined objectives; or special financial interests, behind closed doors, through the banks? You haven’t even heard about this question? Well check our history: Government paper money was crucial in both creating and preserving our nation.

The wrong turns? Watch out – here comes an abbreviated monetary history of the US! The first error was back at the Constitutional Convention. The American revolution had given us the Articles of Confederation, which placed the monetary power in the hands of the government. It was in (Art.9) the provision to “emit bills of credit” – paper money not backed by anything, like the Continental Currency, which Thomas Paine, the father of the revolution, called “a cornerstone” of winning the war for independence.

This power was not unusual – one sure sign of sovereignty has always been control over a nation’s money system.

But just seven years later, with Paine and Jefferson in France, and Franklin too old to speak, many delegates to the Constitutional Convention ignored that there would have been no USA without the Continental Currency. Delegates who really wanted to organize a privately controlled currency system, as had been done in England, emphasized that the continentals had become worthless, and downplayed that the British enemy had counterfeited perhaps ten or more times as much of them as the $200 million our government restricted itself to issuing!

As a group the delegates demonstrated a poor understanding of the nature of money. They ignored how paper money helped build the colonies and instead were influenced by Adam Smith’s primitive notion that money is merely a piece of metal, rather than a legal institution of society, as had been well explained by Aristotle, Plato, Paulus, Berkeley, Locke, Franklin and others. Smith’s metallist view of money was backward even in 1776 when his book was published; by then the Bank of England, which he idolized, had been using an abstract money system for 82 years.

The phrase “to emit bills of credit” was fought over and left out of the new document. Those who President Van Buren called the “MONEY POWER” (he always capitalized it) tried to explicitly exclude this power from the federal government, but failed, leaving the matter unclear. Delegate Gorham said “The power so far as it is necessary or safe, is involved in that of borrowing.”

So, in short, our government would be pushed into borrowing money instead of creating money. Within a year Hamilton put through legislation giving special monetary privileges to the privately owned 1st bank of the United States to issue money. The bank’s notes achieved acceptance in the new nation mainly because the government accepted them for tax payments; and because as Jefferson would later testify, there was little alternative currency. Of the bank’s 25,000 shares, 18,000 turned out to be foreign owned. Some of the same people we fought the revolution against?

To provide a growing money supply, needed for a growing nation, required going into individual and national debt to this bank, and the many state chartered banks, which printed the money.

Where did the banks get the money? Mostly they created paper money out of thin air, pretending to back it with gold and silver. In other words they issued their own form of “bills of credit”! They had usurped the monetary power, which had been “denied” to our government at the convention.

Jefferson’s influence helped dismantle the 1st Bank of the US. In his later years he developed a deep understanding of money and of the necessity of the government to control it, as made clear in his June 1813 letter to John Eppes:

“Yet although we have so improvidently suffered the field of circulating medium to be filched from us by private individuals, yet I think we may recover it… The states should be applied to, to transfer the right of issuing circulating paper to Congress, in perpetuum…”

That’s what President Madison attempted in 1814, to resolve the monetary chaos created by about a hundred state chartered banks. But he was blocked by the growing power of the moneyed interest in Congress, and a second privately owned Bank of the US was chartered instead.

President Jackson fought that bank; removed its federal charter; and for the first (and only) time since the Constitution had gone into effect, paid off all the national debt in 1835. But there was still no adequate circulating currency in the nation, and when President Van Buren seriously attempted to restrict paper money issued by state chartered banks and use scarce coinage instead – the first and last time that happened – the nation had one of its worse depressions, and soon abandoned the metallist approach.

Van Buren and his advisors didn’t understand that the nature of money is not a barterable commodity, but an abstract legal power; an institution of society and the law; that even private paper bank notes were better than nothing and that paper money had the potential to be a better form of money than any commodity ever could be. What was wrong with the banks issuing paper money was that they were usurping and unfairly benefiting from a power which derives from and belongs to the nation.

Shortly after the Civil war broke out in 1861, all the banks suspended payment of their paper bank-notes into coinage, and stopped pretending that they were backed by metal.

Treasury Secretary Chase estimated that $300 million in borrowing would be needed to fight the war. He had been working on a new National Banking Act, but realized there wasn’t time to implement it. Congressman Spaulding of Buffalo, switched from writing the bank act, and instead drafted the Greenbacks legislation, which made borrowing unnecessary.

“Why then should we go into Wall St, State St, Chestnut St, or any other street begging for money? Their money is not as secure as government money … I am not willing that this government should be left in the hands of any class of men, bankers or moneylenders…” he wrote. Senator Howe said:

“The government cannot borrow (coinage) of the banks … but (only) their promises to pay money … all paper currencies have been and ever will be irredeemable. It is a pleasant fiction to call them redeemable … I would not expose that fiction only that the great emergency (requires) … that the nation should begin to speak the truth to itself; to have done with shams, and to deal with realities.”

Since the Greenbacks were not borrowed money, there was no interest payment for the government to make on them, and they didn’t add to any national debt.

Predictably, the Bankers shamelessly misused the Greenbacks, creating $1.49 in bank money for every Greenback created by the Government; but the Greenbacks still functioned well and the union was saved. After the Greenbacks got our nation through the crisis, they became as valuable as their gold counterpart. However, through the pulpit, and university chairs, the moneyed interest succeeded in smearing them as “immoral” – even to the present day!

The bankers went into high political gear in 1868 to have this excellent and instructive example of government created, interest free money removed from circulation, and from the view of the nation and the world; to be replaced by their own bank notes, under their new National Banking legislation.

While the Republican Party supported the bankers (surprise!), the leadership of the Democratic Party was co-opted (surprise again!), and soon splintered into several populist parties formed mainly to support a permanent Greenback money system.

Through these splinter parties, the national populist majority in favor of the Greenbacks was squandered over two decades of the most heated political debate in our history. Private bank notes were again allowed to dominate – our second wrong turn.

Why did the people like the Greenbacks? The historian William Sumner wrote “The people … have a patriotic attachment to the greenback because they think that it saved the country.” Thus while government issued Continental Currency won the revolution and made the nation, government issued Greenbacks preserved the nation.


Skipping ahead, over some errors on silver and bi-metallism, the third wrong turn – strike – you could say, occurred in 1913 when the privately owned Federal Reserve System was given the power to create and control America’s money supply. But by that time, little awareness and fire over the “Great Question” made it into the press. Only one major magazine noted that this vast power was being placed into private non-elected hands.

So the nation struck out, and the bankers won. The “Question” could not clearly arise in the orthodox media even after the bankers policies ran the nation into the wall, with the Great Depression.

Nor did the slightest hint of this Essential Question surface in the money controlled media during the demoralizing 1980′s savings and loans debacle; or when Congressman Gingrich went so far as to close down our government in 1996, over balancing the budget (Or was it political gamesmanship, or seating arrangements on Air Force One?).

But this is not a light matter; millions of lives are at stake, as they were in the Great Depression. It can happen again. For since government debt in our present defective monetary system is a major force pumping much needed new money into the system; curtailing new government debt curtails that introduction of additional money.

Should Mr. Perot’s drive to actually reduce the debt be attempted, that would be a force for monetary contraction. Apparently, he, and others promoting such moves don’t understand that leads to depression, destruction, and even death.

So today, the great question is all but forgotten; but some very ill-advised moves are about to be undertaken in the name of national parsimony, or to appease the demands of the free market cults intent on serving up human sacrifices to their god, HAND the Invisible; on his free trade altars.


In the emergency being created an opportunity just may arise for our government to take back control of the monetary power from the self serving financial manipulators, for example by nationalizing the Federal Reserve system and ending fractional reserve banking. Several past Chairmen of the House Banking Committee, including Rep. Henry B. Gonzales, introduced legislation over the years to do just that. So called “classical”, “neo classical”, and “Austrian” economists shouldn’t squeal too much – they endlessly tell us that our government runs the monetary system anyway. That’s their way of shifting the blame for economic injustice away from the MONEY POWER, and onto our government; visibly one of the main purposes in life, of too many economists.

Reform can begin, even without a complete and detailed blueprint of the ideal money system to be ultimately reached; so long as reform is consistent with the nature of money, and considerations of justice play the major role. Emergency or not, the process of reform starts with an understanding of money’s nature as a legal institution, not a commodity, or so called economic good. As such, it must be part of government, just as the law courts are.

Short term it is crucial to institute enough monetary reform to place time on the side of Justice, instead of against it as at present. Once in charge of the money system, the American government could start to carefully use real, and honest money – modern American Greenbacks – debt free US money to break the current depression and near subsistence levels so much of the population is still mired in. For example to build and re-build roads and bridges; and water and sewer systems; and schools and air traffic control systems; quality low cost housing, and the Internet freeways.

Long term, it would become recognized that the monetary power is stronger and more pervasive than the three other branches of government. In keeping with its actual power and importance in the daily lives of the citizenship, the monetary department should evolve into a fourth branch of government. In fact that’s what it is now, but run largely for private gain, instead of the common good.

This Fourth Branch would refine and codify its protocols in ever-increasing accuracy; starting from a point of the considerable knowledge and expertise already embodied in the Federal Reserve apparatus. The overall objective however, would be changed. Instead of managing the monetary system to further enrich the leisure class, the goal would be to promote the general welfare.

Those who want smaller government would be happy to see it shrink; since so many of the present day governmental activities, made necessary to counteract the inequitable effects of an unjust monetary and banking system, would no longer be needed. Those who want more government controls, would be happy to see the need for such controls disappear, as the type of corporate predators now in control, would find most of their funding and power cut off.


Those who presently benefit from special monetary privileges would find those benefits ended; but even for the majority of them, the improvements in the quality and security of life, and the release of new creative and industrial energy resulting from a fair money system, would likely outweigh any loss.

Only that tiny fraction of a percent at the very top would be big losers; but considering what they have been doing, shouldn’t they be happy to escape with their lives-if they can?

Oh yes, there’s one more group of losers: The type of ideologue who values so-called free markets above life itself – other people’s lives that is. Apologists who devote careers to justifying the worst predations upon mankind. In their hands those theories are used as bludgeons to beat down their most vulnerable fellow men. Why do these second hand ideologues, so certain of themselves, that its “unnecessary” for them to question their inherited premises, feel smug and moral in causing their fellow men to suffer needlessly? Is it fully explained by their extreme a’priori methods, and their studied avoidance and distortion of historical and empirical verification?


Most would agree that where evil is being done under cover of economic theory, it should be clearly identified, and thereby destroyed. That may sound harsh, but don’t the unconscionable economic attacks against our fellow Americans at least demand the use of plain language?

Some will scoff at being characterized as evil, for merely making semi-logical deductions from their beloved theoretical premises, which they really believe are correct; for merely acting as good priests of their hallowed market god.

But they truly serve an evil deity; and the fruits of their theories grow monotonously bitter. The hallmark of those intent on doing harm is their ever readiness to sacrifice current benefits to the common man, promising him instead some imaginary heaven in the long term, to be made possible by the intercessions of HAND The Invisible.

Somehow their theories always manage to reserve the current benefits for wealthy predators, who in the main part, fund their salaries. But decades have passed in America, and their long term gets ever further rather than closer. About this particular argument, Keynes the younger had the right answer – “In the long run we are all dead.”

That the ideologues aren’t much concerned when their dictums don’t work and create misery for large numbers of Americans suggests a deep psychological disposition to harm the common man. A twisted elitism arising perhaps from unfortunate toilet training; from rejection at a tender age, from being poorly constituted, or whatever.

Is it wrong to call this evil? Would it be any less reprehensible if it were called a psychological inversion; a guilt ridden, ascetic reaction; repelled at seeing mankind prospering, and enjoying life. A mentality which demands that happiness be replaced by their stern discipline, and enforced orthodoxy. Let them know you understand this and watch their reaction closely. Report back to me.

At present, society is in trouble, to the extent that these “economyth’s” dogmas are being followed. Their prescription? – yet more “free market discipline”- their brand of free trade theories now dictate that American workers must compete with Asian and other slave labor; in effect propping up foreign tyrannies, and supporting their patron’s investments. While these enslaving concepts are more associated with the Republican Party, in fact they have been made at home with the present leadership of both parties, so don’t expect help from present day Democrats. That leaves Americans with fewer and fewer real choices at the ballot box.

Of course not all economists are evil. Many are just scared of losing their jobs. But its long overdue for those able to think clearly to become much more vocal, and take heart from the example of William Vickrey, who in a press release after receiving the Nobel Prize in Economics in October 1996, said:

” When can we be weaned from the mindless devout pursuit of the Holy Grail of the balanced budget, a quest urged most assiduously by those in little danger of suffering from the proposed austerity.”


Note to Editors: Footnote sources are available for all quotations, as well as all other substantive statements in the article. Opponents will throw the inflation argument at this theme. The answer to that is the subject of another essay, and surprises everyone, because historically, US government issued money compares most favorably with bank created paper money; or with gold and silver. Why haven’t you heard this before? Good question.

Stephen Zarlenga

The materials in the above essay are documented in the Lost Sceince of Money book.