Stephen Zarlenga, the author of HR 6550, writes:
Infrastructure repair (including human infrastructure - health and education) would provide quality employment throughout the nation. There is a pretense that government must either borrow or tax to get the money for such projects. But it is a well enough known, that the government can directly create the money needed and spend it into circulation for such projects, without inflationary results.
First, incorporate the Federal Reserve System into the U.S. Treasury.
Second, halt the banks privilege to create money by ending the fractional reserve system.
Third, spend new money into circulation on infrastructure, including education and healthcare.
Jared Lee Loughner, who attempted to assassinate Rep. Gabrielle Gifford, writes:
If you're treasurer of a new money system, then you're responsible for the distributing of a new currency. We now know – the treasurer for a new money system, is the distributer of the new currency.
I am not suggesting that Zarlenga ordered the assassination. However, it seems clear that Loughner was inspired by the rhetoric supporting the American Monetary Act (as Zarlenga's proposal was called before it became HR 6550) and decided to take matters into his own hands. For one thing, Loughner repeatedly uses the phrase "debt-based currency," which is a shiboleth for the followers of Zarlenga.
No legitimate economist of any school supports the American Monetary Act. Because of Ron Paul's support, it is sometimes advertised as being Austrian, but this is not true. None of the founders of Austrian economics ever supported any such thing, which is why I made no mention of it in my Critique of Austrian Economics. The American Monetary Act actually derives its theoretical support from the Debt Virus Theory.
The most relevant paper that I have written on the Debt Virus Theory is this one from 2008, in which I contrast Austrian Business Cycle Theory with the Debt Virus Theory. This contrast is confusing to many people today because Ron Paul has joined Zarlenga and his man in Congress, Dennis Kucinich, though Paul's followers still believe that he represents Austrian economics. However, ignoring Paul's shifting position, my thesis is still true that the socialists and the Austrians are at opposite ends of the spectrum of views on the inevitability of the collapse of the dollar.
As I make clear in my 2008 paper, the reason that the Fed purchases short-term Treasury Bills is so they will have something to sell in the event that inflation threatens to turn into hyperinflation and money must be withdrawn from circulation. Selling T-Bills for cash and destroying the cash is a painful, recession-inducing process, as evidenced by our experience during Reagan's first term, but it can be done. Contra Rothbard, hyperinflation is not inevitable under a central bank.
This ability to step back from the brink of hyperinflation has been grievously eroded by Ben Bernanke's decision to pollute the Fed's portfolio with crap that he will be unable to sell if people become worried about hyperinflation. In 2007 he purchased AAA-rated securities which everybody knows are just packages of sub-prime loans that nobody wants. If people wanted them, in the sense of being willing to pay cash for them, then we would not be having a credit crisis in the first place. Since then Bernanke has compounded this mistake with “quantitative easing,” which means buying long-term T-bills. Even with hyperinflation on the horizon, people will still buy short-term (three month) T-Bills because they do not anticipate hyperinflation that soon. But they will not buy ten-year T-Bills, which is what the Fed's portfolio is now packed with.
Clearly, I am not an apologist for Ben Bernanke; I think he is reckless. The Fed's highest priority is to re-establish their ability to withdraw money from circulation in the event that inflation threatens to turn into hyperinflation, and to do so now before hyperinflation actually does threaten. Then it will be too late. Hapless Ben “Mikey” Bernanke will be left desperately trying to withdraw cash from circulation by selling crap that I have mocked as being “about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22.”
Stephen Zarlenga does not like Ben Bernanke either. But, once he gets people like Jared Loughner all riled up about the possibility of hyperinflation, instead of leading them away from the cliff as I would do, Zarlenga would stampede them over the edge. Basically, Zarlenga wants to incorporate the Federal Reserve System into the U.S. Treasury and then spend the new money directly into circulation. What is missing here? A portfolio. The Treasury has neither a sound portfolio composed of (already issued) three-month T-Bills, nor a shaky portfolio composed of AAA-rated securities and ten-year T-Bills, but no portfolio at all.
Under Zarlenga's plan, what is to prevent Congress from ordering the Treasury to print a lot of money so they can spend it on infrastructure, health care, education and other goodies? To print so much money that hyperinflation looms on the horizon? Forebearance and nothing else. And if Congress should get a little too enthusiastic about doling out the goodies – Can you imagine such a thing? – how will they then withdraw money from circulation? They cannot. (Actually, confiscatory taxes come to mind, but that would be communism, which most people consider worse than hyperinflation.)
The Debt Virus Theory is not worth a Continental!
Indeed, the collapse of the Continental was inevitable because, having spent Continentals directly into the economy (mostly for soldiers' wages), the Continental Congress had nothing in their portfolio with which they could buy them back. They were, in fact, benevolent men who had no desire to see their newly-won nation racked with hyperinflation, but they could no more recall the paper money that they had printed than Frankenstein could recall his monster.
NOTE
Some Debt-Virus proponents have responded to this paper by quoting the Wikipedia article on Early American Currency as a rebuttal to my claim that the Continental collapsed because it was spent directly into the economy on soldiers' wages without obtaining any assets that could be sold if it became necessary to withdraw Continentals from circulation. I respond:
Wikipedia writes, “a primary problem was that monetary policy was not coordinated between Congress and the states, which continued to issue bills of credit.” But this does not make sense. If Continentals were sound, then why would the Continental Congress have to coordinate with unsound state-issued curencies? Does the U.S. Treasury coordinate with Zimbabwe?
Wikipedia writes, “another problem was that the British successfully waged economic warfare by counterfeiting Continentals on a large scale,” and quotes Benjamin Franklin:
The artists they employed performed so well that immense quantities of these counterfeits which issued from the British government in New York, were circulated among the inhabitants of all the states, before the fraud was detected. This operated significantly in depreciating the whole mass....
I do not believe that this is true. The English did not foist counterfeit Continentals on us any more than (as G. W. Bush would have had us believe) the North Koreans foist counterfeit dollars on us. Franklin was just trying to deflect the blame from himself. Printing was done with hand-carved wood blocks. The printer does not have to be a good artist. His “bald eagle” can look like a penguin and it does not matter because all that is required of him is that he create a unique, easily recognizable image. But the counterfeiter must look at a sample bill and then carve a wood block with left and right reversed that exactly replicates every stroke and cut on the original. Then there is the problem of every bill being hand-signed in ink with a quill pen. Then, granting the English these fantastic artistic skills, what good does a warehouse full of fake Continentals do? Englishmen in America were being shot on sight, so who is going to volunteer to distribute the bills? What would they buy with them? American soldiers mostly saved their Continentals because the wartime economy was at a standstill. It was only after the war when they attempted to buy livestock and building materials to improve their farms that they learned that Continentals were worthless and that the sellers were all demanding Spanish or other foreign currency.
The Debt-Virus theorists are arguing against themselves. Suppose that a time traveler has delivered both a color copier and a helicopter to King George so that he can replicate Continentals and distribute them to the unsuspecting Americans. Since the fake Continentals are “debt free” in the Debt-Virus lexicon, that is, they were spent directly into the economy rather than being loaned out, then, using the Debt-Virus theorists' own twisted logic, their distribution should not be inflationary. But the whole point of conjuring up these imaginary counterfeiters is to explain away the hyperinflation that everybody knows existed. If re-defining “inflation” to refer only to money that enters circulation through loans is all that it takes to justify their own printing operation, then consistency requires that this word play should also justify other people's printing operations. If the Debt-Virus promoters really believed their own theory, then they would not restrict the printing of debt-free currency to the U.S. Treasury but would let anybody with a color printer get in on the fun. As long as their funny money is debt-free, it is not inflationary. Right?
If the empirical case against the Debt-Virus Theory is really going to devolve into endless bickering about the artistic skills of English forgers 230 years past, there is no dearth of modern examples. Since Wikipedia seems to be the Debt-Virus theorists’ only source for economic data, let us consult their article about the Ukrainian economy.
In 1991, the [Ukrainian] government liberalized most prices to combat widespread product shortages, and was successful in overcoming the problem. At the same time, the government continued to subsidize state-run industries and agriculture by uncovered monetary emission. The loose monetary policies of the early 1990s pushed inflation to hyperinflationary levels. For the year 1993, Ukraine holds the world record for inflation in one calendar year.
Subsidizing state-run industries with uncovered monetary emissions is exactly what Stephen Zarlenga is proposing. No? How else can the following quotation be interpreted except that Zarlenga would subsidize the Departments of Transportation and Education and fund socialized medicine with uncovered monetary emissions?
Infrastructure repair (including human infrastructure - health and education) would provide quality employment throughout the nation. There is a pretense that government must either borrow or tax to get the money for such projects. But it is a well enough known, that the government can directly create the money needed and spend it into circulation for such projects, without inflationary results.
The Ukrainian currency in the early 1990’s (before it collapsed and was replaced by the hryvnia in 1996) was “debt-free” and yet they set a world record for inflation in one calendar year. Can anyone explain to me why the United States is not going to experience Ukrainian-style hyperinflation if Zarlenga gets his way?
