If We Don’t Change the Way Money Is Created and Distributed, Rising Inequality Will Trigger Social Disorder

Centrally issued money optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.

If we don’t change the way money is created and distributed, wealth inequality will widen to the point of social disorder.

Everyone who wants to reduce wealth inequality with more regulations and taxes is missing the key dynamic: the monopoly on creating and issuing money necessarily widens wealth inequality, as those with access to newly issued money can always outbid the rest of us to buy the engines of wealth creation.

Control of money issuance and access to low-cost credit create financial and political power. Those with access to low-cost credit have a monopoly as valuable as the one to create money.

Compare the limited power of an individual with cash and the enormous power of unlimited cheap credit.

Let’s say an individual has saved $100,000 in cash. He keeps the money in the bank, which pays him less than 1% interest. Rather than earn this low rate, he decides to loan the cash to an individual who wants to buy a rental home at 4% interest.

There’s a tradeoff to earn this higher rate of interest: the saver has to accept the risk that the borrower might default on the loan, and that the home will not be worth the $100,000 the borrower owes.

The bank, on the other hand, can perform magic with the $100,000 they obtain from the central bank. The bank can issue 19 times this amount in new loans—in effect, creating $1,900,000 in new money out of thin air.

This is the magic of fractional reserve lending. The bank is only required to hold a small percentage of outstanding loans as reserves against losses. If the reserve requirement is 5%, the bank can issue $1,900,000 in new loans based on the $100,000 in cash: the bank holds assets of $2,000,000, of which 5% ($100,000) is held in cash reserves.

This is a simplified version of how money is created and issued, but it helps us understand why centrally issued and distributed money concentrates wealth in the hands of those with access to the centrally issued credit and those who have the privilege of leveraging every $1 of cash into $19 newly created dollars that earn interest.

Imagine if we each had a relatively modest $1 million line of credit at 0.25% interest from a central bank that we could use to issue loans of $19 million. Let’s say we issued $19 million in home loans at an annual interest rate of 4%. The gross revenue (before expenses) of our leveraged $1 million would be $760,000 annually –let’s assume we net $600,000 per year after annual expenses of $160,000. (Recall that the interest due on the $1 million line of credit is a paltry $2,500 annually).

Median income for workers in the U.S. is around $30,000 annually. Thus a modest $1 million line of credit at 0.25% interest from the central bank would enable us to net 20 years of a typical worker’s earnings every single year. This is just a modest example of pyramiding wealth.

Next let’s say we each get a $1 billion line of credit which we leverage into $19 billion in loans earning 4%. Now our net annual income is $600 million, the equivalent income of 20,000 workers. We did nothing to improve productivity, nor did we produce any goods or services. We simply used the power of central banking and fractional reserve lending to skim $600 million in financial rents from those actually producing goods and services.

Note that we are not uniquely evil or avaricious in maximizing our private gain from the central bank system; we are simply responding rationally to the system’s incentives.

The system concentrates wealth and subverts democracy not because participants are different from the rest of us but because they are acting rationally within the system. Would you turn down $600,000 a year? How about $600 million a year?

It makes no sense for banks and financiers not to maximize their gains in this system. Those who fail to maximize their gains will be fired.

I hope you understand by now that the current system of issuing money and credit benefits the few at the expense of the many. The vast privilege and the equally vast inequality it generates is the only possible output of the system.

This inequality cannot be reformed away; it is intrinsic to centrally issued money and private banking.

The problem isn’t fiat money; it’s centrally issued money/credit that is distributed to the few at the expense of the many. If we want to limit the subversion of democracy and reduce wealth inequality, we must decentralize and democratize the issuance and distribution of money.

In the current system, money isn’t created to reward increasing productivity. It is created to increase the wealth and power of the privileged.

If we want to connect the creation and distribution of money/credit with productivity, we must issue new money directly to those creating value and boosting productivity, bypassing the privileged few in central and private banks.

By concentrating wealth and power, centrally issued and distributed money doesn’t just subvert democracy. It also optimizes inequality, monopoly, cronyism, stagnation, low social mobility and systemic instability.

This entry is drawn from my new book A Radically Beneficial World: Automation, Technology and Creating Jobs for All: The Future Belongs to Work That Is Meaningful. Get a 25% discount on my new book this week only (ends 11/15/15).

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  • Leo News

    …a must read.

  • A very timely article Mr. Herman, and this one dovetails with your fine work!

    November 12, 2015 The re-enserfment of Western peoples

    The re-enserfment of Western peoples is taking place on several levels. One about which I have been writing for more than a decade comes from the offshoring of jobs. Americans, for example, have a shrinking participation in the production of the goods and services that are marketed to them.


  • Joseph Matthew

    Fantastic walk-through. I appreciate this post. pay for coursework

  • November 13th, 2015 NY Times Rally—Friday the 13th; Drone Papers Coverup

    In June of 1971, the New York Times had the courage to initiate the publishing of Daniel Ellsburg’s “Pentagon Papers.” This brave action against the will of a criminal executive branch, combined with the principled decision by then-Senator Mike Gravel (AK) to release 4,100 pages of the Pentagon Papers into the Senate Record, helped spark a fight that led to the end of the criminal presidency of Richard NIxon and was instrumental in bringing the Indochina War to an end. The Papers documented that the war was being lost, not won, and that McNamara’s “body count” metric was fraudulent and criminal.


  • jadan

    This critique describes very well why our economic system is unstable and currently on life-support. We have a privatized financial system. The public utility of money has been in private hands since G Washington appointed Alexander Hamilton the first Secretary of the Treasury. Smith describes very well what happens when private parties control the people’s money. ” Quantitative easing” is the latest iteration in a long history of exploitation that is at the heart of the Fed. No one regards “QE” as corruption, but that is what it is.

    See the experience of Iceland since 2008. There are no other models available for us to study and our economists have failed to serve the public interest, including monetary reformers such as Ellen Brown who are de facto supporters of the Fed.

    Smith describes the problem, but his solution is vague: “we must decentralize and democratize the issuance and distribution of money.” Dennis Kucinich proposed a revolutionary solution in HR2990. The American Monetary Institute has had a solution in the American Monetary Act for some years now. The money power can be returned to the people through congressional legislation. In an oligarchy, this is revolutionary. Our public discourse is distracted by billionaire’s twaddle and the raving of religious lunatics. But as this dysfunctional system created by and for the rich, continues to collapse, alternative financial models begin to look feasible and can be seriously considered.

    • mulga mumblebrain

      I believe JFK was tinkering with the idea of reining in the privately owned ‘Federal’ Reserve, but they weren’t keen on the idea.

  • Our government disconnected our paper money from the Gold it represented, this removing the “real” value it had. The Federal Reserve can print as much “money” as they are commanded by the administration devaluing existing paper money. I am Middle Class and would not object to increasing my Net Value to hundreds of thousands or even millions of dollars with the understanding that after I have more than I could spend in ten life times, the value of the money, to me, becomes meaningless. I admire those of the wealthy class that use portions of their incomes to improve the less privileged. in this context, let me define Wealthy Class as being debt free and able to support multiple charities.

    • Charles Fasola

      You sir have no idea who creates the vast majority of money in the US. The Administration does not dictate to the Federal Reserve anything. Do you believe the FED is a government agency controlled by the Govment? Well I suggest you make an effort to learn just a little bit about theFED, money and how the vast majority of it is created. The FED is made up of 12 Private Banks. The NY FED being primary. Almost all of monies in circulation is created by Private Banks by keystroke. That is deposits are made into individual accounts when loans are made. Now, do some research on your own. Try to understand the term fractional reserve lending, money created out of thin air. Research the Need Act, the American Monetary and] Institute and

  • Bev

    The N.E.E.D. Act gives an Immediate, Seamless and Non-Disruptive Overnight Transition from a Crisis-Prone Bank Debt System to a Stable Government Money System.

    The NEED Act is an elegant and simple law which overnight converts our crisis prone bank debt money system into a pure, reliable U.S. money system in fully secure accounts. It is painless, everybody’s money is maintained safe and secure, and all debts can be payable, meaning no losses from systemic defaults (thus restoring confidence in crisis ridden markets).

    Overnight Conversion of Bank Deposits1
    Upon the NEED Act becoming law, all bank deposits are designated and treated as United States Money (sovereign money, just as circulating coins from the U.S. Mint are now). All bank deposits become “safekeeping accounts;” they are no longer owed by banks to their depositors, as they now are; but are instead maintained in safekeeping for depositors (what people think they are now). They’re still exchangeable at will for U.S. currency notes and coins. This change happens overnight and won’t disrupt business. It relieves banks of a liability they now have to their depositors. All these liabilities (bank deposits) are equal in value to the bulk of the U.S. money supply.

    In exchange for removing this liability from banks, an equal liability is put in its place which requires banks to pay over to the U.S. Treasury the repayments from outstanding loan balances2 due to them, when banks are repaid by their borrowers.3 The interest remains income of banks. This applies only to the amount of bank loans (or security purchases) that resulted in the creation of bank deposits out of thin air – from so called fractional reserve banking.

    Thus overnight, banks are relieved of liabilities that might be payable at any time (whenever the depositor asked for them), and these are replaced with liabilities that are only payable as and when the borrowers repay their bank loans.

    Any bank loans that arose from banks borrowing money from others will still be paid back to the banks’ lenders in the normal course of business.

    Thus banks have no more liabilities in total than they had before.
    Thus banks’ liquidity situation is dramatically improved, while their net worth is unaffected.
    Also banks’ income situation is dramatically improved since they will no longer pay interest on deposit accounts (their main expense) and can instead charge fees for their deposit services.

    It’s an Overnight, Seamless Transition to a Just Monetary System
    As the principal on bank loans is paid over to the U.S. Treasury it goes into a “Revolving Fund Account” and is recycled back into the economy to maintain the money supply levels. The Treasury revolving fund can lend this real U.S. money back to banks if needed and it can provide funding to pay off the national debt as it comes due; it can provide (on a per capitabasis) interest-free loans to state and local government entities (including school and fire districts), and provide a source of instant funding in case of a national emergency.

    “But Wait – There’s More – Much More”
    The Fed presently holds about $4.2 trillion in various securities in its System Open Market Account (SOMA) as “backing” for present day currency and management purposes. Under the NEED Act these are no longer required4 and can be sold back into the market. This can easily provide funding for a onetime tax free dividend for all citizens living in the U.S. It could also be used to pay off all outstanding student debt (about $1.2 trillion).

    As the economy needs more money5, the Monetary Authority will advise Congress the amount and the Treasury will be authorized to create it instead of borrowing/taxing, and can fund programs for infrastructure, education, assuring social security, and resolving mortgages, as authorized and appropriated by Congress (again on an equitable per capita basis).6 For example it can be used to fund a sorely needed national health care system.

    The NEED Act also grants one fourth of all new money created each year directly to the states7 for their needs – for example pensions. Since the federal and state and local governments will have an interest-free source of money, they will normally no longer need to borrow. Thus as investors holding various government bonds are repaid; if they want to keep earning money from such investments, they will have to re-invest in businesses in the private sector, thereby generating more economic activity and more employment. Interest rates could fall.

    Removing interest expenses from federal, state and local government budgets means taxes can be reduced, which would increase the disposable incomes of consumers and producers alike, thus generating more economic activity and thus more employment.

    Good-paying jobs will be generated in engineering, education, health care, construction and manufacturing, estimated in 2012 at 27.2 million full-time jobs.8

    In this way, the economy can generate enough income to pay off all outstanding debts. Therefore banks’ solvency situation is improved even if their net position is unchanged. As the NEED Act makes banks’ business model more profitable, it will enable banks to reduce the margin between the interest they charge and the interest they pay, which will be good for both borrowers and lenders, and the economy as a whole.

    The NEED Act enables the Federal Government to achieve its mandate of full employment under the Employment Act, and enables the re-constituted Fed to achieve its “dual mandate” of maximum employment and stable prices under the Federal Reserve Act.

    Thus the NEED Act enables a non-disruptive, seamless and painless correction to our presently mis-structured money system that is causing havoc and hardship.

    The NEED Act is simple and not really radical in any sense because it is what our Constitution explicitly calls for and is essentially what most Americans erroneously believe we now have!
    – money is created by our government, not by the banks making loans;
    – banks are acting as intermediaries, borrowing money from some and loaning it to others;
    – government has power to create money for infrastructure, education, and health care.



    1 including the equivalent for credit union accounts and Fed accounts
    2 including on securities (e.g., bonds) that were purchased by banks through the creation of bank deposits
    3 instead of these deposits being destroyed, as they are now when repayments are made on bank loans
    4 because its deposit accounts become safekeeping accounts and Federal Reserve notes are replaced with U.S. currency notes that are not liabilities of the Fed
    5 this will be easily known; the right amount will be when there is no unemployment and no inflation or deflation, any deflation and/or unemployment would indicate not enough, any inflation would indicate too much
    6 if Congress does not authorize or appropriate up to that amount, the U.S. Treasury may still disburse the funds up to that amount by drawing on existing funds held in accounts that it administers (including the revolving fund)
    7 including the District of Columbia, the Commonwealth of Puerto Rico, and all U.S. territories
    8 the combined effect may be more

    The NEED Act:

    And, Bernie Sanders should support the NEED Act as The Green Party in the U.S. and U.K. do:
    via: http://www.golemxiv.co.uk/2015/04/tiny-detail-uk-election/
    In comments:
    Karl Marx did not understand money, according to Joe Bongiovanni. See:


    Joe Bongiovanni
    Why Monetary Reform Must Become Your Number One Issue
    start at time 15:45

    How Does the Monetary System Relate to Socialist Theory?

    Marx did not understand money at all. He never understood money. Marx was willing to work with the private bankers. I am not here to criticize Marx, okay, but the fact of the matter is there has never been a socialist or communists theorists who understood money.

    Now having said that, Trotsky was the closest that I felt who understood money. And, a couple of French Socialists whose names just escape me right at the moment, understood money.

    In sum, the entire left of the left do not understand money (my note: with the exception of the Green Party). In fact they usually refuse to engage it as a substance of discussion, because it doesn’t matter to
    them. It’s the means of production. It’s all the things that count under both socialism and communism.

    I am kind of a bit of a socialists myself, but when it comes to money I am a nationalist. Money is issued by nations. It is up to the nation to control the issuance of the money. The nation that controls the issuance of the money, all you have to worry about is Fascism. Okay. And so, if you ensure that the issuance of the money is something that happens for the good of the people, you are well on your way to controlling all those other issues that are important, the means of production. Not that you control the means of production, but you influence the means of production by true economic decision making.

    You see, money is a commodity. Because it is a commodity, if you control the issuance, image that you had a commodity that you didn’t have to go and acquire. Image that you have a commodity that you can
    just create. It’s like you can create wheat. Or, you can create anything that is a real commodity and you can do it out of thin air and then you can market it. That is the situation with money.

    And, until you take the commodity nature of money out of money. That is to say, money resorts back to its means of exchange function in the economy. Money has to be available to function as a means of exchange. That is the primary function of money. Sort of like the definition of money, that which serves as the universal means of exchange. So, if that is the definition of money, then how does it become a commodity, it is an exchange media.

    And, it should only be created by a government. Because why, there is a production and consumption of goods and services that’s what an economy is about. You need to have a means of exchange in order for
    those things to happen. So, that’s how money should function. And, it will never function that way really as long as it is a tradable commodity, a marketable commodity, as long as we live under capital
    markets. Okay. Capital markets determining what money is all about. We have to get away from that.

    There are those who think that the problems we have today of too much debt and too much mal investment and all that can be corrected by going to the gold standard.

    The gold standard does not matter. It really does not matter. You can have a gold standard or not have a gold standard. It really does not matter. It just depends on who controls the gold. Just like the thing
    that matters is who controls the money. Okay, so then it matters who controls the gold. If you have a gold standard, I’m sorry, but this is what my Dad always said to me, it is okay to have a gold standard if the government controls all the gold. Because, then the value of the money which is the purchasing power of the currency is determined by the government which whatever relationship it has to gold. So, gold is no
    answer to solving any of the problems that we have today. Okay. It’s not that. But, however, neither is it necessarily because of what it is, because of it’s natural properties, neither is it the boogieman that it
    has been said to be.

    Gold should be functioning in the market right now for whatever use it serves. And, its primary use is industrial, creation of jewelry, creation of things that have value to persons, a personal value of something that is made of gold. That is what it should be.

    Now it’s an investment vehicle. Okay. Now you can buy a future of gold; now you can buy an interest in gold and related things. So, it becomes just another marketable commodity. As a marketable commodity, it should not back money. It should never back money if it is a marketable commodity.

    If people want to invest in gold, and hold gold, as something that protects their investment, that is fine. That is true of anything. But, it shouldn’t be backing the currency. It shouldn’t be backing the currency.

    Many people say that gold is going from the West to the East. Jim Willie ( http://www.goldenjackass.com/main5.html ) says that gold is also going into some bankers, intelligence agents, political and military leaders’ private gold accounts, many being held at the (Bush’s) Carlyle Group. He says that governments should get that gold back that was leased or sold from Western government strongholds into private hands. This behavior seems to be less like Marxism, and more like a Fascistic theft of public property.

    Monetary Reform FAQ

    7) Doesn’t your AMA proposal merely continue with a fiat money system?
    Shouldn’t we be using gold and silver instead? Wouldn’t that provide a more stable money?

    Our system is absolutely a fiat money system. But that’s a good thing, not a bad one. In reaction to the many problems caused by our privatized fiat money system over the decades, many Americans have
    blamed fiat money for our troubles, and they support using valuable commodities for money.

    But Folks! The problem is not fiat money, because all advanced money is a fiat of the Law! The problem is privately issued fiat money. Then that is like a private tax on all of us imposed by those with the privilege to privately issue fiat money. Private fiat money must now stop forever!

    Aristotle gave us the science of money in the 4th century B.C. which he summarized as: “Money exists not by nature but by law!” So Aristotle accurately defines money as a legal fiat.

    As for gold, most systems pretending to be gold systems have been frauds which never had the gold to back up their promises. And remember if you are still in a stage of trading things (such as gold) for other things, you are still operating in some form of barter system, not a real money system, and therefore not having the potential advantages as are available through the American Monetary Act!

    And finally as regards gold and silver: Please do not confuse a good investment with a good money system. From time to time gold and silver are good investments. However you want very different results from an investment than you want from a money. Obviously you want an investment to go up and keep going up. But you want money to remain fairly stable. Rising money would mean that you’d end up paying your debts in much more valuable money. For example the mortgage on your house would keep rising if the value of money kept rising.

    Also, contrary to prevailing prejudice, gold and silver have both been very volatile and not stable at all. Just check out the long term gold chart.

    If Bernie Sanders believes in Democratic Socialism then he should support the NEED Act above as the Green Party does in the U.S. and U.K. Then Sanders and all of us should demand paper ballots hand counted in precinct and posted in precinct on primary and the general election night, else wise he will have to overcome the built in bias of app. 10% in those abusive fascists owned e-voting machines.

    And, he may currently have that margin:
    November 11, 2015, 11:00 am
    In new shock poll, Sanders has landslides over both Trump (12 points) and Bush (10 points)
    By Brent Budowsky, columnist, The Hill

    But, in case the machines are reset we need paper ballots hand counted:

    See: the best election statistician Richard Charnin https://richardcharnin.wordpress.com/
    Election Fraud Models: Cumulative Vote Shares and True Vote Analysis

    Historical Overview and Analysis of Election Fraud
    Richard Charnin

    In the 1968-2012 Presidential elections, the Republicans won the average recorded vote by 48.7-45.8%. The 1968-2012 National True Vote Model (TVM) indicates the Democrats won the True Vote by 49.6-45.0% – a 7.5% margin discrepancy.

    In the 1988-2008 elections, the Democrats won the unadjusted state exit poll aggregate by 52-42% – but won the recorded vote by just 48-46%, an 8% margin discrepancy. View the state and national numbers: https://docs.google.com/spreadsheet/ccc?key=0AjAk1JUWDMyRdFIzSTJtMTJZekNBWUdtbWp3bHlpWGc#gid=15

    The state exit poll margin of error was exceeded in 135 of 274 state presidential elections from 1988-2008. The probability of the occurrence is ZERO. Only 14 (5%) would be expected to exceed the MoE at the 95% confidence level. Of the 135 which exceeded the MoE, 131 red-shifted to the Republican. The probability P of that anomaly is ABSOLUTE ZERO (E-116). That is scientific notation for

    P= .000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 000000000 0000001.

    The Case For Open Voting
    by Lynn Landes

    There is no transparency to our current voting system. Congress has legalized election fraud by allowing, if not mandating, non-transparent voting systems that prohibit direct access to a paper ballot and
    meaningful public oversight. Making matters worse, our public voting system has been privatized and outsourced to a handful of domestic, foreign, and multi-national corporations, most of whom have close ties to the right wing of the Republican Party. Just two companies, ES&S and Diebold, started by two brothers, Bob and Todd Urosevich, electronically process (using touchscreen machines or optical scanners), 80% of all votes. Their employees are in a perfect position to rig elections nation-wide. And evidence is mounting that elections in America have been computer programmed to prefer conservative candidates of both political parties.

    ES&S in above article is also Election Software and Systems as in following article which suggests a horrendous link between the ownership of a voting machine company to child abusers potentially to blackmail politicians. We need to save kids and democracy.:

    via: http://www.truth-out.org/news/item/31511-why-hillary-can-t-win#
    In comments:

    Still Evil after All These Years: The Franklin Scandal and Pedophilia in High Places
    By Charles M. Young Posted by Dave Lindorff

    The World-Herald Company is co-owner of Election Software and Systems, which counts half the election ballots in the United States.


    Hands-On Elections: An Informational Handbook for Running Real Elections, Using Real Paper Ballots, Counted by Real People – 2nd Edition
    by Nancy Tobi

  • Some clarification on monetary reform (It is “no reserves banking”; “endogenous money” is what needs to be discussed, NOT full reserves, etc…) http://clintballinger.edublogs.org/2014/10/12/endogenous-mmt-pm/

  • abinico

    The biggest problem for people like you is that so many have done well under the current ‘crooked’ system and they see no reason to change, and especially no reason to trust people like you with money creation.