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The national debt, currently over $19 trillion, is the accumulation of all of the federal government’s budget deficits over the years and certainly is worth complaining about.  Many commentators suggest cutting federal deficit spending. But this doesn’t address the root of the problem: there are no checks or controls on the federal government if it refuses to do so.

What is ultimately at the root of our deficit spending problem: inflation. Governments like inflation because it allows them to reward political allies for doing what they want them to, granting them a windfall when they use inflated money – printed out of thin air, with no corresponding increase in wealth to back it up –  to purchase anything. Deficit spending is related to inflation because it is essentially kicking the inflation can down the road: instead of printing and minting the money now, governments borrow now and print and mint later to pay it back.

Yet Inflation is a form of theft and a violation of the right to property. It is theft because, when money is printed with no corresponding increase in the production of goods and services, it dilutes the value of the money of anyone unlucky enough not to get an inflationary windfall from Uncle Sam.  This kind of theft has been going on since the Federal Reserve was created in 1913. In fact, between 1913 and 1991 the dollar lost approximately ninety percent of its value as a consequence.  It has continued to lose value since.

Perhaps the most devastating effect of Inflation is how it raises the cost to businesses of actually doing business by forcing up interest rates on their lines of credit.  When businesses borrow their operating capital, they have to do it at an interest rate that is greater than the inflation rate; otherwise, their lenders will lose money on the loan.  If the inflation rate is too high for a particular company to afford to borrow at market interest rates, it might very well have to go out of business.  This contributes to unemployment and poverty and further ruins the economy.

There is, however, a way to stop the federal government’s stealing and its detrimental effects: by getting rid of the Federal Reserve, prohibiting governments from creating money, and replacing all government money with private bank notes.  These are just as their name suggests: notes, just like current dollars, but issued by private banks rather than a government bank like the Federal Reserve.  They’ve existed in America before, during the Free Banking Era of the nineteenth century.

As I envision the reintroduction of private bank notes, unlike during the Free Banking Era all notes of the same denomination would under federal law look exactly the same regardless of which bank issued them, so they would be recognizable as legal tender by anyone everywhere. The only difference would be a notice on the face of the note as to who the issuing bank is. Instead of stating that it is issued by the Federal Reserve, as all dollars are now, each note would state that it is issued by a particular private bank – for example in the picture below, a $20 note has been issued by (the fictional) Southern Central Bank. “Freely convertible” means that it is freely redeemable at the will of its holder for $20 of precious metal specie from Southern Central Bank’s reserves.  Also, under its power to coin money the federal government can set a certain weight of gold specie that would be equal to one dollar, setting the standard for conversion from paper dollars into specie and vice versa.

With private bank notes it would be impossible for anyone to act arbitrarily and print however much money as he wants, causing inflation and deficit spending. Unlike the federal government, private banks can’t just print money willy nilly. They have a check on how many dollars’ worth of notes they can print.  A private bank can’t print so many notes that it does not have the specie reserves available to convert the notes when the note holders want to.

Banks would issue their notes for the most part against their equity. Like other types of businesses, banks borrow capital to operate and provide a good or service of value to customers. They borrow capital by encouraging people to deposit their money with them for safe keeping, paying a low interest rate on the deposits to induce them to do it. The good or service they provide is loans, which they make with the deposited money.  The banks charge borrowers a higher interest rate on loans than they pay depositors.  If the loans are paid back and not defaulted on, the bank makes a profit on the difference between the amount it pays out as interest to depositors and the amount it takes in as interest from borrowers.  This profit is equity. What banks could do is print up notes against their equity to give to depositors when they withdraw money from their accounts, and to give to borrowers for their loans.

With private bank notes banks would have the incentive not to please government bureaucrats by making unprofitable “loans” (essentially handouts) to political cronies, but rather to make the most profitable loans possible so as to build up their equity as much as possible.  Banks with the most equity would have the reputation as the most financially solvent and reliable at transferring their notes into specie, and would attract the most deposits and be able to make a greater share of profitable commercial loans.

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iPatriot Contributers


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