The Great Cookie Jar
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The Great Cookie Jar

Table of Contents

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15


Chapter XIII

Our money system is such that the people and governmental bodies must incur ever increasing interest-bearing debts. But let us keep in mind that we have a very good system, the private enterprise system, [p. 128] for the production of goods and the rendering of services. It is the money system that we use to facilitate the exchanging of our goods and services that needs correcting. Our money system, the system of making money out of debts, is imposed on our governmental bodies and on our private enterprise system. Our government officials and private individuals must learn how to adopt a money system that does not require the incurring of interest-bearing debts.

The debt money system did not become a legally sanctioned one before 1694. We can learn from history how to change our debt money system into a debt-free and interest-free system.

The following figures taken from the Congressional Record-Senate of June 17, 1974-tells us in graphic terms that our money system places us in ever increasing interest-bearing debts:

Total Gov’t and private
debt in Billions
Total per capita
1929$215.2$ 1,757
1949$510.8$ 3,393
1969$1,981.3$ 9,719

This total interest-bearing debt of more than 2 trillion, 885 billion dollars is now increasing at the rate of more than $9,325 every second. Is it not time to do a little homework?

A debt is an obligation to pay. It is only individuals who can pay debts with their goods and services. A debt made by government officials is an obligation upon the people who pay taxes to that government. A debt made by the officials of a corporation is an obligation placed upon the people who are the stockholders of the corporation. A debt made by the officials of a church congregation is an obligation placed upon the members of the congregation. We may speak of a government debt, a company debt, or a church debt, but all such debts are debts on the individuals within these entities. [p. 129]

People can pay their debts only by their labor or with the product of their labor. So contracts or agreements to pay debts ought to be made so that the debts could be paid with a person's labor (his services) or with the product of his labor (his goods).

Contracts, or agreements to pay, should not be made so that a person has to make his payments with the products of someone else's labor. A man who produces cotton should not agree to make payments with wool, or with copper, or with gold. The man who has sheep can make payments with wool. The man who owns copper can make payments with copper. And the man who owns gold can make payments with gold.

People who own gold, silver, wool, copper or other commodities or merchandise could issue certificates of credit for those items. They could make their payments with those certificates. The commodities and the merchandise would be transferred to the bearer of those certificates on demand. If those certificates were written so that they could be redeemed for cash after a specific date, they would serve as an acceptable currency.

The adoption of such a system would make it convenient and practical for many people to avoid incurring interest-bearing debts. It would enable them to buy other goods and services with the products of their own labor, instead of with the product of someone else's labor. Legal tender and bank credit are not products that can be created by the producers of goods and services. Ultimately, all payments are made with goods or services, even those made with legal tender, because eventually the legal tender is exchanged for goods or services. Whenever it is practical, certificates of credit should be used as a means of making payments and avoiding incurring interest-bearing debts.

Certificates of credit do have some limitations on their acceptability, but that does not mean they should not be used within their limitations. (Personal checks have limitations, yet people use them all the time.)

Certificates of credit issued in lieu of borrowing by a large utility company could serve in a limited way as a [p. 130] practical debt-free medium of exchange and at the same time save the issuing company large interest payments.

The certificates should be issued in convenient denominations in an amount not to exceed the amount of the company's charges for services to its customers. Then those certificates can be used as payments to its employees for wages and salaries. Every certificate would be redeemable either as a payment for the company's services or after a certain date for cash. That is why they would be acceptable as a medium of exchange. The following is an example:

10             10
No.________       Date________
      This certificate is receivable, at its face value, for the payment of all utility bills due The State Utility Company.
      Sixty days after date of issue it is redeemable for cash at any office where payments for our utility bills are received.
(Signed by)
Company Treasurer
10       TEN DOLLARS       10

[Editorial note: The certificate above is presented as it appears in Dr Popp’s book. However, serious arguments can be made that utility companies should be privately owned and that the certificate should read “good for 100 kilowatt hours of electrical service” which is the service or good actually provided.]

When certificates of credit are issued so that they may be redeemed for goods or services on demand and also redeemed for cash after a specific date, they can serve as an acceptable medium of exchange. Because most of our buying and selling is done locally, it is not necessary to use nationally acceptable media of exchange for local transactions. Personal checks serve very well locally, [p. 131] but not so well nationally, yet we still use them in large quantities.

Nationally Acceptable Certificates of Credit

To make certificates of credit acceptable nationally, we could have them warranted by nationally recognized corporations for a small fee as we now do when we have checks certified, titles to land insured, the payment of mortgages and leases guaranteed, and the repayment of bank deposits insured by the Federal Deposit Insurance Corporation (FDIC). Such a fee would be small compared to the interest payments required when the currency is borrowed.

Private corporations, like governmental bodies, can avoid incurring interest-bearing debts by the issuing of certificates of credit when it is practical to do so.

Involuntary Debt

A person may place himself in debt voluntarily or he may be placed involuntarily in debt by others. An involuntary debt is a debt placed upon a person without his consent by one or more other persons. Generally speaking, an involuntary debt is placed upon people by a governmental body. The issuing of long term government bonds may place an involuntary debt even upon persons not yet born. In addition to the debt itself, interest charges on the debt are placed upon individuals without their consent.

Debts can only be paid with the goods or services of people who do productive work. When individuals are involuntarily made to pay debts, it means that they are forced to work to pay the debts. The term which can appropriately be applied in such cases is "involuntary servitude.”

In a country where people decide many issues by voting, those who vote to place other people in debt ought to question whether they have such a right. [p. 132] Thomas Jefferson once said that the act of placing a debt on our children is tantamount to enslaving them. We believe that most parents would not consider that they have the right to place their children in debt or in slavery. If parents do not have that right then neither do government officials.

The conclusion we draw is that even when government officials believe that debts are worth incurring in order to benefit the people, they have no right to place interest-bearing debts on them unless every person who is obligated to pay those debts gives his consent.

The most important thing to remember, however, is that there is no need for a governmental body to incur an interest-bearing debt. Bona fide tax credit certificates can be issued in lieu of borrowing; then no interest-bearing debt will be needed.

Article I, Section 8 of the United States Constitution states “The Congress shall have the power . . . To borrow money [not bank credit]." That section makes it legal for Congress to place people in debt, but that does not make it necessary or right.

Voluntary Debt

If a person places himself in debt voluntarily, he places himself in voluntary servitude. He is a bound man. Sometimes he is called a bondman. The person to whom he is bound is called the bondholder. The bondman signs an agreement giving evidence that he binds himself to make a certain payment. This document is called a bond or a note. It is given to the person to whom the bondman is obligated to make the payments. The bondman can become a free man when he fulfills the obligations to which he agreed.

Monetizing Debts

The word "monetize" originally meant to make into coins. Our banking system uses a debt as a substitute for coins.

When the United States government borrows from the [p. 133] banks, the banks in exchange for bills, notes or bonds, enter these debts as a bookkeeping credit in the amount of the loan in the account of the United States Treasury. That deposit is treated as if the deposit were made with coins. That is a government debt that is monetized.

If a commercial bank makes a loan of bank credit to a person or a private corporation, it does so by making a bookkeeping entry credit in the borrower's checking account. The result is that checks may be written against that account in the same manner as they would-be if coins were deposited in that account. In that case a private debt is monetized.

All these debts are monetized because of the scarcity of bona fide currency. If people would learn how to issue and use bona fide debt-free and interest-free tax credit certificates and, if necessary, bona fide debt-free and interest-free certificates of credit, we would have enough non-inflationary currency so that there would be no need or excuse for monetizing debts in order to obtain the needed media of exchange.

Government Debts

It is interesting to read various statements regarding government debts. Before 1915, when the United States was in debt to foreign countries, it was said that it was a benefit to the American people to be in debt to foreigners. Now that the United States government debt is held mostly by Americans, some of our textbooks say that as long as the debt is not held by foreigners, the debt is no serious problem, implying that only foreign debts are a serious problem.

The thought must occur to some of us that if a foreign debt is bad for the people of a country, why are we told that we are helping a poor country by making loans to it and thus placing it in debt?

We Owe It to Ourselves

Some textbooks postulate that as long as we owe the government debts to ourselves, we are not obligated to [p. 134] pay the interest by shipping our goods or services outside of the country. As the payment of interest, or any payment is made with goods and services, the goods and services are paid to ourselves. The implication is that such payments are no burden because we ourselves have the use of these goods and services. Let us study this hypothesis a little further.

It requires work, the expenditure of human energy by individuals to produce goods and services. Now, if the people who work to produce the goods and services that serve as interest payments on the debt were the ones who benefited from these "payments to ourselves," then they could agree that we are paying interest to ourselves. In fact the interest payments could be canceled and no one would complain. We know, however, that the national debt does not offer any such options. If the government stopped paying interest on its debt, we would soon learn who the "ourselves" are. Only the persons who own government securities and receive the interest payments on those securities can say that the interest is paid to "ourselves." They are not speaking for the people who are making the payments.

Governmental Bodies Need Not Go In Debt

How can a governmental body obtain the currency it needs without borrowing it? All of us, especially government officials, should have the answer to that question. All of us, also, ought to know the end result, if borrowing is the only means used to obtain our media of exchange. When a currency is brought into circulation by borrowing it with interest, the principal with the interest can never be repaid. (See Money-Bona Fide or Non-Bona Fide, pages 52 to 56.)

There is a proven method for governmental bodies to obtain their needed currency without incurring interest-bearing debts. In chapter VII we learned that the government of England issued tallies and used them as currency from 1100 A.D. to 1694. Think of it! For 594 [p. 135] years the English government issued currency without going into debt and without paying interest for the use of it.

Now, of course, a governmental body does not have to issue tally sticks, but it can issue tax credit certificates which will serve the purpose even better because they will be just as convenient, just as valuable, and just as acceptable as our present currency.

Government Debts are Used To Control The Economy

The United States government issues bonds, notes, and bills as evidence of its debts. These documents are called government securities. The Federal Reserve banks through the F.O.M.C. buy and sell these securities for the purpose of controlling the reserves of the banking system. The reserves control the supply of bank credit, and the amount of bank credit that can be loaned out controls the economy. A controlled economy is not a free economy.

Thus, we see that when government officials incur a government debt, they give the Federal Reserve System the opportunity to control the economy. As a result of the government debt the taxpayers-the producers and distributors of our goods and services-not only have a heavy burden of interest payments, but they also have to produce and distribute their goods and services with media of exchange controlled by others. Furthermore, the media of exchange (the money supply) is poorly controlled; otherwise, we would not have so many "money" problems.

There Is a Way Out

The goal must be to payoff the debt and then operate the government without a debt. Any candidate for public office who does not know how to do that should be willing to learn how, or at least be open to suggestions from the people he serves. Only then can he consider himself qualified for a government position. [p. 136]

How To Payoff the Debt of the United States Government

To payoff the government debt, Congress must first stop borrowing. When the government needs currency, it should issue bona fide tax credit certificates. Needed goods and services would be purchased with those certificates, a tax levied equal to the amount of the certificates issued, and the certificates received as any payments due the government and redeemed when presented as payment for the taxes which were levied at the time the certificates were issued.

From the time the certificates are issued until they are redeemed, the people would use them as currency. They would have the same value and be just as acceptable as the present coins, United States notes and Federal Reserve notes. The reason our present currency has exchange value - the reason people accept it and use it as currency-is because the government receives it as payment for all charges due the government.

The next step would be for the Congress to carry out the suggestions given in chapter XI which tells how to change the fractional reserve banking systems for demand deposits into a 100% cash reserve banking system for demand deposit accounts.

The government's issuing and selling enough coins and/or certificates in lieu of coins so that the commercial banks can operate their demand deposit accounts on a 100% reserve system would give the government a profit of about 150 billion dollars. That profit would be applied to reduce the debt.

Then the government would issue enough additional coins and/or certificates in lieu of coins, deposit them in the Federal Reserve banks for credit and exchange that credit for the Federal Reserve notes in circulation; then the Federal Reserve notes would be exchanged for the U.S. securities held as collateral for those notes. Those notes would then be canceled and destroyed and the government debts represented by those securities would be paid off. Thus the U .S. government debt would be [p. 137] reduced by another 50 or more billion dollars. This can be done gradually, over a period of about five years.

The two steps outlined above would reduce the debt by about 200 billion dollars. The interest alone saved from those reductions may be about 10 billion dollars annually.

After the 200 billion dollars' worth of the debts is paid off with the profit resulting from the sale of coins and/or certificates in lieu of coins, the remaining portion can be paid off with taxes, but without the need to impose additional taxes.

Because the government would save about 10 billion dollars annually in interest costs as a result of the 200 billion-dollar reduction in the debt, the government can levy a tax of 10 billion dollars annually which otherwise would have gone for interest payments and use that amount to reduce the remaining debts. If that is done for about 25 years, the balance of the debts can be paid off.

If the government would payoff about 200 billion dollars' worth of its debt by the issuing and selling of coins and/or certificates in lieu of coins, would that not cause an inflation of the purchasing media in circulation?

It would if it were not done properly. It is necessary to reduce the dollars' worth of bank credit or Federal Reserve notes in circulation at the same rate the coins and/or certificates in lieu of coins are placed into circulation.

To illustrate, let us suppose that we have 210 billion dollars' worth of purchasing media in circulation. It consists of the following:

United States coins and notes6 Billion
Federal Reserve notes54 Billion
Bank credit (demand deposits)150 Billion
      Total210 Billion
      Now let us assume that every person who had Federal Reserve notes went to his bank and exchanged the notes for coins and/or certificates in lieu of coins. The bank would return the Federal Reserve notes to the Federal Reserve bank where they would be returned to the [p. 138] Federal Reserve agent in exchange for the proper dollars' worth of government bonds which he was holding as security for those Federal Reserve notes. The government then would payoff those bonds with the profit it received from the sale of the coins and certificates in lieu of coins.

If everyone, including the banks, exchanged their Federal Reserve notes for coins or certificates in lieu of coins, the 54 billion dollars' worth of Federal Reserve notes would be out of circulation and 54 billion dollars, worth of new currency would be in circulation. The total amount of purchasing media in circulation would be no more and no less than before.

The profit that the government made from the selling of those new coins and certificates would show up as a credit in the government's accounts in the Federal Reserve banks. That credit must be used to buy back the government securities held by the Federal Reserve banks. The Federal Reserve banks would merely debit the account in exchange for the bonds. The result would be no increase in the amount of purchasing media in circulation.

On the other hand, if the government used the profit it made from the sale of the coins and certificates in lieu of coins to buy securities from any other source, or if the government used that profit to make payments for any other purpose, an increase of bank reserves would take place. The result would be an inflationary increase of the purchasing media in circulation.

Now let us show how the 150 billion dollars' worth of bank credit which people hold in their demand deposit accounts can be exchanged for coins or certificates in lieu of coins. A person who has a demand deposit of bank credit for $1,000 would write a check for $1,000 payable to the bank which has his checking account and use that check to buy from the bank $1,000 worth of coins or certificates in lieu of coins. That person then will have his $1,000 worth of purchasing media in currency instead of in the form of bank credit. The total amount of purchasing media in circulation will be no more and no less than before. [p. 139]

In order for the bank to replenish its stock of currency (coins and/or certificates in lieu of coins), its officers would send to its Federal Reserve bank a $1,000 check or a $1,000 security and exchange it for $1,000 worth of currency.

In order for the Federal Reserve bank to replenish its stock of currency, the United States treasury would deposit $1,000 worth of new currency in the Federal Reserve bank. The Federal Reserve bank would give the government a credit of $1,000 in its account. With that credit the government must buy back a $1,000 U.S. security from the Federal Reserve bank. The Federal Reserve bank on its part would debit the government account by $1,000 and return the security to the government.

By following that procedure there would be no increase or decrease of purchasing media in circulation and $1,000 worth of government debt would be paid off.

Our purpose here is only to show how to accomplish the exchanges. We have not included the cost of making the coins or printing the certificates in lieu of coins.

It must be emphasized again that the government profit or credit made from the sale of its coins or certificates must be used to buy back its securities from the banking system. If the government spent that credit or profit for any other purpose, the purchasing media in circulation would be increased.

If every person and corporation with demand deposits of bank credit exchanged those deposits for currency, in time, the whole 150 billion dollars' worth of bank credit deposits would be exchanged for 150 billion dollars' worth of currency. The banks then would be on a 100% reserve system for its demand deposit accounts.

In the plan given above, the people and the corporations that exchange their demand deposits of bank credit for currency would not return the currency to the banks. If they did, there would follow a serious inflation of the money supply unless the banking system increased their reserve requirements at the same rate as the new currency was deposited.

How can all that new currency be deposited in the demand [p. 140] deposit accounts so that the depositors can use checks in the payment of their expenses without causing an inflation of the money supply?

That can be done in a just and convenient manner by simply requiring that the banking system adopt the policy of having 100% reserves in currency for all demand deposit accounts. When that is done, everyone can deposit as much of his currency as he wishes in his checking account and then he can pay all of his bills with checks in the normal manner.

A slightly different but practical way to exchange the demand deposits of bank credit into currency would be to require that all reserves be in currency and that the banking system increase over a period of five years their required reserves for their demand deposits, as indicated in chapter XI, During that time, the demand deposits of bank credit would be gradually exchanged for new currency. The system of using checks in the payment of bills would then not be interrupted.

It is necessary that the required reserves for the banking system be increased at the same rate that the deposits of bank credit are exchanged for the deposits of the new currency so that the banking system would not use the newly acquired currency as reserves with which to loan out additional bank credit.

When the whole 150 billion dollars' worth of bank credit deposits are exchanged for coins and certificates in lieu of coins, the banking system will be on a 100% reserve system for demand deposits, i.e., all demand deposits can be paid with currency on demand; and the federal debt will be greatly reduced.

The purchasing media in circulation will then consist of the following:

United States currency210 Billions
Federal Reserve notes000 Billions
Bank credit000 Billions
      Total210 Billion

There would be an increase in the amount of currency in circulation, but there would be no increase in the total [p. 141] dollars' worth of purchasing media in circulation. So there would be no inflation of the money supply or purchasing media in circulation.

The Results

If the above suggestions were followed in regard to the paying off of the United States government debt, we could expect the following results:

  1. In time the U.S. government would be out of debt.
  2. The F.O.M.C. would have no services to perform.
  3. The Federal Reserve banks would not be needed to:
    (a)       supply reserves to commercial banks
    (b)       control the banks’ reserves
    (c)       issue Federal Reserve notes
  4. The commercial banks would never fail because of a lack of sufficient reserves.
  5. The banking system would have no opportunity to legally issue inflationary purchasing media.
  6. There would be enough currency in circulation so that the private enterprise system and governmental bodies would be free from a managed money system.
  7. The people would be free from the burden of paying interest on the U.S. government debt.
  8. The government officials would be free of the influence of those who formerly controlled the money supply.

Suggestions For a People Who Wish To Be Debt Free

Let us suppose that the people in a state or a country decided to live free from any interest-bearing debts. Whom could they consult in order to obtain the necessary information to carry out their plan? Which college professor would teach them? In answer to this question, one economics teacher said his job was to [p. 142] teach how our economic system works, not to set up such a system. The money and banking courses teach students how the banking system supplies bank credit with interest, mentioning, of course, that people and governments must go into debt to obtain it. So people who wish to live free from debts will have to devise their own plan.

Let us consider some suggestions. The first step would be for the people to refrain from incurring any interest-bearing debts. The second step would be to obtain their media of exchange without borrowing it. If governmental bodies need media of exchange with which to pay for goods and services, they can issue tax credit certificates. The following is a sample copy:

10             10
Tax Credit Certificate
No.________       Date________
      This certificate is receivable, at its face value, for the payment of all taxes, fees, fines, and other charges due the State of Wisconsin.
      It is redeemable in the payment of taxes due the State of Wisconsin on April 15, 19__. After April 15, 19__, it will be redeemed for cash by the State Treasurer.
(Signed by)
State Treasurer
10       TEN DOLLARS       10

Private corporations offering goods, commodities, or products for sale can issue certificates of credit and use [p. 143] them as payments for their needed goods and services. The following is a sample copy:

10             10
Certificate of Credit
No.________       Date________
      Within one year after date this certificate is redeemable at its face value for any of the products, goods, or services being offered for sale by the Blank Corporation, or for cash by its treasurer.
(Signed by)
Company Treasurer
10       TEN DOLLARS       10

The above certificates can serve as currency for everyone. Those certificates are valuable because they are redeemable. Tax credit certificates are redeemable when presented as payment for taxes. Certificates of credit are redeemable for the goods or services for which they are the evidence of a claim. Also, under certain conditions, they are redeemable for cash. For example, if the blank corporation has sold all the goods it had for sale, it will have the cash from those sales to redeem any unredeemed certificates with that cash.

Those who possess gold and wish to exchange their gold for other items can issue certificates of credit redeemable in gold. Those who posses silver can issue certificates of credit redeemable in silver. Those who possess other commodities and goods can issue [p. 144] certificates of credit redeemable with the commodities or goods they possess.

Mail order companies can issue certificates of credit redeemable for any of the items listed in their catalogs or offered for sale in their stores. Department stores can pay for at least some of their goods and services with their certificates of credit. The oil companies can issue certificates of credit which would be redeemable for any of their products or services at any of their service stations.

All the issuers of these certificates of credit would issue them as payment for the goods and services they needed and wanted. Those who received them as payment, such as their employees, would, in turn, use them as currency with which to buy the goods and services they wanted. Even governmental bodies could receive them as payments due and in turn use them as currency with which to pay for their needed goods and services.

The banks would be in a position to render for a fee a useful service by receiving, keeping, exchanging, transferring, and paying out these certificates.

Let Us Buy a House Without Incurring a Debt

A couple named Ed and Edith wish to buy a house worth $40,000. They have only $8,000 worth of currency. But Bill, an officer of a local savings and loan association tells them his company has $32,000 worth of surplus funds. Ed and Edith will not borrow the $32,000, but they still would like to buy the $40,000 house. They express their wishes to Bill; who says, "Let me think about it."

The next day Bill calls Ed and suggests the following: "We can build the house together. You pay $8,000 and our savings and loan association will pay the $32,000. You will own one-fifth of the house and we will own four fifths. We will share with you proportionately the cost of all repairs, upkeep, and taxes. You may live in the house by paying a fair rent for our four-fifths share. You will not be in debt to us for the four-fifths part we [p. 145] own. We shall agree to sell to you our portion of the house at a mutually agreeable price (the market price) in $2,000 amounts at any time such payments are convenient to you. The rent will be reduced proportionately each time you make a $2,000 payment. You also are free to sell your share of the house at any time for any price you can obtain. Because the buyer will be our tenant, however, he must be a person acceptable to us."

In that manner Ed and Edith obtained a house without going into debt and Bill's savings and loan association made an income producing investment.

Start a Business Without Going Into Debt

A person who may wish to start a business without incurring a debt may either form a partnership or a corporation with the persons from whom he might otherwise borrow. He would not be in debt to them. They would share his responsibilities, profits, or losses. Bondholders do not share responsibilities, profits, or losses. Many companies have been started in that manner. The point is that there are ways to start a business without incurring interest-bearing debts.

Build a Church Without Going Into Debt

If a congregation wants to build a church before its members are able to pay the total Cost, they can do it in the same manner that Ed and Edith obtained their house. The investment company, that would normally make a loan to the congregation in exchange for interest-bearing bonds, might be willing to pay for the church and then rent the building to the congregation under the same plan that Bill's savings and loan association formulated for Ed and Edith.

Obtain Personal Property Without Debt

Automobiles, farm machinery, household furniture and many other items are now available by renting or leasing them. [p. 146]

There Are Two Types of Investments

1.       Investments in property

2.       Investments in debts

What is the difference? When a person invests in property, he is responsible for the care of the property, the payment of taxes, and the production of an income from the property. To accomplish this, he must do the necessary work or hire others to do it. His energy is used to produce goods or services which are always shared with others. Other people are benefited by his labor.

When a person invests in other people's debts, such as bonds and notes (evidence of debts), only the person who incurs the debt assumes the responsibility or the care-of the-property, the payment of taxes, the production of an income from the property, and in addition the payment of the interest on the debts.

What If There Were No Investments to Be Made In Debts?

People could invest in property, in stocks, or in savings and loans associations. Savings and loan associations pay dividends, not interest, to their depositors.

Bankruptcy Would Be Ended

If people became accustomed to living without debt, no one would ever go bankrupt. A person cannot go bankrupt unless he first goes into debt.

The Bank of North Dakota

The people of North Dakota have a state banking system which enables them to be somewhat independent when their governmental bodies need loans. The state has its own bank, the Bank of North Dakota. While the Bank of North Dakota does not make loans without [p. 147] charging interest, in practice it does so in part. Much of the interest it receives from its loans is given to the state, thus reducing some of the need for state taxation. So the borrowers are paying interest in lieu of taxes for the support of the state government.

A policy could be adopted so that the profit, after the expenses of operating the bank were paid, would be returned to the borrowers instead of being paid to the state. The borrowers who paid the interest then could say, correctly, we are paying the interest to ourselves. The results would be about the same to them as if they did not pay the interest.

The people of North Dakota could go one step further toward having all governmental bodies in the state free from the burden of interest-bearing debts by doing the following:

The Bank of North Dakota could, with only minor changes of its policy, establish the practice of operating on a 100% bank credit system. It would not receive or payout any cash. It would make loans of bank credit by issuing checks on itself and it would receive payments only in checks from banks that had accounts in its bank. It would redeem (not cash) its own checks by giving credit in the amount of the checks to the banks that presented them for payment. It would be a completely cashless bank. Let us illustrate with an example:

Let us say the City of Fargo wishes to borrow $1,000,000 from the Bank of North Dakota. The City of Fargo would issue $1,000,000 worth of bonds or notes payable to the Bank of North Dakota over a period of five years. $200,000 of the loan is to be paid back at the end of each of the five years. No interest would be charged, only a service fee sufficient to cover the cost of making and servicing the loan. Perhaps this would be a flat fee of 1%, or an annual fee of $2,000, also payable at the end of each of the five years.

The City of Fargo, on its part, must levy an unrevocable tax of $202,000 for each of those five years in order to make payments. The Bank of North Dakota would then issue a check of $1,000,000 payable to the City of [p. 148] Fargo. The City of Fargo would deposit the check in its demand deposit account at the Fargo Local Bank and receive $1,000,000 worth of bank credit. The Fargo Local Bank would then send the check back to the Bank of North Dakota and receive $1,000,000 worth of bank credit in its account there.

The City of Fargo would then issue checks against its account up to $l,000,000. The persons receiving the checks would deposit them in any bank and receive credit in their accounts. They in turn would write out checks against their accounts. Thus by having everyone use checks in lieu of cash as their medium of exchange, buying and selling would take place in the usual manner.

At taxpaying time, the people would pay their taxes with checks to the City of Fargo. The City of Fargo would deposit those checks in its Fargo Local Bank and receive credit for them.

At the end of each year when the payments on the bonds are due, the City of Fargo would issue a check for the amount due and send it to the Bank of North Dakota. The Bank of North Dakota would credit the City of Fargo for the amount paid and debit the Fargo Local Bank for that amount and return the endorsed check to the Fargo Local Bank which would debit the City of Fargo's account and return the canceled check to the city treasurer.

That procedure would be repeated at the end of each of the five years, at which time the principal would be repaid without any interest charges. The bank's cost of operations would be taken care of by the 1% service charge; but that is not 1% per year.

It would not be necessary for the Bank of North Dakota to charge any interest on its loans because it would not loan out any cash. It would only loan out bank credit, and the bank would not have to pay any interest to obtain that bank credit. The only income the Bank of North Dakota would need is the amount necessary to pay the total cost of its services. It would obtain that amount from the 1% fee.

This suggested system of operating a state bank on a [p. 149] 100% bank credit system is similar to the system practiced by the Federal Reserve banks. The Federal Reserve banks write checks against no funds when they buy securities through the Federal Open Market Committee. Because the Bank of North Dakota acts as the clearing bank for the commercial banks in the state, it, too, could do the same.

The Bank of North Dakota would not make a profit and it should not sustain a loss. The bank would be run to perform a service to the political subdivisions and agencies of the state, so that they could operate without the burden of interest-bearing debts. The commercial banks could continue to make their loans to private corporations and individuals for a profit.

While this system of borrowing interest-free bank credit would be less burdensome for the taxpayers than obtaining interest-bearing loans, still a debt would be incurred. If the taxpayers failed to pay the total amount of the taxes levied on time, the city could not repay the loan. It would be in default.

Whereas, if the city issued bona fide tax credit certificates in lieu of borrowing the bank credit and some people did not pay their taxes on time, the city would not be in default to anyone because the city had incurred no debt to anyone. Only the taxpayers who had not paid their taxes would be in default. No bank would be involved.

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