Qualities Of The Items That Serve As Media Of Exchange
Experience has taught us that when we use as media of exchange coins, notes, certificates, bills, and demand deposits with undesirable qualities, the people are burdened, at times, with deflations, inflations, general [p. 32] unemployment, poverty, and always with economic uncertainty and ever increasing interest-bearing debts.
We know that there are a number of different items that can serve as media of exchange. We know that some of these items are brought into circulation by a governmental body and some by private corporations. We know that some are paid into circulation, some are loaned into circulation and some are sold into circulation.
When a governmental body borrows the media of exchange it needs from private corporations, such as banks, it incurs interest-bearing debts whether the media borrowed are coins, notes, certificates, or bank credit. Such a governmental body is not a sovereign body. A sovereign governmental body does not have to borrow from anyone.
Also, when private corporations and individuals who produce and distribute goods and services depend only upon governmental bodies for the media of exchange they need, they are not a free people. Their economic activities are controlled by the actions and the lack of actions of government officials.
Likewise, when most of the media of exchange in a country is bank credit loaned into circulation to governmental bodies and to the private producers and distributors of goods and services, the governmental bodies and the producers and distributors of goods and services are both dependent upon the good will of the issuers of the bank credit. Both are not free. They cannot operate unless they incur an interest-bearing debt. If they do not incur an interest-bearing debt, they will not have the media of exchange they need to operate. That is the situation in most countries of the world today, including the United States.
When the items which can serve as media of exchange, such as our present coins and our former silver certificates, are sold into circulation, no interest-bearing debt occurs; but that method cannot be used in a country where no other media of exchange exists with which to buy such items. [p. 33]
When coins, notes, or certificates are redeemable for goods or services or as payment for taxes, no inflation of the media of exchange will occur and no governmental body or Federal Reserve System is needed to control the amount issued.
When those who issue the media of exchange do so in good faith, no one will obtain an unearned gain and no one will incur an un-deserved loss from such issues.
The following are the desirable qualities in the items that serve as media of exchange:
- They are to be paid into circulation.
- They are to be redeemable for goods or services or as payment for taxes.
- When demand deposits are used as media of exchange, they are to have 100% cash reserves on deposit in the bank.
- All are to be issued in good faith.
Let us now point out the desirable and the undesirable qualities of several items that now serve or have served in the past as media of exchange.
United States Full Bodied Gold and Silver Coins
Their desirable qualities were that they were paid into circulation. No interest-bearing debt was incurred. They did not have to be redeemed for anything because they had full exchange value in themselves.
The one undesirable quality the full-bodied gold and silver coins had was that Congress placed a fixed exchange value, a legal tender value, on the coins at the time they were minted. That is why they did not stay in circulation.
The coins would have stayed in circulation if the Congress would have declared the legal tender value to be equal to the market value of the metal content of the coins at the times the coins were received by the government as a payment or paid out by the government [p. 34] as a payment. That was what the writers of the Constitution meant for Congress to do when they stated, "Congress shall have the power to regulate the value thereof."
United States Token Coins Now In Circulation
One very desirable quality of our token coins is that they are sold into circulation without incurring an interest-bearing debt.
They have three undesirable qualities:
- They are not redeemable for anything.
- They are sold at the same price they would be if they were full-bodied coins; which they are not.
- They are issued in denominations suitable only to make small payments.
If they were issued in large as well as small denominations, paid into circulation, and redeemed when presented as payment for a specific tax, they would have all the desirable qualities needed to serve well as media of exchange.
Silver Certificates Issued by the United States Government
The silver certificates had one desirable quality, that is, they were sold into circulation without incurring an interest-bearing debt.
Another quality they had was that each dollar's worth of the certificates could be redeemed for 371.25 grains of silver. Note: That each dollar's worth of the certificates was not redeemable for one dollar's worth of silver, even though it seemed to say so on the certificates.
These silver certificates were warehouse receipts for 371.25 grains of silver for each dollar's worth of the certificates. They also were certificates of legal tender. These two facts were written on each certificate. That [p. 35] meant the certificates had two exchange values: One the legal tender value, the other the market value of 371.25 grains of silver for each dollar's worth of the certificates.
When the price of silver was less than one dollar for 371.25 grains, they served as a medium of exchange because they were certificates of legal tender. When the market value of 371.25 grains of silver went above one dollar, they were not used as media of exchange. They were used only as warehouse receipts.
United States Notes
These notes were issued by the United States government only in the years of 1862 and 1863. They had two desirable qualities: They were paid into circulation and they did not incur an interest-bearing debt. The undesirable feature of these notes is that they were not redeemable in anything. It is true that they contained a promise to pay dollars (in coin) on demand, but the government did not have any dollar's worth of coins with which to pay the notes and it did not, at that time, make any provision to obtain any.
It might have been more appropriate to call these notes certificates of legal tender for all debts, except for the payment of custom duties and interest on the public debt. Because that is what they really were at the time they were issued. That statement was written on each note.
If the United States notes had been issued as bona fide tax credit certificates, they would have had all the desirable qualities needed to serve very well as media of exchange.
Federal Reserve Notes
The current Federal Reserve notes have no desirable qualities.
They have a number of undesirable qualities. They are loaned into circulation. An interest-bearing debt is incurred to bring them into circulation. They are not [p. 36] redeemable for anything. They are not bona fide notes. A note is the written evidence of a promise to pay. The current Federal Reserve notes give no such evidence.
The Federal Reserve Banks obtain the notes from the government for the cost of the paper and printing. At the present time the cost is about one cent per note.
If a local bank should wish to obtain any of the notes, it must give the Federal Reserve Bank an interest-bearing government bond equal in value to the value of the notes it receives. The Federal Reserve Bank will receive the interest on that bond. In effect it receives interest on the notes it obtained for the cost of the paper and printing.
We said the Federal Reserve notes are not notes. Then, what are they? They are certificates of legal tender signed by the treasurer and the secretary of the treasury of the United States. They are not signed by any official of a Federal Reserve Bank.
There is no need for the United States government to give the notes to the Federal Reserve Banks. If the government desires to issue certificates of legal tender; it could issue them as such and pay them into circulation and no interest-bearing bond would be needed to bring them into circulation.
Demand Deposits of Cash
When a person deposits cash and/or its equivalent in checks in his checking account, those deposits have the desirable qualities needed to serve as media of exchange. They are paid into circulation. No interest-bearing debt occurs. They are redeemable for cash. The bank can pay them out in good faith because it receives 100% cash for reserves for those deposits.
Demand deposits with 100% cash reserves have no undesirable qualities when used as media of exchange.
Demand Deposits of Bank Credit
Demand deposits of bank credit have none of the [p. 37] desirable qualities needed for a medium of exchange. They are loaned into circulation. They incur an interest-bearing debt. They do not have 100% cash reserves on deposit in the bank. They are not notes; they are not certificates; they are not metal tokens; they are not physical things. They exist in the form of bookkeeping entries of credits and debits.
They come into existence when they are entered as a bookkeeping credit in a borrower's demand deposit account. They are transferred from one person or entity to another person or entity by written orders (checks) and sometimes by verbal orders.
When demand deposits of bank credit are loaned out for any purpose other than to bring goods to market, an inflation of the general price level can occur.
The use of demand deposits of bank credit as media of exchange is the reason why we have at times inflations and deflations of the purchasing media and always ever increasing government and private interest-bearing debts.
Tax Credit Certificates
Tax credit certificates are certificates issued by a governmental body in lieu of issuing interest-bearing bonds. They may be issued in the form of coins and/or certificates. They may be issued in large and small denominations.
They have all the desirable qualities needed to serve as good media of exchange. Their issuance does not cause an interest-bearing debt. They are paid into circulation in exchange for the goods and services received by the governmental body. At tax-paying time they are received and redeemed as payment for the taxes levied at the time they were issued.
Because they are receivable as payment for all customs, fees, fines, and other charges due the government, people will use them as media of exchange from the time they are paid out until they are used as payment for the taxes for which they are redeemed. [p. 38]
The fact that a tax is levied in an amount equal to the amount of the certificates issued tells us that they are issued in good faith.
The government of England issued tax credit certificates in the form of tally sticks from the year 1100 to the year 1694 A.D. without incurring interest-bearing debts.
Tax credit certificates could also be called tax payment certificates.
Certificates of Credit
Certificates of credit, frequently called gift certificates, are issued by producers and distributors of goods and services. They have the desirable qualities required of a good medium of exchange.
They are either paid or sold into circulation without incurring an interest-bearing debt. They are redeemable for the goods or services the issuer is offering for sale. They are issued in good faith because the issuer can only honestly issue them as the evidence of a claim for the goods or services he has available.
They can be issued in the form of metal tokens or in the form of certificates. They can be issued in large and/or small denominations.
Utility companies and other corporations that borrow funds could issue them in lieu of borrowing and use them as payment for apart of the goods and services they receive. From the time they are paid out until they are redeemed people could use them as media of exchange. For every dollar's worth of certificates issued and paid out, the issuer would have one less dollar's worth of interest-bearing debts.
Debt Money System Versus Credit Money System
When we use, as we are now using, items to serve as media of exchange which are brought into circulation by incurring interest-bearing debts, we have a debt money system. [p. 39]
Whereas, if tax credit certificates and/or certificates of credit were used as media of exchange, we would have a credit money system. No interest-bearing debts would be incurred.
The debt money system gives us inflations and deflations, booms and busts, bank failures, bankruptcies, balances of payments deficits and surpluses, future economic uncertainties, and ever increasing interest-bearing debts.
A credit money system would not cause any of these problems because no interest-bearing debts would be incurred and yet we could have all the media of exchange we would need.