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The fractional reserve monetary system controlled by the Federal Reserve Central Bank (Fed) is the primary source of the current United States economic problem. The Fed controls the money supply of the American dollar ($) using a debt based monetary system and supplies liquidity to a group of fractional reserve banks for first use and control in an inflationary wealth transfer and misallocation of capital to the banking sector each time new money is created.
The monetary intermediation cost of the Federal Reserve System is at least
90%
inefficient and is on the order of
2½%
of GDP per year, compounded over 40% since 1984 and over 70% since 1960, that could be more efficiently handled by a full reserve credit banking system, development of depositor owned institutions to exclusively hold demand deposits and direct issuance of new money creation to the people based on a GDP Index Monetary Standard.
CHART 1 DATA SOURCE:
Fractional Reserve Monetary Intermediation Cost Impact Chart. The chart above shows
the impact of fractional reserve monetary intermediation unearned wealth transfer.
It is believed that with the discovery
of the Modigliani-Miller Financial Theorem in 1958 of the irrelevance of
capital structure that proof of the superiority of the full reserve monetary
system has existed because of its lower monetary intermediation cost. There is
no
financial intermediation loss from a full reserve system and there would be a more efficient allocation of economic returns reducing and/or eliminating the current
wealth transfer disparity caused by the fractional reserve system.
Plan Summary
A banking business model based on
full reserve financial intermediation, time matched funding spread lending,
is not a new concept. It has had historical support from at least five
previous Nobel Prize winners, Milton Friedman, 1976,
James Tobin, 1981,
Maurice Allais, 1988,
Merton Miller, 1990 and
Frederick Soddy, 1921, a former Secretary of Agriculture and Vice President of the United States,
Henry Wallace,
at least one former prominent member of the federal reserve system,
Lauchlin Currie,
and numerous
distinguished economists and financial writers including
Mervyn King,
retired governor of the Bank of England and
Irving Fisher,
one of the foremost economists of the first half of the 20th Century.
The complete PDF paper can be viewed
and/or downloaded from the link below:
About the Author William Haugen
CHART 2 DATA SOURCE:
Business Cycle with Leverage and Intermediation Added using Excel Sine
Wave Graph. The chart above shows the impact of fractional reserve leverage,
which adds risk to the economic system in the form of increased variability
of returns but does not change returns to the system, shown above as
increased amplitudes of the business cycle. The compounding intermediation
cost of the Federal Reserve System is also shown gradually increasing
in size that is actually a reduction to system returns.
The attached
Economic
Recovery Plan recommends monetary reform as the best go
forward economic recovery plan for the United States.
The recommended reform is to convert to a full reserve system based
on a GDP index monetary standard with direct issuance of new money creation,
known as seigniorage, to the people instead of Federal Reserve Member Banks.
The improvement to the economy from conversion is expected to be the
approximate amount of the reduced monetary intermediation cost, on the order of
2½% of GDP per year, improve the balance sheet of the United States on the order of $8.4 trillion as of fiscal year 2011 and restore on the order of ten to twelve million jobs.
CHART 3 DATA SOURCE: Fed Annual Monetary Intermediation Cost to Economy 1984 to 2011, Attachment 4. The chart above shows the annual monetary
intermediation cost of the Fed to the economy that could be saved by
replacing the Fed fractional reserve system with a full reserve system.
CHART 4 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply, Attachment 11. The chart above shows the impact of the
Fed creating debt based money faster than economic growth, transferring
wealth from the other sectors of the economy to the banking/financial
sector by virtue of its first use and control of the new money.
Economic Recovery Plan. The version posted was last modified
October 19, 2012.
(Adobe
Acrobat Required)
I have a Masters degree in Finance
from Carnegie Mellon University, Pittsburgh, PA in 1983 and a Bachelors
degree in Business from the University of Washington, Seattle, WA in 1981.
I live in Dallas, Texas. If you have comments or suggestions, please email me at
whaugen@flash.net.