3. QE2 IS the Populist Solution

Gary North, who purports to be an expert on the errors in my book “Web of Debt,” has evidently not actually read it.  In an article posted on the Market Oracle on November 23, he says that in calling QE2 a “bold precedent,” I have switched sides.  He apparently missed the chapter I wrote on this subject, first published in “Web of Debt” in 2007, saying exactly what I am saying now. 

 The Federal Reserve is finally using its “quantitative easing” (QE) tool to good purpose, and I’m endorsing that, not just for our central bank but for any central bank anywhere that would be so bold.  We are trapped in a web of debt devised by an international banking cartel that has hoodwinked us into believing that we have no recourse but to use money created by their banks as loans.  We do have recourse.  Money today is simply a legal agreement, an acknowledgment of services performed and debt owed.  Every country can and should issue its own money and its own national credit.  This would NOT inflate prices, for reasons I have explained again and again.  If  “money” originates as a receipt for goods and services delivered to the government — rather than in speculative leveraging by banks not attached to real productivity — supply and demand will increase together, and prices will remain stable.  If the money supply increases beyond GDP, the excess can be taxed or otherwise drawn back to the government.       

North writes:    

“Ellen Brown initially stood with the Greenbackers in their call to end the Federal Reserve. . . . She now says that the FED is on the government’s side. ‘It is the Fed funding the government virtually interest-free, allowing the government to do what it needs to do without driving up the interest bill on the federal debt – an interest bill that need not have existed in the first place.’ . . .

“If she tries to defend herself by saying, “This is consistent with what I have always said,” then she is dumber than dirt, or else she thinks her followers are dumber than dirt. If she says, “Yes, I switched. So what?” then she is just another lawyer. . . .

“She never had a clue about economic theory or monetary theory. She has therefore switched sides with ease – we might call this intellectual quantitative easing.

“Her only hope now is to insist that she never meant anything like this. “No, no, no, I meant something completely different. It’s all a big misunderstanding.” A lawyer who can’t make herself clear needs to find another career – maybe as an economic guru.”

I have not switched sides, as anyone who had actually read my book “Web of Debt” would know.  Chapter 40, which is all about Ben Bernanke’s helicopter money, says in part (again this was first published in 2007):

“[I]n a speech he delivered when he had to be less cautious about his utterances, Dr. Bernanke advocated what appeared to be a modern-day version of Lincoln’s Greenback solution: instead of filling the balloon with more debt, it could be filled with money issued debt-free by the government. 

“The speech was made in Washington in 2002 and was titled ‘Deflation: Making Sure ‘It’ Doesn’t Happen Here.’ Dr. Bernanke stated that the Fed would not be ‘out of ammunition’ to counteract deflation just because the federal funds rate had fallen to 0 percent.  Lowering interest rates was not the only way to get new money into the economy.  He said, ‘the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost

“He added, ‘One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies.’  If the government was inexperienced with the policies, they were not the usual ‘open market operations,’ in which the government prints bonds, the Fed prints dollars, and they swap stacks, leaving the government in debt for money created by the Fed.  Dr. Bernanke said that the government could print money, and that it could do this at essentially no cost.  The implication was that the government could create money without paying interest, and without having to pay it back to the Fed or the banks. 

“Later in the speech he said, ‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.’ Dropping money from helicopters was Professor Friedman’s hypothetical cure for deflation.  The ‘money-financed tax cut’ recommended by Dr. Bernanke was evidently one in which taxes would be replaced with money that was simply printed up by the government and spent into the economy.” 

QE2 is not quite replacing taxes with money printed up by the government, but as I wrote in the article criticized by Mr. North, in our current system it is the functional equivalent and the next best thing.  The Fed is funding the federal deficit by buying long-term government bonds with money created with a computer keystroke, and the Fed rebates its profits to the government after deducting its costs, so this funding is nearly interest-free.  These bonds never have to be paid back, because the federal debt is never paid back.  An interest-free debt rolled over indefinitely is the functional equivalent of debt-free, government-issued money. 

As Dick Cheney famously said, “Deficits don’t matter.”  The federal debt not only never DOES get paid back but it CAN’T be paid back under our current debt-based monetary regime.  This is because, in some sense, it IS our money supply.  As I’ve explained in another article I’m writing now:

Virtually all money today originates as debt, and private debts eventually get repaid, so somebody has to be in “permanent” debt to maintain a stable money supply.  The federal debt serves this role.  The federal debt has been the basis of the U.S. money supply ever since the Civil War, when the National Banking Act authorized private banks to issue their own banknotes backed by government bonds deposited with the U.S. Treasury.



To meet the demands of an expanding economy, the money supply must be able to expand; and when the money supply is created as a debt (as it is today), that means the federal debt must be able to expand.  This was confirmed by Marriner Eccles, Governor of the Federal Reserve Board, in hearings before the House Committee on Banking and Currency in 1941.  Representative Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds. 

“We created it,” Eccles replied.

 “Out of what?”                                                                     

 “Out of the right to issue credit money.”

“And there is nothing behind it, is the­re, except our government’s credit?”

“That is what our money system is,” Eccles replied.  “If there were no debts in our money system, there wouldn’t be any money.”

That explains why the federal debt never gets paid off but just continues to grow.  The federal debt hasn’t been paid off since the presidency of Andrew Jackson nearly two centuries ago.  On Jan. 8, 1835, six years into Jackson’s presidency, the debt actually reached zero.  According to the Bureau of Public Debt, this officially lasted one day.  Not long after, America plunged into a depression.  By 1838, the debt was $3.3 million.  By the end of the Civil War, America owed $2.7 billion.

Economist John Kenneth Galbraith wrote in 1975:               

“In numerous years following the [civil] war, the Federal Government ran a heavy surplus.  [But] it could not pay off its debt, retire its securities, because to do so meant there would be no bonds to back the national bank notes.  To pay off the debt was to destroy the money supply.”

In all but five fiscal years since 1961 (1969 and 1998 through 2001), the U.S. government has actually exceeded its projected budget, adding to the national debt.  The debt soared to record proportions during World War II.  By the end of the war, the U.S. debt was more than 100 percent of GDP.

This obviously did not hurt the economy.  The productivity generated by record government spending during World War II created the infrastructure that allowed the country to dominate industry globally for the next half century.  We are seeing the same sort of rapid infrastructure development today in China, which may well fill the role of world productivity leader in this century.

The U.S. debt incurred during World War II was never paid off but just continued to rise.  This too did not hurt the economy; the debt just became a smaller and smaller percentage of GDP as the economy expanded.


Indeed, that is the secret to adding “money” to the system without inflating prices: it needs to be used for productive rather than speculative purposes.  Inflation results when “demand” (money) exceeds “supply” (goods and services).  When money is used to “make money” (speculation) without adding to goods and services, prices are driven up.  When the money is used to produce goods and services, supply and demand increase together and prices remain stable.

The issue posed by QE2 is the sovereign right of a country to print its own money, debt-free and interest-free.  Whether conservative, liberal, or populist, any true patriot would support that; and we should support it not just for the United States but for all countries. 

Mr. North perceives me to be a threat and has declared he will destroy my credibility, just as Stephen Zarlenga perceived me to be a threat when I disagreed with his 100% reserve solution.  It’s too bad, as I was once an admirer of both and we could have been on the same team.  The trouble is, the threat is not a person or a book; it’s an idea, and it’s already out there and has blown the grass.  It’s moving and picking up steam of its own accord. Gold won’t work and the 100% reserve solution won’t work; in fact they’re very close to the same thing.  The Euro system is in the nature of a gold/100% reserve/fixed currency solution, and it has just proved that those won’t work.  A public credit system will work, and there are already finer minds than mine working on the details, globally.  

96 Responses

  1. Atticus, What makes you suspect that those agreeing with Ellen Brown’s positions on money would not “understand this historical phenomenon”? We are all thoroughly informed on the “legal tender” issue. IMO it is a non-starter. Legal money is the only kind I would really want. All that means is that it must be accepted in payment of taxes or other non-specified obligations. It does not prohibit anyone from contracting for payment of goods or services in any other form of wealth, i.e., goods or services. The “Legal Tender” argument is vastly distorted by those with a “gold as money” agenda. The term simply means that it is legal money, not that other goods or services cannot be used in exchange, or barter.

    This is simply a distraction from the main issue, which again, is whether or not “money” should be created and regulated (controlled) by the public, via governments, or by private bankers. This is the central issue. Our US Constitution gave the right to create “coin” money to congress, and “to regulate the value thereof”. The last time I checked, “congress” was still (at least nominally) an elected body representative of “We The People”. Nowhere is it specified that congress has any right or power to abrogate that responsibility and give it to the bankers. But that is exactly what happened in the Federal Reserve Act of 1913, the greatest theft in the history of the world.

    • “Legal tender” laws, it is true, do not prevent people from bartering, although it’s worth noting that in Canada the Bank of Canada Act gave the central bank a monopoly on the issue of bank notes, so no one else could issue bearer paper. I’m not sure the Federal Reserve Act did that, but it might have.

      But you’re inaccurate in stating that legal tender laws “simply mean that it is legal money”; because legal tender notes MUST be accepted as payment in every transaction (not just payment of taxes), by law, even if the recipient doesn’t want them. So while you can barter, you can’t be sure that your counter-party will similarly barter, and if he purports to pay you in legal tender notes you have to accept them.

      I don’t know what “legal money” is anyway. There is a phrase in the law, “lawful money”, but that is not defined either. Article I section 10 of the constitution provides that “No state…Shall make any thing but gold and silver coin a tender in payment of debts”, but this argument is not specifically about the gold standard or Article I section 10. It’s about an accurate understanding of paper money and legal tender laws.

      Of course legal tender notes would be accepted in payment of taxes, but you wouldn’t need a legal tender law for that. Obviously, the government would accept its own notes.

      The objection most have to legal tender laws is that they are a forced satisfaction of “all debts, public and private”.

      “Money” has never been controlled entirely by governments, so if that’s indeed what you are suggesting it’s quite novel.

      • I posted over on my own blog about this, where I thought it would be more clear.


  2. [...] at Ellen Brown’s blog people are talking about money, what it is, who should decide what it is, what’s right, [...]

  3. QE2 thus boils down to government combination FOMOC printing up legal-tender-IOU-S for services-value-goods-received. Because government functions are financed by IOU-legal-tender rather than by taxation there is not taxation to slow the economy. Economy takes off like a bat out of hell so that private citizens need less public services thus less IOU currency is circulated. As currency becomes scarce deflation supervenes to make currency appreciate in value. Value appreciation is the equivalent of receiving interest thus equivalent to having a t-bill in ones back pocket,but without the overhead of getting on-line at http://WWW.TREASURYDIRECT.GOV for the interest transaction. Instead of exchanging scarce currency, credit is exchanged for value-goods-services with deflation penalizing debtor and rewarding creditor thus incentive for everyone to work and save. In short, a very efficient system. You don’t need no cash. Only you need good credit rating and 4 lucrative jobs. All that work gluts the market with goods-value-services making life cheaper and more fun for everyone.

    Let the good times roll
    , and thrill your soul

    . Got soul

  4. Amazing lack of an actual argument by Gary North. Checking out his web-site he has pages and pages dedicated to pigeon-holing Ellen Brown as either a Keysian, Austrian or Socialist, probably so he can then recite the correct argument.

    Money can be created.
    This will be inflationary if there is too much created.
    This will be deflationary if there is not enough created.
    So should it be created by a public or private institution?

    • You along with Ellen, have bought incorrectly into the view that the public issuing money is better than government issuing money. Isnt it obvious that commercial/bank interests are now one and the same as government, they are as unaccountable as each other. All QE is doing is allowing runaway deficit spending, without tax mandate, taxing illicitly via debasement, and at this point mainly serving at the moment to allow the banks to fix their damaged balance sheets, thus further transferring yet more wealth from the public to the banks. Its a sad day in hell when the supposed reformers are on the side of the elite.

      No, your solution is a result of your misconception of money. Money IS debt. Thats a fact of economic life which most people are ignoring. The only sovereign issuer of money or debt is the people, the traders themselves. This has been denied to us by banking and government for so long and only further denied by those promoting government issued fiat.

      The fact of the matter is that if the banks were required to recognise that when traders take out loans that THEY the trader are creating money, then the ‘money supply’ expands and contracts as needed, banks wouldnt claim the interest for themselves becasue the money that was created doesnt belong to the banks, as they claim, but to the trader that made the loan and the collective trader community that bears the debt.

      All money is an IOU, an obligation to provide value in the future. Its not some intrinsically valuable thing in itself ( as most people mistakenly believe) but a contract on future labour.

  5. Erata: the word ‘government’ in the first sentence should be ‘banks’.

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