There is not only the need for an alternative to the Federal Reserve, there is the strong potential for an alternative.

The year 2013 will mark the one hundred year anniversary of the formation of the Federal Reserve. For about the same amount of time, this institution has garnered controversy from how it was planned out to how it operates on a daily basis. The major characteristics of the Federal Reserve is that it is a private banking system, it releases the national currency into circulation through loans, and it lends money directly to the government through bonds. Its internal method of banking is fractional reserve banking, where a percentage of reserves held by each bank in the Fed hierarchy is the amount that is generated out of thin air for loans to the lower banks or to individuals at the bottom, and when those loans are paid back to the private banks it increases the reserve and therefore the amount of fiat currency that can be generated. Fiat currency by definition is not taken from the physical supply of the reserve that is held but is loaned out separately, in this day and age electronically as a transfer of numbers from one account to another. The percentage of the reserve determines the amount but not its source. All four aspects of the Federal Reserve such as its private status, its fractional reserve banking, its putting money into circulation through loans, and its lending to the government are all subject to criticism. The least controversial aspect of the Federal Reserve is its ability to set interest rates, which is a minor component compared to its major actions and duties. All that can be criticized can be replaced with other methods in order to have a far more just and stable banking system, one that is responsible to all citizens rather than a banking elite in partnership with a political elite.

The background of the old system of banking is inherently usury. What is conceived as banking is the charging of interest for loans, at first from a physical supply of money and then afterward through the fractional reserve process when it was discovered that more loans could be issued beyond the physical supply with a greater return on those loans. But alongside this practice there has been various religious laws against usury as charging interest. This has been a great contradiction in the modern era where banking has been a prominent factor in the economy yet has been condemned as a predatory act in the community. The logic behind the religious ban can probably be traced back to the fact that interest is a primary form of debt, and debt was an ancient form of domination that broke apart existing relationships of community reciprocity and trust. Warring invaders, for example, would make the invaded people indebted to them and in many cases the debt was paid through indentured slavery. The debt that emerges from interest promotes various actions to create economic growth in order to pay back the loan with more than what was taken out. The connection of debt to growth, where the power imbalance of one causes misallocation of resources of the other, is a modern phenomenon and can be said to be the first and foremost reason for a growth-based economy rather than a steady-state economy. But the flaw in incessant growth, aside from the environmental costs in a finite world, is that growth leads to hierarchy. The surplus that is generated is controlled not by all those who made that surplus, but rather by a few. These few then appropriate and determine how that surplus is used. As the growth in economic terms may mean a short-term ability to pay back loans with interest and therefore to cancel debt, the long-term effect is that the surplus of an economy is accumulated by a few and the debt of interest persists in general in the society. Instead of finite debt that can be easily ended, there is now infinite debt where a permanent underclass is always in a weakened position because they have limited access to the economic surplus on one hand and must try to pay back the interest with limited resources including new debt on the other hand. The preponderance of debt allows for people to be under the direct control of others who have resources needed for survival and paying back those debts. The problem with usury, as charging of interest, is that it assists in the development of hierarchy through debt and the appropriation of growth. When loans with interest are used as the only way for a national currency to be put into circulation, then one will find the institutionalization of infinite debt.

The form of the new system of banking can be countywide public banks, as originally proposed by Edward Kellogg in the 1800’s. These local public banks would be accredited directly by the Treasury Department as the basic unit for the distribution of currency into the population. Even though they would be accredited by the Treasury Department, they would have oversight by the county legislature. The combination of federal accreditation and county oversight would mean that the national banking system would not be a private organization such as the Federal Reserve is today. This would address the issue of a banking system that is directly responsible to the people rather than be motivated by profit. As recommended by Adrian Kuzminski, in adaptation of Kellogg’s original idea, collateral loans could be issued at a nominal 1.1% per year interest. These collateral loans, based on actual reserves of private accounts, would only require the 1.1% per year interest for deposits to collect the 1% as interest and for the 0.1% to cover transaction fees. The collateral loans would not be the way that the currency is distributed, but rather allow for people to make use of loans for various constructive ways and not have to be burdened by interest. These constructive goals can be a form of growth that is more equally shared in the economy, made possible by severing the link between infinite debt and appropriated growth.

The content of the new system of banking would be a basic income as the method to place the national currency into circulation. The basic income would be issued through the local public banks as an equal amount in a year. The equal amount in a year would be the equivalent of a living wage in one year, a living wage defined as a minimum wage calculated to the cost of living. This form of basic income would be seen as apublic dividend, where a public dividend is a rent on the private use of the commons that is shared by all citizens as co-owners of that commons. The rent on the commons would be the initial reserve held by the various countywide public banks, aside from the private deposits of individuals. The currency that would be issued as a basic income would still be a fiat currency, not backed by something like gold or silver, but would still have value based on the intrinsic worth of the commons. In this respect the commons would include the natural commons such as public land, air, and water as well as the artificial commons that includes ideas and open source designs. When the basic income is instituted, a reevaluation of welfare and taxes can be conducted. Welfare has historically been a way to fill in the gaps of capitalism, making it possible for people to survive despite the boom and bust cycles of the economy. Welfare helps people in the short-term but prevents calls for real structural change in the long-term. A basic income as a standardized way to put money into circulation can allow for reductions in welfare spending without impoverishing people who need it. Reductions in public spending can also lead to reductions in public taxes in the same way, being reduced when there is no chance of negative repercussions. The guarantee of an income for all people regardless of their wage income can in fact develop a degree ofeconomic independence for all people, also leading to a reevaluation of the wage system of employment. Citizens as workers would no longer have limited choices or options when faced with wage employment, having to take menial or exploitative jobs because unemployment would lead to such things as poverty, starvation, or homelessness. A basic income therefore accomplishes two things at once, a distribution of currency without the need for loans that charge interest as well as an option that frees people from wage slavery or indentured servitude because of debt.

The quantity of the new system of banking would be a steady ratio of money to population. The issuance of a basic income could be criticized as being inflationary, where the money supply is too big in comparison to the goods in the market. If a money supply gets too big, then the value of the individual units of the currency decreases. Therefore, in order for the goods to be sold at the same value, their prices would have to be increased. Inflation can be difficult to comprehend, so a concrete example may be necessary. If the money supply begins as 1,000 dollars, and a bushel of apples costs 5 dollars, when the money supply increases 10 times the value of each dollar is reduced by 10 times to the amount of 10 cents. In order for the value of the bushel of apples to be constant, it has to be sold for 50 dollars. This example is simplified to show that there is a limit to increasing the money supply. The theory behind fractional reserve banking was that the money is created out of thin air when needed for a loan, but that it disappears from the supply when it is paid back. The Federal Reserve spits out money and then swallows it back up. The behavior of people needing or not needing loans was to signal whether the money supply needed to increase or decrease. But since these loans also charge interest, then it was demanded that more money in total must be paid back than was first sent out. In the real world, this meant that someone had to fail to pay back their loan fully using the money supply, so that others could include interest when they paid back their respective loans. Since a basic income method of distribution replaces loans with interest, a new way to check inflation is needed. Bernard Palicki, a conservative who ran as an independent presidential candidate in 2000, had one small aspect of his platform that actually offers such a check against inflation that is harmonious with a basic income. The idea of a ratio of money to population is the total money supply divided by the total population. As the population grows or shrinks the money supply would grow or shrink accordingly. The total money supply divided by the total population acts as a constant limit of inflation, and matches with the idea that with a basic income each citizen would receive the same amount on a yearly basis. Once the constant limit of inflation is achieved, what is calculated as twice the constant ratio can be established as the lowest level of the income tax brackets. In this way income tax can still be deployed without eating into the basic income.

The quality of the new system of banking is demurrage. A constant ratio of the money supply to the population prevents inflation in a year for a basic income, but there is still the threat of inflation when that basic income is compounded over several years. This is where demurrage comes in. Demurrage, also known as negative interest, was first advocated by Silvio Gesell as a way to stop inflation and to encourage spending in an economy. When a currency is issued, after a certain amount of time it begins to lose a percentage of its value on a regular basis. For example, it could lose 1% each day for 100 days after being in circulation for one year. When Gesell first proposed this idea in the early part of the 1900’s, the method of recording this negative interest was through stamps on the currency notes. But now, demurrage can be recorded electronically in a much more effective manner, making it easier to comprehend. For a basic income, demurrage offers two years of stability for one year of currency issuance. The two years of stability would include the first year when the currency was distributed as a basic income, and then the second year when the negative interest of demurrage would begin for that first year of currency. The negative interest rate would be 1/365 per day, meaning that each day of that second year the currency would lose 1/365 of its value. As this is happening, the second year of the basic income would also be in operation, adding 1/365 of the yearly basic income each day. The rate of 1/365 per day extracted as negative interest would be monetary value recycled to new currency issued as the basic income. Each year of the basic income and the demurrage would overlap to insure that the money supply was stable and noninflationary at the same time. In other words there would be equilibrium in the money supply, not only between individuals in the society but over time in the society. The money supply would not skyrocket over time since each year money is added at the same rate as value is subtracted.

The expression of the new system of banking is a deep change of structures. The many aspects and moving parts of this new plan for a national banking system can seem daunting. This is especially true when compared to the appearance of permanence that the Federal Reserve enjoys. But the characteristics of this new plan bringing together ideas from Edward Kellogg, basic income activists, and Silvio Gesell can be introduced in small ways. Sometimes working models can be the best way to convince others of a new idea that may seem too revolutionary through words. The structural change can begin with a local currency system that uses the form of basic income and demurrage in how it manages the money supply for a community. From a local currency one can then move to a movement to establish a state bank such as now exists in North Dakota to demonstrate how Kellogg’s ideas about public banks can be accomplished in one state. And of course from the experiment with a state bank one can push for a real reform of the Federal Reserve through adopting these ideas and how they all work together. But it must not be forgotten that this type of reform of the Federal Reserve is ultimately a disruption of the Federal Reserve, changing it so completely as to destroy it. For there must be a new type of banking, public banking, that can be used as a tool by the people for their own empowerment. There must be an alternative that can successfully replace and improve upon a private banking power that uses fractional reserve banking and charges loans with interest to put money into circulation. Many have talked about whether or not to reform the Fed or repeal the Fed. This new plan offers a real alternative that makes it easier to envision a just economy with just banking.