The Five Stages of Money (and why we’re stuck at stage 4)

By J.D. ALT

Like everything else, money has evolved. It began in a primitive form and morphed into something more sophisticated, more successful. Then, probing and testing for an even better form, it morphed again. A simplified history of money’s evolution can be outlined in five stages:

STAGE 1: Money is a tangible thing of value—e.g. a gold coin.

At some point in the pre-history of humankind, the “invention” of money solved a time-gap problem in cooperative trade: I’ll give you my baby goat in exchange for your flint-knife—but you have not yet made the knife, so the exchange is stymied. To solve the impasse, you give me a token of gold to temporarily stand in place of the flint-knife, so you can take my baby goat. The gold token is a promise that the knife will be delivered, and that promise is secured by the fact that the gold itself is deemed equally valuable as the knife. In the meantime, I may find someone else with a flint-knife already made who will exchange it for the gold, thus completing the trade. The invention of this place-holder transformed the cooperative trade interactions of human society.

Eventually, this stage of the invention was “perfected” with the innovation of the gold coin—a standardized golden disk, stamped out by an authority, guaranteeing that it contained a specific amount of the precious metal. Thus, the place-holder could be quickly and accurately quantified in transactions without the need for weighing or measuring.

STAGE 2: Money is a paper receipt for a tangible thing (e.g. a gold coin) held in safekeeping.

The next stage dramatically raises the bar for monetary convenience and safety. Instead of carrying the heavy gold or coin around and physically transferring it from person to person in transactions, the precious metal is kept in a secure vault. The owner of the gold receives a paper receipt which can claim the safe-kept gold when presented to the keeper of the vault. The paper receipt, then, is what is carried around—and is used to buy goods and services. Sellers accept the paper receipt as a place-holder because they know they can present it to the gold-keeper and receive the specified precious metal.

There are two important things to notice in Stage 2 money: First is the mechanism of “displacement.” The gold is still the physical place-holder of value, but it is operationally displaced by the paper receipts. It is possible for the paper receipts to be exchanged in many trades before one of them actually makes its way back to the safe-keeper of the gold itself.

Second, the paper receipt being traded is a receipt for a specific gold hoard safe-kept in a specific repository. Having received the paper receipt in a transaction, if you want to get your actual gold place-holder, you must present the receipt to the actual repository where that specific gold has been stored.

STAGE 3: Money is a promissory note for tangible things held in safekeeping.

Stage 3 replaces the idea of a “receipt” with the idea of a “promissory note.” This may seem like a minor detail but operationally it is a huge innovation that changes what money can do, and how it can be used.

In stage 2, the paper place-holder was a receipt for a specific hoard of gold being safe-kept at a specific repository. Your receipt could obtain that specific gold—but not, for example, a different deposit of gold being safe-kept in another, perhaps closer, repository. This inconvenience created an obstacle to trade that Stage 3 money overcame.

The innovation was the “promissory note.” This is a piece of paper that promises to exchange a specific amount of gold for the paper note. Most important, the promissory note could be presented to any safe-kept gold repository—including the one that happened to be just down the road, as opposed to one three hundred miles away. The real innovation here, obviously, was not the promissory note itself, but the cooperative arrangements and agreements between the keepers of the various gold repositories that honored this convention.

The thing to notice is that Stage 3 has added something new to the idea of “displacement.” Gold is still the physical place-holder in a trade transaction, but in addition to being operationally displaced by a piece of paper, it is now “anonymous”: While the gold held in the repositories can be claimed by specific people (the holders of the promissory notes) in specific quantities, in aggregate it is “owned” by all of them together, because any promissory note can claim gold in any repository.

The innovative result of this anonymity—and the ultimate perfection of Stage 3 money—was that the keepers of the gold repositories discovered they could legally make loans backed by the precious metal they held in safekeeping. They could do this without usurping ownership of a specific thing owned by another person. They could, in effect, evolve into what we now call “banks.” The amount of gold in safekeeping could now back-up more than one promissory note at the same time—based on a calculated improbability that more than one note would simultaneously claim the gold. As a consequence, the number of place-holders for cooperative trade, and the ease with which they could be obtained and traded, increased dramatically.

STAGE 4: Money is a promissory note for a tax credit.

Stage 3, as just described, was basically the money status quo for what we think of as modern history. Then something extraordinary happened quite by accident. As is usually the case in evolution, not only was the innovation accidental, but it is still taking time for the benefit to be understood and functionally incorporated in a new operational stage. But there can be no doubt about the fact that Stage 4 money—whether we acknowledge it or not—has arrived.

The accident happened in 1971. At that time, the U.S. dollar was a Stage 3 promissory note promising to exchange a specific amount of gold from the U.S. Treasury, on demand, to the holder of the note. In a spat between French president Charles de Gaul and U.S. president Richard Nixon, the Stage 3 cooperative arrangements and agreements were momentarily abandoned: de Gaul suddenly presented the U.S. promissory notes (dollars) held by France to the U.S. Treasury and demanded the gold in exchange!

Rather than loading ships with gold-bars from Fort Knox (America’s safekeeping repository) Nixon took the unprecedented step of declaring that the promise in the promissory notes would not be honored. U.S. dollars would no longer be exchanged, on demand, for any amount of gold at all. When he did this, Nixon (and the rest of the world) assumed it was a temporary declaration—that the U.S., France, and the rest of the world would soon negotiate a new understanding of how gold exchanges would be handled. It was a big “yawn” that, for the most part, everyone soon forgot about. Of crucial importance, however, the new gold-exchange agreements were never made, and gold quietly slipped from its role as place-holder in trade.

Even though the collective yawn was quite robust—trade amongst people and states and countries continued as always—something quite fundamental had changed. The world had transitioned to another stage of monetary evolution: Money was still a “promissory note” place-holder, but what was promised in exchange for the note was no longer an amount of gold safe-kept in some repository. The promise had been replaced with something else—but what? After half a century, the answer has yet to percolate into the awareness, understanding, and operational policies of mainstream economic thinkers and policy-makers.

In fact, the answer is clearly printed on the front of every U.S. Federal Reserve Note—the promissory notes (which we now use as dollars) that replaced the old U.S. Gold Certificates: “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE.”

Other than stating the banal fact that you can “legally” use the U.S. dollar to buy your groceries, these words establish the very significant promise that the U.S. government will accept your Federal Reserve Note as a payment for your debt to the government—meaning, most specifically, your tax debt. More to the point, the government’s Federal Reserve Note is the only thing the government will accept as a tax payment.

The accidental innovation that created Stage 4, then, is this: Money has become a promissory note for a tax credit. A tax credit, in a society that regularly and unfailingly requires its citizens to pay taxes, it turns out, is just as valuable as a place-holder in a trade transaction as was a token of gold.

Stuck in Stage 4 with Stage 3 thinking

The innovative twist of Stage 4 money is profound: whereas the amount of Stage 3 gold a society safe-kept to back up its promissory notes was finite and limited, the number of “tax credits” a national government can issue is (a) unlimited, and (b) completely controlled by the discretion of the taxing authority. The U.S. government, in other words, has an infinite supply of U.S. tax credits in its “vault”—and it can issue them, at will, with the stroke of a keyboard.

It is critically important to see that this is different, in fact, from “printing money”—a Stage 3 transgression where promissory notes were issued without having safe-kept the gold they promised. A promissory note for a tax credit, in contrast, can always be backed up by its promise—at no cost, it should be emphasized, to the federal government.

The irony of the present moment is that even though we are now firmly established and operating with Stage 4 money, our mainstream economic planners and political leaders continue to think and operate as if we were still, somehow, in Stage 3. They behave, in other words, as if U.S. dollars are “backed” by some invisible, finite, “gold-like” resource which everyone—including the U.S. government—must compete to have some apportioned share of.

It’s very likely that it will require a new generation of economic explainers and political leaders—individuals not guarding professional claims staked out in the Stage 3 money-structures—to fully understand and utilize the innovation Stage 4 money makes possible. When that does happen, human society will move on to Stage 5. For a lot reasons, we can’t get there soon enough.

STAGE 5: Money is a mechanism for social enlightenment.

This may sound grandiose, but I’m simply referring to the ability of a large society, operating collectively, to (a) build and operate a sustainable interface with earth’s resources, and (b) actively provide each society member opportunities to optimize their potential for health and success. Understanding and creatively managing Stage 4 money makes these aspirations possible.

Specifically, Stage 5 is possible because promissory notes for tax credits can do something new. Not only can they act as place-holders in the trade of profit-making enterprises—as Stage 3 money so efficiently and effectively made possible—they can also be issued and used as direct government payments for non-profitable goods and services. This can happen because (a) it “costs” the government nothing to produce the promissory notes, and (b) they provide real income to the citizens providing the non-profit generating services. In other words, Stage 5 money can uniquely and directly be used to pay citizens, on a large scale, to undertake, design, build, and provide non-profit goods and services which, until now, could not be undertaken or accomplished without stressing the monetary system itself (i.e. by “printing money”).

Given the pressing needs America and the world now face, which profit-making enterprise has no interest in addressing—access to land and affordable housing for low-income people, global warming and rising sea-levels, climate change, drought-induced migration and catastrophic storm and wild-fire events, the collapse of ocean fisheries, loss of agricultural diversity and food self-reliance of local communities—the time for Stage 5 money is at hand. We have it in our grasp. The question is: when we will see what it is and how to use it.

32 Responses to The Five Stages of Money (and why we’re stuck at stage 4)

  1. Andrew Anderson

    the time for Stage 5 money is at hand. J.D. Alt

    Except government privileges for private credit creation enable the banks to consume allowable price inflation space that Stage 5 money might otherwise use.

    So when are the MMT folks going to get serious about removing those privileges?

  2. Sorry, your first stage is truly misguided. It accepts the myth that exchanges between, e.g., Robinson Crusoe and his man Friday, were the origin of money. Money was a substitute for barter. Not so. Money was a religious item (you must pay god to show you’re grateful), or a social item (instead of blood feuds, eye/for/eye conflicts, you would pay a penalty).

    Such money is both religious and social in its origins. It may even explain why we’re so insistent on preserving myths about money. After all, the root of “credit” is the Latin “credere” (“to believe”)…and nothing persists like even misguided belief.

    Anyway, money or monetary tokens are how we humans handle the extreme burden of obligation we feel to each other and to the gods. I know we’re supposed to be atheists now, but I’d suggest even that is misguided. Jesus’ “Great Commandments” are also great observations. You cannot love someone else if you don’t love yourself. And whatever you love with all your mind, soul, etc… That’s your God! So there are plenty of people whose God is money, or the Oakland Raiders… I’d even suggest people cannot *not* have a god.

    Which also means the sense of obligation, payback or quid pro quo is deeply embedded in the human psyche. It also may be why the really great religious figures tried to get beyond that. After all, did the prodigal son *really* deserve that fatted calf?

  3. One other suggestion: Read David Graeber’s Debt: The first 5,000 years…really worthwhile.

    • madame defarge

      David Graebers book is a slog, but while reading this column, it popped into my mind and I will try to get back to it… The interesting thing is that ‘Class’ is not generally brought into these discussions, I did finish both The Divide by that Jason Hickel and also White Trash by Nancy Eisenberg.

  4. China has far more dollar reserves than it can ever use to pay any US tax that may ever be levied against it. How does that fit in with the idea that taxes are what gives money its value?

  5. David Harold Chester

    The picture is not quite as simple as this.
    1. Promissory notes were expressions of trust between the Treasury and the client, who expects to return them at a specified time for actual currency. Without this trust the promissory note would have no use. Even on the Dollar bills is printed “In God we trust” which implies that others should pay cash!
    2. Temporary money is not new. It was created from the time checks were first used so that when they are post-dated the same situation is brought about as for the promissory notes. This kind of money has been created for a limited time. Debit-cards work similarly. However, since this process is continuous one can claim that within the social system money is always being created (and returned), and the total of which is indefinite.
    3. After the institution of interest on savings in the bank was introduced, the banks wanted to get in some interest too (at a somewhat higher rate), so they began to invest in the stock market and as professionals they were very successful. Today these banks have a lot of control of big business outside of their service to regular clients. They also found that the selling of “bad debt” namely risky mortgages, was a sensible way to conduct some of their business. Both these activities are well outside the purpose for which banks were first established and in my opinion should not be allowed to continue.
    4. With the introduction of laws controlling deposit reserve accounts, the banks discovered that they could issue credit that exceeds their currency holdings. The percent of the reserves deposits were initially discovered to be a convenient means for the government to control the rate of investment in the country. But with the introduction of electronic money, many banks ignored these rules or found ways around them, so that the claim of “banks creating money from fresh air” became popular. It is not the whole story because
    a) this credit is continuously being returned almost as fast as it is created,
    b) the old fashioned reserve limits are still respected to a degree where the bank’s policy is a more conservative one and it doesn’t like the high interest rates associated with being “bailed out” and
    c) there is still a limit imposed by the treasury as to how much total sum the banks are permitted to lend in this way. The necessary documents may be regarded as a form of money that the treasury lends to the banks and it is these sums that come from nothing but a few committee decisions.

    Many banks are not yet “up to speed” regarding the need to be more honest, and avoid the free issuing of credit. MMT believers claim that this is all of the story, but in fact only a relatively small proportion of credit is generated in this way conmpared to the total amount of currency in circulation.

    • ‘In God we Trust’ is not the legally important part of the note, and it is relatively new. The legally enforceable statement on US notes is ‘This note is legal tender for all debts public and private’.

      When the monetary system became that of a fiat currency system in the thirties and early forties and then from 1971, banks could always issue more credit than they held in deposits or other holdings. Deposits are never lent out in modern monetary systems. You haven’t made your history clear. Credit in a modern monetary system is issued depending only on the creditworthiness of the borrower. Your final sentence is unclear.

  6. Merijn Knibbe

    Please update your economic history about money. Money was invented y the state (Lydia) , the first known coins were made of electrum (a natural alloy of gold and silver). Fun fact: de alloy in the coins was, compared with the natural ally, debased… (and the famous Archimedes story shows that the ancients knew everything there was to know about debasing). But….

    This was not the first money. The first money was a kind of token money. Remember: a ‘grain’ of gold? That’s indeed a grain. And a shekel is known to have been a kind of coin. But: ‘The Sumerian word shekel derives from “She” which meant wheat, and, “Kel” was a measurement similar to a bushel”. One ‘shekel ‘ in silver (fun to check out herodotus, who occasionally writes about the weight of precious golden statues in temples: hoards). Also, numbers of bushels of grain (units of account) were inscried on clay tables and used to denote debts. These accounts became a store of value (for the creditor). Only after (grain but also honey and sheep based) units of accounts developed (which predated money in your sense), money kind of things could be used. For coins, the big brakthrough was however when a kind discovered that his stamp on a piece of electrum enabled him to debase it. With revolutionary consequences: on when coins had come into existence, retail trade started to flourish (which means that youf flint example is wrong, too).

  7. Really interesting read, thank you.

    Here’s a thought. When you say that “They behave… as if U.S. dollars are ‘backed’ by some invisible, finite, ‘gold-like’ resource” I think the “resource” some of the more economically literate are thinking of is “claims on future goods or services” – just as you explain in stage 1. This seems like a fairly orthodox view don’t you think?

    So to people who understand that money is no longer backed by gold, but understand that borrowed money is a type of debt that ultimately needs to be repaid (indirectly) in goods or services, it might be worrying for the state to issue money in relatively large quantities. Such thinking may instinctively lead them to feel that the ratio of money to goods and services would change (i.e. inflation) and devalue their money.

    How would you explain to such people that the system can absorb fairly significant quantities of new money without devaluing existing money?

    Hope that makes sense, thanks 🙂

    • Mike P, this comment is interesting. Thanks. MMT has always made clear that inflation is the limiting factor with regard to direct sovereign spending. At some point, either additional dollars must be drained by taxes (or bond sales) or the direct spending must be cut off—or some combination of the two. The question of whether there’s a difference, with regard to inflation pressure, between bank-created money and direct sovereign spending created money is something I’m not sure how to consider. Both are “claims on future goods or services.” Does the spending of one create more new goods and services (which would offset inflation pressure) than the other? This, by the way, is also related to the comment by Andrew Anderson above.

      • The money injected by the banks that is offset in accounting terms by the loan that the borrower takes out, has a time period where the money is in the borrowers hands and not paid back to the bank. This money is paid back to the bank in regular payments (usually) over the life of the loan. If borrowing from a bank didn’t give you the opportunity to buy something now that you couldn’t buy now with the borrowed money, then there would be no point in borrowing money from a bank. This should not be hard to fathom for an MMT aficionado.

        I think this limitation on how long a bank loan’s principle stays under the control of the borrower is what makes the difference from the money the Fed injects. This difference is partially cancelled because the bank gives out the money out first, and receives payment later. The Fed inserts money by buying something from the private sector, be it government bonds, or commercial paper, or actual goods and services that rest of the executive branch of the government buys from the private sector.

        It probably takes a computer, or a computer model like Keen’s Minsky, to figure out how these offsetting factors balance out.

      • Andrew Anderson

        Does the spending of one create more new goods and services (which would offset inflation pressure) than the other? J.D. Alt

        Consider this example: A member of the government privileged banking cartel makes a loan for automation that dis-employs workers yet the factory can now sell its product cheaper while repaying the loan from increased profits. Is that good?

        Consider instead if the monetary sovereign simply distributed all deficits equally to all citizens and that banks were 100% private with 100% voluntary depositors. Then banks could still create SOME credit safely but largely they would have to operate under a “loan-able funds” policy as loan intermediaries and not be able to, for example, bypass the savings of workers in order to dis-employ them without compensation. Note that interest rates can still be low without any privileges for the banks via sufficiently large fiat distributions equally to all citizens and/or negative interest on large fiat account balances at the Central Bank.

        • There is a difference between distributing money and buying goods and services, When you give out money, you have no control of what people use it for. So there is the funding of infrastructure, for instance, that the private sector does not fund if it is just given money. So there are some things, that benefit the economy, that only we can collectively fund through our government’s purchases.

  8. The ‘fact to value quotient’ FTVQ is the missing component in all this and the relationship of ‘will’ to fact and value is the tripartite definition of harmony. Time is the board upon which all this is scored and notated as in a musical notation.
    What is missing today?
    Harmony is what is missing today because of a blockage in the reality of understanding what ‘will’ is, therefore ill-will abounds.
    Good-will can return, but the change from ill-will to good-will is not brought about by the intellect – this is spiritual work.
    See http://www.drt.global for more information.

  9. Human Constructs vs Natural Laws

    It is important to clearly delineate what are human constructs (eg money) and what are natural laws (eg gravity).

    Human Constructs are always arbitrary and open for debate and change. There is nothing natural or inevitable or required about them. It doesn’t matter how many dollars china has, what the banks say, etc. Desire to change and it is changed. Not so with natural laws, those must be worked around, dealt with.

    We do not need to work around human constructs, those that do not promote justice and equality must simply be ignored or destroyed if necessary.

    No compromise, no tinkering, no incremental progress. Justice or death.

    • Grand Pa Ken Smet

      Dear Patricia, I found your comment very appropriate and refreshing. I think you summed up the gist of the situation extremely well… So much so, I wonder what your opinion might be of how I thought the article should have ended, which is what follows:

      “Given the pressing needs…” THAT THE WHOLE WORLD NOW FACES BECAUSE NATIONAL NEEDS AND DESIRES ARE SO FAR OUT OF WHACK (that profit-making enterprise has no INHERENT ABILITY TO ADDRESS (access to land and affordable housing…global warming and rising sea-levels, etc) (I saw no need to change anything on the long list of all the things that private enterprise by itself can’t do) So, I agree, the time for Stage 5 money in the world is at hand… BUT, I DO BELIEVE THE BIG QUESTION IS: will we be able to invent the government we need on earth (THE WHOLE EARTH) to manage Stage 5 money IN A TIMELY ENOUGH MANNER TO SAVE US ALL? Or, are we stuck with a morass of nationalism and the never-ending-dysfunction of Un-United Nations on earth… until the end of time (which could be any day now)?

      “Your money or your life!” Has that ever been a question or has it always been and always will be an admonition forever… until the end of time?

  10. Mike P,

    Why does new money devalue old? If my neighbor now afford can eat, how am I harmed?

    There is no requirement that more money = it’s less valued or that prices go up. This is a result of greed. If I have 10 trinkets and 20 people wanting to buy them I’m not required to raise the prices as those enslaved to the market cult of supply and demand claim is the inevitable outcome.

    But it goes further than that. Why should we assume that it should be normal and right to even charge anything at all? Is it other arbitrary constructs that cause this to be so? The tieing of wage labor to survival for example?

    What it seems has happened is that we have allowed those in power to dictate the limits of our reality. We claim the beliefs are our own but they are in fact placed there by Mother Culture. We can’t actually fix any of our true problems without acknowledging this.

    • Hi Patricia.

      “Why does new money devalue old?” I don’t think it does, necessarily. But the value of money is derived from (very roughly) its usability in paying for goods/services/taxes/etc, and its scarcity relative to things it can be used to pay for. So *lots* of new money may be sufficient to significantly change the relative scarcity of money to goods, and that may devalue money (new and old).

      “There is no requirement that more money = it’s less valued or that prices go up. This is a result of greed.” I know what you’re getting at, but my question was about how the economy behaves as it is, not as we would wish it to be if humans were unselfish.

      “Why should we assume that it should be normal and right to even charge anything at all?” Because no one is capable of producing all of the things one might want for themselves, so we have to trade, and money makes that easier. Sure, it’s possible to imagine an ‘economy’ without money where everyone does what they’re good at and everyone shares their output with everyone else. Sounds lovely, but I fear that is a long way away 🙁

  11. David Harold Chester

    Merijn Knibbe might like to know that the subsequent measure for the value of a gold coin in ancient Palestine was also the shekel, a talent being a greater mass. In modern Hebrew the verb lishkol comes from the same root and means to weigh.

  12. Whether or not ” the system can absorb fairly significant quantities of new money without devaluing existing money” depends on what people do with the new money. If they see no investment opportunities and don’t have anything they want to buy, then the money goes into inflating things like stocks and/or bonds (treasuries). If the economy were robust, with plenty of things that seemed like good investments, then the people with the money would be trying to open factories and hire people. That could cause inflation in the wages and general prices. What happens depends on the situation.

    When people buy government bonds, the money that the Fed injects into the private sector goes right back to the government sector. The selling of war bonds during WWII was not to pay for the war. It was to keep money out of the hands of the public until the economy could focus on producing consumer goods again.

  13. Thank you for the comments pointing out that my “history” is greatly simplified and does not touch on many permutations and historical facts of money evolution. I should have placed a lot more emphasis on that fact at the outset. My fault. My goal was, in a short essay, to place modern fiat money in a broad historical context revealing that “money” continues to evolve—and to suggest how and why we are preventing ourselves, as a collective society, from going to the next stage (which, in my opinion, we desperately need to do).

  14. Andrew Anderson: Thanks for pointing this out. The way you have framed it, I think, gives the issue a new perspective.

  15. Second the motion to read Graber’s book “Debt the first 5000 years”.

    You could also read Randall Wray “Introduction to an Alternative History of Money” here http://www.levyinstitute.org/pubs/wp_717.pdf

  16. Actually, the US virtually arrived at stage 5 money with the issuance of true government promissory notes (Treasury versus bank) notes in 1862–Lincoln’s original “greenbacks”—at which time they saved the Union from default. I say “virtually” in recognition of certain constraints on their issuance–e.g. they couldn’t pay interest on the public debt, and they anticipated a future peacetime date at which they would be redeemable for gold. Nevertheless, as issued (and as subsequently circulated for decades), they represented true stage 5 money. Of course their issuance resulted in fierce bank opposition, wherefore US currency (paper money) promptly regressed to stage 3 money with the National Bank Act of 1863. We are now stuck at stage 4 in substantial part because Federal Reserve Notes are not issued by and for the elected government. Simply put, the government cannot, as presumed in stage 5, simply spend new money into the economy–statutes strictly prohibit the issuance of new Treasury notes. Instead, the government must borrow money at interest from the open market, originally issued by the twelve Federal Reserve Banks to its member banks. Albeit window-dressed to seem government-driven, money creation is thus primarily driven by private enterprise interests–the very private interests that stage 5 money is presumptively free of.

    While I can see that the public debt, as now structured, can be conceived of as not limiting public spending, that is not how it is conceived in political fact, and I don’t see any such conceptual jump being made politically, unless and until the Fed is formally nationalized, so that the creation of the base money supply becomes unequivocally a public utility. In the meantime, and in addition, public banking devices can and should be expanded to generate and channel public credit, as a placeholder for stage 5 money.

  17. Clifford Johnson, you said “unless and until the Fed is formally nationalized,”.

    Can you explain how you nationalize the Fed that is already an independent entity of the national government? The Fed is not a private bank. The Congress knows this, and the Fed knows this.

    Here is an article from the board of Governors of the Federal Reserve System – “Who owns the Federal Reserve?”
    https://www.federalreserve.gov/faqs/about_14986.htm

    Yes, I know that there are many people who are not on the board of governors of the Federal Reserve System who will swear up and down that it is a private bank. They will even misunderstand facts so that they can think they have proved it is a private bank. Every argument you bring up to prove it is a private bank I have a reference that will refute it. These references will explain the misunderstanding.

    Here, let’s start with one. The private member banks own stock in the Federal Reserve Bank. However, this stock is not like a normal corporate stock. It is more like someone buying a membership to Costco so that they can shop at Costco to get the discounts. These people don;t think they own Costco. Neither do the Costco stock holders think that the people who have bought “memberships” own Costco.

  18. Andrew Anderson

    It is more like someone buying a membership to Costco so that they can shop at Costco to get the discounts. Steven Greenberg

    Except ALL citizens should be able to safely and conveniently use their Nation’s fiat via inherently risk-free checking/debit accounts of their own at the Central Bank and not just banks, wouldn’t you think?

  19. Bernie Sanders and others have proposed bank services provided at US post offices. Remember that the Fed does wholesale banking. They let the private banks do the retail banking. The post office is one way for the government to get into retail banking especially for the people who are very poorly served by today’s private banks.

  20. The Bank of England provides one model of a fully nationalized central bank.

    It is the 12 Fed Reserve Banks that need nationalizing, rather than the Board. All stock would be government owned. The government would not owe anything to the Fed.

  21. The Fed is part of the government. The Fed is not allowed to lend money directly to the Treasury. However, any profits the Fed makes are paid directly to the Treasury. There is no stock in the traditional sense that you are thinking. The Fed’s Open Market Committee make all the decisions about buying and selling Treasury securities and commercial bank assets. The members of this committee are all government employees as are the members of the board of governors.

    I just learned from reading more at the link I gave you that the Fed is already audited by various independent auditors. Maybe Rand Paul and Bernie Sanders don’t like the way it is audited, but it is audited. You really ought to poke through those web pages to learn how the Fed actually operates.

    For other readers of this comment thread, you would find this page and the pages it links to as being very educational.

    “Who owns the Federal Reserve?”
    http://www.federalreserve.gov/faqs/about_14986.htm

  22. Andrew Anderson

    So there are some things, that benefit the economy, that only we can collectively fund through our government’s purchases. Steven Greenberg

    I concede your point; it would be silly to distribute fiat that would be better spent for the general welfare since that would be a waste of allowable price inflation space unless it were taxed right back. Good catch.

    But I should point out that 100% private banks with 100% voluntary depositors imply NO fiat creation EXCEPT for the monetary sovereign (e.g. US Treasury). Thus no lending by the CB to the private sector, no asset purchases by the CB from the private sector, no currency swaps, etc. Instead, if additional liquidity is deemed necessary* for the economy beyond that provided by normal deficit spending by the monetary sovereign then THAT liquidity should be provided by equal fiat distributions to all citizens.

    *Please note that “100% voluntary depositors” imply a risk-free, liquid-at-all times payment system** in addition to the payment system that must work through banks AND that all privileges for the banks, such as deposit insurance, have been abolished. Thus the banks would no longer hold the economy hostage.

    **Consisting of inherently risk-free debit/checking accounts at the Central Bank itself for anyone in the private sector, not just for banks, credit unions, etc.

  23. Andrew Anderson

    Remember that the Fed does wholesale banking. They let the private banks do the retail banking. Steven Greenberg

    The Gold Standard, by intention, made fiat creation by the monetary sovereign too difficult* for all citizens to safely and conveniently use their Nation’s fiat. This is supposedly to protect the value of fiat but the proper way to protect the value of fiat is to MAXIMIZE the legitimate demand for it by allowing all citizens to safely and conveniently use fiat via checking/debit accounts of their own at the Central Bank and by removing all privileges for banks and other depository institutions.

    Thus the current two-tiered money system, whereby fiat use is largely limited to the banks and the non-bank private sector is largely limited to the use of bank deposits, is an inherently unjust relic of the Gold Standard and ironically results in the self-fulfilling prophecy of making fiat creation dangerous wrt price inflation.

    *Because while the monetary sovereign can afford to pay any price to buy gold to back its fiat, the large scale use of gold backed fiat by citizens would:
    1) eventually make gold too expensive for anyone else to buy but the monetary sovereign.
    2) divert a large portion of the economy to the senseless acquisition of gold only to bury it in central bank vaults.

  24. Andrew Anderson,

    So much of what you say is nonsense, that it is hard to respond. It is called a fiat currency because it is not backed by anything. If the government buys gold to back the currency, then it is not a fiat currency. The definition of fiat is “a decree”. That means that the government tells you what it is worth by decree. There is nothing backing it but the decree that a certain amount will be accepted to pay your taxes. For the rest you are on your own. Until you can give up the idea that money has the meaning you attribute to it, then there cannot be a rational discussion about money.