By: Thomas Lee Abshier, ND

Summary: Part 1: In this essay I propose a new paradigm for increasing the money supply without inflation, reaching full employment, and steadily increasing the wealth of all economic classes.

Summary: Part 2:  Like a watch or clock, the economy has many necessary and interdependent parts which require proper design and interface.  I contend that money has been improperly defined in economic theory and popular understanding and thus misused – creating dysfunction throughout the entire socio-politico-economic system.  Money mediates every exchange of goods and services, and it must maintain a stable representation of value to create the climate of trust required for robust trade.  Money supply should only increase when coupled with (and thus initiated by) a reliable contract to increase new value and productivity.

Issues of employment, inflation, and recession all resolve when the economy is properly organized by law and custom.  The foundational conditions required for economic activity are: 1) workers willing to work, and 2) consumers willing to consume.  When these foundational conditions are present, any recession in work and consumption is due to problems of law and/or trust.  A recession is an artifact of restrictions on production due to the unavailability of credit, and the concurrent restrictions on consumption due to saving and/or unemployment.

New Definitions of Money: Money: Money is a medium of exchange, representing goods and services already produced, or committed to be produced.

New Money: New Money is money created out of nothing.  New money can be responsibly put into circulation to increase the money supply.  New money should only be issued with a contract to produce new value, and an increase in the rate of producing new value.  New money is created irresponsibly, for example, when the Fed buys T Bills (not capitalized by borrowing from foreign countries, businesses, and individuals), and the government spends them into the economy for entitlement programs.  In the current system, the Central Bank (Federal Reserve) can loan money (created out of nothing) to the Treasury (to spend into the economy to fund legislative mandates) or banks (to loan at interest).  The government and banks pay back the Fed with interest; the government repays with taxes collected, and banks repay with dollars collected by loan repayment.  There is nothing immoral or inflationary about this process.  New Money should only be issued to borrowers committed to producing new value at a greater than the dollar quantity loaned.  Such loans would typically involve increases in productivity (i.e. the rate of producing goods and services).  I propose that every local bank be authorized to loan new money to businesses that project an increase in the production rate.  No bank loan should not be created entirely out of “New Money”.  Rather, new money should be related to the projected increase in productivity.  The percentage of new money loaned should be at the discretion of the bank but within limits established by modeling and associated legislation.  Money loaned to create new physical capital (tools of production), has the potential to increase the rate of production (productivity), and thus produce value multiplied many times above the loan amount.  Loans for consumption (e.g. cars, houses, boats…) are dependent upon the production of the economy for their repayment (i.e. by employment producing income from the production of other goods and services).  The economy, in general, should be expanding, and monetary policy should be applied to keep the value of the dollar stable (no inflation nor deflation).  Monetary policy should use primarily a diffuse, at local bank discretion, constant injection of new money related to expanding productivity.  And, when inflation or deflation appears, the local banks would then change the percentage of loans for production and consumption.  The privilege and responsibility to introduce new money has been badly abused.  The Central Bank appears to have used its capability to issue new money to indirectly monetize the debt by buying Treasury Bills (when sales of T Bill issues to foreign countries, businesses, and individuals does not cover the total bond issue).  This policy is inherently inflationary.  Government can abuse its power to issue new money (i.e. not borrowed or taxed) by borrowing from the Fed and creating a T Bill that is then spent by the Treasury.  This policy may be more common to pay in the future as the taxes are taken in to fund Social Security, Medicare, and Welfare are insufficient.  The unfunded liabilities for the “entitlement” programs have the potential of creating the same problems we see in Greece and the PIIGS economies.  Loans are contracts to repay with interest and should be issued in response to the desire of the community for more production and consumption.  Regarding the primary drivers of the economy, there is an unlimited desire to consume, but a limited desire to work.  Thus, consumption is necessarily limited to the goods and services available (although this is flexible when there is more production), and by the income and assets of the consuming class (which is flexible, dependent upon the level of employment, willingness to draw down savings, and borrowing).  Production depends on willing entrepreneurs and the promise of payment for providing valuable goods and services that meet the wants and needs of consumers.  The producing class is paid by the consuming class, which enables the producing class to consume.  Consumers (should also be producers in the other portion of their life) are willing to trade their work only for what they consider valuable.  The reason for creating “new money” would be to gradually increase the money supply, and this is necessary and should increase at exactly the same rate as income and consumable value.  The goods and services produced by the authorization of the New Money, give the new money “reality”, and the increased rate of production prevent it from being inflationary.  Coming at the question of the rate of introduction from a different angle, the percentage of loans issued as new money should approximately correspond to the percentage of savings.  This is because there will be a time lag between the issuance of new money and the manifestation of an increased rate of productivity.

Loans on Assets: The current monetary system depends largely upon banks borrowing money at low-interest rates from other money funds, and re-loaning that money to borrowers at higher interest.  Some would declare such a process to be “printing money”, but in fact, it is not.  The money loaned by a bank, even though above the level of deposits, is taken out of the account of the person/institution who loaned it, and given to the account of another who borrowed it.  The amount of such loans that any particular bank is authorized to make is at its base dependent upon the total deposits in the bank.  The banks can loan out 90% of their total deposits, but those loans are now assets.  Loans made on consumer goods are clearly assets with a certain repossession value, such as cars and houses.  Likewise, a business loan is an asset, which in the case of repayment default can precipitate a claim on ownership of the business.  A functioning business has a cash flow, profit potential, and/or a liquidation value, which can be sold to regain at least some of the principle.  Intangibles such as a company’s “goodwill” are also an asset.  The banks own assets, which include deposits by its customers, as well as the value of the loans they have made.  Banks can use those assets as security, and borrow money based upon those assets.  Each new loan is an asset, and a portion of the value of that loan could likewise be used as the security to make another loan, etcetera.  The problem with this scenario is when the value of the assets decline due to deflation, recession, or falling demand, the Mark to Market rules demand recapitalization of assets.  Thus, most of the government “bailout” of banks has been in the realm of buying distressed assets to keep banks from failing due by falling below the Sarbanes Oxley defined (Mark to Market) asset to loan ratio.  Loans on assets do not increase the money supply, and should not be inflationary as long as the percentage of loans used for production (i.e. the consumable value produced) approximately meets the loans for consumption.  When wars and regulatory burden takes money away from the pool of consumable value, the money supply is at risk of inflation unless savings reduces the consumptive pressure on prices.

Real Money is the mature stage of money after issue/initiation/creation as new-money.  Money goes through stages of maturity:
1) Examination, approval, contract, and issue,
2) Expenditure to establish productive infrastructure and production,
3) Distribution, marketing, and consumption.
In each stage, new-money becomes more “real” as it moves from trust/faith in production to actually available consumption.  Goods and services are real wealth.  New money becomes real money through the general sequence of contract, production, distribution, and consumption.

Circulating Money is the script used in daily commerce as compensation for value produced by work.  Circulating Money is given value by the production of consumable value associated with its issue.  Money only has value for people and is ultimately all disbursed to workers in return for labor (white and blue collar, internal and external to the company).  Money is given value by the societal agreement and trust between workers as to the meaning of the dollar scrip.  All workers become consumers, and society recognizes the scrip they receive in payment for labor represents the authorization of its bearer to redeem value from other workers.

Saved Money is a store of value for later redemption.  Given that the delay between production, disbursement, and consumption may be many years, the economy-society must honor the contract to redeem over/between the generations.  The goods produced are not the goods consumed, the redemption is fulfilled by others not involved in the original service contract/transaction.

(Note: to effect the changes proposed, these new Concepts of Money should be propagated through the media, educational establishments, and financial/capital institutions.)

To resolve the current stagflation-recession, the financial system should institute a new mechanism to fund with “new money” startup businesses/industries desiring to create a new product or service.  This proposal would, of course, necessitate a legal framework that authorized the creation/issuance of new money by banks, as well as an entire body of monitoring and feedback that regulated the rate of issuance.

1) Startup & Productivity Expansion Funding: Change the relationship between business, banking, and government.  Encourage individual banks to fund businesses for expansion and production if they demonstrate the customary qualified business plan, and the necessary competence, innovation, and industry.  The current regulatory environment prevents loaning money to business because of concerns about debt to loan ratios.  While the solidity of investments is important, fear of failure is a self-fulfilling prophecy.  Business, banks, and the economy all fail when regulatory safeguards are so stringent that loans become unavailable.  The question is whether with this legislation/proposal to inject new money into the economy if the enterprise can realistically generate an increased rate of production of goods and services?

Of course, any business may fail due to demand deficiency.  And in a recession, a business may fail due to lack of available consumers.  Thus, a gradient approach to business growth is safest — test the market, and expand in increments.  The startup is not as safe, but this proposal is based upon the theory that if people want to work, and people want to consume the goods/services, then it is both beneficial to the society and individual to authorize the work and associated production of valuable goods and services.  The effect is payment of workers, and the multiplication of this effect millions of times throughout the economy.

This is one of a suite of concepts/proposals that will revitalize the economy.  It illustrates the concept of “new money” as a commitment to creating new value.  By placing trust in men who are committed to serve by work and production, the needs of the economy can be met.  Employees are hired, they then have money to consume.  If there is consumption, then those who have worked to produce are able to pay back loans, hire more, borrow more, and expand.

This is a seed money concept.  Giving trust to a worthy workman, to which he adds hard work, can create vast multiples of value for consumption.  Work and consumption flow naturally in the presence of a need, which enables the creation of new wealth from new money.

Such “cash ex nihilo” loans (money out of nothing) could be inflationary if too many are issued at the same time, i.e. before the loans have had enough time to produce goods/services for consumption.  That is, the impact of new money is determined by the demand it puts on consumables.

With a large injection of new money into the economy for startups, if there is an appropriate level of saving compared to consumption, no inflation will result.  Inventory databases can inform the consuming public and business about limits in the supply pipeline.  Having been informed, the supply chain can increase production, and the consuming public can delay optional purchases to ease the inflationary pressures.

The Problem – Part 1: The purpose of regulating the money supply is to prevent inflation (i.e. too few goods, and too much money, resulting in inflation).  Money Supply (and inflation) is currently regulated by the Fed through the regulation of the prime interest rate.  The interest rate charged by the Fed is passed on to banks, which in turn makes money more or less expensive to borrow.  Banks can lend 15 times more money than they have on deposit, which is the method used by the Fed to increase the money supply.

The Problem – Part 2: Having explained the normal, accepted, (somewhat) financially reasoned method by which money supply is increased, we must proceed to list the other covert fiat-methods by which the Federal Government injects money into the economy – either to manipulate employment or inflation numbers.  1) The government has the authority to appropriate money for expenditures, and create debt (Sales of bonds (to people or nations), or borrow money from the Federal Reserve (which is known as monetizing or printing money)) if its tax revenues do not meet its expenditures.  Government debt does not necessarily increase the money supply; for example, bonds purchased from citizens, simply takes money out of circulation for one person and puts it into the hands of another to consume.  Foreign debt (T Bills issued, and purchased by Foreign governments) can increase the money supply compared to the goods available.  2) Money issued directly to the Federal Government via “printing”.  When there are no domestic or foreign bond buyers to fund the deficit spending of government, then the Fed issues new-money into the account of the government to purchase goods and services.  Such expenditures are in essence counterfeiting since the money issued has no correspondent production, or commitment to produce associated with it.  It is merely a fiat authorization to take from the pool of consumable supply.  Such money supply pressure is inflationary.  And while inflation may not be evident immediately, the market will eventually recognize the demand, and the prices of goods and services will rise.

The basic principle being illuminated here is that money must in some way represent value or commitment to produce value.  Any scheme of money introduction into the economy divorced from these principles is arbitrary, and will at some point produce unintended consequences.  Thus, we should exit the monetary policies based on regulating the rate of bank loans based on interest rates, as well as eliminate government debt financed by printing money.

Printing money to finance government programs is inflationary since more dollars and committed buyers chase the same quantity of goods and services.  This is, of course, unfair to those who have worked, been paid, and now want to consume.  Obviously, the legislative method of borrowing/printing and injecting into the money supply is a foolish use of credit if done chronically for purposes of consumption (lifestyle – e.g. Healthcare and Retirement).  Such a policy will eventually lead to inflation unless production and consumption are equalized by increased production or reduced expenditure.

Further examination of the current system of expanding money supply through Bank Loans:

During times of slow national economic activity, the Fed will often attempt to spur economic expansion by lowering the prime interest rate.  As explained above, this ultimately results in lower-priced loans for business and consumers.  This expansion of money produces inflation if the supply of goods and services does not increase, and/or if people do not save.

The problem with this system is that injections of new money are unreliably related to a commensurate increase in the availability of more goods and services.  And, any change in the balance of money supply (demand) and the availability of goods and services (supply) will result in either deflation or inflation.  Implicit within the mind/heart/soul of those who worked, delayed consumption, and saved money, is a trust in the contract represented by money and the society/economic-system, that they could redeem the money earned & saved at the same value in the future.  For the government to forcefully impose any policy upon the society/economy which devalued the money is the equivalent of societal theft and breach of contract.  The implications of institutionalized theft are both spiritual and temporal.  1) God will not bless a people with miraculous intervention when they corporately violate His laws of relationship.  2) A people who see that their money is purposefully devalued as a result of governmental theft (disguised as charity – that may be motivated by pandering to a dependent voter base) will be poorly motivated to work and save.  The prosperity of a society can only stand on the Righteousness of a people both in terms of their individual and corporate character/actions.

As mentioned above, in an effort to keep the value of the money inflating at a modest and constant rate, the Fed watches the economic indicators for signs of inflation or recession.  When alerted by the indicators, the Fed changes the prime rate to either stimulate or depress the economy.

Again, the point of this essay is that Keynesian Theory, and all the other currently used tools of monetary policy, are not addressing the fundamental issue of what must be regulated.  Money must maintain its value constant, not slightly inflationary, and not slightly deflationary.  The Gold Standard is not the answer.  The answer is a monetary/fiscal policy which expands new money in relation to the contract to produce new goods and services.  There is no other justification for increasing the supply of money, and no other criterion or endpoint need be added.

Money is a transferable contract, representing both the obligation to provide value and the right to receive value.  Buyers and sellers, workers and employers, are on different sides of the money-contract.  The buyers and sellers have different rights and obligations in the contract.  New-Money acquires its initial value by being issued by a societally authorized party, such as a bank, who holds the borrower accountable to perform the terms of producing new value.  The issuance of new-money should follow upon a rigorous examination of the credit-worthiness of a borrower in terms of his ability to produce the stated value.

The center of the concept of creating/issuing new-money is the promised commitment of the borrower to create new-value in return for receiving money.  That money provides the borrower with the right to immediately redeem “already-produced-value”, and compensate labor for their effort in assembling materials into new goods and services.

The intended effect of issuing new-money is the authorization of the borrower to accumulate the materials, labor, and intellectual property required for assembly of a new and useful level of organization (i.e. goods and services).  The industrial loan would be the most obviously worthy of creating new-money in return for the contract to produce value.
There is an inherent process-lag between the introduction of new money into circulation and the actual availability for consumption of the contract-associated real-value.  Ideally, the economy is large enough to buffer the newly authorized demand for labor and materials without causing shortages or inflation.  Prior to the performance of the contract, the newly issued money necessarily will be drawing down on the economy’s store of goods and services.  Such demand is inherently inflationary unless there is a culture of saving money (delayed consumption) in the society-economy.  As the contract is progressively fulfilled, the new-money becomes more “real’, as it now has value associated with it for consumption.  The contract was created on the faith of eventual production; delayed consumption enabled acquiring goods and utilization of unemployed labor.

The time lag between the issuance of new-money and the manifestation of the promised goods and services clearly points to the importance of saving a portion of income.  The quantity of saved money not claiming immediate redemption reduces pressure on the economy’s inventory of unconsumed value.  An appropriate savings rate reduces buying pressure to the level commensurate with available inventory, which eliminates inflationary pressures.  Saving is at its essence delayed consumption, which frees labor and already-produced value, which can be used in the production of consumables, or the means of production, thereby increasing available consumables far in excess of the value of the original new-money loan.

In other words, when the economy diverts its consumption from, a satisfaction of immediate wants, and accepts the meeting of current needs as sufficient for today, it may divert maximal resources to installing the machinery which can massively multiply the efforts of labor.  When the installation is mature, an industry can justifiably compensate men with wages increased in correspondence with the greater rate of value production their machine-assisted labor has produced.

Thus, as a society-economy, we must focus on the installation of ever more leveraging of labor’s efforts to meet the wants and needs of an affluent and prosperous society-economy.  The limitations of current productivity and the economic engine are only temporary in the face of a people committed to multiplying their effort with machine-energy-control-system-assisted production.

The desirable goals of universal healthcare and luxurious society-wide compensation in the retirement years are realistic only in the presence of an extremely productive society-economy.  Without such massive increases in productivity, we will be left with the eternal battles between the societal factions, each of which desires to consume more and better.  The classes and factions will engage in various forms of economic-political warfare to attain or retain their higher level of consumption.

The arguments used by each class to justify their particular desired levels of consumption may, in fact, be morally justified in terms of effort, fair compensation, and human need.  But we see the temporary and destructive nature of this solution by using a simple illustration; by applying a socialistic/communistic/Statist solution to “make it fair” ends up, simply redistributing the same sized pie, rather than baking more pies.  Those who worked hard to make pies are less motivated to make pies when the obligations of enforced charity are thrust upon them.  The end of such a solution is a universal reduction of affluence.

Forced charity via the power of the State to redistribute wealth may seem morally justified on the basis of fairness or compassion.  But this often-tried solution makes some slightly richer, and others much poorer.  And, even though such a society is now more “fair” ‘socially just” and “egalitarian”, a large number of people will still get substandard retirement and medical care.

The problem is that society has not yet adequately harnessed the labor-multiplying effects of energy-intelligence-device-assisted production.  If the State wished to intervene and require the increased investment in means of production, and the minimalist consumption of the society for a season, this would be helpful.  It would not be constitutional for the Federal government to place such requirements on business, but the State could exert this level of force.  I do not advocate the use of State-based force to require the improvement of the Nation’s productive base, because the State has a notorious record of poor judgment in manifesting the specific requirements of production.  But, I do believe the State should use the power of the microphone, the media, and moral persuasion to educate the masses of consumers and businesses, of the concept of investment, delayed consumption, and the hope of future prosperity based on productivity and a relatively short time of sacrifice.

At each stage in the development of the engine of production (labor-resources-means-of-production).  Thus, without expanding that rate of production, there is a necessary limit to the rate of wealth production, which is in turn available for consumption.  The only way for the society to actually meet the needs dictated by social-justice is to increase productive capacity.

This argument for social-economic justice (classless-equality) drives the Communist rhetoric and their call for class warfare as a solution to the theft of inordinate resources, for value not produced by the owner-investor class.  Communist theory proposes that the classless society will bring in an era of equality where the workers are justly compensated.  They argue that the worker is the true source of wealth generated by industry, and that the owner-investor class has stolen the fruit of the workers hands, and the tools of production should be given to the workers.  The Communist solution is to simply redistribute the small/insufficient quantity of consumable value among everyone.  (Note: History has shown that when such Statist wealth-redistribution mandates are imposed upon a people, that the workers live in a rigid, freedom-less, gray world of poverty, while the ruling class lives in relative luxury.)  Such a solution is short-sighted, focusing on the redistribution of limited goods and services, rather than on increasing the absolute quantity of value available for consumption.

Reaching that goal of universal prosperity requires sacrifice of consumption in the present.  Labor, management, ownership, the investing class, and government, should divert its efforts to installing the maximal amount of new productive capacity, leaving only the appropriate residual to manufacture for the essential needs of the workforce and the dependent class.  The wine and oil of luxury will be available in large amounts if the workers and citizens sacrifice consumption for a season.

Government can facilitate the nation-wide installation of productivity by creating the legislative environment that motivates investment.  Specific policies which would support the expansion of productivity include low Capital gains tax, no inheritance tax, return to the States the authority to establish laws regulating all aspects of moral life (education, sexuality, drugs, commerce, abortion…).  And, to connect with the initial thesis of this essay, money and debt issues would be kept in balance by the contracting of projects through loans funded by new-money in proportion to the obligation and projection of new wealth created.

We must cease in our State-based efforts to forcefully redistribute wealth, and thereby create equality.  Sadly, it will not be possible to instantly turn off the flow of welfare, Medicare, Social Security money, and fully/productively employ the working class, and turn the care of dependents into self and voluntarily funded private programs.  But, this will naturally come as the society embraces the goal of installing productive capacity, and letting Capitalism/Private Enterprise be the engine of realizing that goal of adequate consumption for all.

But, productive capacity is only one aspect of creating a pleasant/satisfying societal experience.  Within the boundless availability of goods and services must be an esthetic balance of mass-production, crafts, and the human touch.  This balance will only manifest in a Righteous Society, one which bends the knee to the God of the universe, and listens to the counsel of the Holy Spirit for guidance in the allocation of resources.

This discussion began with an analysis of the proper perception of value as it related to the creation of New-Money and the connection of real value to that new money to have it actually represent consumable wealth.  The creation of New-Money is an important step in the proper valuation of money as it relates to the right to consume real value.  Upon creation, New Money becomes Circulating Money, which can be used for either taking ownership of tangible value, or saving the money for later consumption.  (Note: this is the commonly used principle of investment.  The value may be stored in various investment vehicles such as savings accounts, bonds, equities, precious metals, real estate, collectibles…)  There is a tight interlinking between delayed consumption, investment, and redirection of resources to produce the labor-leveraging tools of production, and the resultant prosperity.  The Communist solution to redistribute wealth, eliminate classes, give the means of production to the works, and foment class-warfare to institute this system, is unworkable because it deflates the human spirit.  Prosperity will only come when the people are motivated, and when productivity rises.  This will only happen when all the spheres of society are in harmony, agreed upon this common goal, and willing to participate in the time of prayer and fasting required to install the new means of production.

The various investment instruments all are vehicles that could be used to direct Circulating-Money into the installation of labor-multiplying machine-assisted production.  This installation enables the realization of ever greater ratios of new-value production rate in proportion to the effort of labor.  Lest we be excessively focused on the material and intangible factors and phenomenon such as the value of money, return on investment, profitability of corporations, or the size of government, we must remember that the entirety of the purpose of work, economy, and government is the satisfaction of human needs and wants.  Thus, consumption is the end goal of all labor and investment, and consumption is the redemption of the credit stored in money for the tangible goods and services society has contracted to deliver to the bearer of legal money.

Money arises first as a contract to return value in promise for value consumed.  Thus, the individual who consumes value produced by another has the obligation to repay equal value.  The scrip of money would be the record of obligation.  In the distributed economy, governmental agencies and banking institutions create new money to be placed in circulation, and that money can claim already produced value.  Thus, the introduction of new money must be regulated to a rate commensurate with the rate of new-value introduced into the system.  The foundational transaction that authorizes the issuance of new-money is the establishment of a contract to produce new value.