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Zero Interest Financing

“...in my opinion, there never was a good War, or a bad Peace. What vast additions to the Conveniences and Comforts of Living might Mankind have acquired, if the Money spent in Wars had been employed in Works of public utility!” — Benjamin Franklin, 1783 - quoted from a letter to Joseph Banks.          Cost of the Iraq war could surpass $1 trillion

Finance American energy independence with interest-free loans

There is no reason why a modern computerized government cannot issue and manage interest-free loans for public works projects such as the construction of a new energy infrastructure. The interest-free loans need not be borrowed from financial institutions, foreign governments or private investors. The United States government could borrow the money from itself.

The U.S. national debt is now more than eight trillion dollars. And, because Congress has allowed the government to borrow money with interest, obligating the government to pay accrued interest to private “investors”, future generations of Americans will be born into financial servitude—stuck with paying interest on the huge national debt every year (over 400 billion dollars this year alone).

Interest-free money offers a way for government to borrow money without creating a secondary debt of hundreds of billions of dollars in interest accrued on the primary debt. More American tax dollars could be spent for public good if the government did not have to pay interest on the huge national debt.

In a perfect world government would always have a balanced budget — Zero debt — but we do not live in a perfect world and it is doubtful that we will see the national debt paid off. Zero interest is the next best thing. The huge interest payments are the poison in the national debt that is passed on to future generations. Think of Zero Interest Financing like defanging a rattlesnake: it won't kill the snake but it will make the snake less dangerous.

The U.S. Congress has the power to create money based on the economic sovereignty of the United States. The U.S. Constitution gives Congress the sole authority to create (coin) and regulate money within the United States and its territories. This means that Congress has the authority to create and assign value to our nation's currency without backing the currency with precious metals. Congress also has the power to create money without issuing U.S. Treasury Debt Securities, if necessary, backing the currency only by the economic sovereignty of the U.S. government.

The United States Congress has the responsibility to operate a money creating business on behalf of the citizens of the United States. Congress has delegated this responsibility to the U.S. Treasury department. Congress also established the U.S. Federal Reserve system to control and regulate the nation’s money supply. The U.S. Treasury department and the Federal Reserve work hand-in-hand.

If the federal government stopped issuing interest-bearing (or discounted) U.S. Treasury Debt Securities and instead borrowed money directly from itself, interest-free, then at least the huge yearly interest debt would stop growing.

How does government borrow money from itself?  By creating the money.

People are often confused about where money comes from. All new money, in the form of U.S. currency, is created by the U.S. Federal Reserve, not by the U.S. Treasury (although the U.S. Treasury prints and coins all physical forms of money when needed—less than 10% of all U.S. money is in the form of physical coins and dollars). The process is somewhat esoteric, but money is created, though not by the U.S. government directly. The government first creates value by issuing U.S. Treasury Debt Securities (Treasuries) and incurring interest-bearing debt. The Federal Reserve then issues the government U.S. dollars (Federal Reserve Notes) in exchange for the interest-bearing U.S. Treasury Debt Securities.

The Federal Reserve System uses U.S. Treasury debt securities (Treasuries) for its open market operations to execute U.S. monetary policy and as collateral for U.S. currency in circulation.¹ The Federal Reserve will then "sell" the Treasuries to the public whenever the Fed determines there is too much money in circulation—threatening inflation. In this way, the Fed can rapidly remove money from circulation if it needs to. Or, if the Fed thinks there is too little money in circulation, the Fed will "buy" Treasuries from the public, in order to put more money into circulation.

Where does the Federal Reserve get the money that it gives to the U.S. government in exchange for the U.S. Treasury Securities? That is the esoteric part. Trillions of dollars exist today - yet not one dollar is based on gold or silver, the money is simply created by the Federal Reserve as an electronic entry in the Fed's ledger.

If the money is created, why is the government required to pay interest?

Congress has given the Federal Reserve the power to create money to "loan" to the U.S. government in exchange for U.S Treasury Debt Securities.

Congress also has the power to authorize interest-free money to finance government. Congress could create the money by fiat and lend the money directly to the government, instead of "borrowing" the money from the Federal Reserve at interest.

Under disciplined monetary management this can be done without causing inflation. To accomplish this discipline, Congress would need to collect and remove from circulation, over time, an amount of money equal to the amount of money borrowed (created) and spent (put into circulation). This would be done over a fixed period of time, such as ten or twenty years beginning at the time the money is created and put into circulation. The purpose would be to maintain a balance between money created and money removed from circulation (destroyed), allowing a fixed period of time for the money to circulate within the economy before an equal amount is collected (by taxes or by other means) and then removed from circulation.

Article I, section 8 of the U.S. Constitution gives Congress the power to create interest-free money, if Congress chooses to exercise that power. However, it would be wise for congress to pass legislation to establish the rules for creating, spending, collecting and destroying the interest-free money.

Example Legislation:

Section 1: Congress will be authorized to create money based on the economic sovereignty of the United States, to be indistinguishable, in both value and form, from all other money coined and regulated by Congress through the United States Treasury or any of its surrogates, and to deposit the created money electronically into a special reserve account, within the United States Treasury, designated to hold the created money.

Section 2: Congress will be authorized to borrow money from the United States Treasury special reserve account designated to hold created money, on the credit of the United States, and without obligation to pay interest on the loan, by way of Appropriation Bill(s) passed by a majority of both Houses of Congress and signed by the President of the United States, for the purpose of financing the establishment and maintenance of Homeland national energy independence and other national infrastructure, with an obligation to collect taxes on imported products and services, or by other means, for the purpose of destroying, or otherwise removing from circulation, an amount of money equal to the amount of created money borrowed, and thereby accomplish a zero balance between created and destroyed money within twenty years following the time a given amount of created money is borrowed; but, a vote of two thirds of each House may cancel the debt, or any portion thereof, at any time.

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To accomplish the disciplined management of interest-free money, the example legislation obligates Congress to collect and destroy, over a twenty-year period, an amount of money equal to the amount of money created and borrowed. This means that for every one billion dollars created and borrowed, fifty million dollars must be collected and destroyed (removed from circulation) in every year for twenty consecutive years following the date that the money was created and borrowed.

Section 1 of the example legislation only gives Congress the power to create the money; it does not give Congress the power to spend the money. Congress would be obligated to deposit the created money electronically into a special non-interest bearing reserve account, within the United States Treasury, designated to hold the created money. (The Government Accountability Office [GAO] would audit the account and provide periodic reporting.)

Section 2 of the example legislation provides the only way that the created money could be transferred from the U.S. treasury and spent. Congress would have the power to borrow the created money, on the credit of the United States, interest-free, but with the condition that the loan is obtained through an Appropriation Bill(s) passed by a majority of both Houses of Congress and signed by the President of the United States. Section 2 also obligates Congress to remove from circulation, by collecting taxes (or by other means such as loan repayments from private companies, or the states and cities, that have been given interest-free loans to increase energy production and reduce oil dependence within the United States), an amount of money equal to five percent of the original loan, each year, for twenty consecutive years (the life of the loan). A balance between money created and money destroyed will be accomplished by the end of the twenty-year loan. Removing money from circulation would be the same as destroying money, provided that the removal is irreversible.

The Appropriation Bill(s) that authorizes the government to borrow the created money can only be for the purpose of financing the establishment and maintenance of Homeland national energy independence and for national infrastructure.

A two-thirds majority of both Houses will have the power to forgive the loan and leave the money in circulation. Imagine what it would be like if the government could forgive the national debt without hurting anyone.

History and overview of interest-free money:

The U.S. Constitution gives Congress the power “to coin money, regulate the value thereof, and of foreign coin”. Until the 20th Century, with the notable exception of Abraham Lincoln, U.S. politicians assumed that Congress did not have the power to create money without basing it on precious metals held in a government vault like the Bullion Depository at Fort Knox.

President Abraham Lincoln printed greenbacks (Government-issued United States Notes) to finance the Civil War. During the Civil War, greenback referred specifically to paper money not backed by gold that helped finance the Union cause. The greenbacks represented interest-free federal debt, backed by the sovereignty of the U.S. government, rather than by gold or silver. The greenbacks were considered debt because the government had issued a promise to redeem them (to remove the greenbacks from circulation at a future date). The greenbacks were not borrowed from a bank, or a private investor, they were created by the government and issued with a promise to redeem them at a later date with silver or gold at face value - that promise turned the greenbacks into debt, but without an obligation to pay interest to anyone.

If the greenbacks had been identical, in form and value, to all other currency coined by the U.S. treasury, rather than green on one side to identify them, then removing the greenbacks from circulation, over a period of time, by way of tax collection would have been the same as redeeming them. But, that was not acceptable to the 19th century bankers.

Abraham Lincoln was a genius who was ahead of his time. Modern computer systems can now make Lincoln's dream of interest-free debt come true. Zero interest financing, or interest-free debt, is an economic paradigm—a monetary system that is inherent within the U.S. constitution and intuitively makes sense for a democracy.

Some people still think Lincoln may have been assassinated because he advocated Zero Interest Financing – interest-free debt – to replace interest-bearing debt, whenever the government needs to borrow money. Conspiracy theories continue to this day, suggesting that the international banking people were not too happy about Lincoln’s monetary ideas.

After Lincoln's assassination the Banking industry, with friends in the Treasury department, re-wrote history and discredited Lincoln's ideas. The Greenback party formed in 1874 to promote Lincoln’s ideas.

Today, the U.S. Treasury prints and mints money for circulation, however, the money is no longer based on precious metals; it is based on values recorded in a ledger at the Federal Reserve. Although a percentage of U.S. currency is in the form of paper dollars and coin, most U.S. money remains in the form of electronic entries in bank ledgers, with the daily ledger balances and inter-bank transfers recorded at the Federal Reserve. Modern technology has made it easy to transfer money electronically between banks and accounts. People and corporations are increasingly using credit and debit cards, online payments, and wire transfers.

The U.S. monetary system is now based entirely on debt (interest-bearing debt), not precious metals. The value of the U.S. dollar is based on trust in the U.S. Federal Deposit Insurance Corporation (FDIC) and faith in the U.S. economy. The Federal Reserve creates new money and then the private banking system expands the money supply by lending. Lending, spending, depositing and re-lending will expand the money supply. How? The same money exists in more than one place at the same time in the form of entries in bank ledgers.

Here is how it works:

The government borrows money by selling United States Treasury Securities. Treasury Securities, also known as debt instruments, are offered in several different types: the T-bill is a short-term Security (one year or less) sold at a discount (for less than full price), which the government promises to buy back at full price on the maturity date. Two other Securities are the Treasury note and the U.S. Savings bond; both offer a fixed interest rate for longer terms.

The federal government sells Treasury Securities when it needs money to operate its departments and agencies, and to make interest payments on the national debt. In this way, the government borrows money to finance its operations and to pay off previously borrowed money, perpetuating the endless growth of government debt. As of January 2008 the national debt is more than nine trillion dollars (that comes to over $30,000 for every U.S. citizen: man, woman and child). The total dollars paid out each year by the U.S. Treasury for interest payments on the national debt – for the privilege of borrowing money to finance the government – is between 400 and 500 billion dollars per year depending on interest rates. By comparison, the annual budget for the Department of Defense is $400-500 billion. The interest on the national debt is now equal the cost of national security. Most of that interest is paid to foreign "investors".

The various government departments and agencies will spend the borrowed money to pay for their expenses. Then whoever receives the money as income will deposit the money into their local bank. The bank is then free to re-lend the money to other people, who in-turn spend the money, which is then re-deposited in the banking system by a different person or company, and then re-loaned again, and re-spent, and re-deposited, and re-loaned, and so on. Each individual deposit retains its value as an entry in the bank ledger, and the money is then re-loaned to someone else, spent, and deposited again by yet another person, becoming a new entry in the ledger.

Economists may argue that this explanation is too simple; yet, anyone can follow the “paper trail” and see how the private banking system expands the money supply by lending. This system may not be at the same level as a con man’s slight-of-hand; however, any explanation that denies that new money is created by expansion of the money supply through lending should be considered an attempt at slight-of-mind.

When a government creates interest-free money for its own use, with an obligation to remove an equal amount of money from circulation at a predetermined date, the government has created a Zero interest debt, because the government would not be required to pay interest to itself.

Interest-free money will produce new sustainable wealth if it is used wisely. However, if interest-free money is created for the purpose of paying for social services or for military expenses, it will not stimulate the creation of real or new sustainable wealth, and therefore it will not generate the new sustainable tax revenue needed to pay back the loan (remove the money from circulation).

However, if interest-free money is created to build new public infrastructure designed to support or increase new economic activity then new wealth will be created, generating new tax revenue sufficient to pay back the loan (to remove the created money from circulation). The new wealth would also provide additional tax revenue for social programs, so interest-free money would not be needed for those programs.

Because energy has become the economic foundation of a modern society, the U.S. government should create interest-free loans to stimulate the growth of the national energy sector, which would in-turn stimulate growth in all other economic sectors.

Finance the nationwide construction of renewable energy farms, synthetic fuel refineries and many other energy projects with Interest-free loans—put America to work building energy independence.

American energy independence would create tens of thousands of new sustainable jobs in the United States and create billions of dollars of new economic activity beyond the energy sector.

Who owns the Federal Reserve? “The Federal Reserve System is not owned by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

“As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as independent within the government.

“The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about ownership. For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

“At the end of each year, Reserve Banks return to the U.S. Treasury all earnings in excess of expenses necessary for operations.”

How does the Federal Reserve Create money? “Purchases or sales of securities by the Federal Reserve, whether outright or temporary, are called open market operations, and they are the Federal Reserve’s principal tool for influencing the supply of balances (money) at the Federal Reserve Banks.

“Purchasing securities increases the quantity of balances because the Federal Reserve creates balances (money) when it credits the account of the seller’s depository institution at the Federal Reserve for the amount of the transaction; there is no corresponding offset in another institution’s account. Conversely, selling securities decreases the quantity of Federal Reserve balances (money) because the Federal Reserve extinguishes balances when it debits the account of the purchaser’s depository institution at the Federal Reserve; there is no corresponding increase in another institution’s account. In contrast, when financial institutions, business firms, or individuals buy or sell securities among themselves, the credit to the account of the seller’s depository institution is offset by the debit to the account of the purchaser’s depository institution; so, in such cases, existing balances held at the Federal Reserve are redistributed from one depository institution to another without changing the total available.

“Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities held by the Reserve Banks.” In other words, U.S. Treasury securities are collateral for the creation of U.S. money by the Federal Reserve Banks. The process does not literally require the immediate printing of new currency. The Federal Reserve account for a member bank can simply be increased electronically. However this will increase the Federal Reserve's requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance.
For more information, see The Federal Reserve System: Purposes and Functions

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