Buy Photo

John Turnbull

I herewith offer this shot across the bow of our battered ship of state. Purchasing power is what we buy things with, and it comes in two forms: cash and credit. When we use cash we don't create debt; when we use credit, we do. However, we cannot pay for things with credit; we can only pay for them with cash. We create credit when we borrow from one of the Federal Reserve System's thousands of member banks, including the credit card services they offer. This is basically how it works.

We ask one of the banks for some of the money the system claims it lends, say $1,000. If the bank approves, it requires us to sign an IOU asking for credit and promising to repay this amount plus interest in the future with cash. It takes the IOU, opens a line of credit in our name, and gives us some checks to pay for what we buy. We leave the bank thinking there is cash in our account when there isn't any because the bank will monetize the amount of our IOU by calling it a deposit of cash, adding it to its own account and using it as a basis for more lines of credit. Since calling a horse's tail a leg doesn't make it a leg, the imaginary deposit of cash remains a deposit of credit.

If you doubt what I say, I quote Mariner Eccles, chairman of the governing board of the Federal Reserve, who, when testifying before the Banking and Currency Committee of the House of Representatives in 1947, was asked, "What do you mean by the monetization of the public debt?" He replied, "I mean the banks creating money by the purchase of government securities. All money is created by debt, and to the extent that the banking system creates deposits through the purchase of government securities or through the lending of money, either way, it is a process of monetization. You monetize private debt, but there can be no objection to that so long as the debt that is created is increasing production and employment. There may be such a thing as private debt that is purely speculative, such as the stock market and other operations, which are creating no production and no employment. It certainly is not a very desirable situation to have money created through that form of debt."

Since we do not have to monetize money, it is obvious that Eccles was referring to the monetization of the government IOU and all other IOUs created by borrowers requesting a loan. Eccles confused his ad-lib answer by saying the process created money. As far as I know, I am the only one to avoid the improper use of the word "money" by employing the term "purchasing power" and breaking it down into two categories: cash, which is money, and credit, which is not money.

Eccles stresses a fact that has to be at the center of any effort to change the course of human history, namely, that the creation of credit is not undesirable provided all of it is used to create jobs and increase the supply of goods and services. In short, it should not be used to make possible the purely speculative and destructive ventures that today's greedy wizards of finance offer to an unsuspecting public.

The moral of the story, if there is one, tells us that when we chose the capitalistic system of free enterprise as our economic system and debt as the means by which we would finance it, we allowed the baser attributes of our human natures to run amok, resulting in the terrible consequences now afflicting us. Therefore, I argue that self-preservation requires us to discuss in greater depth the pros and cons of both systems, thereby hopefully enabling us to come up with the best possible solution.

Since the final solution can only be put into practice by our elected representatives, especially those serving on the national and state levels, I ask them to courageously lead this discussion, knowing they will incur the merciless wrath of the special interest groups that are now trying to run the world.

John Turnbull of Bakersfield is a retired attorney and former candidate for the Kern High School District board of trustees. Community Voices is an expanded commentary of 650 to 700 words. The Californian reserves the right to edit all submissions for length and clarity.