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Reassessing the Greenback and Other Alternative Monetary Systems

by on October 13, 2011

The Greenback was the Dollar, or United States Note, printed by Abraham Lincoln’s Treasury to finance the Civil War.

It was a paper dollar, debt free and, therefore, also interest free. It was spent into circulation by the U.S. Treasury department beginning in 1862. Although modified many times through legislation, U.S. Notes were printed until 1971. Even today a minute number of Greenbacks are still in circulation.

Debt-free paper money was the basic design for most early government currencies as usury was heavily frowned upon. The Continental was similar, as was the paper printed by the Chinese Emperors. In this essay we will use the term Greenback to describe this basic model.

The Greenback is both much maligned and much admired.

The Libertarians and Austrian Economists are concerned with the inflation that the Greenback brings. They rightly point out that every debt-free government currency has inflated itself into extinction.  This is their primary motivation for demanding a gold standard to hedge inflation.

Populists and others praise the fact that it’s debt free (interest free), which clearly is a great boon to society, as it stops the interest drain to the plutocracy.

Money supplies operated by government are usually prone to long term inflation, which can often be quite severe.

Currencies operated by the Banking Fraternity (today’s Dollar, Yen and Euro, etc) are usually characterized by boom/bust cycles, also known as the business cycle.

When governments can print their own cash and spend it into circulation, they clearly have a great incentive to inflate the money supply. They basically have a free lunch, spending the newly printed dollars at full value, after which the population pays when prices rise as a result of these new dollars.

Besides the hidden inflation tax, when they do this, it results in more actual taxes. Taxes must be raised by governments to maintain the higher cost of operating public services due to inflation and increased spending.

Therefore, inflation does not hinder, but actually facilitates nominal economic growth. This appears to be beneficial to both the population at large and the government because the GDP is artificially inflated.

The Central Banking Fraternity usually creates the business cycle; first inflation, then deflation, inflation again etc. During the days of gold-backed currencies which operated in modern Europe up to the thirties of the last century, the norm was deflation, alternated by asset bubbles. Since the Second World War and especially after 1972, they dropped their peg to gold and operated a debt-based paper currency. Inflation was then the norm, alternated by deflationary depressions.

Most importantly, banking currencies are now always interest bearing. For every unit in circulation, interest must be paid. This should hinder the velocity of money circulation and is ultimately deflationary, thus hindering economic growth.

However, governments could of course create some interest-free credit for itself.  But this would also add to the inflationary pressures, because it would probably give itself far more credit than it could pay off — as we have seen in recent times but with interest attached.

There is another major limitation to the Greenback: it still needs banks for credit. Savers are needed to capitalize those banks, both in a full reserve or fractional reserve environment.  Those banks will operate with interest, preserving at least some of the drain to big banks, but eliminating the blood-sucking of the central banking cartels.  Interest-free mortgages will not be available.  Additionally, savers could also be very vulnerable with an inflationary Greenback.

Also there is the point that it is very easy to get debt-free money in circulation (just print and spend), but it’s very difficult to get them out of circulation. Credit-based currencies are taken out of circulation when debts are repaid, but debt-free money must be taxed and then not spent again to discontinue circulation. This is not the kind of discipline governments are known for.

There is yet another important point to be made: governments preside over too large of regions to manage currencies properly.

A perfect example is the Euro. It is now well known that the Euro’s one-size-fits-all monetary policy is disastrous for all parties. There is a structural imbalance in competitiveness. Germany and its satellites are great exporters, and therefore importing tens of billions of euros annually from less-productive economies in Euroland. This results in deflationary pressures in these less competitive regions. This brings strong pressures to these nations to either adapt, or to suffer.

But what for? Must a Spaniard be as thrifty as a German? They enjoy a more pleasant climate and may have other priorities. It is the collectivists in Brussels and Frankfurt deciding for them through monetary policy.  If a country no longer determines its own tax and spend policies, what sovereignty do they really have?

This is the same everywhere. The United States has known one basic monetary unit ever since their independence. Because regions like Arkansas, Montana etc are less competitive, relatively few dollars circulate there. As a result there is not sufficient capital to allow full employment.

This problem exists even in small countries. For instance The Netherlands, which has been one of the richest countries in the world ever since the days of the Amsterdam Empire. But the Dutch economy is to this day centered around Amsterdam and the other major hubs in the western area of the country. The north and the southeast have suffered depressed economies for centuries for no other reason that the competitive west sucks away liquidity which is needed for local trade.

National currencies have a right to exist: they enable transparent pricing and trade throughout the nation.

But perhaps they should be complemented with regional currencies, allowing cheap credit to facilitate regional trade. This is important, because even in this age of Globalization, regional economies still provide a very substantial percentage of what is regionally consumed. This regional production should not be dependent on national, let alone supranational currencies. It should not be endangered by the tampering with money supplies managed elsewhere.

The idea that these regions must compete and adapt to centralized money is a goal of the Globalists and their control of capital: as if regional economies exist to produce better returns for their coffers.

Economies should exist to provide the population with the means to survive so they can focus on the higher aspects of being human.

Considering these pros and cons of government-run debt-free currencies like the Greenback versus money supplies provided by banks through fractional reserve debt-based money, we must conclude that the Greenback is probably much better than allowing the banks themselves to create money.

Yes, it can (and will) be inflated, but the boom bust cycles seem worse for society. However, the Greenback clearly is not a fully functional model. It greatly favors Government, is easily abused at the cost of the population and empowers more government — where a currency should keep government in check. It does not fully stop the interest drain. Capital costs will still be substantial, especially for the poor. And major imbalances between the regions of the nation will likely persist.

Social Credit

Social Credit was designed by C.H. Douglas and is nowadays mainly propagated by populists.

It is a Greenback, where the government does not spend the money into circulation itself, but hands the cash over to the population. They then bring the money into circulation by spending it.

This seems to be a great improvement. Not the Government, but the people spend the money, and therefore decide in which direction the economy and society will develop. It provides people with a small basic income, allowing them to avoid the worst of wage slavery, while also building a free-market economy based on true consumer demand, not a bank-financed cartel-driven economy.

It emphasizes and does justice to the fact that it is the population’s credit and consumption which is the basis of the money supply.

Also the Government’s incentive to inflate the money supply would be much smaller. And even when inflation does occur, the population is fully compensated with the extra purchasing power of the newly printed dollars.

The major limitation of the Social Credit model is that it also does not provide interest-free credit. It would still need the banks, and capitalization from savers. It does not solve the problem of regional imbalances.

Social Credit is a much improved Greenback that would greatly alleviate our plight when implemented. It would, however, not solve all problems.

Public Banking

Public Banking is an eminently practical approach: let the commonwealth open it’s own banks, providing cheap credit. Public Banking is favored by Ellen Brown and those proposing it are starting to be called ‘Brownites’.

It’s great strength is, that it can be relatively easily implemented. Determined individuals should be able to meet the conditions to found their own banks, much like local credit unions. States could open their own banks as well to finance their own needs. State legislature is presumably closer to the Vox Populi than Federal government, and certainly more so than transnational or central banks.

Public banking would allow a flexible money supply based on credit using existing procedures. It would dampen the interest drain to ultra-rich centralizers. Because even when the public bank charges interest (which it does not need to), these profits would be recycled back into the local community. Public banks don’t need fat cats on Wall Street to function, and the bankers would be regular people, our neighbors.

Another important point is that public banks would be interested in investments for the common good. A big problem with the current construct is that privately operated banks decide what society can and cannot invest in. That’s why clusterbombs get a lot of funding, while feeding the poor does not.

Despite all the benefits, public banking would suffer from the risk of inflation. Governments would have an incentive to provide itself with more credit than it pays off, inflating the money supply.

It does not address fractional reserve banking, still needing savers to capitalize the banks. And leaving these savers to the risks of inflation. Also Public Banking assumes Government promotes the commons, which is an opinion that is not universally supported.

Additionally, public banking would still operate within a currency monopoly, disallowing the public choice and missing market discipline. Yes, public banks would compete with normal banks (and slaughter them because they would be much cheaper), but it would be vulnerable to problems of the currency itself. And these problems are and will be forthcoming, because the Dollar (and other banking currencies) are horribly exploited.

Also, public banks would operate under the supervision of the Federal Reserve System, not only incurring high costs of regulations, but the Fed would be inimical to low interest banking.  So although Public Banking is promising, addressing the interest problem, it still suffers from a number of limitations.


Government-controlled currency does seem to be much better than the currencies of private banking cartels. The fact that government can allow an interest free money supply greatly diminishes cost for capital to society. Full employment is more likely. The drain from poor to rich is smaller.

Yes, government will inflate these currencies. But inflation is the lesser evil, compared to the boom/bust cycle of the crony financial system that we’ve been forced to bailout time after time. And with social credit, inflation can be more manageable. A hybrid of social credit and public banking (private credit unions and state banks) may be the best approach for government.

But although a government monopoly on currency is probably more benign than a private monopoly, it is still problematic. Government tyranny remains a threat and government is potentially much more powerful when it directly controls money.

Regional imbalances will persist.

To be completely at ease, a more diverse approach is necessary. A free market for currencies, operating on several levels. Where businesses and citizens can choose the currencies that best serve their community’s needs. Where the market provides transparency in terms of effectiveness. Where monetary power is decentralized. Where the discipline of the market will keep the controllers of these money supplies in check.

Obviously, systematic changes must take place for economic fairness and human freedom to prevail.  Please leave your comments and suggestions.

This article was written for Activist Post.

  1. I object to the implication that it has been government, and not the private banking sector, including the Central Bank, that has inflated the currency. In fact, government, whether through legislation or through its too rare direct issuance of money (e.g. U.S. Notes or coins), has been far too miserly in providing the economy with sufficient money to meet its productive capacity (which ought to be the only criteria for money creation anyway).
    The Central Bank has produced up to $29T in loans or guarantees, according to L. Randall Wray and his 2 Phd students in a paper about 2 years ago (it must be more now, with continuing QEs). Government, even under the most generous definition of the stimulus package, has provided only a tiny fraction of that.
    If people are really worried about over-production of governemnt Greenbacks, we could constrain it by various measures. My personal favorite is the Output Gap – defined as $1T/year by the Congressional Budget Office, since 2008, or $6T currently, and counting.
    An extra trillion/year put into the infrastructure sector, and a few others where we have need woudl solve most of our true unemployment problem, and with GOOD jobs, not the minimum wage jobs with no future. A new New Deal.
    Much of this spending cannot be inflationary, since true wealth is being created, not just asset inflation bubbles, as is created now with QE money.
    As Keith Gardner has observed, the best way to tax back potentially inflationary spending, is through a Land Value Tax. This self-correcting tax would hit land hoarders and speculators particularly hard, as they should be, since they are by definition, not producing. We could untax actual fruits of production like wages, sales and true capital (like buildings) at the same time we shift to taxing Land, including location and pollution (Pigovian taxes).

    • Thanks for this, good stuff.

      I’m not saying Government is ‘inflating’ currently. With the current system the money supply is totally managed by the Banks, not Govt.

      However, with the Continental, it WAS the Government (and British counterfeiting) that inflated the unit away. My main point is that Government money has inflation as its main threat, which is not so bad, compared to the Usury and Deflation of banker units.

      • Well, Stephen Zarlenga, and the sources he relies upon, say that British Counterfeiting was much more responsible for the inflation of the Revolutionary times, than the Continental Congress. And we should keep in mind that ALL wars are inflationary, the more major, the more inflationary. That is a separate issue, having nothing to do with whether the money is issued by the Government, the private banks, or simply borrowed.
        As for the Lincoln Greenbacks, just enough were produced to pay the huge Northern Army, and not much more, though this did add up to 40% of the budget ($450m) at its Civil War peak. After Lincoln was assassinated (and here, Gerry McGeer shows some strong evidence that the European bankers were bankrolling John Wilkes Booth and his co-conspirators, in “The Conquest of Poverty,” chapter 5), the Greenbacks were withdrawn, causing deflation and a recession, and then frozen at just $351m, which was the level of issuance through 1971, at which point they were a trivial part of the inflated currency. During all that time, Greenbacks were only used for Government expenses, like the Civil War, and never for banks or bank-led speculative activities, unlike the Federal Reserve Money, which lately has been almost used for that entirely.
        History shows that truly Government issued money, whether here or in China, Japan etc. is used for Government projects, often infrastructure, and not for Wall Street gambling. It’s the Central Banks, staffed and managed by big bankers, for the big banks, that does that.
        He who issues the money controls its uses.

        • Yes, of course I agree with this. However, Government projects are far from always what the people really need. And I do think it’s reasonable to say that history shows that Government is capable of creating inflation to solve for instance its budgetary problems.

          But the fact that Government is more reliable a money creator than the Banks, that is one of the key issues under discussion here, so no disagreement there.

          Also: inflation really is the least of our problems. Child stuff, really, compared to Usury and deflation.

          However, best is to further decentralize. Let the people themselves circulate the money on the basis of their credit. It’s their money, not the Government’s.

  2. Positive interest currency is responsible for much human bad behavior, as David Korten and Bernhard Lietaer explain. It is important that no currency be a monopoly, the people need to be able to create currencies when they need them to connect needs with resources.

    • absolutely!

  3. you can create a hybrid of the alternatives. you can have 100% reserve banking but have a centralized and managed reserve according to inflation indexes available for private and public banks while the government originates debt-free to meet inflation targets for economic growth and originates to bring reserves to full reserves. the government can also issue a citizen dividend for social credit, though such would probably be more ideally funded with land value taxation and natural resource taxation since agrarian justice is a more clearly justified, especially as a flat dividend given to all citizens. you can have a dividend based on other economic injustice, such as chronic issues due to limitations in accurately modeling all economic concerns accurately, usury, corruption, and fraud which would surely be present in any system.

    • Yes. I believe that as our awareness of the different alternatives grows we will be looking to combine their strengths. One of my aims is to simply promote all decent approaches. It’s a nasty habit of many monetary schools to think they’ve seen the light. They often don’t understand there is much broader opposition to orthodoxy then just themselves and they tend to equate all opposition to their schemes as orthodoxy itself.

      It surely educates me, anyway, georgism is one that I missed and I’m happy to have found a good instructor on its ideas!

  4. congress can set the target inflation rate. the wealthy would also lobby against inflation with a greenback system. therefore, it has a built-in check and balance. the wealthy currently lobby for inflation because they collect the interest on monetary expansion. also, if the money supply is not tied to debt, you wouldn’t care about inflation over the long-term since inflation only applies to average cash daily balance which isn’t invested. inflation would encourage people to put the money to work into a savings account at the minimum to negate the cost of inflation. the hoarding of notes puts a deflationary drain on the system. long-term overall inflation is not destructive in itself if it isn’t based on interest. the interest is destructive, especially if the money supply is tied to debt or something even more limiting like gold, where you have a boom/bust cycle.

  5. Very interesting article.

    The danger of politicians spending the nation into hyper-inflation is less than the danger we have now, politicians borrowing the nation into hyper-inflation at interest.

    • I certainly agree.

      The question is, are there even better systems?

      • Denny permalink

        I don’t believe there is a better system without better people.

        Every single system mentioned here, including the current one, has the potential to work well and benefit the people to varying degrees. The common denominator in all of these systems is human beings. It’s not the system that is the problem or the solution. It’s the human beings running it. The American Republic addresses all of these issues. The founding fathers warned us what would happen if we did not adhere to the law of the land.

        A new system is not going to solve our problems or even improve them very much. Consider this, every system discussed here seeks to minimize the possibility of corruption. It’s a noble goal but I have absolutely no faith in any of them being successful. A Public bank will just as easily succumb to corruption as the federal reserve.

        We need honorable and decent people of high character in government positions who understand the deference between a Republic and a Democracy.. Our banks and institutions must be chaired by people with high moral and ethical standards. This is the only answer.

        The founding fathers understood the threat of Government and private interests and wrote a document designed to limit their influence but it only works if the government is staffed with good people who also possess the cognitive ability to understand the threat. As a long as we allow Corporate interests to lobby and control our Government as well as finance and control the election cycle, there is absolutely no hope of a new and improved system raising up from the ashes.

        We don’t have to worry about devising a new system to limit the potential of corruption because our founding fathers already did that for us. All we have to do is follow the plain language in the constitution.The Constitution is as crystal clear as can be.. Those people promoting a false ambiguity in regards to the Constitution are enemies of the state. They are the Communists behind the current system.

        If you don’t believe it is possible to elect good smart people who will honor the Constitution than the question becomes, what’s the next best thing? Passing a law that stops giving corporations the same rights as individuals would be a good start. Electing Ron Paul might help.

        • I guess it’s and/and not or/or. I agree with you that the main problem is that we let the maniacs run the asylum.
          Worse: the maniacs have DESIGNED the asylum. As a result the world has become their playground.

          People need more discernment on their ‘leaders’ and their need for them.

          But we also need systems that are more in line with both natural law and our need for security from the rotten apples.

Trackbacks & Pingbacks

  1. The Daily Bell: Usurious Commercial Banking is Freedom, Interest-Free Government Money is Tyranny | Real Currencies
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