The following is my high school teaching assignment for Advanced Placement Macroeconomics students (available as extra credit for other classes) on how money is created. I offer this for non-profit use; divided into seven sections:


6. Cost-Benefit Analysis for Monetary Reform

“That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. …But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. …It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people.”  - Thomas Edison and Henry Ford, interview with NY Times, 1921

“The art and mystery of banks… is established on the principle that ‘private debts are a public blessing.’ That the evidences of those private debts, called bank notes, become active capital, and aliment the whole commerce, manufactures, and agriculture of the United States. Here are a set of people, for instance, who have bestowed on us the great blessing of running in our debt about two hundred millions of dollars, without our knowing who they are, where they are, or what property they have to pay this debt when called on; nay, who have made us so sensible of the blessings of letting them run in our debt, that we have exempted them by law from the repayment of these debts beyond a give proportion (generally estimated at one-third). And to fill up the measure of blessing, instead of paying, they receive an interest on what they owe from those to whom they owe; for all the notes, or evidences of what they owe, which we see in circulation, have been lent to somebody on an interest which is levied again on us through the medium of commerce.” - Thomas Jefferson to John W. Eppes, 1813. ME 13:420

Monetary reform nationalizes the Federal Reserve (this name is deceptive so the public would perceive it as a government entity) and retain its use for bank administrative functions. Fractional reserve lending by private banks would be made illegal, with the US Treasury having sole legal authority to issue new money for the benefit of the American public rather than the benefit of the banking industry. About 30% of the national debt is intra-governmental holdings (47) and ~16% held by the Fed (48); this debt would be cancelled as it becomes a bookkeeping entry with nationalization. Of the publicly-held debt of various parties holding US Securities, the US Treasury would monetize (pay) the debt in proportion to fractional reserves being replaced with full reserves over a period of one to two years to monitor money supply and avoid inflation. This means the US government would create debt-free money to pay the debt as it’s due exactly to the extent that private banks’ ability to create credit is reduced. The purpose of this is to avoid inflation.

The American Monetary Institute has a proposal called the American Monetary Act (49) to do this. This proposal was also endorsed by America’s best-known economist, Milton Friedman, as the single most important action possible for US economic improvement (see footnote 14 on this monetary reform proposal [50]).

The governmental cost of this reform is negligible because it simply authorizes Congress to enter money into its own account to directly pay for public goods and services. In fact, Americans would save money from decreased reliance on managing taxes.

The benefits are astounding: the American public would no longer pay over $400 billion every year for national debt interest payments (because almost 50% of the debt is intra-governmental transfers, this is a savings of over $200 billion/year). If lending is run at a non-profit rate or at nominal interest returned to the American public (for infrastructure, schools, fire and police protection, etc.) rather than profiting the banks, the savings to the US public is conservatively $2 trillion (51). If the US Federal government increased the money supply by 3% a year to keep up with population increase and economic growth, we could spend an additional $500 billion yearly into public programs, or refund it as a public dividend (52). This savings would allow us to simplify or eliminate the income tax (53). The estimated savings of eliminating the income tax with all its complexity, loopholes, and evasion is $250 billion/year (54). The total benefits for monetary reform are conservatively over three trillion dollars every year to the American public. Three trillion is $3,000,000,000,000. This saves the ~100 million US households an average of $30,000 every year. Another way to calculate the savings is to figure those amounts per $50,000 annual household income (for example, if your household earns $100,000/year, you save ~$60,000 every year with these reforms).

Those of us working on these solutions openly invite professional economists and committed citizens to analyze and comment on our observations of costs and benefits.

To give you an idea of this amount, imagine a new stack of $1 bills. New bills are about 200/inch. Imagine if you laminated bills in a horizontal stack; this would be the same size as a 2×4 board. Now imagine that this board of money was to travel on your nearest freeway. How far would the money-board go to equal $3 trillion? Make your guess, then check the footnote (55).

The private sector economic costs of monetary reform are transfers of wealth from the banking industry to the American public. The replacement would be either non-profit banks operating as needed with minimum public cost such as fire departments and the postal service, for-profit banks lending time-deposits in regulated free-market competition, or a hybrid of the two (perhaps with government mortgages at a non-profit rate of 1%). The Public Banking Institute works for the public to act now for at-cost credit (56) rather than waiting for federal reform.

Monetary reform stops the current built-in increases of the money supply through fractional reserve banking, and redirects it for direct payment of taxes for public goods and services. Each dollar transferred from bank creation to public benefit is one dollar less in public tax payment.

Opponents of monetary reform claim that even if government issued money with transparency, any oversight created would be defeated; government would issue too much money and cause inflation. Ron Paul believes that gold should be used as a physical-limit barrier to creating money. Some fear that any change will make things worse. Some also claim that competition for large profits in the banking industry spur innovation that wouldn’t occur in a non-profit design. Improvements such as ATMs, on-line banking, instant purchasing are worth the cost of giving monetary power to the private sector.

The statutory purposes of the Fed (57) are stable prices, maximum employment, and moderate interest rates. For prices, consider for yourself how well they’ve done since the Fed began in 1913. Ask parents and grandparents if prices have remained stable in their lifetimes or if they’ve increased just a teensy-weensy little bit. You could, of course, also check the data and confirm that the dollar has lost over 95% of its value since the Fed went to work for “stable prices.” Importantly, you haven’t been told that official measurements for inflation were redefined in 1980 and 1990 that lowers today’s inflation rate by ~8% (58). Examine the cumulative effect of accelerating prices (59) 30 times more expensive since the Fed began in 1913 (and here [60]), and feel free to play with the Fed’s Consumer Price Index (CPI) calculator to compare their claims of prices over time.

shadowstats inflation

For employment, consider that we have unemployed people in this country, resources to put to work, and infrastructure to improve; then judge the Fed’s effectiveness in creating money only as debt. Unemployment only occurs because money is debt in our current system; we would not have this problem if government restored this Constitutional power and issued money directly. If we were serious about achieving the goal of full employment, OBVIOUSLY the only way to achieve it is for government to be the employer of last resort. In market failure of what free-market capitalism cannot employ, we either put people to work on infrastructure/public service jobs, or we don’t achieve our goal of full employment. Please ponder that idea to full realization. If the public jobs provided to the unemployed and funded by government-created money provide greater economic benefit than their cost, then inflation will actually decrease from creating those jobs. That is conservative definition of how inflation/deflation works.

The official definition of “unemployment” is also a lie of omission. If someone works just one hour a week, they are considered “employed.” If adults want work, and are not currently applying for jobs because they have found their efforts in vain, they are not counted as “unemployed.” If we counted unemployment the same way we did in the Great Depression (61), the US has had that same level of unemployment since 2009: between 20% and 25% unemployment. You might consider the explanation of Paul Craig Roberts (62), former Assistant Secretary of the US Treasury, and Wall Street Journal editor.

shadowstats unemployment

Another angle of minimizing our costs for unemployment: consider that the US Government Interagency Council on Homelessness has compiled every known study on cost-benefits of housing the homeless, and providing food, medical care and job-employment services versus just leaving them on the streets. In every case study the costs are less to take action for their care (63). Ponder that.

For interest rates, the greatest effect to minimize this cost to the public is with public banking. For example, if we had a “Bank of California” with public credit issued mortgages and credit cards at ~5% (64), this form of taxation would abundantly pay for all California public goods and services while eliminating all need for taxation. It also releases CAFR funds back to the public worth TRILLIONS (65). These include “rainy day” funds no longer necessary if they had access to at-cost credit.

Remember: the Federal Reserve is a privately-owned corporation that exists to maximize its own profit. It is not in their profit-interests to disclose these options. In fact, Congressman Oscar Callaway demanded investigation into JP Morgan & Company in 1917 (66) for purchasing control over America’s leading 25 newspapers to propagandize US public opinion in favor of the Federal Reserve system and to push the US into World War 1.

Perhaps the fact that you’ve had to read this information here is evidence that corporate media is still owned today: just six US corporations control ~90% of what Americans get for news (67). Consider this: MIT’s Simon Johnson (and former Chief Economist of the International Monetary Fund) describes (68) our big banks being led by gambling oligarchs who have captured government as in “banana republics” (his words). He concludes fraud is the heart of Wall Street (69). His immediate best-selling book, 13 Bankers: The Wall Street takeover and the next financial meltdown, was discussed with President Johnson’s Press Secretary and journalist with over 30 Emmy Awards, Bill Moyers (70), to explain the US banking system, loss of trillions of American taxpayer dollars to oligarchs’ manipulation as a matter of definitive fact, the looting of America being protected by partners with political muscle, and all rational consideration of the facts proving massive financial crimes:

SIMON JOHNSON: The American democracy was not given to us on a platter. It is not ours for all time, irrespective of our efforts. Either people organize and they find political leadership to take this on, or we are going to be in big trouble, okay?… That’s absolutely the heart of the problem. I would also say and tell you, and emphasize, these people will not come out and debate with us. The heads of these companies or their representatives, they will not come out. They’re afraid. They don’t have the substance. They don’t have the arguments. We have the evidence. They have the lobbyists. And that’s all they have.

BILL MOYERS: They’ve got the power, the muscle, the money.

SIMON JOHNSON: They have money.

BILL MOYERS: You just have the arguments. You just have the facts. On your side.

SIMON JOHNSON: Absolutely. That’s exactly what it comes down to.

To conclude, if the performance of the Fed is acceptable to you along with its $3 trillion dollar annual cost compared to monetary reform and public banking, feel free to defend it.

Thank you for your attention to learn how “money” is created in the US so-called “monetary system.” After Benjamin Franklin discovered it was possible to manage colonial Pennsylvania’s government without taxes (71), similar to what we describe as public credit, he was so inspired by the idea that he wrote a pamphlet, commending people like you to understand this vital idea of what we create and use for money:

“There is no Science, the Study of which is more useful and commendable than the Knowledge of the true Interest of one’s Country; and perhaps there is no Kind of Learning more abstruse and intricate, more difficult to acquire in any Degree of Perfection than This, and therefore none more generally neglected.  – Benjamin Franklin, A Modest Enquiry into the Nature and Necessity of Paper Currency, 1729 (72).

For more history in support of monetary and banking reform, including Benjamin Franklin’s documentation of colonial Pennsylvania successfully using these methods to operate their government without taxes:

Critical thinking skills in action: economic analysis of ‘current events,’ past and present (73)


47 Treasury Direct. The debt to the penny and who holds it:

48 Federal Reserve Bank of St. Louis. Federal debt held by Federal Reserve banks. 2014: Q2:

49 American Monetary Institute. American Monetary Act. 2011:

50 The Money Masters. Monetary reform act:

51 Of $60 trillion total debt, a conservative current interest cost of 5% is $3 trillion every year. Two trillion dollars of savings if the profits are transferred to the American public rather than to the banking industry is probably low. St. Louis Federal Reserve Bank:

52 The US GDP is ~$17 trillion. Three percent growth is moderately conservative.

53 Of the US Federal government’s ~$4 trillion annual budget, about $1.7 trillion is received from income tax.

54 Tax Foundation. Hodge, S, Moody, J, Warcholik, W. The Rising Cost of Complying with the Federal Income Tax. Jan. 10, 2006:

55 About ten times around the world at the equator. Yes, that’s a lot. Earth’s circumference is ~25,000 miles. There are 63,360 inches in a mile.

56 Web of Debt. Brown, E. California dreamin’: how the state can beat its budget woes. July 8, 2009:

57 Federal Reserve. Monetary policy and the economy:

58 Shadow government statistics. Williams, J. Alternate inflation charts:

59 Liberty Blitzkrieg. Krieger, M. Chart of the day: inflation since the American Revolution. Jan. 7, 2013:

60 Is inflation the legacy of the Federal Reserve? Jan. 17, 2013:

61 Shadow government statistics. Williams, J. Alternated unemployment charts:

62 Roberts, P. John Williams ( on the December payroll jobs report and unemployment rate. Jan. 13, 2015:

63 Herman, C. Ending homelessness SAVES money; monetary reform and public banks should fund this now. Feb. 28, 2015:

64 Herman, C. Public banking conference good news: all solutions already here for deficits, debt, full-employment. June 3, 2013:

65 Herman, C. CAFR summary: if $600B ‘fund’ can’t fund $27B pension, $16B budget deficit, why have it? June 18, 2012:

66 Herman, C. 1917: J.P. Morgan bought US corporate media to be 1%’s lying sacks of spin? Jan. 28, 2012:

67 Business Insider. Lutz, A. These 6 corporations control 90% of the media in America. June 14, 2012:

68 The Atlantic. Johnson, S. The quiet coup. May, 2009:

69 Huff Post. Johnson, S. Goldman Sachs: too big to obey the law. June 19, 2010:

70 Bill Moyers Journal. Johnson & Kwak. April 16, 2010:

71 Herman, C. Benjamin Franklin, William Jennings Bryan on monetary reform. March 11, 2012:

72 Herman, C. Top 10 Americans for monetary reform: #7: Benjamin Franklin discovers government WITHOUT TAXES! Sept. 24, 2009:

73 Herman, C. Teaching critical thinking to high school students: Economics research/presentation (6.1 of 6). March 2, 2015: