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A Review of the Fiat Money System


Many of the old and the wise-men discussed in Part 4 and Part 5 of this series, have influenced and reminded contemporary scholars about the dangers that are inherent in the private banking system.

Well-known scholars thus far have understood that the private banking system is the root cause of the perpetuating debt and unsustainable growth that many countries have been experiencing.

These problems have forced many leaders to propose solutions to the current monetary system.

This movement is known as Monetary Reform, and within the movement there are quite a few different camps. These include;

Fiat Money Reformers (FDF)

Modern Money Theorists (MMT)

Post Keynesian Reformers (PKR)

Islamic Banking Advocates (IBA)

Social Credit Reformers (SCR)

Land Reformers (LR)

Hard Money Reformers (HM)

Competing Currency Reformers (CCR)


This article presents the case of fiat money advocates and their proposals to reform the current monetary system.

Fiat money reformers tend to view the monetary system as exogenous in nature, as emphasized in greater detail in Pt 8.

A few of the reformers we discuss are Ellen Brown, Stephen Zarlenga, Dennis Kucinich, Rocco Galati, William Krehm and Ann Emmett.


The Problem with Fiat Money Systems

A major problem mentioned throughout this series is the fractional reserve principle that the current private banking system operates in, that has monopolized the control of credit in the economy.

Ellen Brown notes that 95% of fiat money in circulation (in the U.S.) has been created by banks through private bank credit whereas only 5% has been issued by government authority.

This figure is also confirmed by Paul Grignon in his video documentary titled Money as Debt, covered more extensively in Part 2 of this series.

Private bank credit is essentially the bank’s promise to pay, and is often accepted as a form of money similar to physical cash.

Thus, an increase and/or decrease in bank credit would result in the same shocks as the increase or decrease of physical money in the economy.

Because of the virtual monopoly banks have over credit creation (95%), Brown notes that banks would be capable to withdraw and extend credit at will, resulting in booms and busts in the economy.

Brown’s issue with the current monetary system is that many governments around the world have chosen to borrow money from the private banks at compound interest instead of printing the money themselves.

The effects of these interest charges has forced governments to engage in drastic measures such as the privatization of crown assets, fiscal austerity cuts to social programs, corporate tax cuts, and more, as noted in Article 1 of this series.

To resolve the compound interest dilemma, Brown advocates in the abolishment of the Federal Reserve System (a private central bank) in the U.S. in order to restore control of issuing money to the government. Brown highlights her solution, in her book titled Web of Debt where she writes,

The only solution to this conundrum is to get “real” money into the system — real, interest-free, debt-free, government-issued legal tender of the sort first devised by the American colonists.

The early American colonists of the 1800s had used a form of money known as Colonial Scrip, similar to the fiat money (a.k.a. greenbacks) introduced by Abraham Lincoln during the Civil War.

Colonial Scrip was an alternative form of paper money, issued by the Colonial governments to facilitate direct spending into public projects (roads and bridges) and through lending for private projects. The Scrip was issued as a credit instead of a debt, and allowed the colonies to avoid issuing bonds to private bankers who would then purchase those bonds using gold.

By avoiding gold and the debt associated with it, the American colonies had low rates of taxes, and by issuing  just enough Scrip to match the volume of their trading activity, the value of the Scrip remained stable.

Economist Stephen Zarlenga is another fiat money reformer that has advocated for creating independence of money creation from the private banks.

Zarlenga has believed so strongly in the principles of debt-free money, he has founded the American Monetary Institute (AMI) in 1996, in order to study monetary history and bring about meaningful reform.

In order to achieve monetary reform, Zarlenga states three requirements that must be met. Zarlenga addresses these requirements in an article titled The Need for Monetary Reform, where he writes,

First, incorporate the Federal Reserve System into the U.S. Treasury where all new money would be created by government as money, not interest-bearing debt. Second, halt the bank’s privilege to create money by ending the fractional reserve system in a gentle and elegant way. Third, spend new money into circulation on 21st century eco-friendly infrastructure and energy sources, including the education and healthcare needed for a growing and improving society.

Zarlenga’s goal is to enable the government to regain control the money supply in order to promote growth and prosperity for the public good.

Zarlenga’s views on monetary reform has influenced U.S. congressman Dennis Kucinich to propose legislation calling for the end of the Federal Reserve System and to nationalize the central bank and place it under the U.S. Treasury.

This proposal’s implication is that each of the state Federal Reserve banks would no longer be allowed to create money, thus putting an end to fractional-reserve banking.

In 2011, Kucinich introduced the National Emergency Employment Defense (NEED) Act which contained all of the essential monetary reform measures proposed by the Zarlenga and the AMI. The objectives of the act include,

1. Abolishing the creation of money, or purchasing power, by private persons through lending against deposits, by means of fractional reserve banking, or by any other means.

2. Enabling the Federal Government to invest or lend new money into circulation as authorized by Congress and to provide means for public investment in capital infrastructure.

Perhaps most surprising in a testament to bipartisan leadership, Kucinich’s (a Democrat) legislation had strongly been supported by Republican Congressman Ron Paul, who has also called for the abolishment of the Federal Reserve System.

Brown differs from other reformers here, in that although she would like to see an end to the private Federal Reserve System, she would not mind a fractional reserve system if it were under the control of the government.

The reforms Brown has proposed have already been implemented in the U.S. state of North Dakota, the only state to have a publicly owned state bank; The Bank of North Dakota (BND).

Brown states that a publicly owned bank such as the BND could collect  interest revenues and remit them back to the government allowing them to fund social welfare and infrastructure projects for the public good.

Brown praises the Bank of North Dakota, in her Book Web of Debt, where she writes,

Restoring Credit with a Publicly-owned Bank: Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy. Only one U.S. state actually owns its own bank – North Dakota. As of last spring, North Dakota was also the only U.S. state sporting a budget surplus. It has the lowest unemployment rate in the country and the lowest default rate on loans.

Stephen Zarlenga contends that simply transferring the power of banks from private to public hands does not address the root cause of the problem. Zarlenga expresses his views in his article titled American Money Scene 5, where he writes,

That vicious system by which money is created in our society must be reformed, not imitated. But there is no reform whatever in the proposal for states to enter the banking business.

As an alternative to Brown’s version of a government controlled fractional reserve system, Zarlenga advocates for a 100% Full Reserve Banking System, where Banks should act according to their original mandate as deposit-taking institutions. Monetary reform has also been discussed by reformers in Canada as well.

The Canadian Reformers


Several Canadian reformers call for the reconstruction of the monetary system in response to the injustices inherent in the current system.

Economists William Krehm and Ann Emmett from the Committee for Monetary and Economic Reform (COMER) argue that Canada’s unsustainable debt is partially a result of the neglect of the Bank of Canada (BoC).

COMER argues that Canada has been placed in a troublesome situation ever since 1974, the year the Canadian government chose to stop borrowing from the BoC in favour of borrowing money from private banks at compounded interest.

Many factors played into the government’s decision including; the 1970s oil crisis, BIS Recommendations, and the adoption of Monetarist principles by BoC Governor Gerald Bouey in 1975.

Further information about the use of the BoC can be found in Articles 3, 7, and 10 of this series.

As of December 2011, Krehm and Emmet have filed a lawsuit against the Bank of Canada because they argue the Bank of Canada has not been following it’s legislative mandate.

The court case is fully covered in this article: Allegations against Bank of Canada engaging in conspiracy to thwart Canadian sovereignty.

The constitutional lawyer Rocco Galati has explained the lawsuit:

The challenge essentially is a two prong challenge that’s set out in the statement claim….it challenges the application of sovereignty and governance in handing over monetary, financial, and socio economic policy through finances to foreign private entities and a refusal to abide by and implement the Bank of Canada Act with respect to loans, with respect to human capital spending such as hospital, health, education, and so forth.” The second aspect of the challenge is as follows: “[The claim] challenges the government’s refusal to publish and set out the actual revenues that are collected, or collectable before the transfer back of tax credits before net revenue is calculated and announced every year.

The discussion of monetary reform in Canada has exploded into the limelight in May 2012, due to the popularity of 12 year old girl Victoria Grant, who discussed the problem the private banks created – and are continuing to cause to Canadians.

Her solution has provisions for returning the Bank of Canada to its original mandate. Her views reflect the views of those advocates mentioned above. Thus there is a four step plan that fiat money reformers propose should be undertaken in order to address monetary reform in Canada.


The Four-Step Plan of Fiat Money Reformists

  1. The Government should be given the right to create/issue fiat money.
  2. The Government should spend new money into existence to fund social and infrastructure programs thus increasing the standard of living in the economy.
  3. The Government should enforce the use of this newly issued money through legal tender laws enforced by the courts.
  4. The Government should remove the money out of circulation through fiscal policy measures such as taxation, in order to prevent inflation.

Interestingly, the reforms that fiat money free reformers propose have already been implemented in the Austrian town of Worgl.


The Worgl Case

Worgl had experienced a period of economic instability in the wake of the Great Depression of the 30s. Due to this, the government implemented an experiment in 1932, where it printed interest-free, Demurrage-charged fiat money. Demurrage is a feature of money, which reduces its value over time similar to inflation.

Both inflation and demurrage reduce the purchasing power of money held over time, however demurrage implements it through fixed intervals.

This essentially creates transparency, as the entire population is aware that the power of their money will diminish over time.

An illustration of the local Worgl currency is depicted below.

 A special feature of the above note was that it decreased in value by 1% every month.

Anyone holding the note by the end of the month had to buy stamps from local authorities in order to bring the value of the note back up to face value.

Since the value of the note deteriorated over time, people were encouraged to spend their money instead of saving or hoarding it, thus spurring economic activity.

The experiment involving the creation these notes led to increasing levels of employment in Worgl, and stimulated its economic recovery from the Great Depression.

This recovery had been prevented in 1934, when the Austrian Central bank halted the experiment on the basis that it challenged the banks monopoly on printing money.

Although the experiment was terminated in Austria, it was noted and tried elsewhere.

In Canada, for instance, the provincial government of Alberta had set up a  depreciating currency in the mid-1930s in the form of Prosperity Certificates.



Critics offer their counter arguments to proposals offered by fiat money reformers.

A notable Austrian economist, Gary North, attacks fiat money reformers, on the basis that their proposals for monetary reform would cause hyperinflation and would be akin to theft by the government. North’s arguments are expressed on his website, where he writes,

So, by forcing people to take paper money, governments create wealth as good as gold. This is something for nothing: wealth as good as gold out of pieces of paper and some ink. Her [Ellen Brown] book is based on this magic. Only it is not magic. It is theft by government. She says debt is owed to bankers. It in fact is owed to private citizens who buy savings bonds, Treasury bills, and money market funds that buy Treasury bills. She is calling for the impoverishment of Americans through hyperinflation…

American Investment advisor Mike Shedlock agrees with the abolition of the Federal Reserve System but also criticizes Brown’s solution of allowing government control of the fractional reserve system. Shedlock is opposed to the fractional reserve system, yet also criticizes the concept of printing money by the government.

Shedlock criticizes the NEED Act introduced by Kucinich in his article titled: Fatally Flawed “End the Fed” Proposal From Rep. Kucinich would Allow Congress to Print Money into Existence for Essentially Anything, stating that,

Neither sound money nor the free market comes from printing money into existence. Arguably the only thing worse than the Fed printing money out of thin air is Congress printing money out of thin air for the purpose of full employment and/or any other absurd ideas Congress has.

Another criticism against the fiat money reformers is the nationalization of private central banks. Modern Money Realism (MMR) economist Cullen Roche questions the feasibility of nationalizing central banks.

Roche’s asserts his position in his comment on the article titled; Negative Space in MMT: Where’s The Banking?, where he writes,

The problem with nationalizing the banks is that you’d have to nationalize all their partners also. The insurers, the brokers, etc. They’re all intertwined now. ..I think the only logical solution is better regulations (and strict). Things like a 20% down requirement would substantially reduce the risks in banking and derivatives.

In addition, Zarlenga’s proposal on full reserve banking has also received criticism from economist Kaj Grussner. Grussner attacks Zarlenga’s proposal for monetary reform in his article titled; The Dangers of Monetary Reform, where he writes,

Presently, the banks have only a fraction of their deposits in reserves. How does Zarlenga propose to solve the problem of the transition from fractional reserves to full reserves? He proposes to lend government-printed money to the banks, thus increasing their reserves to cover all outstanding claims on them. This solution has a few flaws. First, the government-created paper currency is no more real than the credit issued by the banks, as neither represent actual resources accumulated from real savings. Second, the bank’s equity is not enhanced by the government loans. The infusion of a $9,000 loan would increase its reserves to $10,000…but it would also increase its indebtedness by the same amount. The solution … by which the same type of continuous inflation of the money supply could be carried on under the guise of full reserve… would debase the currency and cause boom-bust cycles, all the while enriching government and the banks.

As one can clearly see, there are a variety of arguments against the solutions proposed by fiat money reformers to reform the current monetary system. Another major criticism against fiat money reformers, centers on the use of fiat money.

In conclusion, fiat money reformers claim that the excess money creation due to the fractional reserve system is fraudulent since it incentivizes banks to lend money it does not have in reserves.

And this drives not only the public into debt, but the private sector as well.  And these fiat money reformers want to return the power to create money back towards the people in the form of a government controlled monetary system since the assumption is that the government would ensure the best interests of the public and thus would avoid the gross errors made by the private banks in the wake of the global meltdown.

Meanwhile, MMT theorists also argue for government control over the money supply, and are examined in Pt 10.


Part 1 – The Overview of Canada’s Current Financial Position

Part 2 – How the Monetary System Works

Part 3 – The History of the Bank of Canada

Part 4 – The Dangers of Usury in the Banking System

Part 5 – The Dangers of Usury in the Banking System Pt 2

Part 6 – The Loss of Canadian Sovereignty

Part 7 – The Decline of Canada’s Economic Environment

Part 8 – The Movement for Monetary Reform

Part 10 – The Fundamentals of Modern Money Theory

Part 11 – Endogenous Theories on Monetary Reform

Part 12 – Principles of the Islamic Banking System

Part 13 – A Review of the Social Credit Money System

Part 14 – Henry George and the Land Reform Movement

Part 15 – A Review of the Austrian School of Economics and the Gold Standard

Part 16 – Currency Competition and Alternative Money Systems

Part 17 – The Shadow Banking System

Part 18 – Economic Recovery at the End of the Road





Comments (4)

  1. Pingback: The Decline of Canada’s Economic EnvironmentPrudent Press

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