Money, Bona Fide
or Non-Bona Fide
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Money, Bona Fide
or Non-Bona Fide

Table of Contents

Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14

Chapter 4
Media Of Exchange Used In The United States

The media of exchange used in the United States in 1969 may be placed in two groups: 1. Money, and, 2. Credit.


That portion of the media of exchange which is coined or issued by the authority of the United States Constitution (not necessarily by an Act of Congress) may properly be called money.

Note: When money is made by an unauthorized person, that person is guilty of being a counterfeiter. However, when an unauthorized person issues a false check, he is not a counterfeiter but a forger. It is not as serious a crime to be a forger as it is to be a counterfeiter. A forger steals from one person; a counterfeiter steals from many persons.

The money we find in circulation ill the United States consists of:

  1. Coins - half dollars or 50 cent pieces, quarter dollars or 25 cent pieces, dimes or 10 cent pieces, nickels or 5 cent pieces, and l cent pieces
  2. United States notes
  3. (Federal Reserve notes)
  4. There may be some other types of notes or certificates either held by or used by the Federal Reserve Banks, but we do not find them in circulation. [p. 43]


Let us see how United States coins come into existence and into circulation. The following are quotations from the pertinent parts of the “Coinage Act of 1965”:

Sec. 101. (a) The Secretary (of the treasury) may coin and issue pursuant to this section . . . (coins) . . . in such quantities as he may determine to be necessary to meet the needs of the public.

Sec. 102. All coins and currencies of the United States (including Federal Reserve notes and circulating notes of Federal Reserve Banks and national banking associations), regardless of when coined or issued, shall be legal tender for all debts, public and private, public charges, taxes, duties, and dues.

Sec. 3528. The Secretary of the Treasury may use the coinage metal fund for the purchase of metal for coinage. The gain arising from the coinage of metals purchased out of such fund into coin of a nominal value exceeding the cost of such metals shall be credited to the coinage profit fund. The coinage profit fund shall be charged with the wastage incurred in such coinage, with the cost of distributing such coins, and with such sums as shall from time to time be transferred therefrom to the general fund of the Treasury.

The United States mint, in effect, sells the coins to the Federal Reserve banks; The Federal Reserve banks sell the coins to the local banks; the local banks then sell them to anyone who wishes to buy them. It has been reported that the cost to the government for making of a 25-cent piece is 2.5 cents. So the government makes 22.5 cents profit for each 25-cent piece it makes and sells. The profit goes into the general fund of the U.S. treasury and is then used to pay regular government expenses.

The profit made by the minting of the coins is used just [p. 44] the same as is the income the government receives from taxes. For the government, the making and selling of our (token) coins is a revenue-making enterprise. That revenue would otherwise have to be raised by taxes. The coins are a medium of exchange because the people use them as such. They have their face value because the government sells them for their face value and accepts them at their face value in payment for taxes.

Because our coins are sold into circulation by the government instead of being paid into circulation (for goods and services and a tax levied for an equal amount), they do not fulfill the definition of a bona fide medium of exchange. They are not real tax credit certificates or certificates of credit. However, they are a medium of exchange which has the advantage over Federal Reserve notes and bank credit money, because interest does not have to be paid in order to bring them into circulation. They also fulfill the definition of (non-bona fide) money. On December 31, 1968, there were about $5,691,000,000 in worth of coins in circulation in the United States.


The United States notes were created by the United States Congress in 1862 and 1863. They were used by the government to pay the expenses of the Civil War. The government did not borrow them from the banks. They were paid into circulation for goods and services. They then became a medium of exchange which could be used in the payment of United States taxes, and all of the first issue was accepted as money for all purposes.

On the second issue of those notes the Congress, unwisely, added a clause restricting their use in the payment of interest on the public debt and on import duties. Later it was learned that those restrictions were a mistake. Since 1885 the United States notes have circulated as full legal tender. They too fulfill the definition of non-bona fide money, brought into circulation without borrowing it, which serves as a medium of exchange. [p. 45]

On December 31, 1968, there were about $310,000,000 worth of these notes in circulation. Anytime the United States Congress and the President have the proper information; the will and the courage; they can create enough United States notes to replace all the Federal Reserve notes. (On December 31, 1968, there were $44,653,000,000 worth of Federal Reserve notes in circulation.)


We put the Federal Reserve notes in parenthesis because they do not deserve to be classified as money. They do not fulfill the definition we gave for money, even though the Congress, by the passage of the “Coinage Act of 1965,” made those notes legal tender. The Federal Reserve so-called “notes’ are not issued by the United States government. The Federal Reserve banks issue them and then loan them to the United States government as well as to others.

Uninformed persons may place Federal Reserve “notes,” United States notes, and coins on an equal basis as money; but by using a little logic, we conclude that notes issued by a bank and loaned to the government with interest cannot be exactly the same as the United States notes and coins which are issued and coined by the government, and upon which no interest is paid in order to bring them into circulation. Therefore, Federal Reserve “notes” do not deserve to be classified as money.


The following media of exchange belong to the credit group:

Federal Reserve “notes”
Bank credit
Certificates of credit and gift certificates
Tax credit certificates [p. 46]


We will classify the Federal Reserve “notes” under the group called “credit”, but they really do not deserve such classification. They are just a “make believe credit,” but they are placed into circulation as if they were real certificates of credit.

Perhaps we might understand just what Federal Reserve “notes” really were if the Congress would permit the Federal Reserve banks to issue our coins (in the same manner that they issue their “notes”) and to loan these coins to the government and others with interest. These coins would be tokens loaned out with interest and used as media of exchange. In the same manner Federal Reserve “notes” are written paper tokens, called notes, loaned with interest, and used as media of exchange. No one earned these notes. There are no goods or services for which they must be redeemed.

Remember (see Chapter 3) the Federal Reserve note in 1914 was a real certificate of credit, redeemable in gold; but as the years went by, the document contained less and less information on it, so now it is almost a blank piece of paper. That is why we can call them paper tokens.

But let us see how Federal Reserve “notes” come into existence and into circulation. The following is the pertinent part of The Federal Reserve Act:

Sec. 16. Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose are hereby authorizedů..

2. Any Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes hereinbefore provided for as it may require. Such application shall be accompanied with a tender to the local Federal Reserve agent of [p. 47] collateral in amount equal to the sum of the Federal Reserve notes thus applied for and issued pursuant to such application The collateral security thus offered shall be notes, drafts, bills of exchange, or acceptances acquired under the provisions of section 13 of this Act, or bills of exchange endorsed by a member bank of any Federal Reserve district and purchased under the provisions of section 14 of this Act, or bankers’ acceptances purchased under the provisions of said section 14, or gold certificates, or direct obligations of the United States. In no event shall such collateral security be less than the amount of Federal Reserve notes applied forů.

Now let us use a sample illustration to show how Federal Reserve “notes” can be brought into circulation. Let us say that the United States government wishes to borrow $1000 from a Federal Reserve bank. The government offers to the bank a 4% $1000 bond. The bank takes the bond and deposits it with the United States Treasury and hires the treasury department to paint $1000 worth of Federal Reserve “notes.” (The Federal Reserve bank pays the printing cost, which may be between 50 cents and $1 per $1000 of the “notes.”) The “notes” are printed and given to the Federal Reserve bank. The bank then loans the $1000 worth of brand new bills to the government. The government then uses them to pay for governmental expenses. The “notes” (bills) are then in circulation.

Note: The Federal Reserve bank loans, with interest, its so-called note that has no backing, to the government for its note (bond), which is backed by the taxing power of the United States government. The government will now collect from the taxpayers the $40 interest, per year, to be paid on that bond until that bond matures. But when it matures, the government will borrow another $1000 or more to replace it.

(The government will never have enough Federal Reserve notes to be able to pay back the $1000 loan with interest. That statement can be more easily understood, if we assume that no other money or medium of exchange [p. 48] exists in the whole country and that the loan was the first loan the bank made. It means that only those $1000 worth of Federal Reserve notes are in existence. Let us assume that no more loans are made for one year and the government wanted to pay back that $1000 loan plus the $40 interest with Federal Reserve notes. It could pay back only the $1000 because that is the amount of all the notes in existence. It would have to borrow the extra $40 in order to be able to pay the interest. You see; it could not get out of debt.)

Any time the banking system needs “money,” the Federal Reserve banks can, by depositing the appropriate securities with the United States Treasury, order the treasury to print Federal Reserve “notes” (“money”) for them. The banks then loan, with interest, that “money” into circulation to borrowers who likewise can never get out of debt. They will have to borrow more and more, if for no other reason than to pay the interest. If some individuals are to pay off their loans plus interest, they can do it only if other individuals borrow some more “notes” and give (by making exchanges) some of their “notes” to the individuals who then will be able to pay off their loans plus interest.

The twelve Federal Reserve banks in the United States are owned by their member banks. They are the local banks, which are members of the Federal Reserve system. On June 30, 1963, there were 6,058 such member banks. These banks, at that time, held 85% of the nation’s “money” in checking accounts. It should be pointed out that since 1947 the Federal Reserve banks have paid to the United States treasury as interest on Federal Reserve notes a large share of their earnings. For the year 1967, they paid to the United States treasury $1,907,498,270. They kept for themselves, to add to their surplus $29,851,200.

The following objections are listed against the use of the present Federal Reserve “notes” as a medium of exchange:

  1. They are not real notes or real certificates of credit. [p. 49]
  2. They are not redeemable with goods or services.
  3. They are not redeemable in the payment of taxes.
  4. They have to be borrowed in order for them to serve as a medium of exchange.


All banks that have checking accounts can create bank credit. Bank credit is also called checkbook money. It is not real credit. It is not a certificate of credit that gives evidence of a just claim for some goods or services for which it must be redeemed by the one who issued it. It is a “make believe” credit. However, people use it as if it were real credit. So let us see how bank credit comes into existence as a medium of exchange. An example may show how it is brought about.

Let us say a merchant would like to buy $2000 worth of merchandise to be sold in his store. He only has $1000 of his own. He goes to his local bank and asks to borrow $1000. The banker says he will loan him the $1000 if he will pledge the $2000 worth of merchandise for collateral security and pay 6% interest. They agree. The merchant signs a note and other necessary papers. The banker tells the merchant that he will credit to his checking account the $1000. The merchant can now write out checks for the $1000 that he borrowed.

The banker added (deposited or credited) $1000 to the merchant’s checking account, but the banker did not receive any money for that deposit. He did not take that $1000 away from any account of his own. He did not take that $1000 away from the account of anyone else. The bank now really has $1000 more bank credit money on demand deposit than it had before the loan was made.

When the banker added that $1000 deposit to the merchant’s checking account, he, at that instant, created $1000 of bank credit money. That bank credit money became $1000 worth of new media of exchange or checkbook money in the community. That bank credit money or checkbook money has the same buying power as coins or currency. [p. 50]

That is an example of how bank credit money is created. There may be between 100 and 140 billion dollars of bank credit money in circulation. The amount varies with the number of loans made by the banks. Between 85% and 95% of all the business in the United States is done with bank credit money or checkbook money. It is not a bona fide medium of exchange for the following reasons:

  1. It is not evidence of a just claim for goods or services for which the bank (that issued it) must redeem it.
  2. It is not earned by anyone. (The banker just wrote in the merchant’s checking account a $1000 demand deposit.)
  3. It is loaned into circulation with interest.
  4. If it were the only medium of exchange in circulation, the borrowers could never get out of debt.
  5. When the banks loan too much of it, we have inflation.
  6. When the backs loan too little of it, we have deflation.


There is another type of credit that is used as a medium of exchange, called certificates of credit or gift certificates. They are issued by merchants and either sold to customers or given to customers as refunds or as credit for future purchases. They also could be used to pay employees for services. The certificates state that the bearer can claim a certain number of dollars’ worth of goods or services at the store that issued them. Only a small number of them are used as a medium of exchange. If people would know of their advantages, they could and would be used much more frequently.

These certificates are evidence of real credit (not “make believe” credit) and they are a bona fide medium of exchange for the following reasons: [p. 51]

  1. They are evidence of a just claim for the goods or services because the merchant who issued them will redeem them.
  2. They are not loaned into circulation; they are paid or sold into circulation.
  3. They are earned by either the employee who receives them as pay or by the person who buys them.


Tax credit certificates issued by governmental bodies are not used at the present time. They could be issued as payment for goods and services. They could be issued in lieu of borrowed bank credit money. No interest would have to be paid for the “use” of them. If the officials of federal, state, and local governments, as well as people in general, would fully understand how to use tax credit certificates most of the interest paid by governmental bodies could be saved. They would be a bona fide medium of exchange for the following reasons:

  1. They would be earned by the person who received them.
  2. They would not have to be borrowed.
  3. They would be redeemed by the governmental body that issued them when received as payment for taxes. [p. 52]

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