In 1913, the U.S. Treasury gave our country’s sovereign right to create currency to the Federal Reserve Bank (which is essentially a private commercial entity with little to no oversight from the government). Prior to 1913, the Federal government had created money itself. These were called Greenbacks. The value of a Greenback fell dramatically during and after the Civil War because too many were printed to fund the Union war effort. If the U.S. Treasury only created dollars to fund public infrastructure projects (not warfare or welfare) the dollar would be backed by the value of the infrastructure. If dollars are created to build a high speed train system, for instance, the revenue that the train system brings in for the government will pay for the project after some number of years.
Some argue that fractional reserve banking structure of the Federal Reserve should be eliminated and the dollar tied back to the gold standard, but this would privilege those who hold gold. While backing the dollar with gold or some other commodity would protect against inflation, it can lead to economic depression if the government doesn’t have enough of the reserve commodity to create the amount of currency that is needed for a healthy economy. A Public Bank can expand the money supply when there are workers available, needs abound, and there not enough currency in circulation to get the goods, services, and capital flowing.
A Public Banking Option, sometimes called “nationalizing” the Federal Reserve, takes back the power of the government to create currency. The money supply would then be expanded only as the government built public assets. The government would not have to collect income taxes or sell Treasury Bonds for public projects. Since the government would not be borrowing money, it would not pay interest or go into debt.
If the money supply becomes over expanded with a Public Bank, then it is necessary to impose a progressive income tax and/or impose higher user fees for public services to take money out of circulation. If the government were prudent — and only created enough money for capital improvements, infrastructure, public schools and hospitals — then inflation could be avoided.
If fiat currency is used for war, excessive welfare or useless bureaucracy, then inflation would continue as it is with the Federal Reserve system.
Various forms of local currencies could augment U.S. currency. These different approaches include rCredits, Berkshare dollars, and Ithaca Hours or even P2P barter networks. Bitcoin is another popular form of alternative currency, the main difference being that is global instead of local. U.S. dollars would be the only form of currency accepted for use of public services and for paying taxes.
For a history of disadvantages of a Private Central Bank instead of a Public Central Bank see Bill’s Still’s 1996 documentary Money Masters.