This is a response by Money Reformer , Jere L Hough to the AMI criticism of state banking reform proposals, primarily being advocated by Dr. Ellen H Brown, JD, author of “Web of Debt”, currently the most popular book available on money reforms. My responses to AMI’s assertions are [bracketed] and in BLUE.
AMI’s Stephen Zarlenga writes:
August 16, 2009
As you know the states are in terrible financial condition, cutting back on necessary programs, laying off people and raising taxes. This has been the case for several years, and thanks to the banking crisis has reached horrific levels in some states. This is the time – an opportunity to push for real reform, such as the American Monetary Act. But instead, ill advised suggestions have recently been circulated on the internet that the states go into the banking business to solve or lessen this problem. The American Monetary Institute concludes that these suggestions, though they may be for well meaning purposes, are bad ideas for a lot of reasons as described below. People involved in real monetary reform understand that the private creation of money through what amounts to a fractional reserve accounting system is at the heart of the monetary problem which has plagued humanity and has now brought down the world economy. 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.
[Response: ***On the contrary, people involved with “real monetary reform” understand that what is an “ill-advised” idea is that ALL money reform efforts must all be focused in one direction by one group. Our current system is a predatory one that is destroying our civilization, one loan (money-creation) at a time. But nearly all agree on that point. It is not exclusive the AMI, no matter how excellent your role has been in bringing this matter into the open. We agree that this is the time to push for real reform. However the bankers are pushing back, and when it comes to money-muscle, we have no chance to win with the hand we are dealt. What we need is promotion and education on all fronts, from the most local to the national and international. And it is simply wrong to say there is “no reform whatsoever” in the state banking proposals. It is a start, and a foot in the door.]
It would also distract lawmakers from facing the facts about the national reforms that are needed to solve this crisis and institute a money system grounded in justice, which will operate to promote the general welfare. It would even sanction and endorse the present fractional reserve banking system, the source of the problem. That system requires condemnation and structural reform, not endorsements! We now have a blog at the end of this article below, so that you may record and post your reactions to Mr. Walton’s research.
[***This last paragraph is pure unsupported conjecture and supposition. Rather than a distraction, I think the added publicity for public banking would focus attention on the need for structural banking reforms. A clamor for a state bank would not “endorse” fractional reserve banking. It would only divert the profits from the “privateers” to the public – a public that is now being fleeced and bankrupted by this pernicious system.]
Why States Going into the Banking Business Would be a Distraction, not a Solution to their Fiscal Problem
by Jamie Walton, AMI researcher
“We may not be able to stop them, but we can join them. We the people need to play the bankers’ game ourselves.”1 – that was written by one of the promoters of the notion that the state governments should go into the fractional reserve banking business to beat Wall Street at its own game and solve their fiscal problems.
What an insult to humanity! How about a dose of morality and common sense. Isn’t that like saying: “We’re victims of organized financial crime, so lets join the criminals!”
Trying to beat Wall Street at its own game is obviously not the answer. As Albert Einstein once said, “We can’t solve problems by using the same kind of thinking we used when we created them.”
[Response: Insult to humanity? How about a dose of morality and common sense? One might easily say the same about the authors of these words. And no, it isn’t like saying we’re victims of organized crime, so lets go and join the criminals. It’s like saying we need to defend ourselves and survive long enough using the weapons or tools we have in order to utilize the higher orders of thinking Einstein spoke of. The peace-loving idealists can never establish their models if they allow the baser orders of society (the criminals) to kill them. Adopting the tools available to us is only a band-aid, but it might keep up alive long enough to effect more constructive and permanent solutions. And it would divert money from the pockets of the criminals into the public treasury in the meantime.]
Forty-eight States currently have budget deficits and many are sharply cutting services to try to close ‘fiscal’ gaps opening up to an average 24% by 2010.
Some attention has recently been given to the idea that State governments can get out of their fiscal problems by setting up their own banks. This is mainly a distraction away from genuine reform of the system, as encapsulated in the proposed draft American Monetary Act (more about that below).
The argument being put forward is that State governments can increase their revenues without increasing taxes by collecting profits from State-run banks. The proposal suggests that State governments go into the banking business and “fan” their deposits into 10 or 12 times as much in loans, using ‘fractional reserve’ or ‘capital adequacy’ rules, to cover fiscal gaps with bank profits.
This is a foolish suggestion, for several reasons.
1. You don’t solve a problem with more of the problem.
This scheme for states to go into the banking business would only ‘serve to protect’ the status quo. The ‘proposal’ completely fails to confront the main problem identified by all serious monetary reforms: ‘fractional reserve’ banking. Instead, it actually endorses and sanctions this vicious and destructive process, by suggesting that State governments engage in it – it’s immoral!
2. What the promoters describe is not how banking operates.
No single bank can multiply its deposits by 10 or 12 times in loans, they can only make loans (or purchases of securities, e.g. bonds) up against 90-95% of their deposits; these loans create new deposits, which, when spent, are most likely transferred to other banks; then receiving banks can again make new loans up to 90-95% of their deposits, and so on. This ‘process’ is repeated indefinitely, in ever-decreasing increments, and the effect over time is that the banking system as a whole multiplies those initial deposits by 10 or 12 times. The only reason some progressives might be considering this proposal is they don’t understand how fractional reserves work.
This process is carried on at great cost to the community as a whole, because every new loan (or new security purchase) is additional interest-bearing debt.
As presently operated, banks can be viewed as debt factories; they primarily create debt and only create the bulk of our money supply as a debt byproduct. Banks make profits and stay in business by putting the community as a whole into more debt than it can repay in any given time. This results in a net claim against the community going into the future. While some profits are paid to shareholders as dividends, this is only a small percentage of the debt created. If a bank was State-owned, the ‘shareholders’ would nominally be the people of the community, but any profits would still be based on the indebtedness of the community. That’s the inevitable outcome, no matter who owns a bank, because the same rules apply to all banks in the banking system.
But; the question is not who should be the beneficiaries of perpetual claims against the community, the question is should anyone be the beneficiaries of perpetual claims against the community – why place ourselves forever on a treadmill just to have what we’ve already got? It makes no sense.
[Response: What makes no sense is this entire specious argument. For instance:
“If a bank was State-owned, the ‘shareholders’ would nominally be the people of the community, but any profits would still be based on the indebtedness of the community.”
It shouldn’t take a genius to understand that if the community is indebted to itself, and paying interest to itself, that is a far better situation than if it were indebted to 3rd party private bankers and paying interest profits to them that will be forever lost to the community.
If a community owns a bank, and the bank makes loans to the community, then all the interest stays in the community, doesn’t it? That is the whole purpose of wanting public banking over private, possibly absentee banking, isn’t it?]
3. The problem is being misidentified as interest, when the problem is debt.
Proponents of the scheme are alleging that interest collected by “private” banks is kept out of circulation and is therefore not available to repay loans the bank have made. But this is not true. Most, if not all, interest re-enters the system in some way at some time (e.g. as expenses, dividends, investments, etc.). This is not the problem. The problem is almost all of our money is created with a debt attached; it is ‘borrowed into existence’ from banks, who create it when we have to borrow it.
As our economy grows, we need new money, but almost all of the new money is presently created with interest-bearing debt, so almost every new dollar has more than a dollar owing on it – so it has to ‘earn’ more than a dollar and pay it all back to banks (who never had it in the first place). Who owns and runs any particular bank makes little or no difference because the debt-based money-creating banking system will still own and run us, on a treadmill.
Money doesn’t have to be created like this; coins aren’t, they’re just created as money, with no debt attached; when they’re issued, it’s revenue for the U.S. government, saving taxpayers $$$. All money can be created this way. And; if we don’t start with any debt, then we don’t start with any interest either.
[Response: This entire argument is doubletalk. The “problem” is neither debt nor interest. The problem is who originates the debt and who collects the interest (profits). The statement that “Who owns and runs any particular bank makes little or no difference…” is pure nonsense. The very heart of banking reform is to shift money creation from private to public control. Credit and debt will always be needed. The only issue is where the money comes from to create that credit/debt and who will profit from the interest, the community or privateers? This entire point #3 is circular meaningless rhetoric.]
With that in mind, let’s look again at the States’ fiscal crisis.
[Yes, with all of it in mind.]
State governments receive money from the community for the provision of public services and the support of volunteer services. These are generally things that are needed in the community which aren’t commercial in nature, they’re not the types of things that it’s either possible or desirable to make a profit on (e.g. rape crisis centers, battered women’s refuges, assisted housing for people with physical/mental impairments, respite care for caregivers, etc.).
[So far, so good, but you could have included fire, police, water, sewer, roads, transportation, communications, energy and other “public” services. The dividing lines between what should be private and what should be public are in need of much further clarification.]
Non-commercial services needed in the community couldn’t exist without being paid for straight out, because providers can’t borrow and then generate income to repay loans, that’s not how they work (if they could do that, they’d be doing it already) – they need money that doesn’t have to be paid back.
[That is not entirely true. Municipal bonds (loans) are utilized all the time to pay for public works. If there were community banks, they would be borrowing from themselves, and the interest would be effectively 0, because it would be paid back to themselves.]
Diverting public resources away from desperately needed services toward a commercial venture would only make things worse. The effect on the ground could lead to the commercialization of services intended for the relief of poverty, disability, pain, suffering and misery; by forcing service providers to also be profit makers (e.g. commercialized prisons); or reverting to relying on the whims of charity. If neither of these ‘choices’ worked-out (which history shows, they generally don’t), the community services essential for any viably functioning civil society might disappear altogether, and then “there goes the neighborhood” – social disintegration is a slippery slope, for everyone.
[OK, starting with the word “diverting” they are issues with this paragraph enough to write many theses or hold a series of debates. I don’t think there would be any “diversion” of funds at all. In fact I think there would be a “reversion” or an influx of funds to the community. So your basic premise doesn’t even hold water. Also, we already have commercialized prisons, even an entire prison system. Prisons in the US are a very big industry, which is one of the reasons why about 2% of the US population are in them. Your claim of historical viability needs lots of work, But mainly, is public or community banking really a “commercial” enterprise? Should it be? Or should it be a “community” or “public” function? Lot;s of room for debate here. Oh yes. One last thing. “The neighbourhood” is already going, going, gone. If I ever saw a “slippery slope” we are on one right now. All this talk of “diversion” is simply silly.]
This is a very serious situation – it’s no time to be playing games.
[OK, then why start this one?]
In addition to these defining moral questions, there are also some more technical reasons why they won’t automatically work as suggested.
[I certainly hope they are more well-reasoned than the supposed “moral” reasons, above.]
1. No bank’s an island – they’re all in it together.
A bank can only lend out what it can expect to receive back, not only from its borrowers in the long term, but also from all other banks through the clearing process in the very short term, i.e. usually overnight. Even if a State-run bank could attract other banks to have accounts with it and/or require its employees and suppliers to have accounts with it, the other banks would have to call in their loans by 10 or 12 times the amounts transferred (so there’d be no net gain in loans available). Of course, at some stage, all of its depositors would need to spend their money with people having accounts at other banks, so sooner or later its reserves would drain back to other banks and it would then have to call in its loans by 10 or 12 times as much. In any case, no bank can lend more than the prevailing level of lending of all other banks; every bank has to move in step with every other bank, otherwise it would soon sustain an adverse net balance through the clearing process and drain all its reserves to the other banks. It’s a complete error that any bank can just go ahead and multiply it’s ‘reserves’ or ‘capital’ by 10 or 12 times in loans. If the other banks aren’t lending, a State-run bank wouldn’t be able to lend either.
[More nonsense. A state bank could use all state assets as capital in order to make as many loans as it wanted, for all practical purposes.]
2. Don’t be fooled by what’s happening in a low-population State.
North Dakota has about 700,000 people, a strong community spirit based on farming in difficult conditions, and significant oil revenues. The model being presented is the Bank of North Dakota, which provides support services to some other banks in its area.2 But this arrangement won’t automatically translate to other States, as the banks in other States may not wish to engage in it, and requiring them to could be very unpopular. This could lead to significant risks to taxpayers. In 1931, the Government Savings Bank of New South Wales (a federated State of Australia), at that time the 2nd largest savings bank in the British Empire, was closed down by a run caused by a series of ‘scare’ stories put out in the media as part of a ‘political’ attack.3 If a similar action were possible against a State-run bank today, taxpayers might be called upon to pay for the aftermath (e.g. the Bank of North Dakota is not FDIC-insured(!), and is instead guaranteed by the State Government itself).
[I believe Ellen Brown has sufficiently addressed the deficiencies in these fanciful straw man arguments. They simply do not apply to what Dr. Brown is proposing.]
3. The promised golden goose may prove to be a noose.
What may look like a boost for taxpayers could end up being a ball-and-chain. For instance; where are States already in deficit going to get the money to set up a bank? As the President of the Bank of North Dakota, Eric Hardmeyer, explains (in the article cited above), to avoid a drain on existing deposits from other banks, and the consequent contraction in loans, a State government would probably have to issue bonds to raise the capital needed to set up a State-run bank.4 Yet more debt bondage at a time like this may be more than the State’s taxpayers can bear. In any case, a new bank would be as much of a burden on the community as any other bank. We would have the ridiculous situation of the people, as taxpayers, being put further into debt to build a debt factory to put the people, as the community, even further into debt.
[There are too many “conditionals”, mays, mights, and unjustified suppositions in the above to warrant a serious response. EHB already provided one. The people are already in unimaginable “debt-factories” and need ways to get out of them. State-run public banks could be one way to do that.]
4. States shouldn’t gamble taxpayer’s money on risky business.
The actual balances of State government bank accounts aren’t huge, and they don’t grow, because they’re always being spent – that’s what they’re for. The actual profit margins banks make on their funds under management are generally modest, so any returns from a relatively small loan portfolio, after deducting operating expenses and re-investment in the business, wouldn’t be anywhere near the amount required to fix the current fiscal shortfalls of the State governments. For example, in recent years the Bank of North Dakota has transferred between about a third to a half of its net income to the State coffers; ~$25 million in 2007, ~$20 million in 2008.5 The total budget for the State Government for the 2007-2009 fiscal period is $6.5 billion.6 A State law requires the bank to pay $60 million to the general fund over the same period – a contribution of less than 1% to the State budget. Meanwhile, State governments face average budget shortfalls of 24% for 2010 – so the numbers just don’t stack up.7 Weighing the pros and cons; relatively low potential returns compared to potential high risks (e.g. the concerted aggressive actions of other banks); it’s not a very good bet.
[Your weighing scales for pros and cons are very different than mine. What is NOT a good bet is what we have going now. It is headed for a train wreck.]
5. States would be better-off using their clout with the banks.
A more prudent course of action would be for State governments to negotiate more favorable contracts for their banking business with one or more banks. This would involve much less cost and trouble (e.g. recruiting competent staff and administering a new enterprise) than trying to set up a bank, especially when public services are being cut. The banks need those deposits – they’ll do anything to keep them (even if they don’t like to admit it).
[This is also an idea I’ve been playing with, and could have merit. Except it doesn’t have to be an either/or situation. It could be worked into the package along with the public bank solutions. States COULD receive far more revenue from chartering banks than they now do, and in fact could partner with them in profit-sharing modes. Half a loaf is better than none, as the saying goes.]
6. We don’t need any more diversions.
We citizens have only so much energy and time to devote to changing our world for the better. Diverting good people into nonsense condemns us to continue suffering unnecessarily. This time of crisis must be used for real reform, not diversions.
[There you go again with that word. Addressing money reforms from more than one angle is not necessarily a “diversion” and it is probably just the opposite. It is more likely a “multiplier” effect. Money reform of any meaningful kind simply is NOT going to happen without a massive education campaign to gain public backing. The more avenues we use to do this, the better.]
So what is the solution?
It’s the monetary system which must be changed to end the fiscal crisis, and State governments cannot do this – it’s a matter for the Federal Government.
[Suppose there is more than one solution? Suppose the current monetary system collapses, perhaps even worldwide? Suppose the dollar goes into hyperinflation and becomes next to worthless? (There are numerous scenarios one might envision this happening. Hoarded dollars being dumped into the market is only one of them.) What if, like Argentina, Iceland, or Weimar Germany, our national currency essentially collapsed? What then? Would or should not communities of citizens have the right to bring alternative currencies into existence? Wouldn’t discussions of what such currencies might look like be profitable?]
Under present constitutional and legal conventions, the only institutions that can create money without debt are national treasuries and/or central banks. State governments within a federal nation cannot do this – the problem can only be solved at the national level. Proposals promoting anything else would require a constitutional amendment, which is not necessary.
[There are debatable legal issues here that are presented as unassailable facts, when they are not.]
There are some additional specious arguments being made within these promotions claiming that the U.S. Constitution (Article I, Section 8, Clause 5) does not authorize the U.S. Congress to issue non-coin money, so implying that it authorizes the States (or the people) to issue non-coin money.8 It most certainly does not. As Robert G. Natelson, in the Harvard Journal of Law and Public Policy, exhaustively and authoritatively determined, the term “coin” (with a lower-case “c”) means to create money in any form, whereas the term “Coin” (with an upper-case “C”) means coins.9
There’s also a lot of misinterpretations in these same arguments regarding the term “Bills of Credit” in the U.S. Constitution (Article I, Section 10, Clause 1) and “bills of credit” in other contexts, and the terms “Tender” and “Coin” (again). These misinterpretations lead to some ridiculous assertions like stating that: “The States violate the [U.S.] Constitution every day … to pay their debts … since gold and silver coins are no longer in general circulation.”10
All of these spurious ‘ideas’ only serve as distractions during a time of crisis.
We have a big problem in our economy and society today: too much debt. Banking cannot solve this problem because banking produces debt, which is the problem. It’s incredible that even now the delusion of borrowing ourselves out of debt is still seen as a solution, by anyone, let alone so-called reformers. We’re in a deep hole because we listened to cheerleaders yelling “keep on digging” without thinking. We cannot afford to keep doing this any more.
Proposing to get governments involved in banking is the complete opposite of a solution, because it keeps the problem in place.
As American Monetary Institute Chapter Leader, Dick Distelhorst, says:
“We don’t want to put the government into the banking business – we want to get the banks out of the money creation business!” – Dick Distelhorst
The correct solution to the crisis was presented in Stephen Zarlenga’s speech at the U.S. Treasury in December, 2003, titled “Solution to the States’ fiscal crisis” (read it at www.monetary.org). That solution has become the proposed American Monetary Act. In California, Governor Schwarzenegger has had a copy of The Lost Science of Money (the historical research which led to the solution) on his bookshelves since the spring of 2004.
Historical experience has taught us what we need to do:
1. Put the Federal Reserve System into the U.S. Treasury.
2. Stop the banking system creating any part of the money supply.
3. Create new money as needed by spending it on public infrastructure, including human infrastructure, e.g. education and health care.
These 3 elements must all be done together, and are all in draft legislative form as the proposed American Monetary Act (read it here: http://www.monetary.org/amacolorpamphlet.pdf).
The correct action is for Congress to fulfil its constitutional responsibilities to furnish the nation with its money by making the American Monetary Act law.
The correct action for the States is to insist on this Federal action!
Genuine monetary reform is the solution to the nation’s fiscal problems, and that can only be achieved at the national level.
The American Monetary Institute is sponsoring the 5th annual Monetary Reform Conference at Roosevelt University in Chicago, September 24-27, 2009, to bring together the best minds to get done what has to be done.
Jamie R. Walton
[Response summation: I know of know one in the extremely small money reform community who proposes or supposes that community or state banking solutions are the only answer to our monetary problems. Quite the contrary, there is an apparent universal consensus that the best or ideal solution includes the federal government reclaiming their sovereign and constitutionally authorized right to create and regulate money without borrowing it from anyone. Publicly created money would not bear interest to the taxpayers. If only the government (public) has the right and duty to create money, then private money creation via the fractional reserve banking process would have to cease, or be eased out of existence in a way that would not create havoc and ruin within the private banking industry. Not that I have much sympathy with the banks, but the idea if for a smooth transition, and more chaos is to be scrupulously avoided.
All serious money reformers know this, and it is rather disingenuous to suggest that those who advocate other avenues of education, information and action than that AMI is engaged in are somehow damaging the money reform efforts at the national level. This is simply not true. Many of the above statements are distorted misrepresentations of the actual positions held, and some are even insulting prevarications.
In fact, it is so divisive that it makes me wonder about the sincerity of those who make such “my way or the highway” assertions. It smacks of an authoritarian flavor I find extremely distasteful in the same way I find this entire indictment of other money reform efforts distasteful.
I even wonder how the same mind that produced “The Lost Science of Money” could have also been responsible for poverty of reasoning shown in the above, or at the very least has condoned this irresponsible piece. One last example: Walton writes:
“We have a big problem in our economy and society today: too much debt. Banking cannot solve this problem because banking produces debt, which is the problem. It’s incredible that even now the delusion of borrowing ourselves out of debt is still seen as a solution, by anyone, let alone so-called reformers. We’re in a deep hole because we listened to cheerleaders yelling “keep on digging” without thinking.”
Saying the problem is “too much debt” is a gross oversimplification without mentioning what the debt is for, how much interest is involved and who is profiting from these debts. Those are the key factors, not just the debt itself. Then, does banking alone produce the debt? Another oversimplification. Then, to imply that any reasonable person, especially a serious money-reformer, be in the grip of the delusion that “borrowing our way out of debt” is a solution is not only disingenuous, but insulting and even delusional itself. No one I know believes that without a huge amount of qualification or reservations, including changing the entire system of banking and lending. Finally, we are NOT in a deep hole “because we listened to cheerleaders yelling ‘keep digging” without thinking.” We’re in a deep hole because we didn’t know who the “cheerleaders” were, or what they were up to, or why they wanted us deeper and deeper into an inescapable pit. The bankers were and are the “cheerleaders”, and apparently some of us don’t know that even yet.
So what this dispute boils down to is whether or not there is more than one valid approach to reform our money system. I believe there not only is, but there must be. I say this because I have been convinced that the national or federal reforms will not happen, or will happen only after an economic collapse of biblical proportions, and even then, I think the gold-bugs will win the reform efforts, and we will usher in a new era of an illusory gold-standard, or some electronic wrinkle thereof.
The reality is that every “serious money reformer” other than AMI/Zarlenga want to see pressure brought from as many directions and groups as possible. Every “serious” reformer wants to see a large, all-inclusive tent calling for money reforms because they know that is the only way reform is going to happen. A massive popular movement is needed in order for it to be possible.
The push for transparency would be a good place to start. If we can’t make that happen, then all else is impossible on the federal level.
What we really need is some kind of organized coalition of reformers who can agree on the essentials: 1) Public money creation, regulation and distribution, regardless of the level, but preferably on the national or federal level, if possible. 2) Absolute transparency and governmental regulation and oversight over all money authorities. Penalties for breaking the law should be far greater than the profit-potentials for lawbreaking. 3) Revision of Fractional Reserve credit-money creation, so that government plays a larger role in it, and over time assumes it all.
Paul Grignon, Bill Still, Ellen H Brown, and many others have made useful contributions to our total body of money reform knowledge. Here are some of the latest gems from Grignon:
– Jere L Hough
Filed under: economic crisis |