How Cash Starved States Can Create their Own Credit
by Ellen Brown
Global Research (March 03 2009)
"He that will not apply new remedies must expect new evils;
for time is the greatest innovator". --- Francis Bacon
On February 19 2009, California narrowly
escaped bankruptcy, when
Governor Arnold Schwarzenneger put on
his Terminator hat and held the
state senate in lockdown mode until they signed a very controversial
budget {1}. If the vote had failed, the state
was going to be reduced to
paying its employees in IOUs. California avoided bankruptcy for the time
being, but 46 of fifty states are insolvent
and could be filing Chapter
Nine bankruptcy proceedings in the next two years {2}.
One of the four states that is not
insolvent is an unlikely candidate
for the distinction - North Dakota. As Michigan management consultant
Charles Fleetham observed last
month in an article distributed to his
local media:
"North Dakota is a sparsely
populated state of less than 700,000, known
for cold weather, isolated farmers and a hit movie - Fargo. Yet, for
some reason it defies the
real estate cliche of location, location,
location. Since 2000, the state's GNP has grown 56%, personal income has
grown 43%, and wages
have grown 34%. This year the state has a budget
surplus of $1.2 billion!"
What does the State of North Dakota
have that other states don't? The
answer seems to be: its own bank.
In fact, North Dakota has the only
state-owned bank in the nation.
The state legislature established the
Bank of North Dakota in 1919. Fleetham writes that the bank was set up
to free farmers and small businessmen
from the clutches of out-of-state
bankers and railroad men. By law,
the state must deposit all its funds
in the bank, and the state guarantees its deposits. Three elected
officials oversee the bank: the governor,
the attorney general, and the
commissioner of agriculture. The bank's stated mission is to deliver
sound financial services that promote
agriculture, commerce and industry
in North Dakota. The bank operates as a bankers' bank, partnering with
private banks to loan money to farmers,
real estate developers, schools
and small businesses. It loans money
to students (over 184,000
outstanding loans), and it purchases
municipal bonds from public
institutions.
Still, you may ask, how does that
solve the solvency problem? Isn't the
state still limited to spending only
the money it has? The answer is no.
Certified, card-carrying bankers are
allowed to do something nobody else
can do: they can create "credit" with
accounting entries on their books.
A License to Create Money
Under the "fractional reserve" lending system,
banks are allowed to
extend credit (create money as loans)
in a sum equal to many times their
deposit base. Congressman Jerry Voorhis,
writing in 1973, explained it
like this:
"[F]or every $1 or $1.50 which people -
or the government - deposit in a
bank, the banking system can create
out of thin air and by the stroke of
a pen some $10 of checkbook money
or demand deposits. It can lend all
that $10 into circulation at interest just
so long as it has the $1 or a
little more in reserve to back it up". {3}
That banks actually create money with
accounting entries was confirmed
in a revealing booklet published by the
Chicago Federal Reserve titled
Modern Money Mechanics {2}. The
booklet was periodically revised until
1992, when it had reached fifty pages
long. On page 49 of the 1992
edition, it states:
"With a uniform ten percent reserve
requirement, a $1 increase in
reserves would support $10 of additional
transaction accounts [loans
created as deposits in borrowers' accounts]" {4}.
The ten percent reserve requirement is
now largely obsolete, in part
because banks have figured out how to
get around it with such devices as
"overnight sweeps". What chiefly limits
bank lending today is the eight
percent capital requirement imposed
by the Bank for International
Settlements, the head of the private global central banking system in
Basel, Switzerland. With an eight
percent capital requirement, a state
with its own bank could fan its revenues
into 12.5 times their face
value in loans (100 ÷ 8 = 12.5). And
since the state would actually own
the bank, it would not have to worry about shareholders or profits. It
could lend to creditworthy borrowers
at very low interest, perhaps
limited only to a service charge covering
its costs; and it could lend
to itself or to its municipal governments
at as low as zero percent
interest. If these loans were rolled over
indefinitely, the effect would
be the same as creating new, debt-free money.
Dangerously inflationary? Not if the
money were used to create new goods
and services. Price inflation results only
when "demand" (money) exceeds
"supply" (goods and services). When they
increase together, prices
remain stable.
Today we are in a dangerous deflationary
spiral, as lending has dried up
and asset values have plummeted. The
monopoly on the creation of money
and credit by a private banking fraternity
has resulted in a
malfunctioning credit system and monetary
collapse. Credit markets have
been frozen by the wildly speculative
derivatives gambles of a few big
Wall Street banks, bets that not only destroyed those banks' balance
sheets but are infecting the whole private
banking system with toxic
debris. To get out of this deflationary debt
trap requires an injection
of new, debt-free money into the economy,
something that can best be
done through a system of public banks
dedicated to serving the public
interest, administering credit as a public utility.
Some experts insist that we must tighten
our belts and start saving
again, in order to rebuild the "capital"
necessary for functioning
markets; but our markets actually functioned
quite well so long as the
credit system was working. We have
the same real assets (raw materials,
oil, technical knowledge, productive
capacity, labor force, et cetera)
that we had before the crisis began.
Our workers and factories are
sitting idle because the private credit
system has failed.
A system of public credit could put them
back to work again. The notion
that "money" is something that has to
be "saved" before it can be
"borrowed" misconstrues the nature of
money and credit. Credit is merely
a legal agreement, a "monetization" of
future proceeds, a promise to pay
later from the fruits of the advance. Banks
have created credit on their
books for hundreds of years, and this
system would have worked quite
well had it not been for the enormous
tribute siphoned off to private
coffers in the form of interest. A public
banking system could overcome
that problem by returning the interest to the
public purse. This is the
sort of banking system that was pioneered
in the colony of Pennsylvania,
where it worked brilliantly well.
Restoring Michigan to Solvency
Among other advantages to a state of
owning its own bank are the
substantial sums it could save in interest.
As Fleetham notes of his own
ailing state of Michigan:
"According to recent financial reports
(available online), the State of
Michigan, the City of Detroit, the Detroit
Water and Sewerage
Department, the Wayne County Airport,
the Detroit Public Schools, the
University of Michigan, and Michigan State
University pay over $800
million a year in interest on long term debt.
If you add interest paid
by Michigan cities, school districts, and
public utilities, the cost to
our taxpayers easily tops a billion [dollars]
a year. What does Wall
Street do with our billion plus dollars?
They decorate their offices
like kings."
Interestingly, the projected state budget
deficit for 2009 is also $1
billion. If Michigan did not have to pay
over a billion dollars in
interest to Wall Street, the budget could
be balanced and the state
could be restored to solvency. A state-owned
bank could not only provide
interest-free credit for the state but could
actually generate revenues
for it. Fleetham notes that in 2007, the
Bank of North Dakota earned a
net profit of $51 million on a loan volume
of $2 billion. He comments:
"Last year, Michigan citizens paid over
$5 billion dollars in personal
income tax. With a state bank like North
Dakota's we could reduce this
burden, fund new businesses, and restore
our crumbling water and sewer
systems. And we don't have to feel sorry
about Wall Street losing our
business. They didn't 'earn' the money
they lent us. They created it in
computers and charged us interest to boot.
Let's follow North Dakota's
lead and get free from Wall Street's web."
Taking the Initiative in California
California could do this as well. Robert Ellis
is a Tucson talk show
host who once worked on Wall Street and
has been involved in setting up
several banks and financial institutions. In
January of this year, he
proposed in a letter to Governor Schwarzenegger
that California could
resolve its financial woes by setting up a bank
on the model of the Bank
of North Dakota. Ellis wrote to the governor:
"I admire your tenacity in dealing with
California's financial problems.
Your idea of using IOUs was ingenious
but there is a better way. The
State of California can charter its own bank
and issue its own checks to
all state employees ... It can also pay all
its vendors, contracts and
contractors through the bank ... Additionally,
once the bank is
operational, you can fund your own state
projects and you determine the
interest rate paid as opposed to being at
the mercy of the banks you
currently deal with or the interest rates the
investment bankers make
you pay to issue bonds. By doing this, you
will put the state in control
of its own destiny and make it the benefactor
of its own money.
"... What I am proposing is not new. It has
been done by one other state
in the nation [North Dakota]. Why should
you continue to pay the banks
for services and interest on loans when
you can receive that interest
for the benefit of the state of California?
Wouldn't it be better if
you could fund your own infrastructure
projects without having to get
the approval of independent banks or
investment bankers? Additionally,
you set the interest rate on your own projects.
You can even set it at
zero if you deem the project worthy enough."
Ellis offered his services in setting up
the bank, which he thought
could be chartered in a few short months.
The Governor has not replied,
but some pressure from constituents might
encourage a response.
Failing that, there is the initiative and
referendum process pioneered
in California. It allows state laws to be
proposed directly by the
public, and the state's Constitution to
be amended either by public
petition (the "initiative") or by the legislature
submitting a proposed
constitutional amendment to the electorate
(the "referendum"). The
initiative is done by writing a proposed
constitutional amendment or
statute as a petition, which is submitted
to the California Attorney
General along with a submission fee,
which was a modest $200 in 2004.
The petition must be signed by registered
voters amounting to eight
percent (for a constitutional amendment)
or five percent (for a statute)
of the number of people who voted in the
most recent election for
governor. {5}
As Gandhi said, "When the people lead,
the leaders will follow". We the
people can beat the Wall Street bankers
at their own game, by moving our
legislators to set up publicly-owned banks
that create credit using the
same banking principles that are accepted
as standard and usual in the
trade by bankers themselves.
_____
Ellen Brown developed her research skills as
an attorney practicing
civil litigation in Los Angeles. In Web of Debt (2007), her latest book,
she turns those skills to an analysis of the Federal Reserve and "the
money trust". She shows how this
private cartel has usurped the power to
create money from the people themselves, and how we the people can get
it back. Her earlier books focused on
the pharmaceutical cartel that
gets its power from "the money trust". Her eleven books include
Forbidden Medicine (2008), Nature's
Pharmacy (1998), co-authored with Dr
Lynne Walker, and The Key to Ultimate
Health (2000), co-authored with Dr
Richard Hansen. Her websites are
www.webofdebt.com and www.ellenbrown.com.
Notes:
{1} Anne Davies, "Lockdown Vote Saves California from Bankruptcy",
theage.com.au (February 21 2009).
http://www.theage.com.au/world/lockdown-vote-saves-california-from-bankruptcy-20090220-8do1.html?page=2
{2} John Mitchell, "46 of 50 States Could File Bankruptcy in 2009-2010",
Freedom Arizona (January 30 2009).
{3} Jerry Voorhis, The Strange Case of Richard Milhous Nixon (1973),
excerpted at
http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html.
{4} Modern Money Mechanics: A Workbook on Bank Reserves and Deposit
Expansion (Federal Reserve Bank of Chicago, Public Information Service,
1992, available at
http://www.rayservers.com/images/ModernMoneyMechanics.pdf ).
{5} "California Ballot Proposition", Wikipedia.
http://en.wikipedia.org/wiki/California_ballot_proposition
_____
Ellen Brown is a frequent contributor to Global Research.
http://www.globalresearch.ca/index.php?context=viewArticle&code=BRO20090303&articleId=12522
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