Sustainable
Government: Banking for a “New” New Deal
by
Ellen Brown
“This
isn’t about big government or small government. It’s about
building a smarter government that focuses on what
works.”
– Barack Obama, November 26,
2008
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Cover of The Web of Debt by Ellen
Brown |
| As our 45th
President prepares to enter the Oval Office, bank lending has
seized up, some of the nation’s largest banks are on life
support, and the big three automakers are bankrupt. Housing
continues to crash, and so does the economy.
Little wonder that Obama is being compared
to Franklin D. Roosevelt, who entered the White House in
similar financial straits in 1932. Even before taking office,
Obama has started his version of the “fireside chats” (updated
from radio to online video) given by Roosevelt nearly weekly
to reassure the public. He said on November 22 that he plans
to create 2.5 million new jobs by 2011 and kick-start the
economy by building roads and bridges, modernizing schools,
and creating technology and infrastructure for renewable
energy. These are excellent ideas, but what will they be
funded with—more government debt?
Obama has pledged to honor the commitments
of the outgoing administration to rescue financial markets, on
the theory that if we don’t, our credit system could freeze up
completely. But as noted by Barry Ritholtz in a December 2
article, the bailout
has already cost more than the New Deal, the Marshall Plan,
the Louisiana Purchase, the moonshot, the savings and loan
bailout, the Korean War, the Iraq war, the Vietnam war, and
NASA’s lifetime budget combined. 1 Increasing the debt burden could
break the back of the taxpayers and plunge the nation itself
into bankruptcy.
How can the new President resolve these
enormous funding challenges? Thomas Jefferson realized two
centuries ago that there is a way to finance government
without taxes or debt.
Unfortunately, he came to that realization only after he had
left the White House, and he was unable to put it into action.
With any luck, Obama will discover this funding solution early
in his upcoming term, before the country is declared bankrupt
and abandoned by its creditors.
The Key to a
Solution: Understanding Money and Credit
Jefferson
realized too late that the Founding Fathers had been misled.
He wrote to Treasury Secretary Gallatin in 1815:
“The treasury,
lacking confidence in the country, delivered itself bound
hand and foot to bold and
bankrupt adventurers and bankers pretending to have money,
whom it could have crushed at any
moment.”
He wrote to John Eppes in 1813:
“Although we have so foolishly
allowed the field of circulating medium to be filched from
us by private individuals, I think we may recover it
… The states should be
asked to transfer the right of issuing paper money to
Congress, in
perpetuity.”
It had long been held to be the sovereign
right of governments to create the national money supply,
something the colonies had done successfully for a hundred
years before the Revolution. So why did the new government
hand over the money-creating power to private bankers merely
“pretending to have money”? Why are we still, 200 years later,
groveling before private banks that are admittedly bankrupt
themselves? The answer may simply be that, then as now,
legislators along with most other people have not understood
how money creation works. Only about 3% of the U.S. money
supply now consists of “hard” currency—coins (issued by the
government) and dollar bills (issued by the private Federal
Reserve and lent to
the government). All
of the rest exists merely on computer screens or in paper
accounts, and this money is
all created by
banks when they make loans. Contrary to popular belief,
banks do not lend their own money or their depositors’ money.
They merely “monetize” the borrower’s promise to repay. Many
creditable authorities have attested to this fact. Here are a
few:
“[W]hen a bank makes a loan, it
simply adds to the borrower’s deposit account in the bank by
the amount of the loan. The money is not taken from anyone
else’s deposit; it was not previously paid in to the bank by
anyone. It’s new money, created by the bank for the use of
the borrower.”
– Robert B. Anderson, Secretary of the Treasury under
President Eisenhower
“Banks create
money. That is what they are for… The manufacturing process
to make money consists of making an entry in a book. That is
all… Each and every time a Bank makes a loan… new Bank
credit is created—brand new money.”
– Graham Towers, Governor of the Bank of Canada
from 1935 to 1955
“Of course,
[banks] do not really pay out loans from the money they
receive as deposits. If they did this, no additional money
would be created. What they do when they make loans is to
accept promissory notes in exchange for credits to the
borrowers’ transaction accounts. Loans (assets) and deposits
(liabilities) both rise [by the same
amount].”
– The Chicago
Federal Reserve, Modern Money
Mechanics (last
updated 1992)
Not only are banks merely pretending to have
the money they lend to us, but today they are shamelessly
demanding that we bail them out of their own imprudent
gambling debts so they can continue to lend us money they
don’t have. According to the Comptroller of the Currency, the
books of U.S. banks now carry over $180 trillion in a form of
speculative wager known as derivatives. Particularly at issue
today are betting arrangements called credit default swaps
(CDS), which have been sold by banks as insurance against loan
defaults. The problem is that CDS are just private bets, and
there is no insurance commissioner insuring that the
“protection sellers” have the money to pay the “protection
buyers” if they lose. As loans have gone into default, the
elaborate gambling scheme built on them has teetered near
collapse, threatening to take the banking system down with it.
Now the players are demanding that the government underwrite
their bets with taxpayer funds, on the theory that if the
banking system collapses the public will have no credit and no
money. That is the theory, but it misconstrues the nature of
money and credit. If a private bank can create money simply by
writing credit into a deposit account, so can the federal
government. The Constitution says “Congress shall have the
power to coin money,” and that is all it says about who has
the power to create money. It does not say Congress can
delegate to private banks the right to create 97% of the
national money supply in the form of loans. Nothing backs our
money except “the full
faith and credit of the United States.” The government could
and should have its own system of public banks with the
authority to issue the credit of the nation directly.
Buyouts, not
Bailouts
Accumulating a network of publicly-owned
banks would be a simple matter today. As banks became
insolvent, instead of trying to bail them out, the government
could just put them into bankruptcy and take them over.
Insolvent banks are dealt with by the FDIC, which is
authorized to proceed in one of three ways. It can order a
payout, in which the
bank is liquidated and ceases to exist. It can arrange for a
purchase and
assumption, in which another bank buys the failed bank
and assumes its liabilities. Or it can take the bridge bank option, in which
the FDIC replaces the board of directors and provides the
capital to get it running again in exchange for an equity
stake in the bank. An “equity stake” means an ownership
interest: the bank’s stock
becomes the property of the government. 2 Nationalization is an option
routinely pursued in Europe for bankrupt banks. As William
Engdahl observed in a September 30 article, citing economist
Nouriel Roubini for authority:
“[I]n almost
every case of recent banking crises in which emergency
action was needed to save the financial system, the most
economical (to taxpayers) method was to have the Government,
as in Sweden or Finland in the early 1990’s, nationalize the
troubled banks [and] take over their management and assets …
In the Swedish case, the Government held the assets, mostly
real estate, for several years until the economy again
improved at which point they could sell them onto the market
… In the Swedish case the end cost to taxpayers was
estimated to have been almost nil. The state never did as
Paulson proposed, to buy the toxic waste of the banks,
leaving them to get off free from their follies of
securitization and speculation abuses.”3
As in any corporate acquisition, business in
the banks nationalized by the government could carry on as
before. Not much would need to change beyond the names on the
stock certificates. The banks would just be under new
management. They could advance loans as accounting entries,
just as they do now. The difference would be that interest on
advances of credit, rather than going into private vaults for
private profit, would go into the coffers of the government.
The “full faith and credit of
the United States” would become an asset of the United
States. Instead of paying half a trillion
dollars annually in interest, the U.S. could be receiving interest on its
credit, replacing or
eliminating the need to tax its citizens.
3 Ways to Fund the
“New” New Deal
There are three ways government could
fund itself without either going into debt to private lenders
or taxing the people: (1) the federal government could set up
its own federally-owned lending facility; (2) the states could
set up state-owned lending facilities; or (3) the federal
government could issue currency directly, to be spent into the
economy on public projects. Viable precedent exists for each
of these alternatives:
1. The Federal Bank
Option
The federal government could issue credit
through its own lending facility, leveraging “reserves” into
many times their face value in loans just as banks do now.
Franklin Roosevelt funded his New Deal through the
Reconstruction Finance Corporation (RFC), a government-owned
lending institution. However, the RFC borrowed the money
before lending it. 4 A debt-free alternative would be
for a government-owned bank to issue the money simply as
“credit,” without having to borrow it first. This was done by
the state-owned central banks of Australia and New Zealand in
the 1930s, allowing them to avoid the worldwide depression of
that era. 5 In the informative booklet “Modern
Money Mechanics,” the Chicago Federal Reserve confirms that
under the fractional reserve system in use today, one dollar
in reserves is routinely fanned by private banks into ten
dollars in new loans. 6 Following that accepted protocol,
the government could fan the $700 billion already earmarked to
unfreeze credit markets into $7 trillion in low-interest
loans.
Apparently, that is how Treasury Secretary
Henry Paulson and Federal Reserve Chairman Ben Bernanke are
planning to generate the $7 trillion they say they are now
prepared to advance to rescue the financial system: they will
just leverage the $700 billion bailout money through the
banking system into $7 trillion in new loans. 7 But the Federal Reserve is a
privately-owned banking corporation, and the recipients of its
largesse have not been revealed. 8 The $700 billion in seed money
belongs to the taxpayers. The taxpayers should be getting the
benefit of it, not a propped-up private banking system that
uses taxpayer money for the “reserves” to create ten times
that sum in “credit” that is then lent back to the taxpayers
at interest.
Seven trillion dollars in government-issued
credit could furnish all the money needed to fund Obama’s New
Deal with a few trillion to spare. Among other worthy
recipients of this low-interest credit would be state and
local governments. Many state and municipal governments are
going bankrupt through no fault of their own, just because
interest rates shot up when the monoline insurers lost their
triple-A ratings gambling in the derivatives market. 9
2. The State Bank
Option
While states are waiting for the federal
government to step in, they could charter their own
state-owned banks that issue low-interest credit on the
fractional reserve model. Article I, Section 10, of the
Constitution says that states shall not “emit bills of
credit,” which has been interpreted to mean they cannot issue
their own paper currency. But there is no rule against a state
owning or chartering a bank that issues ten times its deposit
base in loans, using standard fractional reserve principles.
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Archive photographs from 1919 of the
founding of the Bank of North Dakota. Visit www.banknd.nd.gov |
| Precedent for this
approach is found in the Bank of North Dakota (BND), the
nation’s only state-owned bank. BND was formed in 1919 to
encourage and promote agriculture, commerce and industry in
North Dakota. Its primary deposit base is the State of North
Dakota, and state law requires that all state funds and funds
of state institutions be deposited with the bank. The bank’s
earnings belong to the state, and their use is at the
discretion of the state legislature. As an agent of the state,
BND can make subsidized loans to spur economic and
agricultural development, and it is more lenient than other
banks in pressing foreclosures. Under a program called Ag PACE
(Agriculture Partnership in Assisting Community Expansion),
the interest on loans made by BND and local lenders may be
reduced to as low as 1 percent. 10 North Dakota remains fiscally
sound at a time when other state governments swim in red ink,
and its educational system is particularly strong. While
disruptions in capital markets have hampered student loan
operations elsewhere, BND continues to operate a robust
student loan business and is one of the nation’s leading banks
in the number of student loans issued. 11 North Dakota’s fiscal track
record is particularly impressive considering that its economy
consists largely of isolated farms in an inhospitable climate.
Ready low-interest credit from its own state-owned bank may
help explain this unusual success.
3. Government-issued
Currency
A third option for creating a
self-sustaining government would be for Congress to simply
create the money it needs on a printing press or with
accounting entries, then spend this money directly into the
economy. The usual objection to that alternative is that it
would be highly inflationary, but if the money were spent on
productive endeavors that increased the supply of goods and
services—public transportation, low-cost housing, alternative
energy development and the like—supply and demand would rise
together and price inflation would not result. The American
colonial governments issued their own money all through the
eighteenth century. According to Benjamin Franklin, it was
this original funding scheme that was responsible for the
remarkable abundance in the colonies at a time when England
was suffering the depression conditions of the Industrial
Revolution. After the American Revolution, private bankers got
control of the money supply, but Abraham Lincoln followed the
colonial model and authorized government-issued Greenbacks
during the Civil War. Not only did this allow the North to win
the war without plunging it into debt to the bankers, but it
funded a period of unprecedented expansion and productivity
for the country.
Obama would do well to consider these
funding solutions for his “smarter” government. He has been
quick to assemble his advisers and form policy, but a fast
start down the wrong road could do more harm than good. The
bailout scheme of the current administration is serving merely
to keep a failed banking system alive by draining assets away
from the productive economy. The conventional wisdom is that
we must continue down the path we are on, because the
alternative means frightening, radical change. Financing a new
New Deal without putting the country further into insolvency,
however, would not be a radical departure from tradition but
would represent a return to our roots, to the uniquely
American monetary policy advocated by our venerable forebears
Benjamin Franklin, Thomas Jefferson and Abraham Lincoln.
| Ellen Brown, J.D.,
wrote this article in December, 2008, for Path to a New
Economy, a collection of online articles for
YES!
Magazine, on
economic and financial solutions. Ellen developed her
research skills as an attorney practicing civil
litigation in Los Angeles. In Web of Debt, 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
eleven books include the bestselling Nature’s
Pharmacy, co-authored
with Dr. Lynne Walker, and Forbidden
Medicine. Her websites
are www.webofdebt.com
and www.ellenbrown.com.
 Buy Web of Debt
 www.YesMagazine.org/bailout
Read
the YES! Take on economic and financial solutions,
including the Plan for Recovery from the Institute for
Policy Studies.
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CITATIONS:
1. Barry Ritholtz, “Bailout
Costs More than Marshall Plan, Louisiana Purchase, Moonshot, S
& L Bailout, Korean War, New Deal, Iraq War, Vietnam
War,”, Global Research (December 2, 2008).
2. G. Edward Griffin, The
Creature from Jekyll Island (Westlake Village,
California: American Media, 1998), pages 63, 65.
3. “William Engdahl, “Financial
Tsunami: The End of the World as We Knew It,” Global Research
(September 30, 2008).
4. See Ellen Brown, “The
Collapse of a 300 Year Ponzi Scheme,”
webofdebt.com/articles, October 16, 2008.
5. See “Sustainable
Energy Development: How Costs Can Be Cut in Half,” ibid., (November 5,
2007).
6. Chicago Federal Reserve, “Modern
Money Mechanics” (1963, updated 1992), originally produced
and distributed free by the Public Information Center of the
Federal Reserve Bank of Chicago, Chicago, Illinois, now
available on the Internet.
7. Mark Pittman, Bob Ivry, “U.S.
Pledges $7.7 Trillion to Ease Frozen Credit,” Bloomberg.com
(November 25, 2008).
8. Ellen Brown, “The
Fed Now Owns the World’s Largest Insurance Company – But Who
Owns the Fed?”, www.webofdebt.com
(October 7, 2008); Mark Pittman, et al., “Fed
Denies Transparency Aim in Refusal to Disclose,”
Bloomberg.com (November 10, 2008).
9. Tami Luhby, “Credit
Crisis Hits Main Street,” CNNMoney.com (February 21,
2008); “Bond
Failures May Bankrupt Cities,” Marketplace
(February 28, 2008).
10. “The Bank of
North Dakota,” New Rules Project, newrules.org; “Ag PACE,”
banknd.com (2007).
11. Richard Sisson, et al., The
American Midwest: An Interpretive Encyclopedia
(2007), page 41; Liz Wheeler, “Bank
of North Dakota Keeps Student Loan Funds Flowing,” Northwestern Financial
Review, BNET.com (September 15, 2008). |
