Money system: ELLEN BROWN IS WRONG
Trent Schroyer
i became friendly with ellen brown and she had mentioned she was at the
american monetary institute meeting and i assumed that she had presented
there
someone on the list asked if she and stephen zarlenga
were in agreement and i wrongly said i thought they were
boy was i wrong - i got in touch with stephen whom we had a
facilitated at the 2004 toes event in georgia and he sent me the
following piece by one of his researcher's --- which is a lot nicer
than his comments. and he corrected my assumption that she presented
at his event.
http://www.monetary.org/moneyscenefive.html
ZARLENGA THINKS OF HER "AS THE GREATEST BLOCK TO MONETARY REFORM
IN THE COUNTRY" !
Trent Schroyer
Emeritus Professor of Sociology-Philosophy
School of Social Science
Ramapo College of New Jersey
Mahwah, N.J. 07430
http://phobos.ramapo.edu/~tschroye/story_n.htm
The American Money Scene
Bulletin Five of the American Monetary Institute 2009
PO Box 601, Valatie, NY 12184
http://www.monetary.org
a...@taconic.net
Dedicated to the independent study of monetary history, theory,
and reform
Stephen Zarlenga, Director
August 16, 2009
Dear Friends,
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.
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.
Sincerely,
Stephen Zarlenga
Director, AMI
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."
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.
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.
With that in mind, let's look again at the States' fiscal crisis.
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.).
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.
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.
This is a very serious situation - it's no time to be playing games.
In addition to these defining moral questions, there are also some
more technical reasons why they won't automatically work as
suggested.
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.
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 2^nd 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).
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.
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.
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).
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.
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.
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 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
[1]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: [2]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 5^th 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
Notes:
1. "The Public Option in Banking: How We Can Beat Wall
Street at Its Own Game" ", Hodgson Brown, Ellen, J.D. Web of Debt
(website), August 5, 2009.
2&4. "How the Nation's Only State-Owned Bank Became the Envy of
Wall Street", Harkinson, Josh. Mother Jones, March 27, 2009.
3. "NSW Savings Bank Board Official Announcement:
Protection To Depositors", The Age, April 23, 1931.
5. Bank of North Dakota 2008 Annual Report: Independent
Auditor's Report, p. 4.
6. State of North Dakota: 2009-2011 Executive Budget
Summary, p. 3.
7. "New Fiscal Year Brings No Relief From Unprecedented
State Budget Problems", Lav, Iris J. and McNichol, Elizabeth.
Center on Budget and Policy Priorities (website), updated August 12,
2009.
8&10. "Another Way Around the Credit Crisis: Minnesota Bill
would authorize State Banks to "monetize" productivity", Hodgson
Brown, Ellen, J.D. Web of Debt (website), March 23, 2008.
9. "Paper Money and the Original Understanding of the
Coinage Clause", Natelson, Robert G. Harvard Journal of Law and
Public Policy, July 1, 2008.
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References
1. http://www.monetary.org/
2. http://www.monetary.org/amacolorpamphlet.pdf
3. http://moneyreform.wordpress.com/2009/08/24/why-states-going-into-the-banking-business-would-be-a-distraction-not-a-solution-to-their-fiscal-problem-by-jamie-walton-ami-researcher/
4. http://monetary.org/service.htm
5. http://www.monetary.org/