Sustainable BankingEllen Hodgson Brown, J.D.

 22nd annual SRI in the Rockies Conference

Sheraton New OrleansOctober 2 - 5, 2011 

WHERE DOES MONEY COME FROM?

Contrary to popular belief, U.S. dollars are NOT issued by the federal government.

They are issued by the Federal Reserve and LENT to other banks and the government.

Not just the Federal Reserve but all banks create money with accounting entries. So said U.S. Treasury Secretary Robert B. Anderson in 1959:

• “[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.”

Banks create money by “fractional reserve” lending.

Modern Money Mechanics, p. 49:“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts.” In effect, the deposits are double-counted.

landru.i-link-2.net/monques/resexp2.gif

Cumulative expansion in deposits on basis of 10,000 of new reserves and reserve requirement of 10%.

Expansion stagesFinal

100,000

60,000

20,000

80,000

40,000

Initial deposits

This system goes back to the 17th century goldsmiths-turned-bankers, who issued private banknotes supposedly backed by gold. They issued many times more notes than they had gold. At a 10% reserve requirement, 90% of the notes were “created out of thin air.”

                       .

Today, nearly all of our money is issued by banks when they make loans.

• M1 (blue) -- coins, dollar bills and checkbook money

• M2 (purple) -- money and “close substitutes”, including savings deposits and individual time deposits

• M3 (pink) -- adds large time deposits and institutional money market funds

The snag is the interest. Banks create the principal but not the interest needed to pay back their loans.

paulgrignon.netfirms.com

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New borrowers must continually be found to pay the interest, turning banking into an unsustainable pyramid scheme.

•www.answers.com

SUSTAINABLE BANKING: THE PUBLIC OPTION

• There is another alternative, one that goes back to the American colonists. They used paper scrip – money issued by the government as receipts for goods and services delivered. The scrip was backed only by the credit of the community.

Boston colonial scrip, 1690

The best of these systems was in Benjamin Franklin’s colony of Pennsylvania. It owned its own bank.

Interest and profits returned to the government.

Government prints $105

Lends $100 @ 5% interest

Spends $5 on budget, infrastructure

$105 circulates in economy; comes back to government as principal and interest

Government lends $100 @ 5% interest

Spends $5 on budget, infrastructure

During that period:• the colonists paid

virtually no taxes, • prices did not inflate, • and there was no

government debt.

Why does a sovereign government need to borrow money?

What happened to just printing it?

• The American colonial system worked until King George II forbade the colonists to produce new issues of paper money. Taxes had to be paid to England in gold. . . .

The result was a serious depression.The colonists rebelled, prompting the American Revolution.

The colonists won but had huge war debts.

• In 1791, Treasury Secretary Alexander Hamilton set up the First U.S. Bank to pay these debts.

• Like the Bank of England, it was a privately-owned bank that would print banknotes “backed” by gold and lend them to the government.

The debts were paid and the economy thrived.

But it was the beginning of a system of government funding by borrowing privately-issued paper money at interest, when the government could have issued the money itself.

          

                   

President Lincoln returned to the government-issued money of the American colonists to avoid a crippling war debt during the Civil War. But this “Greenback” issuance ended after he was assassinated.

In 1913, the privately-owned Federal Reserve was authorized to issue its own Federal Reserve Notes and lend them to the government at interest, usurping the government’s own power to issue money.

Today, our money is debt.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, wrote in 1934:

“We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve.”

IThe national debt just keeps growing, forming the money supply. No debt, no money.

Federal debt 1940 to 2007 ($9T) Money supply 1959 to 2006 ($10T)

• Interest-free banking.• Interest-free

complementary currency systems.

• Publicly-owned banks, where profits return to the public (the colonial Pennsylvania model).

AVOIDING THE INTEREST TRAP: ALTERNATIVES FOR SUSTAINABLE BANKING

HOW STATES COULD TAP INTO WALL STREET’S PERKS: OWN A BANK

• With its own bank, the state could leverage its own capital and deposits into credit.

• The state bank could have access to Fed funds at 0.2%.

• The state bank could partner with local banks to help with capital requirements.

• The state could keep the interest and profits, and guarantee cheap, ready credit for itself and the local economy.

Fourteen state legislatures have now introduced bills to establish state-owned banks or to study their feasibility: OR, MD, WA, HI, AZ, IL, MA, VA, LA, VT, ME, NM, MT, and CA.

These initiatives are all following the lead of North Dakota, the only state to have its own bank.

• ND is also the only state to have a major budget surplus in 2010.

• ND has had its own bank since 1919, when farmers were losing their farms to the Wall Street bankers.

• They organized, won an election, and passed legislation.

ONLY N. DAKOTA ESCAPED THE CREDIT CRISIS.

• In 2009, while other states floundered, North Dakota had its largest budget surplus ever. It was the only state to cut personal and business taxes during the recession.

• ND has the lowest unemployment rate in the country, the lowest default rate, the most local banks per capita, and hasn’t lost a single bank to the credit crisis.

The Bank of North Dakota (BND) has a captive deposit and capital base.

• All state revenues are deposited in it by law.

• The BND is also a dba of the state. That means that ALL the state’s assets are the bank’s assets.

What the BND does for ND:

• Pays a dividend to the state of $30M/year. The BND had a return on equity in 2010 of 19%.

• Pays 5% on the state’s deposits. (Compare this, for example, to an average 2.5% received by WA State from its depository banks.)

• Provides a direct credit line for the state, avoiding extortionate interest, fees and threats of downgrades.

• Partners with local banks to increase their capacity for local lending.

• Guarantees a stable, low interest rate for state and local government infrastructure projects.

Consider the possibilities . . .

Extrapolating from the BND model, just using government revenues --

North Dakota: • Population 647,000• Deposits $2.7B• Deposits per capita –

approx. $4000• Loans $2.6B

California:• Population 37,000,000• At $4000/person, deposits

= $148 B• Potential loans = $142 B 0

20

40

60

80

100

120

140

160

ND CA

population

deposits

What could the state do with $142 billion?

One of many possibilities:• The CA budget includes interest on its debt of $7.65

billion. • CA could buy $142 billion in muni bonds, generating

interest at 5% of $7.1 billion -- enough to service nearly the whole state debt.

California General Obligation and Revenue Bonds as of Nov 1, 2010

http://www.treasurer.ca.gov/bonds/debt/201011/summary.pdf

• Interest is 44% of the obligation on CA’s general obligation bonds (mostly for infrastructure).

• Eliminating interest would have cut the debt by 44% -- nearly half.

Cutting out interest cuts the average cost of public projects by 50%, making otherwise unsustainable projects sustainable.

A state-owned bank can raise state revenues without raising taxes, by:

• Returning an annual multi-million dollar dividend to the state.

• Increasing the tax base by partnering with local banks to increase their loan capacity, fostering local business.

• Reducing state borrowing costs by providing interest-free or low-interest loans to state and local government, when Wall Street is raising public borrowing costs.

Some ways a state-owned bank can aid SRI and CDFIs:

• Increase loans to small business, when Wall Street is cutting back.

• Reduce interest charges for local business; replace business credit cards (16% interest) with credit lines (8% interest).

• Expand the local money supply and availability of cheap credit by factoring receivables, turning invoices into money (an offshoot of the community currency model).

As Buckminster Fuller said --

“You never change things by fighting the existing reality.

To change something, create a new model that makes the old model obsolete.” 

 

For more information – http://PublicBankingInstitute.org http://WebofDebt.com