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Take the Power to Create Credit Away from the Giant Banks and Give It Back to the People
Many people - including former analyst for the U.S. Treasury Richard Cook - argue that credit is too important a function to be left to the private banks.
Indeed,
even after taxpayers have given trillions in bailouts, backstops,
guarantees, and other gifts, the giant banks are still not lending out
much credit to individuals or small businesses.
The talking
heads say that real reform of this nature is not "politically
feasible". But not politically feasible doesn't actually mean anything
except that the powers-that-be don't want it.
We
have been throwing ourselves against a brick wall trying to force the
giant banks into doing the right thing, but as Buckminster Fuller said:
You never change things by fighting the existing
reality. To change something, build a new model that makes the existing
model obsolete.
A Better Model
So what is a better model?
Gold advocates argue for a return to a gold-backed standard. This would, in fact, be a vast improvement
over the fiat currency system we have now, as it would help to
stabilize the currency, add discipline and consistency, and reign in
the funding of unnecessary wars and other imperial mischief which are
funded by the unlimited printing of new fiat dollars.
But Ellen Brown argues
that a gold standard restricts credit for the little guy, not just
Uncle Sam. If Brown is right - and given that the too big to fails are
refusing to lend to most little guys - public banking might be the only
way to restore a healthy economy and ease the pain for the average
American. (Brown also argues
that it was actually the bankers - and not the populists - who forced
the adoption of a gold standard in the 1890s, and that the true meaning
of the "Cross of Gold" speech has been forgotten).
National Public Bank
AFL-CIO president Richard Trumka told Congress last week:
If the Federal Reserve were made a fully public body, it would be an acceptable alternative.
The American Monetary Institute proposes the following alternative:
Incorporate
the Federal Reserve System into the U.S. Treasury where all new money
would be created by government as money, not interest-bearing debt; and
be spent into circulation to promote the general welfare. The monetary
system would be monitored to be neither inflationary nor deflationary.
Second, halt the bank’s privilege to create money by ending the fractional reserve system in a gentle and elegant way.All
the past monetized private credit would be converted into U.S.
government money. Banks would then act as intermediaries accepting
savings deposits and loaning them out to borrowers. They would do what
people think they do now. This Act nationalizes the money system, not
the banking system.
Bloomberg News columnist Matthew Lynn writes:
The
U.K. government needs to start thinking about what it will do with all
the banks it now owns. The answer is simple: Hand them to the people...Instead
of selling the stakes it acquired in the financial system to other
banks, or listing the shares on the stock market, it could create
mutually owned societies. Royal Bank of Scotland Group Plc could be a
people’s bank, owned by everyone.That would ensure more diversity,
competition and stability, all goals just as worthy as getting back the
money Prime Minister Gordon Brown’s government spent on bank rescues...
Sovereign nations such as the U.S. and England have the power to create credit and money (and see this, this and this). Taking
the credit-creation power away from the banks and giving it back to the
nation would ensure that credit is freed up for people's use, and the
stranglehold over the economy is taken away from the too big to fails.
State Public Banks
Many people argue that - given its actions - people don't trust the federal government to create money.
Fair enough. Why not let the states do it?
Michael Moore recommends that the American people demand:
Each of the 50 states must create a state-owned public bank like they have in North Dakota.
Then congress MUST reinstate all the strict pre-Reagan regulations on
all commercial banks, investment firms, insurance companies -- and all
the other industries that have been savaged by deregulation: Airlines,
the food industry, pharmaceutical companies -- you name it. If a
company's primary motive to exist is to make a profit, then it needs a
set of stringent rules to live by -- and the first rule is "Do no
harm." The second rule: The question must always be asked -- "Is this
for the common good?" (Click here for some info about the state-owned Bank of North Dakota.)
As Moore notes, the state of North Dakota already has such a bank, and - because of that - North Dakota is just about the only state which is not running a huge deficit.
PhD economist and candidate for Florida governor Farid Khavari wants to create a Bank of the State of Florida, to create credit without burdening the state and its citizens with high interest charges by private banks.
See this for details.
Local Public Banks
An alternative to federal or state public banking is local public banks, as proposed by Edward Kellogg and others.
As summarized by Adrian Kuzminski:
During
this time of financial and economic crisis, it is worth recalling that
credible alternatives to our current financial system exist, if largely
unrecognized, and deserve serious consideration...The
now-neglected 19th-century American proto-populist, Edward Kellogg ...
was a kind of godfather to the later populist movement on monetary
issues. Perhaps the most profound of American writers on monetary
issues, Kellogg advocated a decentralized but nationally regulated
monetary system based on non-usurious, low-interest public loans to
individuals. His vision inspired 19th-century century mutualists,
greenbackers, populists, and others who sought to restructure the
monetary system to redistribute wealth.In our own day, when
usurious credit in the form of private finance capital remains the
dominant force in economic life, and is largely taken for granted even
by educated people, the alternative Kellogg offers is more important
than ever. Indeed, I suggest that Kellogg's theory of money is the best
monetary alternative we have to the baleful system under which we
suffer...Edward Kellogg (1790-1858) was a New York City
businessman whose losses in the crash of 1837 led him to examine the
business cycle, monetary policy, and debt. In a series of writings,
Kellogg developed the idea of ... having the government provide
very-low-interest loans to the general public. These loans would have a
uniform, fixed interest rate, established by law. They would be issued
locally through a system of public credit banks he called the Safety
Fund. Once issued, these low-interest loan notes would circulate as
currency, replacing the privately issued banking notes of his day
(which today take the form of Federal Reserve Notes)...In his
day Kellogg seems to have influenced even Abraham Lincoln who,
according to historian Mark A. Lause, " . . . had his own copy of
Kellogg's book, Labor and Capital [sic] advocating the government
issuance of paper currency as a just means of redistributing wealth,
and he corresponded with the author's son-in-law." Kellogg's public
currency was intended to end the monopoly over the discretionary
issuance of money at interest, which was held then (and now) by the
private banking and investment system...Kellogg proposed to
establish local public credit banks, and we might imagine one in each
community. These local public credit banks would be part of the Safety
Fund. Instead of money being issued (as it is now) through a privatized
and centralized money-management system on a top-down basis, primarily
as loans at increasing rates of interest from a central bank to major
commercial banks, and then to regional and local banks, and then to the
public, money in his system would be issued by local federal banks as
loans directly to citizens at nominal interest on the basis of their
economic prospects. Once lent out, Kellogg's public credit notes would
flow into circulation, providing the basis for a new currency backed by
the assets of individual borrowers...A centralized national
currency would be replaced, in Kellogg's system, by a locally issued
currency. But that currency would everywhere be subject to common
national standards, ensuring that each local public credit bank
reliably issued equivalent units of currency. A dollar issued by one
local public credit bank of the Safety Fund, Kellogg intended, would be
worth the same as, and be freely interchangeable with, one issued by
any other. The independence of local branches would be guaranteed by
the discretionary power reserved to them as a local monopoly actually
to loan money; the compatibility of their monies would be ensured under
federal law by fixing the value of the dollar by law at 1.1
percent/year – that is, by lending money everywhere to citizens at that
rate...The goal is to establish and preserve economic
decentralization. Amounts of money lent in Kellogg's system would vary
considerably from place to place, with some areas needing and creating
more currency than others. The solvency of local federal public credit
banks would be guaranteed by collateral put up by borrowers, and the
money supply would be stabilized by repayment of loans as they came
due. The interchangeability of public credit bank notes would ensure a
wide circulation for the new money...To achieve a stable
currency, Kellogg insisted that this rate be fixed by law; perhaps
today it would take a constitutional amendment.
What's the Best Option?
People of good faith debate whether the gold standard, or national, state or local public banking is the best solution.
But
they agree that the current fiat currency system where the creation of
credit is controlled by the private banks has pushed us into an
economic crisis and a credit crunch, with little hope of stability for
the future.
Changing to a public banking system would clearly be
a large change. But remember - as Buckminster Fuller pointed out -
building a new model is often easier than fighting the existing one.
The time is right for a new model.
Afterword: Is a Gold Standard Incompatible with Public Banking?
Many people assume that a gold standard is incompatible with public banking. But that might not necessarily be true.
An analysis of ways in which a gold standard might possibly complement public
banking is beyond the scope of this essay, and I have not yet even
thought it through myself. But before ruling out the possibility, I
invite financial experts to brainstorm on this issue to see if we can
have the best of both worlds.
After all, when currency speculation
is removed from the equation, money simply acts as a yardstick to
measure the exchange of goods and services so that barter is not
necessary. People may be able to create a money system which has the
stability and discipline created by a gold backed system. with the
credit availability of a public banking system.
Admittedly, the gold standard may at
first blush be seen as more conservative than public banking, as the
former limits money expansion while the latter encourages it. But as
with all liberal-conservative dichotomies, it is important to get
beyond labels and to determine what is actually best. Indeed, public
banking - especially if it is on the state or local level - would not
create easy credit for the government to launch new imperial
adventures.
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A major reason for the consolidation of the power of money creation is to ensure that money remains fungible. A Federal Reserve Note dollar in Omaha is worth the same as a dollar in New York, Honolulu, or Nome.
If the Bank of Omaha created dollars, and the Bank of Nome created dollars, what mechanism would ensure that they had the same value?
In the Kellogg universe, "money in his system would be issued by local federal banks as loans directly to citizens at nominal interest on the basis of their economic prospects." Wouldn't these economic prospects have some bearing on the value of the money? What if these prospects changed abruptly? "Check the serial numbers on your notes, if they begin with 81205, please be aware that John Smith was recently in a traffic accident and your notes are now worthless."
The essential, underlying problem is that the organization creating money is prone to grandiose schemes and far-reaching plans, and sooner or later will turn to simply printing money to finance them. And the solution is a government limited in scope, beset with internal checks and balances, and held accountable under the law. If only we had such a government.
It can't. Money always gravitates towards local relativism. You don't have million dollar condos in the midwest and you don't have million dollar ira's and you don't pay 8 bucks for cup of coffee. It aways reaches relative balances and it always ends up mostly concentrated in the highest population centers where their debt destroys whatever productivity the lower population centers are able to contribute to it.
If you combine a gold standard with 'real bills' as a clearing system, as per the work of Professor Antal Fekete, you will return power to the citizens, create monetary stability and cut out the middleman(big banks). Good money has three functions:
1. means of exchange
2. store of value
3 ah...... well, the dollar already fails on the second, as will any paper system. Any good system must be able to be inflation tamper proof. Any irredeemable paper system will eventually be inflated to death. If we simply open the mints, and allowed citizens to have their gold minted into coins to use them as currency the system will eventually find its equilibrium as gold will find it's true value. No irredeemable paper system has ever worked. We are headed for monetary collapse.
"Our present financial crisis is the epitome of a tragedy brought upon us by coercion in the monetary field. The way out of the crisis, and the way to prevent another great Depression, is through the restoration of freedom in the realm of money: through an adroit repeal of legal tender laws. The gold standard must be rehabilitated together with its clearing system, the bill market. The monopolistic nature of government debt in the bond market must be eliminated through bringing back the competition of the gold coin to the promises of the government. Bondholders dissatisfied with the rate of interest offered by the coupons arbitrarily attached to government bonds must have their rights restored to them: the right to park their savings in gold coins, as they did before 1909. In this way they could force the government to pay competitive rates of interest on private savings, All coercion in the monetary field must be stopped. The dignity of the individual must be respected. The present collectivistic frame of mind of the government must be discarded in favor of one favoring the individual, restoring freedom and the free initiative of man."
- Antal Fekete
http://www.kingworldnews.com/kingworldnews/G+_Articles/Entries/2009/10/3...
I agree with Hayek: eliminate legal tender laws. The state can arbitrarily set the commodity of preference that they'll allow for confiscation taxes. People will work around and pay the beast its troll toll.
No matter what side of the political spectrum you prefer, the confidence in depository banking cannot be denied as an absolute necessity. This has probably been a problem since Hammurabi and granaries. You simply must have confidence that the people storing your goods or money have what they say they do and will return it when you demand it. Even under the fiatasco system, that's questionable. And here you realize you must differentiate between credit and money.
BTW, I think this issue of money and credit is the single most important social issue of the century. It does not belong solely to the economics profession, and many other great minds from philosophy to anthropology to chemistry should involve themselves in this debate.
GW it's very simple
The answer IS, indeed MUST be a combination of the best of both worlds.
Social Credit + Free Gold is the only way this is going to work out without a bunch of people dying.
Google social credit.
Here is the link to free gold.
It's THE ONLY ANSWER.
http://fofoa.blogspot.com/2009_11_01_archive.html
Thanks Anon - I had asked some months back for Project Mayhem to summarize the Freegold concept for ZH readers. I see many reference links to FOFOA's blog, so it is apparent that he is widely read. I see in comments there that he has been approached to contribute to Seeking Alpha, so it is catching on. Basically, Freegold is independent of a gold standard where it isn't artificially held to a monetary value, but floats unmolested by currency and maintains both its real value (store of wealth), and its freedom from Government confiscation by taxation. You buy Gold with after tax currency units (personal profit) and it rises or falls based on the soundness of policy, like now, but is officially allowed to resume monetary function at any point (i.e., retirement or property purchase) w/o incurring any taxation penalty (income or cap gains). If gold merely maintained value in the future, it is only because sound policy has maintained the real value of the unit, so you haven't lost purchasing power over the years. Mind you, gold would need to be revalued ONCE to reset equilibrium, and small units of gram and grain would be transacted worldwide so that all could become savers. I believe it would suppress carry trades as well, because gold would float truthfully in real time against currencies. Pipe dream? Possibly, but it nonetheless relies on something tangible, that cannot be conjured or readily counterfeited. As Rob Kirby has told it, it is the big players with the bricks that are in danger of the "tungsten stuff", an act that if true, reeks of desperation.
We need a model that allows hard working folks the ability to maintain a comfortable home and put food on the table. I suspect any model put in place will have to eventually revert back to this criteria or there will be a revolt. Heck, let's take credit away completely from the little guy. A gold standard would effectively do this since the pool of available credit would be restricted. Let everything deflate and wipe out the suffocating debts. The more I think about this, the more I view cheap credit as a drug. It makes you feel good in the short run, but eventually it will enslave you to the drug lords. Call me crazy.
Yup, credit is the modern incarnation of Serfdom. the beauty in the invention is that people do it to themselves.
All of this talk of systems is interesting, but this is about who has the power and the wealth derived from the ignorant. History shows us that all systems migrate towards the human need for control and power. We are witnessing the modern incarnation.
View the "control of the system" battles through this lens and it will make more sense.
With all due respect, this is junk economics. I've heard Ms. Brown's arguments and she presents such a confused mess of history and economics that it is hard to even discuss it because her errors are manifest. The fact you cite Michael Moore as one of her idea's supporters is almost laughable. She has a total misunderstanding of a gold standard, doesn't understand money or credit, economic theory of any stripe, and history. I guess I would put her in the populist category. There are a lot of things wrong with the present system that we could discuss, but it's just not worth it to include this in the mix. But if you want to believe in it, then you can believe almost anything.
Until you believe in something besides this reality, this system, this way you will never focus outside of how it operates which will allow you to focus better on how it really operates to see why it will never work.
Outside this reality things could be much different. How about an entire life where you spend say 6 months at a soldering station building electronics. 2 years building houses and maybe a couple years building cars. etc. Whatever sounds good at the moment. All we have to do is build and work for what we need and spend the rest of the time building or working or playing. But the system we have now makes a few people god awful amounts of productivity using all the resources of the planet and generating enormous amounts of neediness towards those focal points. Which allows them to flood the air waves with self-agrandizment (commercials). We listen to a couple thousand people day in and day out as our media or political personalities and with external energy supply help it is necessary to have high unemployment and the welfare state. It however builds dependency and control and manipulation.
Our system is both a brutal economic system and brutal spiritual system. It conforms people to spend all thier energy building and learning and becoming whatever the largest corporations want them to be. It keeps money out of the hands of the poor so they have little ability to demand or ask for anything they would like to see any other person make or produce or provide a service for, ie only the rich are allowed to encourage and reward. It causes real spiritual as well as economic problems do to it's lack of creativity. How can a lady leave her abusive husband in a small town when walmart isn't hiring? So you see it puts less control in everybodys hands to make it more difficult to seperate the bad from the good or make it apparent that bad will isn't going to go far or last long. It causes billions to be cast aside as it marches towards a sick twisted wholeness of victimizers and victims casting billions off as they refuse to return back to source upon death. I guess it keeps pushing and hurtling towards it's fatally flawed destiny using tacticts that work for a while until it hits the fuck up wall where it's destroyed by massive waves of dissatisfaction.
Econophile, I am not citing Moore as supporting Brown's ideas. He has independently proposed state banks, as has the PhD economist running for governor.
Others have independently proposed a federal public bank.
Others - like Kellogg - local public banks.
BTW, what historical claims by Brown do you disagree with?
North Dakota isn't Chicago, obviously. In the model, who bails out the public bank when they succumb to political pressure?
OT - Wenzel has a good guest post where someone tries to explain the difference between capitalism and corporatism to Moore:
http://www.economicpolicyjournal.com/2009/11/explaining-difference-betwe...
Money should be created by an act of Congress on some cyclical schedule. The role of the central bank should be to auction the new money supply to the highest bidder with a banking license, who is willing to pay the highest interest rate. The bank re-loans the money and lives off the differential in interest rates. If there is too much demand for money (some kind of mania forming) interest rates will rise spontaneously. Interest money (needed to pay the loan back with interest) can be injected into the economy via direct government spending. People will say this is inflationary. Not really, as long as increase in money supply is overt and known to the public. Excessive money creation would be inflationary, but the public will generally not go for it, as new money instantly dilutes money currently held. Measured increases in money supply, commensurate with actual economic growth will work for the economy. The problem today is out of control manipulation of money by private interests. If nominal money supply can be doubled in a period of months, and all of this is done in secret, or through some sleight of hand, and nobody even knows for sure what the money supply is and where the new money is going to, you have a problem we have today. Those who can get near money creation prosper, the rest do not, and the worst aspect is, that a perverse system of incentives no longer rewards productive work. The best way to get rich is to work for the money factory, not a real factory. People who feed us are the suckers, people who deceive us live like kings.
We need the mechanism and tools to organize agendas outside the political processes. I dont feel my vote means squat because whoever I vote for is a lobbyist tool in some way anyway. We need major press outlets telling the negatives not just the positive corporate agenda using their privately owned loudspeakers drowning out the truth. I have to laugh at how the corporate tools of GE ,CNBC, have reporters who will say whatever they think within given parameters. Their job is to take that mountain of shit called the economy and play up the positive. ie:The maggots feeding off the pile are eating well this quarter! Thats their idea of quality reporting. Wheres our news outlet that solidifies our perspective to the masses? I think Buckminster Fuller would say we should start one , a non sugar coated channel. We live in a bubble though, we that think about how to change things will always be a minority . Look around you on the freeway. How many of those folks ever think outside of their own little bubble and we have an Oligarchy.
Wikipedia: Oligarchy is a form of government in which power effectively rests with a small elite segment of society distinguished by royal, wealth, intellectual, family, military, or religious hegemony. (and heres the kicker)......Oligarchies have been tyrannical throughout history, being completely reliant on public servitude to exist.....
We needed a real depression not a recession to fire up the masses into opening their eyes. The oligarchy is looking like the good guys by not letting nature take its course. They have fucked with natural law by not letting the old system die so a new one could be built. They will forever be the saviors now and your children's grandchildren will be talking about what assholes saved the system rather than letting it drown in its own megalomania.
But remember - as Buckminster Fuller pointed out - building a new model is often easier than fighting the existing one.
It may be easier in a generalized sense, but I cannot but help thinking that the situation in which we find ourselves may well lend itself to the opposite this time round.
We'll see. The fact remains that the level of fragmentation combined with the exponential growth of mechanisms to coalesce power lend themselves to aggressive interactions and reactions.
That's a pretty good system. 1.1 percent would be stable for several hundred years at a time if it didn't have wild swings in population. Which of course would happen. The people with power would likely kill off the people now instead of trying to indebt the babies but quietly. 100 people died of cancer today. Ok 1000 died really. It would be like vietnam casualty reports.