the public option in banking ellen hodgson brown, j.d. university of washington, seattle kane hall...
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The Public Option in BankingEllen Hodgson Brown, J.D.
University of Washington, Seattle
Kane HallOctober 26, 2011, 7 pm
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WHERE DOES MONEY COME FROM?
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Contrary to popular belief, U.S. dollars are NOT issued by the federal government.
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They are issued by the Federal Reserve and LENT to other banks and the government.
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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.”
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Banks create money by “fractional reserve” lending.
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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
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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.”
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Today, nearly all of our money is created 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
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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
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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
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The best of these systems was in Benjamin Franklin’s colony of Pennsylvania. It owned its own bank.
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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.
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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. . . .
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The result was a serious depression.The colonists rebelled, prompting the American Revolution.
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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.
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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.
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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.
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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.
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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.”
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IThe national debt just keeps growing, forming the money supply. No debt, no money. The problem is not the debt but the interest.
Federal debt 1940 to 2007 ($9T) Money supply 1959 to 2006 ($10T)
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• Interest-free banking.• Interest-free
complementary currency systems.
• Publicly-owned banks, where profits return to the public (the colonial Pennsylvania model).
ALTERNATIVES FOR SUSTAINABLE BANKING
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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.
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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.
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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.
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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.
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The Bank of North Dakota (BND) has a captive deposit base.
• All state revenues are deposited in it by law.
• The deposits are guaranteed by the state.
• Note: It is not the state’s credit but the bank’s credit that is lent to borrowers.
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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.
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Consider the possibilities . . .
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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
Washington State:• Population 6,724,540• At $4000/person,
deposits = $27B• Potential loans = $26B
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What could the state do with $26 billion in credit?
One of many possibilities:• It could buy $26 billion in muni bonds, generating
interest at 5% of $1.34 billion.• That would be enough to service an additional
$26 billion in state debt. (The existing debt is $70 billion.)
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The state could fund infrastructure projects interest-free. Cutting out interest cuts the average cost of public projects by 50%, making otherwise unsustainable projects sustainable.
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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.
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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.”
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For more information – http://PublicBankingInstitute.org http://WebofDebt.com