Take the Power to Create Credit Away from the Giant Banks and Give It Back to the People

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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 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.

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