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).

But as discussed below, it may not be necessary to choose between a gold standard and other options.

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 and/or reimplementing the gold standard 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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  • We already have a model that people should consider using — nonprofit credit unions. The credit union at which I bank has a "reward" checking account which no pays 4% interest on funds up to $25, 000 with no fees and no minimum balance. The requirements are that you have an electronic transfer to the account once a month, like a social security payment, activation of online banking, and use of a debit card, which is free, twelve times a month. Their MC carries an APR of 8.9% and Visa 10.9, with no annual fee, and a late fee of $15, with a ten day grace period after due date. They also offer loans at competitive rates, and the service is extremely friendly and personal.

  • Excellent commentary, GW. Yes, we start with the certainty that the current system is an oligarchy managing us with political complicity as debt peons. The lowest possible interest rates are a public service we deserve. I've documented a trillion dollars of public benefit every year from monetary reform over the Robber Baron system we have today. States might be the easier place to start, but the banksters will need a change of heart before surrendering profit for the good of the public.

  • Wouldn't the people who already own the gold be the biggest winners by going to the gold standard? How much gold do you own, I don't own any. Ellen Brown has a much better answer. The banking system we had survived for 70 years with violent ups and down but it never crashed like we are about to see. The problem quite simply crooks running the banks. For example Goldman/Sachs gathering up mortgages they knew to be bad bundling them and selling them with false rating (a crime in itself) but then they bought CDS swaps betting they would fail (a fact known to them at the time) insider trading at best) The only problem with allowing the government to print the money is the same crooks we have now who are in bed with the lobbists and corporations will be those controlling the money. I think not. State banks might be the answer but a question of who runs them is huge.

  • I just read the American Monetary Institute paper mentioned above. It starts brilliantly, but then confuses two issues: creation of money by the state and spending on infrastructure by the state. These are SEAPARATE issues.When an extra $Xbn is created, this is NO argument for spending that sum on infrastructure. The question as to how much money to created should be determined mainly by factors like the unemployment level and amount of inflation. In contrast, the decision as to whether to do a particular infrastructure project should be determined purely by the cost and benefit figures relating to that project.

  • What about the scores of dozens of people every day in the U.S. who end their lives due to the psychological weight of their ongoing credit problems?No few of them will be just fresh out of college, mere children… When I went to college, tuition was $127.50 a semester. Credit has certainly made college more affordable for everyone!Beyond those whose lives come to an abrupt end due to the psychological stresses that shape their individual realities, these being effected by the commonly rapacious credit traps of the financial industries, -literally many scores of millions of other Americans will have their health ruined by these same psychological stresses caused by credit landmines intended to harvest millions of human limbs, -through hypertension, obsessive compulsive -eating, drinking and smoking disorders-, depression, marital and family problems, problems re-inflicted upon their offspring, and all of it -too often leading directly to screaming psychosis, murder, and jail, -where human beings are placed in cages under crowded conditions unfit for animals.Too many of society's ills can be traced to the credit economy to justify it any longer.Economists generally have the intellectual capacity of a runaway train headed straight down the track toward oblivion. Throw on some more coal… grind up some more human lives…Credit is a cancer.The credit economy is dead.Too subjective? Everything in this world is subjective. The subjective can make your life a living hell. Especially when someone down on their luck -beats you over the head with a lead pipe wondering -what's in your wallet-.

  • @ Grey TigerIt's more complicated that who holds the gold. In a broad sense, economics studies opportunities and constraints. Fixing the value of currencies to gold is a voluntary constraint. There is no intrinsic need to do so. What are the advantages and what are the disadvantages and which outweigh which? This is hotly debated.Austrian School economists think that the intrinsic value of money is its commodity value, so fiat money has no intrinsic value and is unsound. Conversely, currency that is convertible into gold on demand is sound. While that may true to some degree, the constraints engendered thereby restrict the abilities of sovereign governments to influence their economies, e.g., to reduce unemployment. Under a sound money system, rebalancing the economy falls to market forces, which are unmindful of human suffering. In addition, gold-back money has a fixed exchange rate in the international trade, forcing governments running trade deficits to buy gold. This further inhibits the governments ability to set economic policy. That's fine with Austrians, who think that market forces should be independent of all government influence.Neoliberals (9n general) think that sound money is too restrictive and should be replaced with another voluntary constraint — fiscal responsibility in the administration and Congress, and monetary discipline at the Fed. this reduces the ability of the government to influence the economy through spending (deficits). The idea is that fiscal responsibility will preserve monetary stability and avoid inflation (the bane of creditors like banks and bondholders). However, it necessitates a stock of unemployed to stabilize the low wages of labor. According to NAIRU (non-accelerating rate of inflation) this is effectively 5-6% unemployment. So when unemployment falls below 5%, the Fed should cool the economy by raising rates. (Note that asset appreciation is not considered inflation, only price and wage increases, favoring you know who. This lead to the current asset bubbles that are in the process of blowing up.)At the opposite end of the spectrum, modern monetary theory modeled on Abba Lerner's functional finance principles holds that a non-convertible sovereign currency with flexible exchange rates gives government maximum control of economic policy, enabling it to achieve an equilibrium of full employment with price stability, which is held to be an impossibility by Austrians and Neoliberals. Supporters of MMT hold that a floor under the price of labor inhibits deflation, and as long as the economy is not pushed to overcapacity, government spending will not create inflation.Most progressives and liberal economists hold that returning to a gold standard would be counterproductive for achieving national prosperity with distributive justice and low unemployment. In their estimation returning to a gold standard would be extremely ill-advised. Ultra-conservatives, of course, disagree. Centrists are suck in the "financial responsibility" meme and think it is a necessary constraint when it isn't.Regarding the rest of your post about crooks running the banks, banks are money pots and money pot attract thieves. The way to prevent fraud and embezzlement is to disincentive it through strict accountability to stringent fiduciary rules. Instead the present system favors rent-seeking over profit from production, and it incentives pillaging the safety net by creating "moral hazard" (when you're right, you win; when you're wrong, you get bailed out with no penalty attached.)

  • Some brief points: – we already have a hard currency; the dollar is pegged at its upper boundary to oil. Right now, $80 dollars is the highest price the productive, physical economy can bear.The implications of the 'Niewe Hard Dollar' are not seen yet, but they will be. They will be and nobody will like it very much. The Niewe Hard Dollar is quite deflationary and the dollar short squeeze that will run along with the end of the dollar carry trade will resemble a financial hurricane. – Having the government create credit is just as bad as having banks create credit. Leaving aside for one minute that no system is better than its participants, the CONCENTRATION of credit formation itself rather than WHICH CONCENTRATION is responsible for credit creation … is the problem.There is a lot more to be written about this but I will leave it for later as I have to get ready for a trip to New Orleans. Nevertheless, shuffling credit formation from one accountable entity to another will change nothing, and in fact would likely make matters much worse.

  • Re-adopting the gold standard would lead to a real collapse; asset values would plunge because there would be a LOT less money in circulation. Let's not go there.Nationalizing the Fed would put politicians in control of the money supply. Whoa, let's not go there either.What's Plan C?

  • Hey GW,Just wanted to pass along a congrats on being granted contributor rights on Tyler Durden's rag. I've been a follower for quite some time (via M Rivero's aggregator) and look forward to the discussion your posts will engender in the ZH crowd. Best wishes,Grifter (ZH tag)

  • Great insights from all!Tom – While I urge everyone to choose credit unions (or banks like Shorebank) over commercial profit-seeking banks, credit unions still contribute to creating money as interest bearing debt, the ultimately fatal flaw in the system. I personally use dollar coins as much as possible since coins are the only legal tender available that is not interest-bearing debt masquerading as money. The US Mint will pay the shipping to your door for up to $500 of each Presidential dollar or $5000 Native American dollars in $250 increments. 1-800-USA-MINT . Your bank/credit union can get $25 rolls or $1000 boxes.Regarding the proposal from the American Monetary Institute, the most overlooked feature is the agricultural parity proposal (see page 20 at http://www.monetary.org/amacolorpamphlet.pdf).Randy Cook, President of National Organization of Raw Materials (www.normeconomics.org) and one of the contributors to that proposal recently asked Tom Vilsack, Secretary of Agriculture "When you explained to the President that, by faithfully executing your responsibilities under Title 7, S602 of the U.S. code and regulating agricultural markets at 100% parity, it would begin recovery of our nation's economy in six months and yet would would cost less tham the $780 billion promised in the bank bailout, was the problem that he just didn't believe you?"This alone would produce a tremendous increase in earned income which is currently being replaced/displaced by debt.For a more complete pictute I recommend The Nature of Wealth at http://www.economy101.net

  • To Tom Hickey ,Wow! what a long answer to my post, I loved it and it gave me some new research material. I have not focused much on Learner's works but I will now. I was being some what of a wise ass when I said "Those who own the gold will be the biggest winners of going on a gold standard" and they will of course while at the same time it would prevent us from going to full employment. I'm still waiting for an Aussie School type to tell me how they differ from any other Free Market advocates and show how the outcomes would be any different than the last 30 years. Thank you for your reply to my post.

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