A Banking System That Serves the People

excerpted from the book

Web of Debt

The Shocking Truth About Our Money System And How We Can Break Free

by Ellen Hodgson Brown

Third Millennium Press, 2007, paperback


William Jennings Bryan, in his Democratic Party nomination speech, 1896

We believe that the right to coin money and issue money is a function of government... Those who are opposed to this proposition tell / us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson... and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business .... [W]hen we have restored the money of the Constitution, all other necessary reforms will be possible, and... until that is done there is no reform that can be accomplished.

The 300-year fractional-reserve Ponzi scheme has reached its mathematical end-point. The bankers' chickens have come home to roost, and only a radical overhaul will save the system.

... The private banking system can no longer be saved with a stream of accounting-entry "reserves" to support an expanding pyramid of "fractional reserve" lending. Either the banks will have to be nationalized, as in Japan, or they will have to move into some other line of work.

We've seen the roller-coaster result when the Fed has been allowed to manipulate the money supply by arbitrarily changing interest rates and reserve requirements. The Great Depression was blamed on Fed tinkering.

Why does the money supply need to be manipulated by the Federal Reserve? Consumer loans are self-liquidating: the new money they create is eventually paid back and zeroes out. But that result is skewed by the charging of interest, and by the fact that the burgeoning federal debt never gets repaid but just keeps growing. The money supply expands because government securities (or debt) are sold to the Federal Reserve and to commercial banks, which buy them with money created out of thin air; and it is this unchecked source of expansion that has to be regulated by artificial means. In a system without a federal debt and without interest,

Instituting a system of government-owned banks may sound radical in the United States, but some countries have already done it; and some other countries are ripe for radical reform. Rodney Shakespeare, author of The Modern Universal Paradigm (2007), suggests that significant monetary reform may come first in the Islamic community. Islamic reformers are keenly aware of the limitations of the current Western system and are actively seeking change, and oil-rich Islamic countries my have the clout to pull it off.

... The Islamic Republic of Iran has a state-owned central bank and has led the way in adopting the principles of the Koran as state government policy, including interest-free lending. In September 2007, Iran's President advocated returning to an interest-free system and appointed a new central bank governor who would further those objectives. The governor said that banks should generate income by charging fees for their services rather than making a profit by receiving interest on loans. 2

That could be a covert factor in the persistent drumbeats for war against Iran, despite a December 2007 National Intelligence Estimate finding that the country was not developing nuclear weapons, the asserted justification for a very aggressive stance against it. We've seen that a global web of debt spun from compound interest is key to maintaining the "full-spectrum dominance" of the private banking monopoly currently controlling international markets. A paper titled "Rebuilding America's Defenses," released in September 2000 by a politically influential neoconservative think tank called the Project for the New American Century, linked America's "national defense" to suppressing economic rivals. The policy goals it urged included "ensuring economic domination of the world, while strangling any potential 'rival' or viable alternative to America's vision of a 'free market' economy." We've seen that alternative models threatening the dominance of the prevailing financial establishment have consistently been targeted for takedown, either by speculative attack, economic sanctions or war. Iran has repeatedly been hit with economic sanctions that could strangle it economically.

In Sweden and Denmark, interest-free savings and loan associations have been operating successfully for decades. These banks are cooperatively owned and are not designed to return a profit to their owners. They merely provide a service, facilitating borrowing and lending among their members. Costs are covered by service charges 4 and fees.

Interest-free lending would be particularly feasible if it were done by banks owned by a government with the power to create money, since credit could be extended without the need to make a profit of the risk of bankruptcy from bad loans.

When purchases are made with a credit card, Your signature turns the credit slip into a negotiable instrument, which the merchant accepts because the credit card company stands behind it and will pursue legal remedies if you don't pay. But the bank doesn't actually lend you anything. It just facilitates and guarantees the deal. You create the "money" yourself; and if you pay your bill in full every month, you are creating money interest-free. Credit could be extended interest-free for longer periods on the same model. To assure that advances of the national credit got repaid, national banks would have the same remedies lenders have now, including foreclosure on real estate and other collateral, garnishment of wages, and the threat of a bad credit rating for defaulters; while borrowers would still have the safety net of filing for bankruptcy if they could not pay. But they would have an easier time meeting their obligations, since their interest-free loans would be far less onerous than the 18 percent credit charges prevalent today.

A common objection to getting the government involved in business is that it is notoriously inefficient at those pursuits; but Betty Reid Mandell, author of Selling Uncle Sam maintains that this reputation is undeserved. She says it has resulted largely because the only enterprises left to government are those from which private enterprise can't make a profit. She cites surveys showing that in-house operation of publicly-provided services is generally more efficient than contracting them out, while privatizing public infrastructure for private profit has typically led to increased costs, inefficiency, and corruption.

A system of truly "national" banks would return to the people their most valuable asset, the right to create their own money. Like the monarchs of medieval England, we the people of a sovereign nation would not be dependent on loans from a cartel of private financiers. We would not need to pay income taxes, and we might not need to pay taxes at all.

Richard Russell, Dow Theory Letter, April 2005

When the US government needs money, it either collects it in taxes or it issues bonds. These bonds are sold to the Fed, and the Fed, in turn, makes book entry deposits. This "debt money" created out of thin air is then made available to the US government. But if the US government can issue Treasury bills, notes and bonds, it can also issue currency, as it did prior to the formation of the Federal Reserve. If the U.S. issued its own money, that money could cover all its expenses, and the income tax wouldn't be needed. So what's the objection to getting rid of the Fed and letting the US government issue its own currency? Easy, it cuts our the bankers and it eliminates the income tax.

Hans Schicht, in a February 2005 article titled "The Death of Banking and Macro Politics

If prime ministers and presidents would only be blessed with the most basic knowledge of the perversity of banking, they would not go onto their knees to the Central Banker and ask His Highness for loans .... With a little bit of brains they would expropriate all banking institutions .... Expropriation would bring enough money into the national treasuries for the people not to have to pay taxes for years to come.

Commercial bank ownership is held as stock shares, and the shares are listed on public stock exchanges. The government could regain control of the national money supply by simply buying up some prime bank stock at its fair market price.

... At the end of 2004, the total book value (assets minus liabilities) of all U.S. commercial banks was reported at $850 billion. "Book value" is what the shareholders would receive if the banks were liquidated and the shareholders were cashed out for exactly what the banks were worth. Shares trade on the stock market at substantially more than this figure, but the price is usually no more than a generous two times "book." Assuming that formula, around $1.7 trillion might be enough to purchase the whole U.S. commercial banking industry.

Too much for the government to pay?

Not if it were to create the money with accounting entries, the way banks do now.

But wouldn't that be dangerously inflationary?

Not if Congress were to wait for a deflationary crisis; and we've seen that such a crisis is now looming on the horizon. The next correction in housing prices is expected to shrink the money supply by about $2 trillion. Fed Chairman Ben Bernanke suggested in 2002 that the government could counteract a major deflationary crisis by simply printing money and buying real assets with it. Buying the banking industry for $1.7 trillion in new Greenbacks could be just what the good doctor ordered.

Over 97 percent of the money supply is now created as commercial loans.

Banking institutions supported by taxpayer money can and should be made public institutions operated for the benefit of the taxpayers.

The 2006 report by the Office of the Comptroller of the Currency, [found] that 97 percent of U.S. bank-held derivatives were in the hands of just five banks; and that the first two banks on the list were JPM [J P Morgan] and Citibank.

JPM [J P Morgan] and Citibank have many branches and an extensive credit card system. Recall that JPM now issues the most Visas and MasterCards of any bank nationwide, and that it holds the largest share of U.S. credit card balances.

John Hoefle, EIR

Major financial crises are never announced in the newspapers but are instead treated as a form of national security secret, so that various bailouts and market-manipulation activities can be performed behind the scenes...

The Fed is actively involved in looting the American population for the benefit of giant U.S. and global financial institutions, and the global casino. Few Americans have any idea the extent to which the Fed and its system reach in to their pockets on a daily basis and the extent to which their standard of living has been eroded by the financier-led deindustrinlization of the United States.

Dean Baker of the Center for Economic and Policy Research in Washington

Gambling on horse races is taxed at between 3.0 and 10.0 percent. Casino gambling in the states where it is allowed is taxed at rates between 6.25 and 20.0 percent. State lotteries are taxed at a rate of close to 40 percent. Stock market trading is the only form of gambling that largely escapes taxation. This is doubly inefficient. The government has no reason to favor one form of gambling over others, and it is far better economically to tax unproductive activities than productive ones.

... From an economic standpoint, the nation is certainly no better off if people do their gambling on Wall Street rather than in Atlantic City or Las Vegas. In fact, there are reasons to believe that the nation is better off if people gamble in Las Vegas, since gambling on Wall Street can destabilize the functioning of financial markets.

As Richard Russell observed, if the U.S. issued its own money, that money could cover all its expenses, and taxes would not be necessary. If the Federal Reserve were made what most people think it now is - an arm of the federal government - and if it had been vested with the exclusive authority to create the national money supply in all its forms, the government would have access to enough money to spend on anything it needed or wanted.

How much is the U.S. work force under-employed today? the first half of 2006, the official unemployment rate was 4.6 percent; but critics said the figure was low, because it included only people applying for unemployment benefits. It did not include those who were no longer eligible for benefits, those who had given up, or those whose skills and education were under-utilized - people working part-time who wanted to work full-time, engineers working as taxi drivers, computer programmers working as store clerks, and so forth. According to Williams' "Shadow Government Statistics" website, the real U.S. unemployment figure in early 2006 was a full 12 percent.

In the nineteenth century, the corporation was given the legal status of a "person" although it was a person without heart, incapable of love and charity. Its sole legal motive was to make money for its stockholders, ignoring such "external" costs as environmental destruction and human oppression.

[Third World] debts could be canceled simply by voiding them out on the banks' books. No depositors or creditors would lose any money, because no depositors or creditors advanced their own money in the original loans. According to British economist Michael Rowbotham, writing in 1998:

[O]f the $2,200 billion currently outstanding as Third World, or developing country debt, the vast majority represents money created by commercial banks in parallel with debt. In no sense do the loans advanced by the World Bank and IMF constitute monies owed to the "creditor nations" of the World Bank and IMF.

If the money is owed to commercial banks [by Third World countries], it was money created with accounting entries. Rowbotham observes that Third World debt represents a liability on the banks' books only because the rules of banking say their books must be balanced. He suggests two ways the rules of banking might be changed to liquidate unfair and oppressive debts:

The first option is to remove the obligation on banks to maintain parity between assets and liabilities, or, to be more precise, to allow banks to hold reduced levels of assets equivalent to the Third World debt bonds they cancel. Thus, if a commercial bank held $10 billion worth of developing country debt bonds, after cancellation it would be permitted in perpetuity to have a $10 billion dollar deficit in its assets. This is a simple matter of record-keeping.

The second option, and in accountancy terms probably the more satisfactory (although it amounts to the same policy), is to cancel the debt bonds, yet permit banks to retain them for purposes of accountancy. The debts would be cancelled so far as the developing nations were concerned, but still valid for the purposes of a bank's accounts. The bonds would then he held as permanent, non-negotiable assets, at face value.

Third World debt could be eliminated with the click of a mouse!

As long as currencies can be devalued by speculators, Third World countries will be exporting goods for a fraction of their value and over-paying for imports, keeping them impoverished. The U.S. dollar itself could soon be at risk. If global bondholders start dumping their bond holdings in large quantities, short sellers could fan the flames, collapsing the value of the dollar just as speculators collapsed the German mark in 1923.

To counteract commercial risks from sudden changes in the value of foreign currencies, corporations today feel compelled to invest heavily in derivatives, "hedging" their bets so they can win either way. But derivatives themselves are quite risky and expensive, and they can serve to compound the risk. Some other solution is needed that can return predictability, certainty and fairness to international contracts. The Bretton Woods gold standard worked to prevent devaluations and huge trade deficits like the United States now has with China, but gold ultimately failed as a currency peg. The U.S. government (the global banker) had insufficient gold reserves for clearing international trade balances, and it eventually ran out of gold. Gold alone has also proved to be an unstable measure of value, since its own value fluctuates widely. Some new system is needed that retains the virtues of the gold standard while overcoming its limitations.

Web of Debt

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