4 Call for Government to set up a Peoples' Bank using Post

(1) California Dreamin': How the State Can Beat Its Budget Woes - Ellen Brown
(2) Call for Government to set up a Peoples' Bank using Post Office branches
(3) John Curtin’s formula for a national bank
(4) Government-owned "people's bank" would stifle competition - Australian Bankers
(5) Notion of 'people's bank' not considered, Government says

(1) California Dreamin': How the State Can Beat Its Budget Woes - Ellen Brown
From: Ellen Brown <ellenhbrown@gmail.com> Date: 09.07.2009 07:20 PM

California Dreamin': How the State Can Beat Its Budget Woes

July 8, 2009

By Ellen Brown

http://www.huffingtonpost.com/ellen-brown/california-dreamin-how-th_b_228036.html

"As goes California," says the adage, "so goes the nation." All eyes are therefore on the Golden State as it attempts to solve its $26 billion budget deficit. The world's eighth largest economy is not going quietly into that pit of debt and devastation that has devoured Third World countries whole. The State's voters have drawn a line in the sand against further tax hikes, while Democratic leaders have drawn a line at further cuts in services or selloff of public assets. State legislators are deadlocked, caught between the rock of tax ceilings and the hard place of debt limits.

"Expect the best and accept nothing less," says another adage that typifies the attitude sometimes called "California dreaming." You create your own reality. Instead of trying to prop up an old model that has failed, you can dream up a new one. If anyone can come up with an original solution to the problem, Californians should be able to. But what? While waiting for developments, Governor Arnold Schwarzenegger has started paying the State's bills with IOUs ("I Owe You"s evidencing debt, technically called "registered warrants").

Hmm ... Pay the bills with IOUs. Not a bad idea! That was, in fact, the original innovation that got the American colonists out of their financial straits back in the 18th century, when they lacked the silver and gold used in the Old World for conducting trade. Money, after all, was just a medium of exchange, an acknowledgment of goods and services delivered or a debt owed. The notion that the government could pay in paper receipts was first hit on by the governor of the province of Massachusetts in 1691, when he needed money to fund a local war. The use of a paper currency had been suggested in an anonymous British pamphlet in 1650, but the proposal was modeled on the receipts issued by London goldsmiths and silversmiths for the precious metals left in their vaults for safekeeping. The problem for the colonies was that they were short of silver and gold. The Massachusetts Assembly therefore proposed a different kind of paper money, a "bill of credit" representing the government's "bond" or IOU. The paper money of Massachusetts was backed only by the "full faith and credit" of the government.

Other colonies followed suit with their own issues of paper money. Some were considered government IOUs, redeemable later in "hard" currency (silver or gold). Others were issued as "legal tender" in themselves. They were "as good as gold" in trade, without bearing debt or an obligation to redeem the notes in some other form of money later. The new paper money not only made the colonies independent of the British bankers and their gold but actually allowed the colonists to finance their local government without taxing the people. Colonial assemblies discovered that provincial loan offices could generate a steady stream of revenue in the form of interest income by taking on the lending functions of banks.

The same solution was employed in other countries later. When Argentina's government workers were faced with massive layoffs, their unions persuaded six state governments to pay them instead with state bonds or IOUs in small denominations. The IOUs could then be used to pay for state services and taxes, and everyone in the local economy accepted them in trade.

There's Just One Problem ...

Why couldn't California do the same thing? The problem with calling its IOUs "legal tender" today is that the ruse violates the U.S. Constitution. Article I, Section 10, says, "No State shall ... coin money [or] emit bills of credit." The Cornell University Law School Annotated Constitution gives this definition:

    Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society.

U.S. Supreme Court cases are cited from the 1830s, in which "interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section."

That all seems pretty clear cut, until you read a bit further. Article I, Section 10, also says that no State shall "make any Thing but gold and silver Coin a Tender in Payment of Debts." When was the last time any State paid its bills only in gold and silver coin? The States could argue that the Constitution needs to be updated.

They could make some other compelling arguments. The States agreed to give up their right to issue their own currencies because they delegated that power to Congress. Article I, Section 8, enumerates among the powers given to Congress, "To coin Money [and] regulate the Value thereof." Scholars continue to argue about the meaning of "to coin money," but the Constitution clearly gives no entity except Congress the power to create money and regulate its value, and Congress failed to properly husband that authority. It issued coins, but it allowed privately-owned banks to issue "banknotes," which soon made up the bulk of the nation's money supply. Bankers, not Congress, thus "regulated the value" of the currency, through the laws of supply and demand: the more notes they created, the smaller the value of each. In 1913, Congress went so far as to allow a privately-owned central bank called the Federal Reserve to issue its own Federal Reserve Notes and call them the exclusive national paper currency. These notes were then lent to the U.S. government, at interest.

Today, however, Federal Reserve Notes compose only about 3% of the money supply (M3). The other 97% is issued by private banks in the form of loans. "Bank credit" is created simply by entering numbers into the accounts of borrowers, as many authorities have attested. One of the most clear statements of this process came from Graham Towers, Governor of the Bank of Canada from 1935 to 1955, who acknowledged:

    Banks create money. That is what they are for. ... The manufacturing process to make money consists of making an entry in a book. That is all. ... Each and every time a Bank makes a loan ... new Bank credit is created -- brand new money.

Congress has not only reneged on its agreement to create the national money supply, but it has refused to front the funds to bail out California from its relatively modest $26 billion budget shortfall. Californians are justifiably upset, since Congress hardly batted an eye before earmarking some $700 billion in bailout money for the private banking system, and the Federal Reserve has committed trillions more for that dubious purpose. Nearly ten times the sum needed by California was allotted to bailing out AIG, a private insurance company; and half the sum needed by California went to pay off the gambling debts of AIG to Goldman Sachs, a single bank. California underwrites a substantial portion of the federal government's budget, sending a dollar in tax revenue for every 80 cents it gets back. Yet the federal government has even rejected California's request for a loan guarantee, which could have saved the State hundreds of millions of dollars in interest. The clear message is, "You're on your own."

Creative Problem Solving

The situation looks pretty dire, but it may just need some thinking outside the box. The law does not allow the States to issue "bills of credit," but it does allow them to create another form of money called "checkbook" money. All a State has to do is to form its own bank. Quoting again from the Cornell University Law School Annotated Constitution:

    Bills issued by state banks are not bills of credit; it is immaterial that the State is the sole stockholder of the bank, that the officers of the bank were elected by the state legislature, or that the capital of the bank was raised by the sale of state bonds.

If private banks can create credit on their books, so can the world's eighth largest economy. Indeed, there is longstanding precedent for this approach. The State of North Dakota has owned its own bank for nearly a century. North Dakota is one of only two States (along with Montana) that are not currently facing budget shortfalls. North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State's revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the "fractional reserve" lending scheme open to all banks, these deposits are then available to be used as the "reserves" for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND's loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

If California followed suit, it would not need to meet the FDIC's capital requirements but could designate state-owned property (parks, buildings and so forth) as its capital base. Applying the "multiplier effect" by which capital is lent and relent many times over, this base could then generate hundreds of billions of dollars in "credit." The State could deposit its revenues in the State bank and pay its payroll through it, generating an even larger deposit base for making new loans. Enough credit could be generated to allow the State not only to meet its short-term budget needs but to buy back its outstanding bonds (or debt). Bond interest and redemption costs on California's General Fund for the current year are estimated at nearly $5 billion -- about 20% of the budget shortfall. All of that money could be saved in interest, since the State would be paying interest to itself.

The State could do more than just chase the wolf from its door. It could generate enough credit to engage in the sort of economic "stimulus" being undertaken by the federal government. It could create jobs for the 11.5% of the State's population that are currently unemployed, augmenting the tax base and supplying the incomes necessary to prop up the languishing housing market. Loans for income-producing projects (transportation, energy, housing) could be repaid with the profits generated by the funded projects. And if some of the newly-issued loans were not paid back, they could simply be refinanced. The federal government has been rolling over its loans ever since 1835, the last time the federal debt was actually paid off (under Andrew Jackson).

In boom times, this approach could result in unwanted inflation. But today the economy is suffering from a serious shortage of money, because virtually all of our money comes from bank loans, and bank lending has dried up. Since neither the federal government nor the Federal Reserve has stepped in to fill the void, the States must do it themselves; and like the 18th century colonial governments, they can do it by taking on the lending functions of banks.

California's taxpayers and legislators are doing the right thing digging in their heels and drawing the line at further austerity measures. California is being watched not only by the nation but by the world. We the people did not precipitate this credit crisis; the banks did. We should not have to pay for the damage with increased taxes or decreased services or our public parks and parking meters. Like the American colonists, we can replace the old model with something better. If California legislators act quickly, they can have a State-owned bank up and running before their 45-day IOUs run out. With today's new online banking possibilities, the State would not even need to invest in a "brick and mortar" building. The whole business could be done by computer. Weary legislators trying to agree on a budget could all shake hands and go home, without budging an inch from their respective platforms. They could have it all, and so could we the people.

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

(2) Call for Government to set up a Peoples' Bank using Post Office branches

People's bank to break the Big Four

Peter Martin Economics Correspondent

July 8, 2009

http://business.smh.com.au/business/peoples-bank-to-break-the-big-four-20090707-dbtx.html

THE growing power of the Big Four banks has been targeted by a coalition of six influential economists, who have petitioned the Prime Minister and the Treasurer to set up an inquiry into Australia's financial system.

They have suggested the Government set up a "basic bank" so Australians can deposit money with Australia Post and have it managed by the Future Fund.

Calls for a 'peoples' bank'

A group of economists appeal to the Federal Government to increase competition in the banking sector.

The so-called people's bank would be similar to New Zealand's successful Kiwibank, which was set up to break the dominance of the Australian-owned majors.

Since the financial crisis began the Big Four have increased their share of the mortgage market from 80 per cent to 92 per cent and taken over non-bank lenders such as RAMS and second-order banks including St George and BankWest.

The open letter expresses concern at how the banks are using their privileged access to government guarantees, saying they are "rushing offshore" to expand even though Australians are "repeatedly told that our banks were lucky not to have had substantial overseas exposures".

The banks have been under fire for failing to pass on to mortgage holders the full cuts made by the Reserve Bank. Yesterday the Reserve left its official cash rate unchanged at 3 per cent.

The open letter is signed by economists who have advised both sides of politics, including Christopher Joye, chairman of the former prime minister John Howard's 2003 Home Ownership Task Force, and Nicholas Gruen, chairman of the Government 2.0 Task Force for the Finance Minister, Lindsay Tanner.

The letter was delivered to the office of the Treasurer, Wayne Swan, late yesterday, and gained support from the ACTU president, Sharan Burrow, and the shadow treasurer, Joe Hockey.

But a spokesman for Mr Swan appeared to reject it, saying Australia's financial system had performed "very well" during the crisis compared with others and the Government was "not contemplating" a systemic review.

Dr Joye, who runs the research and investment firm Rismark, said Mr Swan's response was an example of the complacency the open letter warned against.

"Everybody knows that providence has played a part in Australia's ability to skate through this crisis. When a coalition of top academic economists calls for a review to evaluate improvements to Australia's decades-old regulatory system, politicians should listen," he said.

The letter says Australia would "do well not to discount the possibility that a roll of the dice left us without more significant system failures" and adds that "in future, we may not be so lucky".

It was also signed by Joshua Gans, a professor at Melbourne Business School, Stephen King, a Monash University professor and former ACCC commissioner, John Quiggin, a professor at Queensland University, and Sam Wylie, a management consultant.

The letter refers to two inquiries into Australia's financial system - the Wallis inquiry of 1997 and the Campbell inquiry of 1981 - and says much of what they brought in is now out of date. It says a new inquiry would examine whether the banks should pay a "systemic capital charge" to account for risks in their business and whether they should have to accumulate capital in good times.

(3) John Curtin’s formula for a national bank

From: CEC Media Release <mediareleases@cecaust.com.au> Date: 09.07.2009 12:16 PM
Subject:  A true peoples bank is a national bank

Citizens Electoral Council of Australia
Media Release  8th of July 2009

... Today six leading economists called on Treasurer Wayne Swan to establish a people’s bank, in response to the lack of competition among Australia’s big four banks.

The need for a national people’s bank modelled on the original Commonwealth Bank has been pushed by the CEC for over 15 years: in legislation written in 1994; in its September 2002 full-page advertisement in The Australian newspaper, endorsed by over 600 current and former elected officials; in the party’s 2004 election campaign slogan, “Rebuild the Country with a People’s Bank”; and at every Community Cabinet meeting attended by the CEC over the past eight months.

Most recently, the debate was raised by CEC Queensland State Secretary Jan Pukallus, when she asked Wayne Swan at the 30th June Logan City Community Cabinet meeting why he doesn’t do what Jack Lang and John Curtin did in the ’30s and ’40s - freeze the debt, implement a debt moratorium, and nationalise the banks.

Mrs Pukallus had prefaced her question by challenging Rudd’s assertion that Australia’s big four banks are amongst the top 11 banks in the world, saying “they’re not Australian at all; we sold off the only Australian bank we had—the Commonwealth bank!”

(Rudd did not allow Swan to take the question; instead, he declared the CEC’s American collaborator, physical economist Lyndon LaRouche, “right off the planet”.)

Mr Isherwood observed, “It’s great to see people are starting to realise we were right to call for a people’s bank, but we must make sure we get it right.

“A true people’s bank is not a copy of New Zealand’s Kiwibank; it must be based on the original Commonwealth Bank.”

Mr Isherwood cited the great Labor Party leader John Curtin’s formula for a national bank, spelled out in his election speech at the Fremantle Town Hall in 1937:

“Three related monetary measures are necessary,” John Curtin said,
“1. National control of credit to ensure its adequacy to maintain and increase employment.
“2. National control of interest rates, in order to keep to a minimum the monetary and capital costs on production and industry.
“3. National direction of investment with the object of assisting in the promotion of a balanced economic development.”

Curtin concluded that, “If the Government of the Commonwealth deliberately excluded itself from all participation in the making or changing of monetary policy it cannot govern except in a secondary degree.”

Mr Isherwood continued, “What this debate shows is that we are now discovering what Curtin warned of in 1937—the government has excluded itself from monetary policy, and, consequently, they cannot govern.

“Ironically, the strongest opponents to Curtin’s position, are from the modern, degenerated version of his own Labor Party, and the current Prime Minister, who told us ad nauseam in 2007 election ads, ‘I’m an economic conservative, I believe in the independence of the Reserve Bank.’

“Curtin didn’t believe in the independence of the central bank; he believed in a government-owned and -run national bank, and remember, he saved Australia, in World War II.”

Mr Isherwood concluded, “The issue for the Rudd government is whether they intend to keep governing on behalf of what Old Labor denounced as the ‘Money Power’, or whether they intend to change their ways and begin governing for the people. The people will soon let them know about it if they don’t.”

http://www.cecaust.com.au/main.asp?sub=info/platform&id=platform2.htm

As you remember, the Commonwealth Bank was partially privatised under the Keating government, and then finally sold off altogether, something which would make John Curtin, Ben Chifley and all the veterans of the old Labor Party roll over in their graves.

John Curtin, in his 1937 Fremantle Town Hall speech said:

"To deal with unemployment and to make that industrial and economic preparedness which is the essence of national defence and security, three related monetary measures are necessary:

1. National control of credit to ensure its adequacy to maintain and increase employment.

2. National control of interest rates, in order to keep to a minimum the monetary and capital costs on production and industry.

3. National direction of investment with the object of assisting in the promotion of a balanced economic development. The Commonwealth bank is the logical instrument to function for the community in effecting monetary re-adjustment and economic reconstruction. The Labor Government will legislate so that the Commonwealth Bank would be able competently to control:

(a) Credit for the Nation

(b) Rates of Interest

(c) Direction of general investment

(d) Currency relations with external markets

"The Labor Party points to the planks of its platform and insists that the Commonwealth Bank must have its original charter restored. The policy of the Government must be given effect and the people's authority established in respect to an indispensable national service." If the Government of the Commonwealth deliberately excluded itself from all participation in the making or changing of monetary policy it cannot govern except in a secondary degree.

(4) Government-owned "people's bank" would stifle competition - Australian Bankers

http://www.independentweekly.com.au/news/national/national/general/peoples-bank-would-stifle-competition-aba/1562733.aspx?storypage=0

People's Bank would stifle competition: ABA

8/07/2009 5:51:00 PM

A proposal to set up a Federal Government-owned "people's bank" would stifle competition and create problems for institutions operating in rural areas, an industry lobby group says.

The Australian Bankers' Association (ABA) said on Wednesday the proposal put forward by a group of economists didn't make sense and would directly threaten smaller banks, particularly those in regional centres.

ABA chief executive David Bell said there was "no compelling case" for a such a bank in Australia.

"If the issue is to create greater competition in banking, by setting up a major force in banking which is government-owned you are going to disproportionately effect smaller institutions which is going to erode competition," Mr Bell said.

"I can't see it make sense."

Mr Bell cited the failures of state-owned banks in Victoria and South Australia in the 1990s as evidence that governments were unsuited to running banks.

"Not only that, if this government-owned bank was to be set up you'd have to have an injection of government funds into it," Mr Bell said.

"The last thing we need currently is to have government monies diverted into something as unnecessary as this."

In a letter to federal treasurer Wayne Swan, six Australian economists called on the government to set up a "people's bank" that would operate out of post offices,

along similar lines to New Zealand's "Kiwibank" established in 2002.

This, the economists said, would curtail the dominance of Australia's big four banks, which have increased market share after the global financial crisis wiped left several non-bank lenders struggling.

Figures published by the Australian Bureau of Statistics (ABS) on Wednesday showed Australia's big banks wrote 91.8 per cent of all new home loans by value in May, totalling $15.6 billion.

Their market share was closer to 80 per cent before the onset of the global credit crunch in the second half of 2007.

The ABS data do not separate out figures for the big four, which comprise ANZ Banking Group Ltd, Commonwealth Bank of Australia Ltd, National Australia Bank Ltd and Westpac Banking Corporation.

Mr Bell said Australian banks are already operating in a very competitive environment.

"Since the global financial crisis has occurred here in Australia, ourselves and the Canadians have both demonstrated that we have competitive banking systems or financial systems and that we have strong systems," he said.

"Those two things have sat beside each other."

A recent Reserve Bank of Australia (RBA) research paper found the banks' net interest margin (NIM) - a main indicator of bank profitability - had risen in the 12 months to March 2009.

The banks' NIM was slightly above levels before the start of the global financial crisis in mid-2007, the RBA report said.

But Mr Bell said he expected margins to revert to a downward trend.

"Based on what has happened over the last 10 to 15 years that is the inevitable trend of margins as banks become more efficient at delivering their services," Mr Bell said.

The six economists also called for a fresh inquiry into Australia's financial system.

Mr Bell said the ABA had an open mind about a new inquiry but believed further regulation of the sector was not needed.

"There could be merit into it but we need to just finalise our position on that," he said.

"We have said this before, we would caution any need for any further regulation here in Australia which would impose unnecessary costs and burdens for our customers here when there has been no systemic failure here in Australia."

(5) Notion of 'people's bank' not considered, Government says

AAP

July 08, 2009

http://www.news.com.au/business/money/story/0,28323,25750873-5013952,00.html

THE notion of a "people's bank" that would be set up to rival Australia's big four banks has not been contemplated, the Federal Government says.

Six influential economists have written to Prime Minister Kevin Rudd and Treasurer Wayne Swan calling on them to set up an inquiry into the nation's financial system, the Sydney Morning Herald reported.

In the open letter, the economists have suggested the Government set up a "basic bank'' - managed by the Future Fund - that would allow Australians to deposit money through Australia Post, the report says.

Since the start of the economic downturn, the big four banks have increased their share of the mortgage market from 80 to 92 per cent, and have taken over St George and Bankwest.

The letter, from economists who have advised both sides of politics, expresses concern about the way the banks are using their privileged access to Government guarantees.

The banks are reportedly rushing offshore to expand, even though the public is told they are "lucky not to have had substantial overseas exposures,'' the report says.

"We believe the banks in our economy have worked very well,'' Home Affairs Minister Brendan O'Connor told Sky News.

"That's not something that's been contemplated by the Government,'' he said, referring to the "basic bank'' idea.

Australia's big four banks were in the top eight banks in the world, which provided confidence in the nation's financial system and ability to recover from the global recession, Mr O'Connor said.

"So I don't think there's any particular need to look at the systemic review of our financial system, it's very sound.''

Opposition finance spokeswoman Helen Coonan said it was an "interesting idea''.

"I think innovative ways with how consumers can be assisted with how they choose their financial products and how they actually run their finances should not be dismissed out of hand,'' she told Sky News.

Senator Coonan said she wasn't "bashing the banks'' but if consumers could be given a better deal, it should be considered.

Small Business Minister Craig Emerson said he believed there was a reason Australia now had no state-owned banks, after having 11 in 1990.

"They all sound like a good idea at the time but they all ended up going either belly up or into severe financial situations,'' Mr Emerson said.

"I can understand why people are feeling this way, it's a concentration I suppose, with the global recession, we do have four major banks in this country.''

Mutual banking institutions, such as credit unions and building societies, already fill economists' calls for a new "people's bank'', a credit union industry body says.

"Credit unions and mutual building societies exist for their members: being mutual organisations, their members own them,'' CEO of Abacus, Louise Petschler, said.

"Instead of maximising external shareholder returns, credit unions and mutual building societies put their profits back into better rates, fairer fees, responsible lending,'' she said.

Instead of arguing for a "people's bank'', the economists should recognise the strong competitive alternative to the banks - credit unions and building societies - she said.