69 Ellen Brown replies to Zarlenga/AMI criticism over state-owned banks

Ellen Brown replies to Zarlenga/AMI criticism over state-owned banks

Zarlenga promotes 100% Reserves, which is a revolutionary change: no more credit.

Ellen Brown proposes state-owned banks (issuing credit), such as Australia had before Privatization.

I admire Zarlenga's book The Lost Science of Money, but I support Ellen's proposal because I myself grew up under a system of state-owned banks in the golden years of the 1950s & 60s:

The Reserve Bank of Australia
The Commonwealth Savings Bank
The Commonwealth Trading Bank
The Rural Bank
various State banks too (one in each State)

(1) Zarlenga/AMI critique of Ellen Brown's proposal for state-owned banks
(2) Ellen Brown replies to Zarlenga/AMI criticism

(1) Zarlenga/AMI critique of Ellen Brown's proposal for state-owned banks

http://www.monetary.org/moneyscenefive.html

 The American Money Scene

 Bulletin Five of the American Monetary Institute

© 2009
PO  Box 601,  Valatie,  NY 12184
http://www.monetary.org
ami@taconic.net
Dedicated to the independent study of monetary history, theory, and reform
Stephen Zarlenga, Director

August 16, 2009

 Dear Friends,

 As you know the states are in terrible financial condition, cutting back on necessary programs, laying off people and raising taxes. This has been the case for several years, and thanks to the banking crisis has reached horrific levels in some states. This is the time - an opportunity to push for real reform, such as the American Monetary Act. But instead, ill advised suggestions have recently been circulated on the internet that the states go into the banking business to solve or lessen this problem. The American Monetary Institute concludes that these suggestions, though they may be for well meaning purposes, are bad ideas for a lot of reasons as described below. People involved in real monetary reform understand that the private creation of money through what amounts to a fractional reserve accounting system is at the heart of the monetary problem which has plagued humanity and has now brought down the world economy. That vicious system by which money is created in our society must be reformed, not imitated. But there is no reform whatever in the proposal for states to enter the banking business.

 It would also distract lawmakers from facing the facts about the national reforms that are needed to solve this crisis and institute a money system grounded in justice, which will operate to promote the general welfare. It would even sanction and endorse the present fractional reserve banking system, the source of the problem. That system requires condemnation and structural reform, not endorsements! We now have a blog at the end of this article below, so that you may record and post your reactions to Mr. Walton's research.

 Sincerely,

Stephen Zarlenga

Director, AMI

 Why States Going into the Banking Business Would be a Distraction, not a Solution to their Fiscal Problem

 by Jamie Walton, AMI researcher

 “We may not be able to stop them, but we can join them. We the people need to play the bankers’ game ourselves.”1 – that was written by one of the promoters of the notion that the state governments should go into the fractional reserve banking business to beat Wall Street at its own game and solve their fiscal problems.

{footnote 1 refers to Ellen Brown's proposal for state-owned banks}

 What an insult to humanity!  How about a dose of morality and common sense.  Isn't that like saying: “We’re victims of organized financial crime, so lets join the criminals!”

 Trying to beat Wall Street at its own game is obviously not the answer.  As Albert Einstein once said, "We can't solve problems by using the same kind of thinking we used when we created them."  

 Forty-eight States currently have budget deficits and many are sharply cutting services to try to close ‘fiscal’ gaps opening up to an average 24% by 2010.

 Some attention has recently been given to the idea that State governments can get out of their fiscal problems by setting up their own banks.  This is mainly a distraction away from genuine reform of the system, as encapsulated in the proposed draft American Monetary Act (more about that below).

 The argument being put forward is that State governments can increase their revenues without increasing taxes by collecting profits from State-run banks.  The proposal suggests that State governments go into the banking business and “fan” their deposits into 10 or 12 times as much in loans, using ‘fractional reserve’ or ‘capital adequacy’ rules, to cover fiscal gaps with bank profits.

 This is a foolish suggestion, for several reasons.

 1.  You don’t solve a problem with more of the problem.

 This scheme for states to go into the banking business would only ‘serve to protect’ the status quo.  The ‘proposal’ completely fails to confront the main problem identified by all serious monetary reforms: ‘fractional reserve’ banking.  Instead, it actually endorses and sanctions this vicious and destructive process, by suggesting that State governments engage in it – it’s immoral!

 2.  What the promoters describe is not how banking operates.

 No single bank can multiply its deposits by 10 or 12 times in loans, they can only make loans (or purchases of securities, e.g. bonds) up against 90-95% of their deposits; these loans create new deposits, which, when spent, are most likely transferred to other banks; then receiving banks can again make new loans up to 90-95% of their deposits, and so on.  This ‘process’ is repeated indefinitely, in ever-decreasing increments, and the effect over time is that the banking system as a whole multiplies those initial deposits by 10 or 12 times.  The only reason some progressives might be considering this proposal is they don't understand how fractional reserves work.

 This process is carried on at great cost to the community as a whole, because every new loan (or new security purchase) is additional interest-bearing debt.

 As presently operated, banks can be viewed as debt factories; they primarily create debt and only create the bulk of our money supply as a debt byproduct.  Banks make profits and stay in business by putting the community as a whole into more debt than it can repay in any given time.  This results in a net claim against the community going into the future.  While some profits are paid to shareholders as dividends, this is only a small percentage of the debt created.  If a bank was State-owned, the ‘shareholders’ would nominally be the people of the community, but any profits would still be based on the indebtedness of the community.  That’s the inevitable outcome, no matter who owns a bank, because the same rules apply to all banks in the banking system.

 But; the question is not who should be the beneficiaries of perpetual claims against the community, the question is should anyone be the beneficiaries of perpetual claims against the community – why place ourselves forever on a treadmill just to have what we’ve already got? It makes no sense.

 3.  The problem is being misidentified as interest, when the problem is debt.

 Proponents of the scheme are alleging that interest collected by “private” banks is kept out of circulation and is therefore not available to repay loans the bank have made.  But this is not true.  Most, if not all, interest re-enters the system in some way at some time (e.g. as expenses, dividends, investments, etc.).  This is not the problem.  The problem is almost all of our money is created with a debt attached; it is ‘borrowed into existence’ from banks, who create it when we have to borrow it.

 As our economy grows, we need new money, but almost all of the new money is presently created with interest-bearing debt, so almost every new dollar has more than a dollar owing on it – so it has to ‘earn’ more than a dollar and pay it all back to banks (who never had it in the first place).  Who owns and runs any particular bank makes little or no difference because the debt-based money-creating banking system will still own and run us, on a treadmill.

 Money doesn’t have to be created like this; coins aren’t, they’re just created as money, with no debt attached; when they’re issued, it’s revenue for the U.S. government, saving taxpayers $$$.  All money can be created this way.  And; if we don’t start with any debt, then we don’t start with any interest either.

 With that in mind, let’s look again at the States’ fiscal crisis.

 State governments receive money from the community for the provision of public services and the support of volunteer services.  These are generally things that are needed in the community which aren’t commercial in nature, they’re not the types of things that it’s either possible or desirable to make a profit on (e.g. rape crisis centers, battered women’s refuges, assisted housing for people with physical/mental impairments, respite care for caregivers, etc.).

 Non-commercial services needed in the community couldn’t exist without being paid for straight out, because providers can’t borrow and then generate income to repay loans, that’s not how they work (if they could do that, they’d be doing it already) – they need money that doesn’t have to be paid back.

 Diverting public resources away from desperately needed services toward a commercial venture would only make things worse.  The effect on the ground could lead to the commercialization of services intended for the relief of poverty, disability, pain, suffering and misery; by forcing service providers to also be profit makers (e.g. commercialized prisons); or reverting to relying on the whims of charity.  If neither of these ‘choices’ worked-out (which history shows, they generally don’t), the community services essential for any viably functioning civil society might disappear altogether, and then “there goes the neighborhood” – social disintegration is a slippery slope, for everyone.

 This is a very serious situation – it’s no time to be playing games.

 In addition to these defining moral questions, there are also some more technical reasons why they won’t automatically work as suggested.

 1.  No bank’s an island – they’re all in it together.

 A bank can only lend out what it can expect to receive back, not only from its borrowers in the long term, but also from all other banks through the clearing process in the very short term, i.e. usually overnight.  Even if a State-run bank could attract other banks to have accounts with it and/or require its employees and suppliers to have accounts with it, the other banks would have to call in their loans by 10 or 12 times the amounts transferred (so there’d be no net gain in loans available).  Of course, at some stage, all of its depositors would need to spend their money with people having accounts at other banks, so sooner or later its reserves would drain back to other banks and it would then have to call in its loans by 10 or 12 times as much.  In any case, no bank can lend more than the prevailing level of lending of all other banks; every bank has to move in step with every other bank, otherwise it would soon sustain an adverse net balance through the clearing process and drain all its reserves to the other banks.  It’s a complete error that any bank can just go ahead and multiply it’s ‘reserves’ or ‘capital’ by 10 or 12 times in loans.  If the other banks aren’t lending, a State-run bank wouldn’t be able to lend either.

 2.  Don’t be fooled by what’s happening in a low-population State.

 North Dakota has about 700,000 people, a strong community spirit based on farming in difficult conditions, and significant oil revenues.  The model being presented is the Bank of North Dakota, which provides support services to some other banks in its area.2  But this arrangement won’t automatically translate to other States, as the banks in other States may not wish to engage in it, and requiring them to could be very unpopular.  This could lead to significant risks to taxpayers.  In 1931, the Government Savings Bank of New South Wales (a federated State of Australia), at that time the 2nd largest savings bank in the British Empire, was closed down by a run caused by a series of ‘scare’ stories put out in the media as part of a ‘political’ attack.3  If a similar action were possible against a State-run bank today, taxpayers might be called upon to pay for the aftermath (e.g. the Bank of North Dakota is not FDIC-insured(!), and is instead guaranteed by the State Government itself).

 3.  The promised golden goose may prove to be a noose.

 What may look like a boost for taxpayers could end up being a ball-and-chain.  For instance; where are States already in deficit going to get the money to set up a bank?  As the President of the Bank of North Dakota, Eric Hardmeyer, explains (in the article cited above), to avoid a drain on existing deposits from other banks, and the consequent contraction in loans, a State government would probably have to issue bonds to raise the capital needed to set up a State-run bank.4  Yet more debt bondage at a time like this may be more than the State’s taxpayers can bear.  In any case, a new bank would be as much of a burden on the community as any other bank.  We would have the ridiculous situation of the people, as taxpayers, being put further into debt to build a debt factory to put the people, as the community, even further into debt.

 4.  States shouldn’t gamble taxpayer’s money on risky business.

 The actual balances of State government bank accounts aren’t huge, and they don’t grow, because they’re always being spent – that’s what they’re for.  The actual profit margins banks make on their funds under management are generally modest, so any returns from a relatively small loan portfolio, after deducting operating expenses and re-investment in the business, wouldn’t be anywhere near the amount required to fix the current fiscal shortfalls of the State governments.  For example, in recent years the Bank of North Dakota has transferred between about a third to a half of its net income to the State coffers; ~$25 million in 2007, ~$20 million in 2008.5  The total budget for the State Government for the 2007-2009 fiscal period is $6.5 billion.6  A State law requires the bank to pay $60 million to the general fund over the same period – a contribution of less than 1% to the State budget.  Meanwhile, State governments face average budget shortfalls of 24% for 2010 - so the numbers just don’t stack up.7  Weighing the pros and cons; relatively low potential returns compared to potential high risks (e.g. the concerted aggressive actions of other banks); it’s not a very good bet.

 5.  States would be better-off using their clout with the banks.

 A more prudent course of action would be for State governments to negotiate more favorable contracts for their banking business with one or more banks.  This would involve much less cost and trouble (e.g. recruiting competent staff and administering a new enterprise) than trying to set up a bank, especially when public services are being cut.  The banks need those deposits – they’ll do anything to keep them (even if they don’t like to admit it).

 6.  We don’t need any more diversions.

 We citizens have only so much energy and time to devote to changing our world for the better.  Diverting good people into nonsense condemns us to continue suffering unnecessarily.  This time of crisis must be used for real reform, not diversions.

 So what is the solution?

 It’s the monetary system which must be changed to end the fiscal crisis, and State governments cannot do this – it’s a matter for the Federal Government.

 Under present constitutional and legal conventions, the only institutions that can create money without debt are national treasuries and/or central banks.  State governments within a federal nation cannot do this – the problem can only be solved at the national level.

 Proposals promoting anything else would require a constitutional amendment, which is not necessary.

 There are some additional specious arguments being made within these promotions claiming that the U.S. Constitution (Article I, Section 8, Clause 5) does not authorize the U.S. Congress to issue non-coin money, so implying that it authorizes the States (or the people) to issue non-coin money.8  It most certainly does not.  As Robert G. Natelson, in the Harvard Journal of Law and Public Policy, exhaustively and authoritatively determined, the term “coin” (with a lower-case “c”) means to create money in any form, whereas the term “Coin” (with an upper-case “C”) means coins.9

 There’s also a lot of misinterpretations in these same arguments regarding the term “Bills of Credit” in the U.S. Constitution (Article I, Section 10, Clause 1) and “bills of credit” in other contexts, and the terms “Tender” and “Coin” (again).  These misinterpretations lead to some ridiculous assertions like stating that: “The States violate the [U.S.] Constitution every day … to pay their debts … since gold and silver coins are no longer in general circulation.”10

 All of these spurious ‘ideas’ only serve as distractions during a time of crisis.

 We have a big problem in our economy and society today: too much debt.  Banking cannot solve this problem because banking produces debt, which is the problem.  It’s incredible that even now the delusion of borrowing ourselves out of debt is still seen as a solution, by anyone, let alone so-called reformers.  We’re in a deep hole because we listened to cheerleaders yelling “keep on digging” without thinking.  We cannot afford to keep doing this any more.

 Proposing to get governments involved in banking is the complete opposite of a solution, because it keeps the problem in place.

 As American Monetary Institute Chapter Leader, Dick Distelhorst, says:

 “We don’t want to put the government into the banking business – we want to get the banks out of the money creation business!” – Dick Distelhorst

 The correct solution to the crisis was presented in Stephen Zarlenga’s speech at the U.S. Treasury in December, 2003, titled “Solution to the States’ fiscal crisis” (read it at www.monetary.org).  That solution has become the proposed American Monetary Act.  In California, Governor Schwarzenegger has had a copy of The Lost Science of Money (the historical research which led to the solution) on his bookshelves since the spring of 2004.

 Historical experience has taught us what we need to do:

 1.         Put the Federal Reserve System into the U.S. Treasury.

 2.         Stop the banking system creating any part of the money supply.

 3.         Create new money as needed by spending it on public infrastructure, including human infrastructure, e.g. education and health care.

These 3 elements must all be done together, and are all in draft legislative form as the proposed American Monetary Act (read it here: http://www.monetary.org/amacolorpamphlet.pdf).

 The correct action is for Congress to fulfil its constitutional responsibilities to furnish the nation with its money by making the American Monetary Act law.

 The correct action for the States is to insist on this Federal action!

 Genuine monetary reform is the solution to the nation’s fiscal problems, and that can only be achieved at the national level.

The American Monetary Institute is sponsoring the 5th annual Monetary Reform Conference at Roosevelt University in Chicago, September 24-27, 2009, to bring together the best minds to get done what has to be done.

 Jamie R. Walton


 Notes:

 1.         “The Public Option in Banking: How We Can Beat Wall Street at Its Own Game” ”, Hodgson Brown, Ellen, J.D.  Web of Debt (website), August 5, 2009.

 2&4.    “How the Nation’s Only State-Owned Bank Became the Envy of Wall Street”, Harkinson, Josh.  Mother Jones, March 27, 2009.

  3.         “NSW Savings Bank Board Official Announcement: Protection To Depositors”, The Age, April 23, 1931.

  5.         Bank of North Dakota 2008 Annual Report: Independent Auditor’s Report, p. 4.

  6.         State of North Dakota: 2009-2011 Executive Budget Summary, p. 3.

  7.         “New Fiscal Year Brings No Relief From Unprecedented State Budget Problems”, Lav, Iris J. and McNichol, Elizabeth.  Center on Budget and Policy Priorities (website), updated August 12, 2009.

  8&10.    ”Another Way Around the Credit Crisis: Minnesota Bill would authorize State Banks to “monetize” productivity”, Hodgson Brown, Ellen, J.D.  Web of Debt (website), March 23, 2008.

  9.         “Paper Money and the Original Understanding of the Coinage Clause”, Natelson, Robert G.  Harvard Journal of Law and Public Policy, July 1, 2008.

(2) Ellen Brown replies to Zarlenga/AMI criticism

From: Ellen H Brown <ellenbrownjd@gmail.com>  Date: 30.08.2009 12:01 PM

Responding to a critique by the American Monetary Institute to the state-owned bank option for solving the credit crisis.  It is posted here --

More than One Way to Reclaim the Power to Create Money

http://webofdebt.wordpress.com/2009/08/29/more-than-one-way-to-reclaim-the-power-to-create-money-an-open-letter-to-the-american-monetary-institute/

http://webofdebt.wordpress.com/more-than-one-way-to-reclaim-the-power-to-create-money-an-open-letter-to-the-american-monetary-institute-august-28-2009/

MORE THAN ONE WAY TO RECLAIM THE POWER TO CREATE MONEY: An Open Letter to the American Monetary Institute, August 28, 2009

Sirs: This is in response to the entry posted on your American Monetary Institute blog on August 16, 2009, which references my articles on a state-owned bank solution to the credit crisis. I was disappointed to read that you thought my proposal was “an insult to humanity,” as the idea was actually drawn from the AMI’s book The Lost Science of Money. I do quite a bit of writing and speaking, and I always follow your lead in saying the ideal monetary model is that established in Benjamin Franklin’s colony of Pennsylvania, which not only spent but lent money into the economy, through its own publicly-owned bank. The Lost Science of Money calls it “Pennsylvania’s Superior Money System.” On pages 370-71, your book quotes Pennsylvania Governor William Keith, who wrote of the province’s founding of a publicly-owned bank:

“It is inconceivable to think what a prodigious good effect immediately ensued on all the affairs of that province . . . . The poor middling people who had any lands or houses to pledge, borrowed from the loan office, and paid off their usurious creditors. The few rich men who had before this [quit] the trade – except that of usury – were obliged to build ships, and launch out again into trade.”

It is submitted that our proposals aim for the same thing – reclaiming the money power for the people themselves. We would just get there by different routes. My public bank would create credit on its books, lend it, and charge interest on it. You would have a public entity create money and lend it to private banks at interest, which would then lend it to consumers and businesses at interest. The private banks in your scheme would no doubt tack their interest costs onto the interest charged to the end borrowers, since banks are in the business of making a profit, and that is the only way they could make a profit in your system. My proposal would just eliminate the profits to the private banker middlemen. Banking would become a non-profit public service, with the interest returned to the public purse.

You maintain that publicly-owned banks are “mainly a distraction from genuine reform of the system, as encapsulated in the proposed American Monetary Act.” Indeed, much in that Act is excellent; but it would leave the determination of how much credit is available in the economy to a central planning board, when the money supply needs to be flexible, expanding and contracting organically in response to the needs of trade. The American Monetary Act gives the final word on the money supply to the Secretary of the Treasury, under the guidance of an independent monetary board. Today, that would be Timothy Geithner. Trusting Timothy Geithner to determine the day to day credit needs of the country would be the equivalent of trusting the Russian Soviet to accurately determine how many size 9 shoes its population needed. When the pot of available funds decreed by the Treasurer ran out, creditworthy borrowers would be turned away, and the economy would falter.

Ready credit is what makes an economy run smoothly, and its availability should not be subject to the whims of a political body. Credit-money is created when creditworthy borrowers take out loans. Banks merely “monetize” the borrowers’ promise to repay. As The Lost Science of Money makes clear, “money” is not a commodity but is created by legal agreement. Credit-money is created when the “full faith and credit” of the community is advanced to the borrower. The function of the banker is just to oversee the agreement, acting as the middleman who advances the funds and collects them back. Publicly-owned banks are the most efficient and cost-effective way to get ready credit into the economy. They are not a temporary stopgap measure, any more than the land bank of the colony of Pennsylvania was.

You have divided your objections to state-owned banks into two groups, “moral” and “technical,” with separate numbering for each. I will follow your numbering in addressing these points.

Moral Objections

1. You state that for a public bank to engage in “fractional reserve” lending – that is, to create credit on its books – is immoral. That appears to me to be a mischaracterization of the problem. What is immoral is the private creation of money. Both our proposals are attempting to overcome that flaw. I am just suggesting that publicly-owned banks are the most direct and practical means to that end. Congress is now owned by Wall Street, as Congressmen themselves are complaining. States, on the other hand, still have some autonomy.

2. You state that banks cannot create credit on their books but can make loans only against 90-95% of their deposits. This is no longer true. Federal Reserve data establishes that the reserve requirement is now essentially obsolete. For a detailed discussion, see Jake Towne, “Yes, Virginia, There Are No Reserve Requirements (Part 2),” August 12, 2009, establishing that “reserve requirements are effectively not in existence and easily avoided by accounting tricks in the U.S. banking system.” See also Eric deCarbonnel, “US Banks Operating Without Reserve Requirements” (March 29, 2009), stating, “Although, under current regulations, all depository institutions are required to maintain reserves against transaction (checking) deposits, the reality is they don’t.” Both articles are supported with Federal Reserve data.

What limits bank lending today is chiefly the capital requirement, and states are in a far better position to meet that requirement than private banks are. Banks must have Tier 1 capital equal to 4% of loans and other risk-weighted assets, and they must have combined Tier 1 plus Tier 2 capital of 8% of risk-weighted assets. Tier 2 capital includes several things, but the most interesting here is the appreciated value of unencumbered real assets. For a private bank, that typically means only the building that houses it; but a state has buildings, prisons, parks, etc. peppered all over the state. It has a HUGE asset base, so it basically does not have to worry about Tier 2 capital at all.

That just leaves Tier 1 capital, which is essentially the bank’s own money. For a private bank, that generally means the capital contributed by shareholders and the interest earned on loans. Again, a state has a huge amount of money of its own. A friendly regulator could count the state’s whole revenue base as Tier 1 capital. But let’s say that the state wants to dot all the i’s and cross all the t’s by actually setting aside enough Tier 1 capital to please the regulators. At 4%, $1 billion would be enough to create $25 billion in credit – virtually enough to meet California’s $26 billion budget deficit in one fell swoop. You say that this would just be a loan, which has to be paid back; but that is not necessarily the case. The state owns the bank, so it can roll the loan over as long as needed; and the interest returns to its own coffers, so the loan is essentially interest-free. The federal government has been rolling over its debt since the days of Andrew Jackson. For a state to create interest-free money on its books and roll the loans over indefinitely produces the same result you wish to achieve – an interest-free government-issued money supply. In both our schemes, the government gets the money interest-free, while private borrowers get it with an interest charge attached.

You say that only the federal government, not the states, can create money under the Constitution; but this is not true. The Constitution forbids states only to issue “bills of credit,” which has been interpreted to mean paper money. U.S. Supreme Court case law holds that a state can own a bank, and that the banknotes issued by the bank are not the sorts of “bills of credit” forbidden to the states by the Constitution. Banks no longer issue banknotes, but the principle still holds: bank-created money is not forbidden to governments any more than to private banks. We know that private banks create money. In fact, they create virtually all of our money. The ownership of the bank will not affect the bank’s ability to create credit on its books. Rather, it will just achieve our mutually desired end of transferring the power to create money from private to public control.

3. “The problem is being misidentified as interest,” you maintain, “when the problem is debt.” You argue that all money could be created interest-free by the government, just as coins are today; and that this would save the taxpayers money. I totally agree with that: Congress should issue money outright. That was the model followed in the colony of Pennsylvania, which we agree was the ideal model. Congress should create not just coins but paper dollar bills and accounting entry money. But that is a completely different issue from consumer credit or debt. You are not proposing to eliminate banks that charge interest to borrowers; you would just tack an extra interest charge on by making banks borrow from the government as the ultimate creator of credit. Under my proposed system, as in yours, the government would be the ultimate issuer of credit; but with a bank that was state-owned, the extra interest drawn off by private banker middlemen would be eliminated.

Technical Objections

1. You state that “no bank’s an island . . . If the other banks aren’t lending, a State-run bank wouldn’t be able to lend either.” Today, the other banks are not lending because they are not able to meet the capital requirement for additional loans; and this is because the “shadow lenders” have disappeared – the investors who were taking loans off their books, making room for more loans. A state-owned bank would have huge capital and deposit bases and a clean set of books, and therefore would have a huge capacity for lending as and where needed. It would not be dependent on other banks to meet its reserve requirement, which as noted above is now essentially obsolete.

2. You caution about following the model of the Bank of North Dakota, which you warn is playing with fire because it is not FDIC insured and could be subject to a bank run. In fact, the FDIC is now broke – literally. Its own funds offer little if any protection. In a few months it will have to start borrowing from the government. If the banks were owned by the government in the first place, this problem would have been obviated.

3. You say that a state bank would take deposits away from other banks, reducing the lending ability of those banks. However, the overall credit capacity of the system would not be reduced; the business would just move to the state-owned bank, as well it should if the latter can provide superior service at cheaper rates. The State of California has $17.6 billion in demand deposits and NOW deposits, which could be moved at will; and most of the banks it has them at actually turned down California’s request to honor its IOUs. Some of those banks got taxpayer bailout money specifically to keep credit flowing to the states and consumers, an obligation they have clearly failed to fulfill. California owes them nothing and has every right to remove its deposits from those banks into its own. That is free-market capitalism. More than that, it is a matter of survival. Why should we be feeding parasitic out-of-state banks that aren’t helping us in return? The Bank of North Dakota was set up in exactly those circumstances: the farmers were losing their farms to the Wall Street bankers, so they set up their own credit system to escape the Wall Street maelstrom — and it worked, brilliantly well.

4. You state that the meager benefits of forming a state-owned bank would not be worth the costs. However, you are looking at a very limited range of benefits. Let’s consider again California. With its enormous capital base, California could generate enormous amounts of credit, which could be used to refinance its existing debt; and since the state would own the bank, it would pocket the interest. California pays $5 billion yearly in interest alone — as much as some states’ whole budgets. Just that savings would make a state-owned bank worth the trouble; but a state-owned bank could serve more purposes than that. It could eliminate the cost of borrowing for income-generating projects such as infrastructure, low-cost housing, and alternative energy development. On average, interest has been calculated to compose 50% of the cost of every project. Moreover, the state wouldn’t have to scramble around looking for a loan when it needed one, knuckling under to inflated interest rates. On the question of costs, today a bank can be set up on the Internet, without even the cost of a physical building.

5. You suggest that negotiating better terms with existing banks would be more cost-effective than setting up a new bank. Again, you are overestimating the costs and underestimating the potential benefits of a state-owned bank.

6. You write, “We citizens have only so much energy and time to devote to changing our world for the better. Diverting good people into nonsense condemns us to continue suffering unnecessarily. This time of crisis must be used for real reform, not diversions.” I agree with that. The economy is in an emergency state. We cannot afford to wait for a Congress that has been captured by the same private money-creating monopoly from which we are trying to free ourselves.

Your plan represents a far more radical diversion from the status quo than mine and is therefore a harder sell to make to basically clueless politicians. A state-owned bank has already been operating very successfully for 90 years in one pioneer state, and following that model would require doing nothing different from what banks do now. How can regulators object, when we’ll be satisfying all their requirements? In fact, the shift will seem so minor that its significance is liable to be missed. Even committed monetary reformers like yourselves have apparently missed its implications and potential. Through state-owned banks that create money on their books, we can achieve what Benjamin Franklin, Thomas Jefferson, Abraham Lincoln and William Jennings Bryan all aimed to achieve: a publicly-created money supply issued by the people for the people.