Time for an Economic Bill of Rights: Ellen Brown

Time for an Economic Bill of Rights

Posted on November 12, 2011 by Ellen Brown 

 

Henry Ford said, “It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

We are beginning to understand, and Occupy Wall Street looks like the beginning of the revolution. 

We are beginning to understand that our money is created, not by the government, but by banks.  Many authorities have confirmed this, including the Federal Reserve itself.  The only money the government creates today are coins, which compose less than one ten-thousandth of the money supply.  Federal Reserve Notes, or dollar bills, are issued by Federal Reserve Banks, all twelve of which are owned by the private banks in their district.  Most of our money comes into circulation as bank loans, and it comes with an interest charge attached. 

According to Margrit Kennedy, a German researcher who has studied this issue extensively, interest now composes 40% of the cost of everything we buy.  We don’t see it on the sales slips, but interest is exacted at every stage of production.  Suppliers need to take out loans to pay for labor and materials, before they have a product to sell.

For government projects, Kennedy found that the average cost of interest is 50%.  If the government owned the banks, it could keep the interest and get these projects at half price.  That means governments—state and federal—could double the number of projects they could afford, without costing the taxpayers a single penny more than we are paying now. 

This opens up exciting possibilities.  Federal and state governments could fund all sorts of things we think we can’t afford now, simply by owning their own banks.  They could fund something Franklin D. Roosevelt and Martin Luther King dreamt of—an Economic Bill of Rights. 

A Vision for Tomorrow

In his first inaugural address in 1933, Roosevelt criticized the sort of near-sighted Wall Street greed that precipitated the Great Depression.  He said, “They only know the rules of a generation of self-seekers.  They have no vision, and where there is no vision the people perish.” 

Roosevelt’s own vision reached its sharpest focus in 1944, when he called for a Second Bill of Rights.  He said:

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights . . . . They were our rights to life and liberty.

As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

He then enumerated the economic rights he thought needed to be added to the Bill of Rights.  They included:

The right to a job;
The right to earn enough to pay for food and clothing;
The right of businessmen to be free of unfair competition and domination by monopolies;
The right to a decent home;
The right to adequate medical care and the opportunity to enjoy good health;
The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
The right to a good education.

Times have changed since the first Bill of Rights was added to the Constitution in 1791.  When the country was founded, people could stake out some land, build a house on it, farm it, and be self-sufficient.  The Great Depression saw people turned out of their homes and living in the streets—a phenomenon we are seeing again today.  Few people now own their own homes.  Even if you have signed a mortgage, you will be in debt peonage to the bank for 30 years or so before you can claim the home as your own. 

Health needs have changed too.  In 1791, foods were natural and nutrient-rich, and outdoor exercise was built into the lifestyle.  Degenerative diseases such as cancer and heart disease were rare.  Today, health insurance for some people can cost as much as rent. 

Then there are college loans, which collectively now exceed a trillion dollars, more even than credit card debt.  Students are coming out of universities not just without jobs but carrying a debt of $20,000 or so on their backs.  For medical students and other post-graduate students, it can be $100,000 or more.  Again, that’s as much as a mortgage, with no house to show for it.  The justification for incurring these debts was supposed to be that the students would get better jobs when they graduated, but now jobs are scarce.

After World War II, the G.I. Bill provided returning servicemen with free college tuition, as well as cheap home loans and business loans.  It was called “the G.I. Bill of Rights.”  Studies have shown that the G.I. Bill paid for itself seven times over and is one of the most lucrative investments the government ever made. 

The government could do that again—without increasing taxes or the federal debt.  It could do it by recovering the power to create money from Wall Street and the financial services industry, which now claim a whopping 40% of everything we buy.

An Updated Constitution for a New Millennium

Banks acquired the power to create money by default, when Congress declined to claim it at the Constitutional Convention in 1787.  The Constitution says only that “Congress shall have the power to coin money [and] regulate the power thereof.”  The Founders left out not just paper money but checkbook money, credit card money, money market funds, and other forms of exchange that make up the money supply today.  All of them are created by private financial institutions, and they all come into the economy as loans with interest attached. 

Governments—state and federal—could bypass the interest tab by setting up their own publicly-owned banks.  Banking would become a public utility, a tool for promoting productivity and trade rather than for extracting wealth from the debtor class.

Congress could go further: it could reclaim the power to issue money from the banks and fund its budget directly.  It could do this, in fact, without changing any laws.  Congress is empowered to “coin money,” and the Constitution sets no limit on the face amount of the coins.  Congress could issue a few one-trillion dollar coins, deposit them in an account, and start writing checks.    

The Fed’s own figures show that the money supply has shrunk by $3 trillion since 2008.  That sum could be spent into the economy without inflating prices.  Three trillion dollars could go a long way toward providing the jobs and social services necessary to fulfill an Economic Bill of Rights.  Guaranteeing employment to anyone willing and able to work would increase GDP, allowing the money supply to expand even further without inflating prices, since supply and demand would increase together. 

Modernizing the Bill of Rights

As Bob Dylan said, “The times they are a’changin’.”  Revolutionary times call for revolutionary solutions and an updated social contract.  Apple and Microsoft update their programs every year.  We are trying to fit a highly complex modern monetary scheme into a constitutional framework that is 200 years old. 

After President Roosevelt died in 1945, his vision for an Economic Bill of Rights was kept alive by Martin Luther King.  “True compassion,” King declared, “is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring.” 

MLK too has now passed away, but his vision has been carried on by a variety of money reform groups.  The government as “employer of last resort,” guaranteeing a living wage to anyone who wants to work, is a basic platform of Modern Monetary Theory (MMT).  An MMT website declares that by “[e]nding the enormous unearned profits acquired by the means of the privatization of our sovereign currency. . . [i]t is possible to have truly full employment without causing inflation.”  

What was sufficient for a simple agrarian economy does not provide an adequate framework for freedom and democracy today.  We need an Economic Bill of Rights, and we need to end the privatization of the national currency.  Only when the privilege of creating the national money supply is returned to the people can we have a government that is truly of the people, by the people and for the people.

——————

Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back.  Her websites are http://WebofDebt.com and http://EllenBrown.com.

Mutually assured existence

Public and private banks have reached a modus vivendi

May 13th 2010 | from the print edition

“INDIA is where China was ten years back,” says Mr Kamath, chairman of ICICI. That is certainly true by size. India’s GDP amounts to about a quarter of China’s today and its banking industry just a tenth. But in at least one respect India is well ahead: it has several dynamic privately owned banks that over the past decade have taken a fifth or so of the market from the state-controlled banks. Until the financial crisis in the West the private banks seemed to offer a template for the entire industry: within a decade or two, it seemed, the state would retreat significantly. Now India’s mixed model of banking is likely to persist for longer.

Part of that reflects the fact that India had its own wobble during 2008. This was not a full-blown crisis; indeed, Aditya Puri, chief executive of HDFC Bank, the second-biggest (and perkiest) private firm, says to describe it that way would be an “appalling misconception”. But there was a sharp spike in money-market interest rates after the collapse of Lehman Brothers, a liquidity squeeze and a notable shift in deposits. At ICICI overall deposits, as well as the stickier category of savings and current-account deposits, dropped by about a tenth between June and December 2008. Savers shifted their cash to the government-controlled banks, which were perceived to be safer. “Money was pouring out of our ears,” says Mr Bhatt of State Bank of India.

That experience has helped prompt a change of strategy at ICICI, which for a long time was one of the most admired private banks in the developing world. After a decade of spectacular growth, fuelled in part by wholesale funding (including bulk deposits), the bank recently slammed on the brakes. In 2009 its loan book shrank by 17%.

Chanda Kochhar (one of several female bank bosses in India), who took over as chief executive from Mr Kamath last year, says that the bank decided to focus on changing its funding mix towards retail deposits because as interest rates rise these should be cheaper as well as stickier than wholesale funds. Current and savings deposits now make up 42% of total deposits, up from 27% before the crisis. Private banks so far lack the state banks’ huge branch networks, but they are working on it. ICICI now has 2,000 branches, against only 755 in early 2007. That should help it suck in more deposits.

The state banks may hold on for a while yet to the market share they have taken. Between June 2007 and December 2009, after a long period of genteel decline, they saw their share of total deposits and loans rise from 73% to 77%. After years of fierce competition from the private banks, they have begun to get their act together. At State Bank of India’s headquarters in Mumbai visitors may still receive a smart salute from a man in uniform, but, Mr Bhatt says, its technology and products are now “comparable to the private sector”. Mr Kamath agrees that the state banks have caught up on technology.

Learning to love state banks

Yet even if the private banks do go back on the attack, attitudes towards the state-controlled banks have changed for good. After all, they were the ones that continued to supply credit to the economy during the downturn. Before the crisis all banks were expanding their loan books at an annual rate of about 25% (see chart 6). After mid-2008 there was a big divergence, with the state banks (which come in three main flavours: the nationalised banks, State Bank of India and the regional rural banks) keeping credit growing fairly steadily. The private banks more or less ground to a halt. The foreign banks went from expansion to sharp decline, with their share of loans dropping from a peak of 7% to a paltry 5.3% last December.

Most bank executives now also concede that old-fashioned regulation was shown to have its merits. Indian banks are required to hold a big slug of their assets (typically just under a third) in government bonds and at the central bank. Now Western regulators too are considering pushing up liquidity levels. Indian bankers joke that all the fiddly rules they face have become the envy of regulators throughout the world.

All this has led to a reappraisal of whether state banks should be fully privatised in the long term. HDFC Bank’s Mr Puri says that “the world has changed and the view around here has changed.” Mr Kamath takes a similar view, predicting that in the new circumstances “India’s evolution will be more or less in line with China’s.” Mr Bhatt reckons there will be “no big-bang reform” and that over time the state-controlled banks’ share will drop only gently, to 55-65% of the market.

A similar message is heard in Brazil. In the past five years Brazilian private banks have risen to global significance, helped by a frenetic 2007 and 2008 when an eighth of the system’s assets changed hands. Itaú bought Unibanco and Santander bought ABN AMRO’s Brazilian business.

But just as important has been the expansion of the state banks, Banco do Brasil (a listed commercial lender with a bias towards agriculture), Caixa Econômica Federal (a mortgage specialist) and BNDES (which acts more as an investment company). Together their share of the financial system’s assets has reversed its earlier decline and now stands at 42% (see chart 7). Part of their increase in market share reflects acquisitions, with Banco do Brasil buying Nossa Caixa, a mid-sized state-owned firm, in 2008 and a 50% stake in Votorantim, a car-finance specialist, in 2009. But about two-thirds of the rise has come from lending more than the private firms during the downturn.

That in turn has changed people’s views of a mixed financial system. Domingos Abreu, chief financial officer of Bradesco, says the state banks “had a very important role…in the government’s anticyclical policies”, adding that in a downturn “it makes a difference” to have a mixture of state, private and foreign banks. He concedes that two years ago he might have answered the question differently, but now he had to acknowledge that the state banks have their merits.

Alfredo Sáenz, chief executive of Santander, which owns the country’s third-biggest private lender, quips that Brazil keeps an “artistic equilibrium” between the private and the public sectors. Persio Arida, a former governor of the central bank and president of BNDES, and now a partner at BTG Pactual, Brazil’s leading independent investment bank, says that the “consensus” in the country is that the state banks played a vital role. However, he cautions that until the extent of bad debts created by their lending is known, no definitive judgment can be reached.

Russia holds the line

In Russia up to 54% of the system’s assets are state-controlled, according to Andrei Vernikov, an economist, compared with 45% in 2007. Foreign banks’ share stands at 18%. The balance-sheets of the three European banks that are most active in Russia, UniCredit, Raiffeisen International and Société Générale, together shrank by about a quarter in euro terms in 2009. Royal Bank of Scotland’s loans to Russian corporate customers dropped by 45% in sterling terms. Net loans at state-controlled Sberbank and VTB declined by only 4% and 10% respectively in local-currency terms. Last summer the government took a larger stake in VTB to bring its holding up to 86%. Andrew Keeley, an analyst at Troika Dialog, an investment bank, says that although the government is likely to sell the additional stake in VTB again, it intends to keep majority control of both big banks.

But none of this means that a Soviet-style banking system is about to emerge in any of these countries. In China the government did take control of credit during the crisis, but for other state banks it was more of a nudge and a wink. Mr Bhatt says he was left to his own devices. Most governments also want private-sector banks to raise the level of competition. Even in China the state accepts some innovative upstarts, such as China Merchants Bank, a mid-sized bank with diffuse ownership and no direct state control. And all emerging markets want some foreign banks in order to keep local firms on their toes.

So although the ratio of ingredients varies, the objective mostly seems to be a mix with a strong state presence. This is seen as more responsive to businesses, less vulnerable to flaky foreigners and more open to “soft” control by the state as it tries to manage the economic cycle. Western bankers see its merits too: HSBC’s Mr Geoghegan, a veteran of banking in Latin America, the Middle East and Asia, reckons that a healthy combination of foreign and local firms leaves foreign banks politically less exposed.

Control freaks

The problem for state banks is that they need to find a way of raising capital without diluting the government’s holding. Most state-controlled banks are listed because a quotation brings market discipline to managers and provides useful information about the performance of the bank. But governments seem determined to hold on to a stake of at least 51%. For example, Banco do Brasil, now the country’s largest lender by assets, announced plans to raise $5 billion earlier this year, but its objective remains the “maintenance of the government’s shareholding control”. Turkey is thinking about floating its largest lender, Ziraat Bank, but the state seems likely to retain control. It is the same story in China, says Bill Stacey, an analyst at Aviate Global, a brokerage firm. The government is happy to sell shares in banks but wants to keep a majority stake. Likewise, in Russia the state wants to retain control of the two biggest banks.

What happens when the state’s holding gets close to that crucial 50%? State Bank of India expects to receive a capital injection from the government this year. Its chairman, Mr Bhatt, says it is still an open question whether the state might breach the 50% threshold in the medium term, but even then it would seek to have a big enough stake to remain the dominant shareholder. Many governments are in better fiscal condition than India’s and have more scope to top up banks’ capital. 

Emerging-market banks’ hunger for capital used to ensure that they would ultimately be sold off to the market—or to foreigners. Not any more. So the prospect now is of a fast-growing, innovative banking industry that remains subject to conservative regulation and only gradual shifts in control. After the West’s experience with no-holds-barred banking, that may be a good idea. But for growth-starved Western banks desperate to do business in emerging markets it means they will find it even harder to get in. 

Taking Control of Our Money

Our sovereign currency and credit has been usurped for private gain instead of public good. Let's take back control of our money from Wall Street and build prosperity on Main Street by creating state, county, and municipal public banks. Public tax monies should be leveraged by public officials, not speculators and

and swindlers. Check out http://www.publicbankinginstitute.org for more information.

North Dakota's Economic “Miracle”—It's Not Oil

Published on Thursday, September 1, 2011 by YES! Magazine

North Dakota's Economic “Miracle”—It's Not Oil

North Dakota has had the nation's lowest unemployment ever since the economy tanked. What's its secret?

by Ellen Brown

In an article in The New York Times on August 19th titled “The North Dakota Miracle,” Catherine Rampell writes:If its secret isn’t oil, what is so unique about the state? North Dakota has one thing that no other state has: its own state-owned bank. (Photo by Reto Fetz)

Forget the Texas Miracle. Let’s instead take a look at North Dakota, which has the lowest unemployment rate and the fastest job growth rate in the country.

According to new data released by the Bureau of Labor Statistics today, North Dakota had an unemployment rate of just 3.3 percent in July—that’s just over a third of the national rate (9.1 percent), and about a quarter of the rate of the state with the highest joblessness (Nevada, at 12.9 percent).

North Dakota has had the lowest unemployment in the country (or was tied for the lowest unemployment rate in the country) every single month since July 2008.

Its healthy job market is also reflected in its payroll growth numbers. . . . [Y]ear over year, its payrolls grew by 5.2 percent. Texas came in second, with an increase of 2.6 percent.

Why is North Dakota doing so well? For one of the same reasons that Texas has been doing well: oil.

North Dakota is the only state to be in continuous budget surplus since the banking crisis of 2008.

Oil is certainly a factor, but it is not what has put North Dakota over the top. Alaska has roughly thesame population as North Dakota and produces nearly twice as much oil, yet unemployment in Alaska is running at 7.7 percent. Montana, South Dakota, and Wyoming have all benefited from a boom in energy prices, with Montana and Wyoming extracting much more gas than North Dakota has. The Bakken oil field stretches across Montana as well as North Dakota, with the greatest Bakken oil production coming from Elm Coulee Oil Field in Montana. Yet Montana’s unemployment rate, like Alaska’s, is 7.7 percent. 

A number of other mineral-rich states were initially not affected by the economic downturn, but they lost revenues with the later decline in oil prices. North Dakota is the only state to be in continuous budget surplus since the banking crisis of 2008. Its balance sheet is so strong that it recently reduced individual income taxes and property taxes by a combined $400 million, and is debating further cuts. It also has the lowest foreclosure rate and lowest credit card default rate in the country, and it has had NO bank failures in at least the last decade. 

If its secret isn’t oil, what is so unique about the state? North Dakota has one thing that no other state has: its own state-owned bank.

Access to credit is the enabling factor that has fostered both a boom in oil and record profits from agriculture in North Dakota. The Bank of North Dakota (BND) does not compete with local banks but partners with them, helping with capital and liquidity requirements. It participates in loans, provides guarantees, and acts as a sort of mini-Fed for the state. In 2010, according to the BND’s annual report:

The Bank provided Secured and Unsecured Federal Fund Lines to 95 financial institutions with combined lines of over $318 million for 2010. Federal Fund sales averaged over $13 million per day, peaking at $36 million in June. 

Over a 15-year period the BND has contributed more to the state budget than oil taxes have.

The BND also has a loan program called Flex PACE, which allows a local community to provide assistance to borrowers in areas of jobs retention, technology creation, retail, small business, and essential community services. In 2010, according to the BND annual report:

The need for Flex PACE funding was substantial, growing by 62 percent to help finance essential community services as energy development spiked in western North Dakota. Commercial bank participation loans grew to 64 percent of the entire $1.022 billion portfolio.

The BND’s revenues have also been a major boost to the state budget. It has contributed over $300 million in revenues over the last decade to state coffers, a substantial sum for a state with a population less than one-tenth the size of Los Angeles County. According to a study by the Center for State Innovation, from 2007 to 2009 the BND added nearly as much money to the state’s general fund as oil and gas tax revenues did (oil and gas revenues added $71 million while the Bank of North Dakota returned $60 million). Over a 15-year period, according to other data, the BND has contributed more to the state budget than oil taxes have.

The state-owned bank allows North Dakota to capitalize on its resources to full advantage.

North Dakota’s money and banking reserves are being kept within the state and invested there. The BND’s loan portfolio shows a steady uninterrupted increase in North Dakota lending programs since 2006.

According to the annual BND report:

Financially, 2010 was our strongest year ever. Profits increased by nearly $4 million to $61.9 million during our seventh consecutive year of record profits. Earnings were fueled by a strong and growing deposit base, brought about by a surging energy and agricultural economy. We ended the year with the highest capital level in our history at just over $325 million. The Bank returned a healthy 19 percent ROE, which represents the state’s return on its investment.

A 19 percent return on equity! How many states are getting that sort of return on their Wall Street investments?

Timothy Canova is Professor of International Economic Law at Chapman University School of Law in Orange, California. In a June 2011 paper called “The Public Option: The Case for Parallel Public Banking Institutions,” he compares North Dakota’s financial situation to California’s. He writes of North Dakota and its state-owned bank:

The state deposits its tax revenues in the Bank, which in turn ensures that a high portion of state funds are invested in the state economy. In addition, the Bank is able to remit a portion of its earnings back to the state treasury . . . . Thanks in part to these institutional arrangements, North Dakota is the only state that has been in continuous budget surplus since before the financial crisis and it has the lowest unemployment rate in the country.

He then compares the dire situation in California:

In contrast, California is the largest state economy in the nation, yet without a state-owned bank, is unable to steer hundreds of billions of dollars in state revenues into productive investment within the state. Instead, California deposits its many billions in tax revenues in large private banks which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state’s own bonds), and do not remit any of their earnings back to the state treasury. Meanwhile, California suffers from constrained private credit conditions, high unemployment levels well above the national average, and the stagnation of state and local tax receipts. The state’s only response has been to stumble from one budget crisis to another for the past three years, with each round of spending cuts further weakening its economy, tax base, and credit rating. 

Not all states have oil, of course (and it’s hardly a sustainable basis for an economy), but all could learn from the state-owned bank that allows North Dakota to capitalize on its resources to full advantage. States that deposit their revenues and invest their capital in large Wall Street banks are giving this economic opportunity away.

This work is licensed under a Creative Commons License

Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest of eleven books, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. She is president of the Public Banking Institute,http://PublicBankingInstitute.org, and has websites at http://WebofDebt.com and http://EllenBrown.com.