U.s. Monetary Policy — Seeking Workable Alternatives
Does The Status Quo Really Work Well?
Most observers of America’s economic plight would agree there is no well articulated situation of strategies which have the intellectual force to reorient dysfunction in our monetary policies at the Federal or State level. They throw up their hands and whine, “What can be done to remove the stigma of being an insolvent nation/state, borrowing from every source available to service our debts and finance our budgets? ” They complain, “We have an ambitious Presidential social program to fund or not, a war to prosecute, myriad other claims on taxpayers and the printing press. They wring their hands while bemoaning the arguable reporting that unemployment has skyrocketed to 17% rather than the genuine 25% that will go higher before August, 2010. Add to these, recent announcements that banks are going under at a rate higher than during the Savings and Loan Scandal of the slack ’80s.”
Those of us who know better ask, “Have we been well served by today’s monetary policy? ” The Administration’s experts need to answer the corollary question, “How’s this “Free Market Capitalism” working for most Americans right now? They’ll likely respond with a great deal of equivocation; it’s temporary, the economy is sound, we’re in a short-term down trend, etc. However, real incomes have not increased in 15 years, is that considered short-term? The economy has been deflating for two years. Is that short-term? What then are the alternatives and who will decide to spend them?
For almost 100 years we have allowed our monetary policy to be managed by private banks,¹ these banks have steered us away from their doors when we seek relief for tight credit or other financial events which force this nation to its knees. The private central bankers have the media, academia, and elected officials chanting the mantra indeed exhorting all that the only alternatives rectifying economic dislocation are to raise or cut taxes and/or increase or lop programs. Yet, supporters on the right and left of these policy prescriptions are quick to call upon the private central bank (Federal Reserve) to assist with its sleight of hand to bailout only banks and other private financial businesses. Despite its having been the considerable, cause through its mismanagement of its oversight responsibilities. This fact, that the Central Bank creates these financial calamities, escapes the public, and is swept under the carpet by elected officials who by and large are re-elected by the financial sector.
Why Not A Better Alternative?
In modern America, (the first era of financial globalization and bond finance 1870-1913) monetary policy was driven by private institutions with the exception of the all too brief period (1862-1870) when President Lincoln and his successors issued debt free “Greenbacks.” While the various National and State chartered banks issued currency and were by-and-large privately owned and managed, the private supply of money created by these banks was not an orderly process and owners could constrain supply or flood markets as they wished. Currency speculators were ever eager to capitalize on broken-down money systems in those states where banks issued both paper currency backed by the State as well species backed currency.
Over time private sector control of national financing has serious disadvantages for relative prices as seen in the graph below.
oregonstate.edu/cla/polisci/faculty-research/sahr/sumprice.pdf
The need for structural reorientation means a significantly different residence of policies which do not create or add to existing shortcomings of current policy. It means that there must be short-run mechanisms which relieve current problems and reduce the likelihood of recurrence in the long-run. This structural reorientation must not only ameliorate economic dysfunction in this society it must be the foundation for the broader participation of Americans in the socio-economic progress of this society.
We can have free market capitalism for the 21st century but it must be designed to correct the inherent flaws of free market avidity of this first decade. Doing so requires (but will not be attempted herein) that we:
A. Assess fundamental concepts of what makes capitalism and free markets work.
B. Mediate the political complexities in which a more efficient alternative must be
managed, and
C. Ensure a Constitutional framework within which any unique alternative must be guided.
There are alternative theoretical treaties containing which lead us to a better understanding of what needs to be favorite in gripping to a more rationale set of operational monetary policies. Some of these contributions to the public discussion on monetary policy have not been championed sufficiently for them to gain currency in this society.
For instance “The Austrian School of Economics”, Joseph Schumpeter, and F. A. Hayek’s, writing on ‘Inflation and the Welfare State.’ And Dr. Ellen H. Brown’s seminal work, “The Web of Debt.” These authors demonstrate alternative monetary policy choices that support as counterpoints to longstanding, received wisdom on both monetary and fiscal policies of Keynesian and Supply Side proponents.
While these ideas are based on real world environments where monetary policy choices are presented to leadership, they are not part of the alternatives from which decisions makers are asked to consider. They are known by the advisors but marginalized as “over the top” or “politically impractical”. These economic counselors to Presidents and Prime Ministers know full well the viability of all alternatives.
For instance, in this society monetary policy drives fiscal policy. The structural underpinnings reinforced by 97 years of private sector control have not created the promised relief from the vicissitudes of recession, inflation, depression and devaluation. At the very basic level of causation there is the inquire of “who decides who decides? ” If the supply of money is to be expanded or contracted, who decides? Congress may authorize the expenditure of funds but unless they are available from the Treasury through the private central bank they are not expended until someone decides to make them available. Will they be made available to the government via the Central Bank interest free? And if not what will taxpayers be charged for having access to fiat money? That decision is fundamental to the operation of any society. The wheels of a free market can advance to a grinding halt if private central bank decisions are delayed or not made at all. Capitalism ceases to produce progress driven by “free market” principles. Progress then becomes dependent upon the public sector creating deficits and in combination—tenants of capitalism and socialism—public and private monetary control, merge, creating corrective mechanisms through public sector intervention, which forces the resumption of the supply of funds at interest. But is this the most efficient way to fund the commons?
In the above graph inflation is relatively flat from 1665-1905 escalating only after the creation, in 1913, of the privately owned Federal Reserve System. And then, in 1973 after President Nixon took the dollar off the gold standard. [Source the office of National Statistics.} In every post, 1913 financial crises, the government has had to authorize massive deficits to rectify the credit tightening of the Federal Reserve System. Or, conversely, mandate increases in interest rates to eliminate excessive liquidity and inflation.
Keynesian and Supply Side monetary policies fail to produce a workable solution without also making matters worse. What then can be done absent a new and accepted theoretical construct that points the plot to a solvent economy; stable supply of money, fundable fiscal policy, elimination of debt and monetary manipulation by profiteers, etc.?
It may just be that we address one fundamental pickle that we know breeds multiple consequences. For all that has preceded, we can with some certainty point to the creation of national debt as a constraint on national progress. John Adams said it best when he declared, “There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
Our national debt, then, is the single most destabilizing component of this society. At some point in the very arrive future leaders will have to inform the public of that fact and tell us that we have an emergency. Gathering, as I write this, are powerful interests intent on delivering this nation to the IMF’s strictures in collaboration with and the support of interests within and in control of the Bank of International Settlement. It will not sit well with Americans to learn, in the very near future, that our monetary policy will henceforth be dictated to us by these institutions. To avoid this Third World status our leaders and economists must use emergency management strategies to win us from the abyss of debt and rend us from the clutches of the aforementioned institutions.
Towards Workable Solutions
There are two strategies that have been made popular over the past two years which can meet the criteria of restoring solvency, eliminating future debt, staving off inflation and devaluation, and creating a new environment for the survival of financial institutions sans taxpayer bailouts.
- Monetize Debt Without Inflation
Is this possible? Yes, despite what the Federal Reserve asserts. The process is fairly straightforward. We can look at what Abraham Lincoln and JFK did to avoid the standard inflationary impact of debt monetization. In 1862 Lincoln issued $150 million in Greenbacks, legal tender backed by the full faith and security of the Union. Greenbacks replaced most other currencies except gold and silver, and were not prone to counterfeiting. When the Union issued these Greenbacks in payment for goods and services it did not charge itself interest. Nor did it flood markets its new currency. While there was inflation it was primarily the result of scarcity not excessive liquidity. By comparison the Confederacy witnessed hyperinflation with its currency since it was easily counterfeited and there were over 100 banks issuing there own currency, all of which competed with very scarce supplies of gold and silver.
President Kennedy, in June, 1963 issued $3.4 billion in Silver Certificates which were intended to drive out Federal Reserve Notes (FRNs) and therefore eliminate any chance of inflating the economy. Unfortunately, JFK did not live to see this happen. Two days after his assignation President Johnson ordered all Silver Certificates withdrawn from circulation. Nonetheless, the recount is clear. The objective was to monetize the debt, and liquidate FRNs and all Treasury securities denominated for payment with FRNs.
President Obama has the same authorities know that Lincoln and Kennedy had in their time. He can employ emergency powers or the power of the Executive to Order implementation of a policy that serves the security and safety of the nation.
The first emergency measure that could be invoked is a revised version of Executive Order 11110. That E.O. gave President Kennedy among other policy choices, authority to monetize debt owned by the government.
Additional Congressional authority/legislation was not needed but Congressional concurrence was sought and received. The essential authority of that E.O. follows:
“Executive Order 11110 AMENDMENT OF EXECUTIVE ORDER NO. 10289 (relevant section)
(j) The authority vested in the President by paragraph (b) of section 43 of the Act of May 12, 1933, as amended (31 U.S.C. 821(b)), to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, to prescribe the denomination of such silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption.
John F. Kennedy The White House, June 4, 1963.”
In essence this E.O instructs the Secretary of the Treasury to liquidate all Treasury securities when redeemed. This instruction is critical to the strategy. It leaves M3 unchanged and eliminates the threat of inflation.
For example, the initial issue of $30 trillion of silver certificates, or even a new “fiat” currency called “U.S. Dollars” backed as the FRN is backed now by the “good faith and credit of the U.S.” would monetize our debt and provide funding for needed domestic, international and defense programs.
Since we have 30-40 million Americans un- and under employed the fresh issue would continue until full employment was reached and, thereafter, M3 would be increased based on the ratio of GDP growth and/or growth in the total number of hours worked annually by the nations labor force.
There are many benefits flowing from this strategy. The first of which is solvency. By definition debt service payments are eliminated and could eliminate the need for corporate and individual income taxes. Additionally, the value of our currency would be reestablished, devaluation would not recur since there would be no inflationary stimulus in the monetary system, with the possible exception of unchecked fractional reserve lending policies. These can be constrained by the second strategy summarized below. (For a full discussion of this alternative please visit: www.webofdebt.com)
2. 49 States Need Recovery
Balanced budget requirements at the position level has not been easily obtained. Only two states will meet their budgets in FY 2110: Montana and North Dakota. Montana’s success arises from energy exploitation. North Dakota’s is institutional. North Dakota owns a State Bank. The details are contained in this excellent review by Dr. Ellen H. Brown, J.D. in her article written for Truthout.com. I have edited the article.
“Pouring money into the private banking system has only fixed the economy for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans rep themselves in.
The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and puny businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to whine sound financial services that promote agriculture, commerce and industry in North Dakota.
The Advantages of Owning Your Own Bank
So, how does owning a bank solve the state’s funding problems? Isn’t the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of “fractional reserve” lending
- the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier carry out that can ultimately lead to a faster creep of economic growth.“
It can, but it hasn’t recently, because private banks are limited by bank capital requirements and by their for-profit business models. And that is where a state-owned bank has enormous advantages: States own huge amounts of capital, and they can think farther ahead than their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by over sized salaries and bonuses; they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.
The Bank of North DakotaCalifornia, the State of California owns about $200 billion in real estate, has $62 billion in various investments and has $128 billion in projected 2009 revenues. Leveraged by a factor of eight, that capital base could support nearly $4 trillion in loans. (BND) is set up as a dba: “the State of North Dakota doing business as the Bank of North Dakota.” Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to
To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital required for a typical California bank is only about $20 million. This is small potatoes for the world’s eighth largest economy, and the money would not actually be “spent.” It would honest become bank equity, transmuting from one form of investment into another – and a lucrative investment at that. In the case of the BND, the bank’s return on equityCalifornia could do substantially better than that. California pays $5 billion annually unbiased in interest on its debt. If it had its own bank, the bank could refinance its debt and return that $5 billion to the state’s coffers; and it would make substantially more on money lent out. BND’s return on equity is about 25 percent. It pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a billion dollars to the state’s general fund, offsetting taxes.
Besides capital, a bank needs “reserves,” which it gets from deposits. For the BND, this too is no jam, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the site in the form of loans.
Public Banking on the Central Bank Model
The BND’s populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a “bankers’ bank.” It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk and buy down the interest rate.
One of the BND’s functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in slack 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks’ books for more loans. But these “shadow lenders”North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.
Other services the BND provides include guarantees for entrepreneurial startups and student loans, the hold of municipal bonds from public institutions and a well-funded disaster loan program. When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by Recent Orleans in similar circumstances; and when North Dakota failed to meet its dwelling budget a few years ago, the BND met the shortfall. The BND has an myth with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself – a prudent move today, when the FDIC is verging on bankruptcy.
The Commercial Banking Model: The Commonwealth Bank of Australia
The BND studiously avoids competition with private banks, but a publicly-owned bank could profitably engage in commercial lending. A successful model for that approach was the Commonwealth Bank of Australia, which served both central bank and commercial bank functions. For nearly a century, the publicly-owned Commonwealth Bank provided financing for housing, dinky business, and other enterprise, affording effective public competition that “kept the banks impartial” and kept interest rates low. Commonwealth Bank put the needs of borrowers ahead of profits, ensuring that sound investment flows were maintained to farming and other valuable areas; yet, the bank was always top-notch, from 1911 until nearly the end of the century.
Indeed, it seems to have been too profitable, making it a takeover target. It was simply “too splendid not to be privatized.” The bank was sold in the 1990s for a good deal of money, but its proponents consider its loss as a social and economic institution to be incalculable.
A State Bank of Florida?
Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:
“For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6 percent for CDs, and make mortgage loans at 2 percent. For $6 per year in interest paid out, the BSF can score $18 by lending $900 at 2 percent for mortgages.”
The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700, while the homeowner would save $88,000 in interest and pay for the home 15 years sooner. “Our bank will establish people about seven years of their pay over the course of 30 years, just on interest costs,” says Dr. Khavari. He also proposes 6 percent credit cards and 6 percent certificates of deposit.
The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its gain debts and those of its municipal governments at very extreme interest rates. According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can get projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable, but profitable for the state, while at the same time creating much-needed jobs.”*
_______________________________________________
*Ellen Brown, October 31st, 2009
http://www.webofdebt.com/articles/cut_wallstreet.php
Conclusion
Combining these two strategies, monetization of National public debt and chartering State owned banks, could accomplish a sustainable national monetary system in our economy. Because these strategies can be implemented under emergency authority there should be every effort to commence a national dialog comparing the benefits of these strategies to the status quo. We have little time in which to engage in debate and must consider how and what must be done to shorten the negative effects of the current crises.
Three hundred and fifteen million people are being wrenched, and then tossed into the abyss of perpetual debt slavery, by the myopia of original monetary policy.
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Filed under Stock Bankruptcy by on May 28th, 2011. 
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