People’s Ledger

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* Article: The People’s Ledger: How to Democratize Money and Finance the Economy. By Saule Omarova. Vanderbilt Law Review, Volume 74, Number 5, October 2021.

URL = [pdf]

Citation: Saule T. Omarova | 74 Vand. L. Rev. 1301 (2021)


Saule Omarova:

"This Article .. offers a blueprint for a comprehensive restructuring of the central bank balance sheet as the basis for redesigning the core architecture of modern finance. Focusing on the U.S. Federal Reserve System (“the Fed”), the Article outlines a series of structural reforms that would radically redefine the role of a central bank as the ultimate public platform for generating, modulating, and allocating financial resources in a democratic economy—the People’s Ledger.

On the liability side of the ledger, the Article envisions the complete migration of demand deposit accounts to the Fed’s balance sheet and explores the full range of new, more direct and more flexible, monetary policy tools enabled by this shift. On the asset side, it advocates a comprehensive qualitative restructuring of the Fed’s investment portfolio, which would maximize its capacity to channel credit to productive uses in the nation’s economy. This compositional overhaul of the Fed’s balance sheet would fundamentally alter the operations and systemic footprints of private banks, funds, derivatives dealers, and other financial institutions and markets. Analyzing these structural implications, the Article shows how the proposed reforms would make the financial system less complex, more stable, and more efficient in serving the long-term needs of the American people."



Ellen Brown:

"Those questions were addressed by Prof. Omarova in an October white paper titled “The People’s Ledger: How to Democratize Money and Finance the Economy,” which does an excellent job of laying out the issues. She has been criticized for saying that the system she was proposing would “end banking as we know it,” but she clarified in that paper that she did not mean that private banks would disappear. They would just revert to being what they profess to be: intermediaries between depositors and borrowers. As the Bank of England has confirmed, today banks are not merely intermediaries. They actually create the money they lend as deposits on their books. In fact most of the circulating money supply is created in that way.

In Omarova’s model, the pooled deposits would be held at the Fed and would be borrowed by “qualifying lending institutions” (chiefly banks) from the Fed’s discount window at preferential rates. This idea is not so radical as it sounds. Banks have traditionally met their liquidity needs by borrowing deposits (“reserves”) from each other through the federal funds market. But that mechanism broke down in the 2008-09 credit crisis, because banks no longer trusted each other to be good for the loans.

Pooling deposits at the Fed, wrote Omarova, would eliminate the threat of bank runs (since the Fed’s deep pocket cannot run dry) and the threat of “bail-ins” (confiscation of private funds to recapitalize failed “too big to fail” banks, a requirement of the 2010 Dodd-Frank Act). It would also eliminate the need for massive bank regulation and “stress tests” to ensure adequate capital and liquidity, and the need for FDIC insurance, “ending the intractable TBTF problem.” It would stem the troubling wave of bank consolidations in order to acquire deposits; stem speculative trading by banks and hedge funds in financial instruments; shrink the derivatives casino to a small private market; and end the need for the Fed to engage in massive repo operations. The reasons are complicated, but Omarova explains them at length in her paper.

Private lending institutions could still take investor funds and make loans, but they would be “narrow banks” or “mutual funds,” limited to lending only the money they actually had. They could not create money on their books but would be “mere intermediaries” as they purport to be now.

Free FedAccounts for all would solve other pressing problems: they would service the unbanked and underbanked, would pay interest on deposits, and would avoid the sort of widespread failure to get timely relief payments to recipients seen in the 2020 crisis. For servicing depositors, says Omarova, community banking institutions (CBIs) could be licensed to assist.

Postal banks or local public banks (if we had them) would be other good alternatives. During the Great Depression of the 1930s, federal postal banking was a very popular public option, and there is renewed interest today in restoring that system.

As interesting as the deposit (liability) side of the Fed’s ledger is, what could be done on the asset (or loan) side. Omarova calls it “The People’s Ledger.” Her white paper begins:

In 1896, William Jennings Bryan delivered his historic “Cross of Gold” speech, making a passionate plea for a monetary system that served the interests of the working people and increased the nation’s prosperity. Today, the precise contours of that political ideal are once again intensely contested. After decades of rising inequality, systemic instability, and relentless concentration of economic power, ordinary Americans are demanding a greater say in the distribution and use of financial resources. The Reddit-fueled GameStop rally, the dramatic rise of Bitcoin and other cryptocurrencies, the “universal basic income” and “public banking” movements—these are all discrete manifestations of the broader quest for more equitable and inclusive modes of finance.

Ultimately, however, it takes a system to beat a system.

This Article takes up the challenge of “beating” the currently dysfunctional U.S. financial system by reimagining its fundamental structure and redesigning its operation. It offers both a conceptual framework for analyzing the core structural dynamics of today’s finance, and a blueprint for reform that would radically democratize access to money and control over financial flows in the nation’s economy. [Citations omitted.]

Today, private banks rather than publicly accountable financial institutions are the chief creators of a national currency backed by “the full faith and credit of the United States.” The banks and their prime customers get the advantage of the “Cantillon effect”: those closest to the source of new money benefit first and most handsomely. They get the money cheaply and have control over where it goes. They can leverage it and speculate with it, pocketing the “seigniorage” as their own private profit; and they have no public mandate to invest it in a way that serves the people. Newly created money goes into speculative ventures, driving up demand without increasing supply, resulting in bubbles and busts, inflating consumer prices and widening the “wealth gap.”

A “People’s Ledger,” says Omarova, can limit the loans created with our deposits to truly productive endeavors. Under her proposal, “the Fed’s principal asset holdings would fall into three categories: (1) redesigned ‘discount window’ loans to qualifying lenders; (2) securities issued by existing and newly created public instrumentalities for purposes of financing large-scale public infrastructure projects; and (3) an expanded portfolio of trading assets maintained for purposes of financial-market stabilization.” Banks could still finance “non-qualifying” loans, but it would be “by issuing corporate debt and equity securities in capital markets, much in the same way as other corporations do.”

She clarifies that the Fed would not be making direct investment decisions, easing the current pressure on it to use its balance sheet for political purposes. Individual and business loans would be made by “qualifying lending institutions” drawing their liquidity from the Fed’s discount window. Loans characterized as “national development” would be made by an independent public institution she calls the National Investment Authority, “envisioned as the modern-day equivalent of the Reconstruction Finance Corporation (‘RFC’), the New Deal-era public institution that successfully led a massive nationwide capital mobilization campaign to aid Depression-struck sectors of the American economy.” That role could also be filled by the National Infrastructure Bank currently proposed in HR 3339, which is also modeled on the RFC.

What of Prof. Werner’s concerns about the centralization of power under a central banking system? His proposed solution is to reverse that agenda and decentralize power, by abandoning the big banks and supporting local not-for-profit community banks. This could also be done with decentralized cryptocurrencies. But it will be hard for either approach to gain the consumer and commercial confidence commanded by the U.S. dollar.

Omarova writes:

- In part, depositors’ privacy concerns should be alleviated by (1) the continuing availability of physical cash, and (2) the CBI option for deposit services.A more complete solution, though, would likely require technology enabling sufficiently anonymous digital-dollar payments, subject to amount limitations and other conditions necessary to prevent criminal transactions. [Emphasis added.]

If Chairman Powell is indeed bucking the “globalists,” as Luongo contends, the Fed is likely to need its own CBDC to compete with the PBOC’s digital yuan and retain the U.S. dollar’s status in global markets. There are clearly reasons for concern, but if a program can be designed that protects against the risks perceived by its critics, a CBDC could be a powerful tool for “democratizing” money and credit; and Omarova’s academic paper lays out how this could be done. She argues that removing private banks from their privileged position as money creators and returning them to their traditional role as specialized intermediaries would return markets to their original state of “freedom.”


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