Ellen Brown on the Case for a Public Credit System
"The flaws in the current scheme are now being exposed in the major media, and it may well be coming down. The question then is what to replace it with. What is the next logical phase in our economic evolution?
Credit needs to come first. We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest. We can avoid the pitfalls of privately-issued credit with a public credit system, a system banking on the future productivity of its members, guaranteed not by “things” shuffled around furtively in a shell game vulnerable to exposure, but by the community itself.
The simplest public credit model is the electronic community currency system. Consider, for example, one called “Friendly Favors.” The participating Internet community does not have to begin with a fund of capital or reserves, as is now required of private banking institutions. Nor do members borrow from a pool of pre-existing money on which they pay interest to the pool’s owners. They create their own credit, simply by debiting their own accounts and crediting someone else’s. If Jane bakes cookies for Sue, Sue credits Jane’s account with 5 “favors” and debits her own with 5. They have “created” money in the same way that banks do, but the result is not inflationary. Jane’s plus-5 is balanced against Sue’s minus-5, and when Sue pays her debt by doing something for someone else, it all nets out. It is a zero-sum game.
Community currency systems can be very functional on a small scale, but because they do not trade in the national currency, they tend to be too limited for large-scale businesses and projects. If they were to grow substantially larger, they could run up against the sort of exchange rate problems afflicting small countries. They are basically barter systems, not really designed for advancing credit on a major scale.
By turning banking into a public utility, profits generated by the community can be returned to the community. The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.
A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.
State-owned banks could be a way for states to bypass Wall Street, balance their budgets, and get local economies moving.
For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see public-banking.com.]
We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance." (http://www.yesmagazine.org/new-economy/time-for-a-new-theory-of-money)
Daily Bell: For those new to this subject, what is Web of Debt’s main thesis?
Ellen Brown: The thesis is that the power to create money has been usurped by a private international banking cartel, which issues our money as debt and lends it back to us at interest. The cartel makes it appear that governments are creating our money, and governments get blamed when things go wrong; but they are actually just pawns of the cartel. We the people can get back our government and our republic only by reclaiming the power to create our own money. We can use the same credit system that private banks use, but administered as a public utility, monitored and overseen by public servants on the model of libraries and courts. To be a sustainable system, profits need to be returned to the community rather than siphoned off into private coffers.
Daily Bell: Can you expand on debt-based money versus money that is issued into the economy without debt – and why the latter is preferable. Some would say the latter exercise comes with debt as well …
Ellen Brown: I don’t think debt is necessarily bad. The flip side of debt is credit, which is a very good thing. Inventing credit is probably the most innovative thing bankers ever did. But because the Italian bankers who first came up with that scheme were on a gold-based system, they had to do it essentially by cheating, pretending to have more money than they actually had. There would be periodic runs on the banks and the system would collapse. A public banking system would acknowledge credit to be just a legal agreement to pay over time. Creditworthy borrowers would get credit. Their access to credit needn’t be contingent on someone else’s agreement to give it up. The system would be mathematically sustainable.
Daily Bell: Let’s back up. You believe that gold and silver only circulated as money once government got involved? True? Can you expand on this?
Ellen Brown: I think that’s true by definition. Webster’s dictionary defines a “coin” as “a usually flat piece of metal issued by governmental authority as money.” Wikipedia says: “King Croesus, ruler of Lydia (560–546 BC), began issuing the first true gold coins, . . . with a standardized purity, for general circulation. They were quite crude, and were made of electrum, a naturally occurring pale yellow mixture of gold and silver.”
Daily Bell: Why do you believe that government is superior to the free market?
Ellen Brown: Why do you believe that I believe government is superior to the free market? I believe government is necessary to have a free market. Otherwise you have the law of the jungle, the exploitation of the weak by the strong.
Daily Bell: Do you believe that government is effective at all levels big and small?
Ellen Brown: Without meaning to be rude, I have to say I’m slapping my forehead at some of these questions. Government can be effective at a variety of levels. Not all government is effective. Some government is very ineffective. It depends largely on the political structure.
Daily Bell: Do you believe in central banking so long as it is publicly controlled?
Ellen Brown: A publicly-owned central bank can be very effective in serving the people. The Commonwealth Bank of Australia is my favorite model. Not all publicly-owned banks, however, are effective for that purpose. I often hear British money reformers complaining that the publicly-owned Bank of England is still serving the interests of the private banking establishment, just as when it was private. It is public in name only.
Daily Bell: Do you believe that government was responsible for a good deal of mayhem in the 20th century?
Ellen Brown: Sure, but somebody manipulates governments into wars and other mayhem. I believe a government could be structured so that it actually served the people; but first, it would have to recapture control of its monetary system. Few governments are in that position today.
Daily Bell: How can anyone know how much money is enough money? Or when to stop lending in your paradigm?
Ellen Brown: Lending is an organic process, responding to the needs of the borrowers. Contrary to popular belief, banks do not lend their own money or their depositors’ money; they create new money on their books every time they make a loan. I think lending is a much more natural and efficient way to get new money into the money supply than to have an independent body trying to dictate what the economy needs. But private banking institutions have proven they cannot be trusted with this powerful tool. Except for coins, which are a very marginal part of the money supply, all money today is just credit – the credit of the people. It should be a public utility, administered through publicly-owned banks.
Daily Bell: Won’t your paradigm end up injecting too much money into the economy nonetheless?
Ellen Brown: No. Loans grow organically in response to the demands of trade, and that credit-money disappears when the loans are paid off. When demand for loans is low, the money supply shrinks naturally. You may be thinking of the paradigm of another school, which in your last article you referred to as representing a “Brownian Schism.” I’m flattered, but they actually came first.
Daily Bell: How will you value the land and other goods used to secure the loan?
Ellen Brown: Just as bankers do now. I’m not talking about putting politicians in charge of running the banks. Publicly-owned banks are run by bankers, just as privately-owned banks are. See, e.g., the very well run Bank of North Dakota. The Commonwealth Bank of Australia worked so well because it was set up by a professional banker who decided to apply his insider knowledge to serve the public interest. Knowing that banks simply created credit on their books, he proceeded to finance massive infrastructure with this sort of book-created credit – and it worked, brilliantly well.
Daily Bell: What makes you think that a government based public money system wouldn’t be taken over by powerful private forces just like this one has been? We call it mercantilism. If you give government power, won’t the wealthiest end up with their hands on the levers of government?
Ellen Brown: That hasn’t happened in North Dakota, which currently has the only state-owned bank in the country. Certainly a public institution that returns its profits to the public, which has full public accountability and transparency, and employs civil servants who make no bonuses or commissions for churning loans, has a better chance of serving the public than the corrupt private system we have now.
Daily Bell: Would you be in favor of one world government?
Ellen Brown: Definitely not of the sort projected by that group. I think national and state sovereignty is very important, particularly in matters of money. But the internet and global trade are increasingly bringing us closer together, and we probably do need some sort of international rules to keep things running smoothly. For example, I think there needs to be a global yardstick for measuring the value of currencies against each other – not the “floating” exchange rates we have now, which are subject to speculative manipulation, but something based on the real cost of goods and services in each country. I have a chapter on that in Web of Debt, including a proposed model.
Daily Bell: OK, thanks for answering the tough questions again. How is your movement doing?
Ellen Brown: Very well, thank you! I did two presentations in the California Bay Area in December, which generated so much interest that we have just launched a Public Banking Institute to follow though. The website is http://www.publicbankinginstitute.org." (http://2020speculator.wordpress.com/2011/01/17/really-good-discussion-on-public-banking/)