Banking on the People

Democratizing Money in the Digital Age

Ellen Brown

• Publisher: Democracy Collaborative
• Year: 2019
• eBook ISBN: 9780998471921
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Today most of our money is created, not by governments, but by banks when they make loans. This book takes the reader step by step through the sausage factory of modern money creation, explores improvements made possible by advances in digital technology, and proposes upgrades that could transform our outmoded nineteenth century system into one that is democratic, sustainable, and serves the needs of the twenty-first century.

Ellen Brown is the founder and chairman of the Public Banking Institute and a Fellow at The Democracy Collaborative.

Part I:
MODERN BANKING: HOW IT WORKS, WHY IT HAS FAILED, AND WHY REGULATION HASN’T FIXED IT

“We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve.”

—Robert Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, 19343

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3 Quoted in Irving Fisher, 100% Money (Foreword), Adelphi Co, 1936, reprinted by Pickering and Chatto, Ltd (now Routledge) (full text online at: fisher-100money.blogspot.fr).

Chapter 1:
THE END OF THE DEBT-GROWTH MODEL

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

—Attributed to American economist Kenneth E Boulding

“We really didn’t see that coming,” said Federal Reserve Chair Janet Yellen in 2016 of the banking collapse that proved to be the most devastating economic crisis of our era.4 Her predecessors Ben Bernanke and Alan Greenspan acknowledged the same thing.5 These highly credentialed economists sat at the apex of the international banking pyramid and had a mandate to provide the nation with a safe and stable monetary system. How could they not see the oncoming steamroller that would collapse the global economy and turn 10 million American families out of their homes?

The answer seems to be that they were looking in the wrong place, working from an obsolete model. The traditional banking system was carefully circumscribed with regulations; but the collapse was not in the traditional banking system. It was in the shadow banking system, where derivatives, repos and securitized financial products hide behind a curtain of obscurity. “Shadow banks” are financial intermediaries that facilitate the creation of credit without being subjected to regulatory oversight.6 This unregulated system is highly unstable and vulnerable to bank runs, creating phantom credit that can be vacuumed up as quickly as it is created. The run on the shadow banks in September 2008 forced massive asset sales at fire sale prices, shrinking the value of assets on the balance sheets of banks, resulting in their technical insolvency. Credit shrank across markets globally, causing the system to collapse in domino fashion.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was one of the largest, most complicated, and most regulatorily burdensome pieces of legislation ever implemented. Yet it too did little to rein in the shadow banking system. The problem is that commercial banks need the shadow banks’ dark pools of liquidity to stay afloat. They are where the rabbits are hidden that banks pull out of their hats when depositors and borrowers come for their money at the same time. But the rabbits are skittish and will run at the first sign of trouble. We need a new source of liquidity (cash-like liquid assets), one that can be relied on to be there on demand.

The conventional economic model overlooks not only the shadow banks but the banking alchemy that makes them necessary. It assumes that banks are merely intermediaries, taking in the money of depositors and lending it out again. But banks create deposits when they make loans, as detailed in Chapter 3. Through the accepted practice of double-entry bookkeeping, banks turn our promises to pay into new money in the form of deposits that did not exist before; and the biggest banks create most of this debt-turned-money. The shadow banks then provide the liquidity needed to balance the banks’ books.

Money created as credit by banks is not actually a bad system. What the banks are really doing is guaranteeing the borrowers’ own credit, turning it into a form of “money” acceptable in the marketplace. But the banks are privately owned and controlled, mandated to serve shareholder profits rather than the broader economy. They are not transparent or accountable to the public. They can speculate and take disruptive risks that can threaten economic stability, while bypassing local businesses and socially beneficial investments.

The bankers’ private privilege of creating the national money supply is also a major factor in the widening gap between rich and poor. According to a January 2017 report by the New Economics Foundation titled “Making Money from Money,” 73 percent of the burgeoning profits of banks arise from the unique right to create money on their books.7 The result is a government-supported monopoly that drains resources from the productive economy and gives a megalithic international banking empire enormous power over people and governments.

Marching to the Drums of Wall Street

Much of the problem with the current system can be traced to the US Federal Reserve. Ever since the 1970s, the Fed and other central banks have declared their independence from political control; but independence has really come to mean a central bank that has been captured by very large banking interests. The Fed might be independent of oversight by politicians, but it is not a neutral arbiter. This has not always been the case. According to Timothy Canova, Professor of Law and Public Finance at Nova Southeastern University, during the Great Depression and coming out of it the Fed as a practical matter was not independent but took its marching orders from the White House and the Treasury; and that decade, he says, was the most successful in American economic history.8

Today, however, Wall Street largely calls the shots. Commercial banks actually own the stock of the twelve Federal Reserve Banks, which are organized as private corporations. This stock does not carry the control given to holders of common stock in for-profit organizations and may not be sold or pledged as collateral, but it does pay a yearly dividend and carries voting rights. Member banks appoint six of the nine members of each Bank’s board of directors and have a vote in the election of the Reserve Bank presidents.9

These privately elected presidents, in turn, serve on the Federal Open Market Committee (FOMC), which sets national monetary policy. The FOMC includes the seven-member Federal Reserve Board of Governors, the president of the New York Fed, and four other Reserve Bank presidents on a rotating basis. As of October 2018, three positions on the Federal Reserve Board were vacant, leaving the Reserve Bank presidents in majority control of the FOMC’s policy decisions. (One position was filled on a temporary basis in late November.) The FOMC’s decisions have major implications for the public, yet the public is completely shut out of the process of choosing the decision-makers.10

The Federal Reserve Board in Washington, D.C. is appointed by the president and is considered “federal,” including being subject to Freedom of Information Act requests as are other federal agencies. But the regional Federal Reserve Banks ...

Table of contents

• Copyright
• Contents
• Introduction: AN AUSPICIOUS TIME FOR A BANKING REVOLUTION
• Part I: MODERN BANKING: HOW IT WORKS, WHY IT HAS FAILED, AND WHY REGULATION HASN’T FIXED IT
• Chapter 1: THE END OF THE DEBT-GROWTH MODEL
• Chapter 2: THE NEW FACE OF BANKING: FROM GEORGE BAILEY’S SAVINGS AND LOAN TO PROPRIETARY TRADING AND DERIVATIVES
• Chapter 3: SLEIGHT OF HAND IS ESSENTIAL TO MODERN FINANCE
• Chapter 4: THE ELEPHANT IN THE ROOM: THE SHADOW BANKING SYSTEM
• Chapter 5: FIXES THAT FELL SHORT: TARP, QE AND DODD-FRANK
• Chapter 6: TEN YEARS AFTER THE CRISIS: STILL FIGHTING THE LAST WAR
• Part II: BANKING THAT WORKS FOR THE PEOPLE
• Chapter 7: TO DOWNSIZE OR NATIONALIZE? ANOTHER LOOK AT THE PUBLIC OPTION
• Chapter 8: MONETIZING LOCAL CREDIT WITH PUBLICLY OWNED BANKS
• Chapter 9: THE RADICAL ANARCHIST SOLUTION: BYPASSING GOVERNMENT AND BANKS WITH CRYPTOCURRENCIES
• Chapter 10: FROM COMMODITY MONEY TO MUTUAL CREDIT: THE COMMUNITY CURRENCY MODEL
• Chapter 11: ASIAN PAYMENT AND CREDIT ECOSYSTEMS: HOW CHINA AND INDIA ARE DISRUPTING THE TRADITIONAL BANKING MODEL
• Chapter 12: CENTRAL BANK DIGITAL CURRENCIES: PROMISE OR THREAT?
• Chapter 13: A CENTRAL BANK FOR MAIN STREET: DEMOCRATIZING THE FED
• Chapter 14: WHAT THE FED COULD DO WITH ITS NEW TOOLS: ENGINEERING A DEBT JUBILEE
• Chapter 15: “QUALITATIVE EASING”: INJECTING MONEY DIRECTLY INTO THE VEINS OF THE ECONOMY
• Chapter 16: HOW TO FUND A UNIVERSAL BASIC INCOME WITHOUT INCREASING TAXES OR INFLATION
• Chapter 17: ELIMINATING THE INCOME TAX AND POPPING THE FINANCIALIZATION BUBBLE
• Conclusion: RE-ENVISIONING MONEY: BANKING THAT EMPOWERS THE PEOPLE
• Appendix: THE TRIAL AND ERROR EVOLUTION OF THE AMERICAN MONETARY SYSTEM
• GLOSSARY
• About The Author
• About The Democracy Collaborative