7 Questions About Public Banking

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7 Questions About Public Banking

7 Questions About Public Banking

This is an open letter to the economics, finance and banking communities. I don't have any dog in the fight, other than to figure out and then publicize what is best for the greatest number of people. People I greatly respect advocate for federal-level public banking, state public banks or a return to the gold standard. I am simply attempting to start a high-level debate about what the best option is.

Please see responses posted by economists and others below.  I will update the responses as I receive them.

 

http://www.zerohedge.com/article/7-questions-about-public-banking

From the essay, the questions:

1. Do you agree that banks create credit by initiating loans, and then obtaining deposits subsequently, to comply with depository requirements? I'm not talking about the coins which governments create (in America, coins represent less than 5% of the total money in circulation).

2. Do you agree with Eccles and Hemphill that money is debt, in that new credit normally comes into existence when a new loan is issued?

3. Do you agree with Greider that the American Constitution and/or the inherent right of sovereign nations gives the government the power and authority to itself create credit?

4. Do you agree with Greider that such government creation of credit need not be inflationary so long as only as much credit is created as is needed by the economy - in other words, the amount actually needed to buy goods and services?

5. Several monetary commentators have said that - if credit is created primarily by the government instead of private banks - that it would save the government trillions of dollars in interest. Specifically, they claim that private banks charge interest to the government to fund the government's debt, but that the government would owe no debt on credit it creates itself. Is that true? What Is the Best Public Banking Option?

6. Do you think a federal, state or local public banking option is best?

7. Is there any way to have a hybrid monetary system which provides the benefits of public banking with the fiscal discipline which something like a gold standard imposes?

----------------------------------

I highly recommend this essay. First and foremost, it ties in a lot of what Chris speaks of with money supply and money growth. Second, there are some very strong deflationary arguments (I tend towards inflation for the record) that are quite compelling and worth at least contemplating. 

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Re: 7 Questions About Public Banking

For the record, the opening statement is part of the essay and are not my words. My comments come at the end. 

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Re: 7 Questions About Public Banking

FYI. PeakProsperity.com and Erik Townsend made the video of the Still Report, which is one of the videos posted in this web essay. 

Congrats Erik! 

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Re: 7 Questions About Public Banking

Thanks Morpheus, I'm a big fan of the Still Report. 

Your last post (#2) about the "salted gold" is a great example of the value of an interactive media.  Let's face it, we get a bunch of un-named sources, hearsay, and maybe some wild speculation that expands a few small facts.  That makes it really hard to figure out what's happening.

A good thread allows us to gather information and even though we may still not know what exactly is going on, it can help us filter, coalesce and define what needs to be known.

I agree, kudos to Erik, he always seems to keep a thread on track - and the tungsten thing was a toughy.

Larry

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Re: 7 Questions About Public Banking

Pete & Larry,

Thanks for the kind words. I do appreciate the spirit in which they were offered, but honestly I was disappointed that I "got famous" in this particular way.

We have a heck of a lot of really informed, intelligent conversations on this site. The Tungsten Gold thing was a bit of a hype story that I did feel needed to be discussed, but I knew going in that it was primarily going to be a matter of separating the hype from the reality, and trying to get down to what small about of real basis for concern might exist in a story that was obviously mostly hype.

I'd feel much more honored if some of the other, more serious discussions and debates that I've participated on in these forums had "made the news", so to speak. But at the end of the day, if it helps Chris draw more public attention to the site, I'm all for it.

Erik

 

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Re: 7 Questions About Public Banking
ErikTownsend wrote:

Pete & Larry,

Thanks for the kind words. I do appreciate the spirit in which they were offered, but honestly I was disappointed that I "got famous" in this particular way.

We have a heck of a lot of really informed, intelligent conversations on this site. The Tungsten Gold thing was a bit of a hype story that I did feel needed to be discussed, but I knew going in that it was primarily going to be a matter of separating the hype from the reality, and trying to get down to what small about of real basis for concern might exist in a story that was obviously mostly hype.

I'd feel much more honored if some of the other, more serious discussions and debates that I've participated on in these forums had "made the news", so to speak. But at the end of the day, if it helps Chris draw more public attention to the site, I'm all for it.

Erik

 

That's exactly what went through my mind as soon as I saw Chris' site on the video. By the way, Bill Still did The Money Masters and The Secret of Oz. (Former newsman for USATODAY) He also quoted Mish Shedlock, Nathan's Economic Analysis, and Karl Denninger. 

Interestingly, I see more and more networking among the bloggers and alternative media. I think this is a good thing. And it's not a pack mentality. For instance, Bil Still is very strongly in the deflationist camp, where Chris is in the inflationist camp. 

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Re: 7 Questions About Public Banking
Morpheus wrote:

7 Questions About Public Banking

6. Do you think a federal, state or local public banking option is best?

It seems to me that having each state issue its own script that can be used to pay taxes is the better solution. It spreads the assasination risk around and makes it obvious if the worst then follows.

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Re: 7 Questions About Public Banking

This was an interesting twist to banking philosophy and from the Islamic point of view. I liked what was said.This is the last interview in the program.

http://www.thestreet.com/podcasts/real-story.html

Archives:

Action Alerts, Market Movers, Islamic Banking

03/15/2010 4:58PM

Guests include Stephanie Link, director of research for ActionAlertsPlus.com, Ken Shreve, TheStreet.com's Market Movers portfolio manager and
(Yahia Abdul Rahman, author of The Art of Islamic Banking and Finance). Listen

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Re: 7 Questions About Public Banking

1. Do you agree that banks create credit by initiating loans, and then obtaining deposits subsequently, to comply with depository requirements? I'm not talking about the coins which governments create (in America, coins represent less than 5% of the total money in circulation).

No, banks cannot create credit, they create debt.  They lend to people, companies and governments that have credit.   

2. Do you agree with Eccles and Hemphill that money is debt, in that new credit normally comes into existence when a new loan is issued?

All money is debt in our system.

3. Do you agree with Greider that the American Constitution and/or the inherent right of sovereign nations gives the government the power and authority to itself create credit?

Yes, the constitution clearly states that congress shall create our money.

4. Do you agree with Greider that such government creation of credit need not be inflationary so long as only as much credit is created as is needed by the economy - in other words, the amount actually needed to buy goods and services?

I would suggest that all new money should be endowed with value by backing it with the collateral of tangible assets.  For example, money should not be created to be spent on social programs but it could be created, and not repaid, if it is used to build needed infrastructure.  

5. Several monetary commentators have said that - if credit is created primarily by the government instead of private banks - that it would save the government trillions of dollars in interest. Specifically, they claim that private banks charge interest to the government to fund the government's debt, but that the government would owe no debt on credit it creates itself. Is that true? What Is the Best Public Banking Option?

It's no coincidence that Federal Income Tax was hatched in 1913 along with the private Federal Reserve Act.  Income tax enables the Fed to directly collect the interest charges from the people.  Over a third of income tax goes to pay interest on the debt and that percentage will go up with higher unemployment and/or higher interest rates.

If the government created all new money, as intended by the constitution, it could charge banks seigniorage or issuance fees to generate enough income to pay for itself, without any taxes. 

6. Do you think a federal, state or local public banking option is best?

I think the federal government should create all new money but it should be limited as to what it can distribute.  States should have the ability to build needed infrastructure without repaying principal or interest.  Private banks could continue to operate in providing traditional banking services such as credit checks and collections.  The big difference would be that instead of creating the money for free, they would get it from the government.

7. Is there any way to have a hybrid monetary system which provides the benefits of public banking with the fiscal discipline which something like a gold standard imposes?

The economy should not be restrained by something scarce like gold.  It is the responsibility of government to make sure there is enough money in circulation to keep unemployment as low as possible.  The gold standard was not reliable as it failed in the U.S. in 1933 and most of Europe in 1931.  Before that we had several serious depressions in the 1800's.  The gold standard has always been a myth.

Larry

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Re: 7 Questions About Public Banking

 

If you are an American farmer,        would you accept as payment  for your grain export,   

a  newly created   debt- free wealth- money   Euro,  printed by European governments?

If not,  why not?

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Re: 7 Questions About Public Banking
DrKrbyLuv wrote:

4. Do you agree with Greider that such government creation of credit need not be inflationary so long as only as much credit is created as is needed by the economy - in other words, the amount actually needed to buy goods and services?

I would suggest that all new money should be endowed with value by backing it with the collateral of tangible assets.  For example, money should not be created to be spent on social programs but it could be created, and not repaid, if it is used to build needed infrastructure.  

Explain how it is backed because I just am not getting it?  Could I turn this money in as a claim against these so called tangile assets?  If not, how exactly is it backed anymore than the paper it is printed on? 

Who gets to determine what is needed infrastructure?  Which addeds more value to society, education of the next generation or a road to nowhere?  So the solution to all of our problems is as simple as direct government spending?  I only wish it was so simple.

DrKrbyLuv wrote:

6. Do you think a federal, state or local public banking option is best?

I think the federal government should create all new money but it should be limited as to what it can distribute.  States should have the ability to build needed infrastructure without repaying principal or interest.  Private banks could continue to operate in providing traditional banking services such as credit checks and collections.  The big difference would be that instead of creating the money for free, they would get it from the government.

Without replaying priciple or interest?  I guess Alaska might as well build a lot of bridges to no where because there would be no negative consequences for such folly in your system.  Sounds like Keynes to me paying 1/2 the people to dig holes and the other 1/2 to fill them.  Would that be instant prosperity?

DrKrbyLuv wrote:

7. Is there any way to have a hybrid monetary system which provides the benefits of public banking with the fiscal discipline which something like a gold standard imposes?

The economy should not be restrained by something scarce like gold.  It is the responsibility of government to make sure there is enough money in circulation to keep unemployment as low as possible.  The gold standard was not reliable as it failed in the U.S. in 1933 and most of Europe in 1931.  Before that we had several serious depressions in the 1800's.  The gold standard has always been a myth.

Claiming that a fractional reserve banking gold standard failed is certainly a myth.

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Re: 7 Questions About Public Banking

goes211 wrote:

Explain how it is backed because I just am not getting it?  Could I turn this money in as a claim against these so called tangile assets?  If not, how exactly is it backed anymore than the paper it is printed on?

The money would represent a claim against hard assets in the event of a default.  For example, you buy a home with a $100,000 mortgage, if you miss enough payments, the home is repossessed by the lender.  If that's not enough, they will take other assets. 

When government borrows money, it is backed solely and completely by the full credit of the people and their property.  This sovereign authority allows nations to create, through their credit, bonds and/or money.  We print bonds which are accepted as collateral by the banks who monetize the debt, they create money for free and we repay it with interest added. 

We are just as free to print money instead of bonds. Both are backed by our sovereign credit and both are promises to pay, but unlike bonds, the money can be created for free.  Why do we borrow, while we have this potential (as a nation)?

When we last defaulted, in 1933, our gold was seized as collateral and the currency was instantly devalued by over 40%.  The people were forced to turn in their gold at an unfair price.  It was quietly sold by the private Federal Reserve at a huge profit over the following 45 years.

During the late 1920’s, the United States had over 26,000 metric tonnes of gold which represented over 60% of the world’s gold reserves.  We may still have some coin melt that is ours, but if there is any pure 99.9% gold left, it doesn't belong to us (U.S.).   

The next time we default, we won't have any gold; other collateral will be taken and we would lose some part of our future earnings through international debts and taxes.  Maybe someone else can be more specific as to what exactly will happen when we next default.

goes211 wrote:

Without replaying priciple or interest? I guess Alaska might as well build a lot of bridges to no where because there would be no negative consequences for such folly in your system.

I trust the people, at the state level, to make good decisions.  Our roads, bridges and schools are crumbling and becoming obsolete.  We need to reduce our energy usage by developing a sustainable society.  But instead, we have over 17% unemployment and the austerity measures will only increase.  All because we borrow instead of creating wealth.

Collectively, we cannot repay our debt as a function of the monetary system - it was designed to fail.  Our combined private and public debt are over $57 trillion while our money supply (M3) is just under $15 trillion.  We are around $42 trillion short.

So, we either give up $42 trillion in collateral or we borrow more.  A perpetual loop.

Since we cannot repay the money, legally I think we have an un-enforceable contract.  Government needs to inject debt free money into the system to help mitigate the difference over a number of years.

goes211 wrote:

Claiming that a fractional reserve banking gold standard failed is certainly a myth. 

When and where did the gold standard work for any extended period without causing poverty and depressions?  Are you suggesting that we return to the gold standard?  If so, how much gold do you estimate that we will need?

Thanks for the great questions, this is really interesting stuff!

Larry

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Re: 7 Questions About Public Banking

Crap...a double post...sorry

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Re: 7 Questions About Public Banking
DrKrbyLuv wrote:

We are just as free to print money instead of bonds. Both are backed by our sovereign credit and both are promises to pay, but unlike bonds, the money can be created for free.  Why do we borrow, while we have this potential (as a nation)?

When we last defaulted, in 1933, our gold was seized as collateral and the currency was instantly devalued by over 40%.  The people were forced to turn in their gold at an unfair price.  It was quietly sold by the private Federal Reserve at a huge profit over the following 45 years.

During the late 1920’s, the United States had over 26,000 metric tonnes of gold which represented over 60% of the world’s gold reserves.  We may still have some coin melt that is ours, but if there is any pure 99.9% gold left, it doesn't belong to us (U.S.).   

The next time we default, we won't have any gold; other collateral will be taken and we would lose some part of our future earnings through international debts and taxes.  Maybe someone else can be more specific as to what exactly will happen when we next default.

A promise to pay what exactly?  Also who exactly seized the gold as collateral?   It was not our creditors, it was our own government.

Who exactly will take this collateral the next time we default?

DrKrbyLuv wrote:

I trust the people, at the state level, to make good decisions.  Our roads, bridges and schools are crumbling and becoming obsolete.  We need to reduce our energy usage by developing a sustainable society.  But instead, we have over 17% unemployment and the austerity measures will only increase.  All because we borrow instead of creating wealth.

Collectively, we cannot repay our debt as a function of the monetary system - it was designed to fail.  Our combined private and public debt are over $57 trillion while our money supply (M3) is just under $15 trillion.  We are around $42 trillion short.

So, we either give up $42 trillion in collateral or we borrow more.  A perpetual loop.

Since we cannot repay the money, legally I think we have an un-enforceable contract.  Government needs to inject debt free money into the system to help mitigate the difference over a number of years.

I think your trust is completely misguided.  Can you give some examples of efficient large scale government spending, perferably within the past decade or two?

I agree we cannot replay our debts.  Something will have to give and there will be a default sometime in my lifetime.  How do you think they will take this $42 trillion in collateral?

DrKrbyLuv wrote:

goes211 wrote:

 Claiming that a fractional reserve banking gold standard failed is certainly a myth. 

When and where did the gold standard work for any extended period without causing poverty and depressions?  Are you suggesting that we return to the gold standard?  If so, how much gold do you estimate that we will need?

Thanks for the great questions, this is really interesting stuff!

I think the gold standard might work in situations where it was started from scratch but I have serious doubts that it would work in the current situation as anything but a part of the solution.  I only favor commodity money because it removes a temptation from those in control of the system to think that they can create capital out of thin air.   I do not favor a mandated commodity system and I would support local currencies that are not backed by anything.  I believe that any system without competition will be manipulated by its controllers for their own personal advantage.

Do you have any examples of your "government issued wealth money" working for a long period of time?   If so how long did it work and how did it end?

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Re: 7 Questions About Public Banking
Carl Veritas wrote:

If you are an American farmer, would you accept as payment for your grain export,   

a newly created debt-free wealth-money Euro, printed by European governments?

If not,  why not?

Carl,

I think this is a great question.  Why are none of the wealth money true believers stepping up to the plate to say that they would trade their food supplies for this valuable wealth money?  If they will not, it only goes to show that they look at this as a trick to get us out of our current problem and are less enthusiastic about receiving someone elses wealth money for something they value.

Are you guys willing to step up to the plate and trade for Greek created wealth money?  The silence is deafening.

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Re: 7 Questions About Public Banking

goes211 wrote:  A promise to pay what exactly?

The Federal Reserve promises to pay with another promise to pay (Federal Reserve Note).  Government backs up the money it borrows by issuing bonds as collateral.  The private sector backs up the money they borrow with pledged collateral.

goes211 wrote:  Also who exactly seized the gold as collateral?

Under the Emergency Banking Act of March 9, 1933, the secretary of the Treasury issued orders requiring all gold coin, gold bullion, and gold certificates to be delivered to the Treasurer of the United States.  A new type of gold certificate, series of 1934, in denominations of $100, $1,000, $10,000, and $100,000, was issued only to Federal Reserve banks.  The special gold certificates were never issued again after 1935. 

In 1983, the "Report to the Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems" was published.  In it, is a revealing statement:

"Gold certificates...are a liability of the Treasury, are issued to the Federal Reserve by the Treasury against its gold holding.  The certificates represent a Federal Reserve claim on the assets of the Treasury, for which the Treasury has recieved a counterpart deposit in its account with the Federal Reserve.

All gold held by the Tresury has been monetized in this fashion."

All of the gold at Fort Knox and other depositories belongs to the Fed, we're just storing it - for free.  But there is very little left.  I've read that there is no longer any pure (99.9%) gold, just melt from the 1933 confiscation of coins. 

The bottom line is that the Federal Reserve got the gold for free as a result of our default.

goes211 wrote:  It was not our creditors, it was our own government.

The gold went to the private Federal Reserve, not the government.  From there, it has been sold off with most being transferred to the Bank of England (same international banking cartel).  Pre-WW2 Nazi Germany bought alot on the cheap.  Needless to say, the elite of Europe and America gorged on the feast while U.S. citizens were not allowed to own gold from 1933 to the early seventies.

goes211 wrote: Who exactly will take this collateral the next time we default?

Creditors.  Intergovernmental debt (e.g. SS) probably won't get paid but the private and foreign debt will have to be reconciled. 

goes211 wrote:  I think your trust is completely misguided. 

Would you prefer to continue trusting the private banks to independently create and control our monetary system?  It all comes down to the fundamental question...are people capable of governing themselves?  If we cannot manage our own finances, we will never have real freedom.

goes211 wrote:  Something will have to give and there will be a default sometime in my lifetime. How do you think they will take this $42 trillion in collateral?

I wonder about that too, but I'm not knowledgeable enough to paint the picture.  If someone else has some answers, I'd be very interested.  Generally speaking, I think we'd see many measures.  For example privatization of public infrastructure, loss of financial sovereignty (IMF could dictate), dramatic devaluation of currency, massive private foreclosures.  Taxes, fees, tolls and debts would be used to help repay the damage over time.

goes211 wrote:  I do not favor a mandated commodity system and I would support local currencies that are not backed by anything. I believe that any system without competition will be manipulated by its controllers for their own personal advantage.

As long as we have our current system, there can be no "competitive" currencies.  At best, we could have complimentary currencies.  But that is different than what you envision when you wrote "any system without competition will be manipulated by its controllers."  The current system would not have any competition.  The banks would still hold a monopoly to create new money as debt, for virtually free. This would continue to be the overwhelming percentage of our money. 

goes211 wrote:  Do you have any examples of your "government issued wealth money" working for a long period of time? If so how long did it work and how did it end?

  • Tally sticks of England, 600 years with great results, very little debt and low taxes.  They ended when England needed money for war and within 75 years, 75% of their budget went to debt repayment. 
  • China past 30 years.  Actually, they have been issuing their money longer but with some interruptions in policy.  Their economic growth defies the understanding of western economists.  They have no national debt and are the biggest creditor in the world.

Hope I covered everything.  You didn't answer some of my earlier questions - When and where did the gold standard work for any extended period without causing poverty and depressions? Are you suggesting that we return to the gold standard? If so, how much gold do you estimate that we will need?

Thanks for the discussion,

Larry

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