This is a short review of Ellen Brown's new book, The Public Bank Solution: From Austerity to Prosperity (Baton Rouge, LA: Third Millennium Press. 2013).
The book is available from Amazon for $22.76 plus shipping. The website [...] has the Foreword by Hazel Henderson plus three complete chapters (1, 25 and 36) that a person can download in PDF form before they buy the book. I will discuss those chapters and chapter 32. The book is full of big picture analyses and important facts. The book is the equivalent of a superb college level course on the world history of banking. I admire the fact that Ellen writes in her preface "my own thinking has evolved on this history" (p. x) and I am grateful she and her co-researchers are doing this work.
Citizens have been active in Washington State pushing the idea of a publicly owned bank here, working with the legislator Bob Hasegawa who has introduced four bills over the last four years. A legislator like Bob, who believes firmly in the concept, is not available everywhere. Nevertheless, the legislature as a whole has been reluctant to pass the legislation. Supporters have not even been able to get a vote in committee. Activists who want more good information with which to convince their representatives or senators could learn a lot from this book, especially from chapter 32 "The State Bank Movement: Guidelines and FAQ".
In that chapter activists familiar with the situation in WA can learn two things relevant to going forward. 1) Probably any public bank established now will have to be a member of the FDIC which the Bank of North Dakota (BND) is not. This is a legal requirement that was not on the books when BND was established. Practically it is not necessary since the full faith and credit of the state guarantees the deposits which are over the $250,000 FDIC limit anyway. This regulation will need to be challenged.(p. 385) 2) If we want to establish a bank on the model of BND, a banker's bank that partners with local community banks, (instead of the Washington Investment Trust SB 5029-2013, a bank that loans only to public entities), we can use the following argument to forge a coalition with small banks and credit unions. A BND style bank can issue letters of credit to small community banks or credit unions that will allow them to hold state deposits which they cannot do now because of the collateral requirements.(p.384) Small banks compete head-to-head with credit unions, but it is the large Wall Street Banks that will buy them up when they fail. The international Basel III regulations on capital requirements is hard on them and the too-big-to-fail perception gives the big banks advantages with investors.
The first chapter "From Bail-Outs to Bail-Ins: A Banking Dinosaur on Live Support" explains the problem we face. We need the services banks provide but the dominant system we have in the United States, England and Europe is privately owned and very centralized. It is dominated in the U.S. by the five too-big-too-fail Wall Street banks. Brown calls them "private profiteers" who can "can cut off the flow (of credit to Main Street), direct it to their cronies, and manipulate it for personal gain at the expense of the producing economy." (back cover) She writes that "it has become eminently clear that wealth does not trickle down. It accumulates at the top and seeps into offshore tax havens..." (p.16)
We know these banks precipitated the financial crisis of 2008 and that the effects of the crisis on millions of people remain: millions of jobs lost and the spread of poverty, lives ruined, the cutting of government services at all levels just when people need them the most, and the putting off of the very much needed transition to a just and ecologically sustainable economy.
After five years, the mainstream press tells us things are finally getting better. But Brown disputes that, saying the deeper causes of the crisis remain. "Paying a perpetually compounding rent to the (private) banking sector may work mathematically, but it is not sustainable in the real world." (p. 10) This is a deeper cause that has precipitated financial crises over the last 400 years. After Cyprus, she writes that the private banking system is preparing contingency plans to convert the deposits of its customers into bank stock, "effectively confiscating depositor funds" when the next crisis occurs. This is the "bail-in" plan.
There is a better system, one that has competed with the private system over the centuries and is alive and well today. "Publically-owned banks operate in the public interest by law. That means they must support the real, wealth-producing economy. Bank profits generated from the credit of the public are returned to the public." (p. 16). Colonial Pennsylvania is one homegrown example. Today, the BRIC countries - Brazil, Russia, India and China - have strong public banking sectors. In the first decade of this new century their growth was 92.7 % compared to 15.5 % for the Western economies. (p. 17) They all have their problems, but getting credit to the productive sectors of their economies is not one of them.
Chapter 25 deals with "Latin America: Breaking the Taboos of the Neoliberal Agenda". In the last three decades of the 20th century, Latin America experienced disastrous economic policies and bloody political repression, all directed from the United States. Today, many of Latin American's elected leaders reject both the "free market" directives of IMF and U.S. Treasury Department as well as the radical socialism of traditional Marxist theory. Instead they are following a mixed "coordinated capitalism" approach similar to China's approach based on public banking. They respect private property and encourage private business and do not do the kind of micromanaging that the Soviet Union was famous for. The "coordination" or direction comes from the large publicly-owned banks (public banks have 52% of bank assets in Venezuela, 43% in Brazil and 30% in Argentina).
Historically, one of the main arguments against public banking is that it is essentially "printing funny money" that will cause hyperinflation. The nightmare scenario is always Weimar Germany in the 1920s where people used wheelbarrows of Reichsmarks to go to the grocery to buy bread. Latin American also experienced some of the worst cases of hyperinflation in history in the last third of the 20th century. Brown references Michael Hudson to say that hyperinflation is not caused by running the government printing presses but by foreign debt service collapsing the exchange rate" as short sellers speculate against the distressed currency. (p.290). This is an argument that we need when confronted by massive propaganda holding up the dual fears of "fiat money" and "ballooning government debt". Paper money, whether loaned by a public bank or spent into the economy by the legislature, is not inflationary if it meets two conditions: 1) it finances real wealth production that the society needs and can and will pay for, and 2) there is not full employment. We are certainly a long way from that. What these public banks in Latin America are doing is no different than what any bank is doing all along the chain of production. They loan to businesses which use the credit to buy materials and hire workers to produce wealth, and then pay back the loans from the proceeds of selling the products. The only difference is that the interest paid to the public banks belongs to the public instead of going to offshore tax havens for the 1%.
Chapter 36, "Toward a New Theory of Money and Credit", is a summary of Brown's arguments. She calls for a "Copernican revolution in economics". She writes that "The world long ago went off the gold standard, yet we still think of money as a "thing", something that must be borrowed from someone else who already has it". She is not just writing about ordinary citizens. All banks are forced to balance their books at 4:00 or 4:30 pm each day. There is massive overnight lending and borrowing to keep up appearances. The money "returns" to the lending banks the next morning. We all know that today this is done by computers and electronic impulses.
Brown puts forward dozens of proposals for the reform of banking throughout the whole book: break up the to-big-to-fail banks, nationalize the Federal Reserve, replace the firewall between commercial banking and investment banking that was repealed in 1999, and much more. But at the highest level, she writes that banks should be public utilities. A network of public banks: state banks, city banks or county banks and a nationalized Federal Reserve Bank should become a mutual credit clearing system. Many recently formed complementary currency systems are mutual credit clearing systems. But what Brown proposes would use the national currency and " have access to courts to enforce the loans and to sheriffs to collect on any collateral" (p.422) Banking should become boring again, run by civil servants, "with no bonuses, fees, commissions or inside trades riding on how they manipulate the markets or their customers." (p.423) Such a banking system is an important part of the solution to the problems that hold us back from realizing the promise of the great technological inventions of the last few centuries and which can help us deal with challenges of climate change.
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