But Governor, You Can Create Money! Just Form Your Own Bank

"I understand that these cuts are very painful and they affect real lives. This is the harsh reality and the reality that we face. Sacramento is not Washington -- we cannot print our own money. We can only spend what we have."

- Governor Arnold Schwarzenegger quoted in Time, May 22, 2009

Christmas comes early, Governor. You can print your own money. Fiscally solvent North Dakota is doing it...and so can California. Now!

In a May 22 article in Time titled "Billions in the Red: Fiscal Reckoning in CA," Juliet Williams reports that since California voters have now vetoed higher taxes and further state government borrowing, Gov. Arnold Schwarzenegger has indicated that he intends to close the budget gap almost entirely through drastic spending cuts. The cutbacks could include laying off thousands of state workers and teachers, ending the state's main welfare program for the poor, eliminating health coverage for about 1.5 million poor children, halting cash grants for about 77,000 college students, slashing money for state parks, and releasing thousands of prisoners before their sentences are finished. Schwarzenegger bemoaned the fact that the state could not print its own money but said it could only spend what it had.

But the state can create its own money. After all, banks do this every day. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create "credit" with accounting entries on their books. As the Federal Reserve Bank of Dallas explains on its website:

Banks actually create money when they lend it. Here's how it works: Most of a bank's loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank...holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

President Obama has also acknowledged that banks create money, through what he calls the "multiplier effect." In a speech at Georgetown University on April 14, he said:

[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks -- "where's our bailout?" they ask -- the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.

Money in a government-owned bank could give us the best of both worlds. We could have all the credit-generating advantages of private banks, without the baggage cluttering up the books of the Wall Street giants, including bad derivatives bets, unmarketable collateralized debt obligations, mark to market accounting issues, oversized CEO salaries and bonuses, and shareholders expecting a sizeable cut of the profits. A state could deposit its vast revenues in its own state-owned bank and proceed to fan them into eight to 10 times their face value in loans. Not only would it have its own credit machine, but it would control the loan terms. The state could lend at ½% interest to itself and to municipal governments, rolling the loans over as needed until the revenues had been generated to pay them off. According to Professor Margrit Kennedy in her 1995 book Interest and Inflation-free Money, interest composes, on average, fully half the cost of every public project. Cutting costs by 50% could make currently-unsustainable projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable but actually profitable for the government.

If all this seems too radical and unprecedented to venture into, consider that one state has had its own bank for 90 years; and it has not only escaped the credit crunch but is doing remarkably well...

The Innovative Bank of North Dakota

Only three of 50 states are now solvent, meaning they have the revenues to meet their state budgets; and one of them is North Dakota. It is an unlikely candidate for the distinction. It is a sparsely populated state of fewer than 700,000 people, largely located in isolated farming communities afflicted with cold weather. Yet since 2000, the state's GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. The state not only has no funding issues, but this year it actually has a budget surplus of $1.2 billion, the largest it has ever had.

North Dakota boasts the only state-owned bank in the nation. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. By law, the state must deposit all its funds in the bank, which pays a competitive interest rate to the state treasurer. The state rather than the FDIC guarantees the bank's deposits, which are plowed back into the state in the form of loans. The bank's return on equity is about 25%, and it pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a trillion dollars to the state's general fund, offsetting taxes. The former president of the BND is now the state's governor.

The BND avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, and buy down the interest rate. The BND provides a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. Guarantees are also provided for entrepreneurial startups, and the BND has ample money to lend to students (over 184,000 outstanding loans). It purchases municipal bonds from public institutions, and it backs loans made to new farmers at 1% interest. The BND also has a well-funded disaster loan program, which helps explain how Fargo, when struck by a disastrous flood recently, managed to avoid the devastation suffered by New Orleans in similar circumstances.

North Dakota has also managed to avoid the credit freeze, through the simple expedient of creating its own credit. It has led the nation in establishing state economic sovereignty. In California and other states, workers and factories are sitting idle because the private credit system has failed. An injection of new money from a system of publicly-owned banks on the model of the Bank of North Dakota could thaw the credit freeze and bring spring to the markets once again.

Comments

[Jive Dadson]

I posted a comment several days ago, and it has not shown up. I'll try again. This is important, and on topic.

Ellen Brown is correct in that banks create credit money, otherwise known as "bills of credit." Tha't what a dollar bill is - a bill of credit. The Constitution of the United States particularly bars the states from issuing them, and for good reason.

Article I, section 10: No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Note that recent legislation would purport to give bankruptcy courts the power to impair the obligation of contracts, which is also unconstitutional under the same section.

It is also clear that legal tender not backed by gold or silver coin is not constitutional. It's hard to name a problem we have today that would not have been averted by following the Constitution.

[lurban]

Kenn Jacobine (View from Abroad blog) May 30, dismisses Ellen Brown’s proposal for California to create its own money.

OK, it’s illegal for states to coin money, so Brown flunks the nit-pick test.. But her proposal COULD save California. It’s just no path there is open. To open the path people must understand that Califonia’s budget deficit and the horrors that will result from the governator’s strategy, could be FIXED, but the fix would end the money monopoly we suffer. (unlikely, eh?)

To make a powerful point about an enormous problem, Brown’s shortcut is forgivable, and Jacobine’s all too common knee-jerk negativism is exposed. No model exists in the US for what California could do, because it is illegal for anyone else to create money the way "the fed" does. The “money trust" saw to that long ago. Even a bailout of victims instead of culprits is impossible now, because, as Whip Durban pointed out a few days ago “The banks own the place.” Brown is on to the solution. Jacobine's critique is an obstruction

[ThomH]

Congratulations, Ellen. Another one knocked out of the park.

Many comments spawned by this post confirm Mark Twain's observation: "It's not what you don't know that hurts you, it's what you know for sure that just ain't so"

The prize for *knowing* the most that just ain't so goes to GrahamInCanada. In the midst of much impressive knowledge, he asserts with great confidence his profound misunderstanding of how money is created and lent out at interest by banks under fractional reserve banking, his mistaken notion that the US mint derives seignorage from providing the service of printing money for the Fed, his insistance that there is no difference between a yard sale IOU and bank-created credit money backed by the "full faith and credit" of the nation, his ignorance of the difference between government-owned and privately owned central banks, etc., etc.

Kudos to you, Ellen, and to Bill Moldestat and Henry for responding to his gratuitous insults with grace and restraint.

[EllenHBrown]

Thanks Thom! I read somewhere that when they start throwing insults, they're defending their vulnerable feminine side, and I can relate to that, so I don't fight back. My younger brother had shorter arms that I did when we were young, so when he started swinging, I just held my arm on his forehead and he couldn't reach me. That really seriously bugged him and was very effective. I was the oldest and was supposed to set a good example. Anyway what we need on this issue is more presence on the Left. The vocal money reformers are on the Right, and they don't trust government. I think what we need is to take back our government. "Money" today is just credit -- the full faith and credit of the United States -- and the United States and the people it represents are the proper parties to administer and oversee it.

[DFA Tucson]

If Ellen can be criticized for anything, it is 'playing within the system'. Since Californians (along with the rest of the country to whom they bequeathed their nation-destroying Prop. 13 idiocies) don't seem to be willing to tax people like Gov. Arnold, the only way they can maintain a tolerable civil society is to borrow. And since the Federal government is using all the money it can create to fight imperial wars and Wall Street - well, you know - why not float yourself a loan?

Incidentally, GrahamInCanada, it isn't tangible money - at least until Geithner / Obama convert it into 'legal tender' through a bailout (not likely to happen. You see, this isn't for the banks or Wall Street. This is just to keep poor Californians from starving and their children from dying because they can't get medical care.) What is these days? But you do have an interesting idea. California could create some money just like the private-sector banks and the Wall Street 'shadow banking system' and then convert what it doesn't need right away into Euros (I prefer Norwegian krone) thus stretching its 'dollars' a little further.

Until the electorate gets smart enough about money and economics to pick up on Ellen's basic message and that of monetary reformers for more than 300 years - that the power to create money is one of the most awesome and lucrative powers there is and should be exercised in the public interest, why not use the system as

[DFA Tucson]

Actually, I suppose as long as the 'Bank of California' was created legally, it wouldn't even need a Federal bailout to do a little currency speculation. Just have it create the 'money' then the State of California can go in and demand good old US dollars, promptly exchanging them for Norwegian krone (or as some misguided souls suggest, Euros).

[pm247]

A privately owned banking and monetary system is an abdication of national sovereignty. The entire banking industry should be permanently nationalized for the public good. And while we're at it include the other two bad actors in the economy: energy and health care.

Banking and energy could then spearhead a new green economy. Profits would pay for universal health care, free higher education (especially medical school and nursing school), and no income tax for the middle class. These benefits would, in turn, stimulate the economy at a sustainable rate without boom and bust cycles.

Enough with trickle down economics and welfare for corporations and the rich. We can reorder the economy with a pragmatic blend of state ownership and free markets, based on what works best for the people.

[Overd0g2]

Liberty works best for the people.

[TJCole]

We need new banks desperatel­y...altern­ate banks and they can be online only even so no great overhead..­.

We must change the banking culture in America if we are to move forward as a functional nation with a sustainable economic model...

[joebaggadonuts]

But but but, the right wing nuts sputter...­. the BND is promoting industrial policy!!!.

Exactly. Without a sound industrial policy, for ND it is "to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota" .

What is it going to be for the US, and for California? If we could simply agree on one, and let ourselves join together by forming a state or national bank that promotes it, we could move more easily into the new economy.

Here's a cocktail napkin proposal:

....to promote the health and wealth and education and useful and self actualizing employment and education of the people of (the State of California/The USA).

[marxmarv]

But but but, the out-of-state bankers and railroad men sputter... the BND is promoting industrial policy!

[Overd0g2]

What is it going to be in California? How about cutting the size of the state government by 30%. That would be a good start.

[SolarPowerGuy]

All right, I'll join you. I favor releasing 30% of the people in jails, reducing police forces and fire departments by 30%, and enlarging public school classrooms to 40 students each (and who cares if there isn't enough space in a classroom for those extra 10 desks, the little brats can sit on the floor).

While we're at it, let's stop maintaining every third lane on our freeways.

What, is there something wrong?

[Henry]

Ellen,
It is true that a bank can create money, but using the state of North Dakota as an example to the Governator of California for a resolution is pure tom foolery. Free money as a solution to a problem is a fools paradise. It is the Banana Republic solution. It was the Weimar Republic solution. And we know these things. The creation of money has responsibility written all over it and taking the creation as the solution is an addicts response to his problem. Every young loan officer (of old) knew that it would be his responsiblity to collect the loan he made. That responsibility has left the lending business ergo the problem. Short term fast money that is divorced from responsibility only turns out to be someone else's problem.

[Bill Moldestad]

Henry,

I would argue that short term fast money is exactly what we've gotten from giving private banks the ability to create money, issue credit. Around 24 trillion dollars in new private sector total debt, which is money, and it's been created in just the past ten years. This is excluding government debt growth. Reference: Federal Reserve Flow of Funds data. At any rate, that's a lot of money! Naturally the money supply has to grow with a growing economy, but I think it's safe to say the private banking establishment has done a horrible job managing this credit growth. You only have to look at the alphabet soup of loan facilities the Federal Reserve has created in an attempt to shore up the toxic balance sheets of the private banking establishment. Or look at the incredibly large, convoluted, speculative bets the banks have made in their attempts to manage irresponsibly issued credit, e.g. Alt-A liar loans.

Will continue, too long for this post.

Bill.

[GrahamInCanada]

Hi Henry,

When you said, "I would argue that short term fast money is exactly what we've gotten from giving private banks the ability to create money, issue credit." if you added something like, "...create money, issue credit, and fail to regulate them as was our duty to do" well then you might find more people agreeing with you.

[Bill Moldestad]

I don't think the Weimar Republic is a fair example of what happens when a government exercises its sovereign right to create money. To my understanding, what sucked the Weimar Republic into a hyper inflationary spiral was not the German government recklessly printing money, but rather, foreign speculators selling the German mark short. Shortly before this massive short selling happened, the Reichsbank became effectively privately owned. The privately owned German central bank accommodated the foreign short sellers by creating massive amounts of currency. Eventually the Reichsbank couldn't keep up with the short sellers demand for money, and the whole banking establishment jumped on the wagon train. After all, it was a great deal for the private banks, create money out of nothing and lend it at interest to the foreign speculators who were betting on the mark to devalue. It wasn't until the government reasserted itself by putting the Reichsbank under strict controls that Germany could begin to recover. And of course, looking again at the example of Germany, the German sovereign credits issued around 1933 ignited an economic boom in Germany.

Will continue.

Bill.

[Walt Thiessen]

Foreign speculators selling the mark short created Weimar hyperinflation? That argument does not make sense. Short sellers lose money if the value of the currency goes up. The only way a short seller can profit is if the value of the currency goes down.

So the real question is: why did the value of Weimar currency go down? The answer is: the supply of the currency increased faster than the overall supply of goods and services. That comes from inflating the money supply, i.e. printing money out of thin air.

I'm constantly amazed at the failure of people to understand basic supply and demand. When the overall supply of money increases faster than the overall supply of goods and services, inflation will result. Currency short sellers (foreign or domestic) have nothing to do with it.

Also, regarding your phrase "government exercises its sovereign right to create money," history does not support your use of that phrase. A "sovereign right" is an exclusive right, meaning that only government may exercise it. Yet, history is replete with private organizations (banks, goldsmiths, etc) creating money. Indeed, the author of this article acknowledges this fact with her description of how debt-based money is created by banks. There is no reason to believe that only government has the right to create money.

[Bill Moldestad]

Getting away from Germany, one only has to look at our own national history to see what power a national soverign credit (government created money) can have. Lincoln's 400 million in government issued Greenbacks saved the nation 4 billion dollars in interest. The 4 billion saved is according to the Treasury Department's calculations. Most of this interest would have gone to foreign lenders. And regarding objections that Greenbacks were a source of inflation during the Civil War, evidence is one the side of inflation being caused by a severe shortage of goods... good 'ol supply and demand.

As Thomas Edison said in 1921: "It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."

Bill.

[GrahamInCanada]

Hi Bill,

When you said "Lincoln's 400 million in government issued Greenbacks saved the nation 4 billion dollars in interest", that is only one side of the coin. On the other side of the same coin, "Lincoln's 400 million in government issued Greenbacks cost the nation 4 billion dollars in growth".

And it really really helps to have a war going on around your ears and no options at all to Greenbacks to encourage people to use it, just like people are willing to use military script.

But short of such convincing, the US Dollar is such an advancement on the Greenback going back would be like trading your airplane for a donkey to get over that mountain over there.

[Kache]

Read the fine print Henry. The BND doesn't create money willy-nilly. It requires state tax revenue being deposited as the backstop, the same way a private bank requires savings deposits to backstop it's loans.

The very ability of a bank to turn your deposit into my loan, thereby doubling the value of your wealth,is the very essence of Capitalism - always has been, always will be.

[Bill Moldestad]

Ellen, Another Great article!

It's funny how we've let the sovereign right of our government be taken over by the private sector. And in response to a prior comment, letting the government take back it's right to create and issue money/credit would not just be rearranging the deck chairs around, it would be putting the deck chairs on a wholly different ship, that is, a ship that's not sinking. You don't think we're sinking. Look at our National Debt, look at our national Net Present Value. As Ellen discusses, there's another way to fix these serious problems other than slashing budgets and raising taxes to astronomical levels.

Fundamentally, money is just an exchangeable receipt for goods and services delivered.

Government regulated control and issuance of money/credit would be safer and fairer than the current private sector control of it. Don't believe me. Look at the Bank of North Dakota (BND) that Ellen discusses, and compare BND with Citi.

A few in government are starting to wake up to the screwy money system we currently have. Check out HR1207 aka The Federal Reserve Transparency Act. This bill is a nice thought, but I don't see how the GAO has the right to audit a private corporation, which is what the Federal Reserve is, a private corporation.

Bill Moldestad.

[Henry]

Bill,
The act of congress in 1913 signed by Woodrow Wilson created the federal reserve system. The fed is supposedly independent of the government (for objective reasons) but the stock of the Fed is owned by the member banks that are chartered in the USA. The shareholders receive dividends but the profits of the fed go to the u.s. government.

http://en.wikipedia.org/wiki/Federal_Reserve_Act

You might also think about the FDIC that is a corporation that was created by the Glass Steagall Act of congress circa 1933.

[Bill Moldestad]

Henry, I appreciate your comments on the Federal Reserve. To my understanding the Federal Reserve system is a private banking corporation where the shareholders are commercial member banks, that is, private banks. Please see Lewis v. United States, 680 F.2d 1239 (1982), in which a Federal Court held that the Federal Reserve was a private corporation.

And you're right, Congressman Wright Patman got the Federal Reserve to rebate government bond interest back to the government. But interest aside, I think you would agree with me that the real advantage to be held by the Federal Reserve, and more to the point, its member banks and the private banking system in general, is the ability to create money, whether as currency or accounting entries.

And from my understanding of things, Federal Reserve notes are, for all practical purposes, private currency, that is, bankers currency. Federal Reserve notes are only national in name: 31 U.S.C. § 5103, 12 U.S.C. § 411.

Cheers. Bill.

[GrahamInCanada]

The Federal Reserve System is not a private sector corporation, Bill.

The Federal Reserve system has three parts:

1. The Federal Reserve Board, created by Congress, appointed by the President, which is a public body.

2. Twelve Federal Reserve Banks, created by Congress, that are quasi private corporations that are authorized to act as fiscal agents for the Federal Treasury within their geographic assigned area. These issue non-transferable shares to commercial banks, which are required to own such shares, as commercial banks are required to join the Federal Reserve. Because of the confusion between the "shares" in a Federal Reserve bank not being what people understand a "share" of a public corporation on the public markets to be, the difference is a "share" in a federal reserve bank is more like a "membership" in a golf club than it is like a "share" in Microsoft.

3. "Federal Open Market Committee", all seven of the appointed Federal Reserve Board members and five of the twelve Federal Reserve Bank Presidents.

All of which, is created by Congress under authority of the Constitution.

What you have now is government regulated control and issuance of money, under the Federal Reserve System.

I tend to agree that the United States has a unique central bank structure and that the international model might be better, but not because I think the current US central bank, the Federal Reserve System, is akin to a private bank. It is not.

[Kache]

All of that is true, but that is not all of the story. The Fed acts independently of the whim of the government. At one point Reagan wanted to fire Paul Volker because he was purposefully causing a recession. The recession was decreasing tax revenues dooming Reagan's "less taxes means more revenue" to - well.... to Voodoo. Reagan was stunned to discover that a President can not fire the Fed chairman. And we are all better off that Reagan couldn't fire Volker for short-term political gain, Volker's recession not only bended stagflation but also broke OPEC's back for 25 years, long term it worked.

[kaski]

And these people are not corrupt? Study Americas Central Banking system and then try to educate We the People. The Federal Reserve is a privately owned banking corporation. We have been and still are a colony of Britain. The Rothschilds own the Bank of England behind the false truth that the English government owns stock in it. Sound familiar?

[Rule Of Law]

Eliminate the FED, and have our national government do the same thing and watch how quickly our country becomes strong again.

[Overd0g2]

Oh yeah. Those geniuses in Congress will set things right! ROTFL!!!!!­!!!!!!!!!!­!!!!!!!!

[GrahamInCanada]

Ellen Brown's two quotes conflate and confuse bank capital and bank reserves, and indirectly, the money multiplier of the money supply and the multiplying effect of new bank capital.

The Federal Reserve creates new money by lending it to the commercial banks. If banks lend it to their customers, their customers will have to deposit it somewhere (while usually it is deposited into the borrower's account, the borrower usually then transfers it somewhere else to pay for something, borrowers do not generally borrow just to see large numbers in their current account). Whichever bank gets the deposit, or many banks, it does end up back in the banking system, and the bank that has it sets aside reserves, and loans it out, less the reserves. This is the money multiplier, which works on new money created by the Federal Reserve. It is nowhere near ten times, in fact for a while now it has been negative; banks have been putting new money into reserves and not lending it out.

The multiplier on capital is the measure of how much capital banks much have to accept deposits, a completely different thing.

While it is not uncommon for a government to set up a bank in a business that is not served by the free market, setting up such a bank is not a way out of this disaster, and setting it up to compete with the free market just moves the deck chairs around, it doesn't create anything new.

[Ellen Brown]

Many authorities have attested that banks simply create money (or "credit") on their books. I was trying to keep this article short, but I've written extensively on this and probably need to draw on a few more quotes to make a solid case. Here are some from an article I posted in January titled "Credit Where Credit Is Due":

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.”

– Robert B. Anderson, U.S. Treasury Secretary, 1959

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”

– Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)

“The actual process of money creation takes place primarily in banks.” [Chicago Federal Reserve, Modern Money Mechanics, p.3]

There are quite a few more quotes in the article, which is here --

http://www.webofdebt.com/articles/creditcrunch.php

[Rule Of Law]

Isn't this what is really at the base of the fractional banking system? And isn't it really a kind of a shell game?

[GrahamInCanada]

Ellen,

When you come to my garage sale, and see a marvelous nick knack I'm selling for $10, and you say, oh, I have no cash, can I pay you next weekend, and I say yes, we've just created $10 in the same way you think that banks create money through credit.

That $10 is uncreated when you pay me next weekend, something that you missed in your analysis of credit and money creation.

You are floundering around in money theory, you seem confused by it all and you are confusing other people.

Here's another quote:

"I'm getting tired of seeing these same ridiculously out of context quotes passing for lack of argument" http://www.huffingtonpost.com/ann-pettifor/bernanke-dodges-the-bulle_b_176753.html?show_comment_id=22179655#comment_22179655

You seem to think you've found a magic bullet that will solve all of our problems through free-lunch money creation.

There is no such thing as a free-lunch, money is only created when somebody agrees to pay it back.

[Henry]

"The multiplier on capital is the measure of how much capital banks much have to accept deposits, a completely different thing."

If I were to start a new bank (in the market) with initial capital of $1000000 and the legal lending limit was 20% of capital and the cash reserve requirements were 10% (hypothetically here) and all of the loans I made were to remain as deposits in my new bank, . . . then what is the limit of the deposits I could create from this initial amount of capital?? Remember when a loan is booked as an asset the deposit account of the borrower is credited in an equal amount. If you were to go through this fundamental economic exercise you'd see the inextricable link between the multiplier and growth effects. One further limit that bankers have to deal with, and that is this: the capital accounts to total assets, the capital ration must be 10%. There is a direct answer to this problem. And reserve requirements but a direct mathematical limit to growth of money and the capital ratio requirements also impinge directly.

[GrahamInCanada]

If you were to start a new bank with one million capital it would set the maximum deposits you could accept, your further question regarding the legal lending limit was 20% of capital is a misunderstanding of banking and cannot be answered because it does not make sense.

However, disregarding that question, if the cash reserve requirements for loans was 10%, your deposits can support up to a 900% loan ratio, of which, 800% would be temporary new money that will either be paid back by the borrower with old money (or, conceivably, other new temporary money from another loan), or paid back by the bank from reserves if the borrower fails to pay.

[birdseye]

Bravo GrahaminCDN!
That's what happens when lawyers get involved in monetary policy. Economists already don't understand what they are doing and now with Ellen we have a lawyer meddling on top of it!

[kaski]

Are you a banker or better yet do you work for the Federal Reserve? The Federal Reserve, and for that matter, all privately owned banking is a scam!!

[healdguy]

Wow - as noted before on HuffPost, Ellen Brown should be appointed to an alt econ panel to advise Obama through this mess. Schwarzenegger, now all but down and out in a state that is down and out, could make California a prosperous model for the nation. I hope someone can get him (and Obama) Brown's articles and her book Web of Debt.

[Overd0g2]

California is in trouble because they spend too much. That is all.

[Kache]

California's tax to GDP is half of the average European tax to GDP. And you don't see Denmark, Norway, Hungary, Poland, Germany, etc talking about slashing taxes 30% because the upper 20% think they are being taxed to highly.

California's problem is that they tax a base (sales) that fell out from underneath them in a recession. California taxes gambled just like their home buyers did - on a never ending growing market. Looks good on the upside but it's a catastrophe on the down hill side. Has the finger prints of short-term Republican greed all over it.

[ScottontheSpot]

Yes, I too hope her article, at least, makes it to the Guvernator. Schwarzenager has shown himself to be a politician who thinks outside the box, certainly for a Republican, and I think if he was getting better advice, he would leap at this. Can we start a petition? Ditto for Obama, who is heavily advised by the same people who created this mess. They haven't learned a thing, IMO, and are continuing to run up debt as the "solution.­"

[Ellen Brown]

A petition - great idea!

[kaski]

Obama is either completely ignorant of fractional reserve banking and what a scam private banking is or he is in with them.

[Sergio Lub]

Right on! This is the best solution yet to our financial crisis.
I have seen this done earlier this decade in Argentina, it worked so well that most provinces issued their own currencies to pay their employees and contractors, and then accepted it back as payment of local taxes.
We should start doing this right away!
Sergio Lub - Walnut Creek, CA

[Rayme]

I agree, states do need to start issuing their own currency, I would love to have an alternative to the dollar.

[GrahamInCanada]

Well, if the states start issuing their own currency, a good new business you'll need is a domestic money changing service.

Here I'm putting it into the public domain, so nobody can claim they own the idea, if such state currencies come to pass.

Me, I'd choose the Euro over any of the state currencies, the Canadian dollar, the Yen, etc., thank you very much.

[Overd0g2]

That is unconstitutional.

[ScottontheSpot]

Ellen overspoke when she said the state can create their own money, in the sense that that implies creating their own currency. What she is talking about is extending the fractional reserve system to the states instead of allowing it to flounder in the Federal Reserve system to go to all sort of 100:1 loan to reserve ratio derivatives (this $700 trillion market is the real elephant in the room and the real reason Obama et al are so terrified of letting the 19 megabanks go the way of Lehman Brothers and Bear Sterns). This, North Dakota does very well, though personally, I would like to see more guarantees about how this would operate before extending this right to the other 49 states, especially New York, where the banking-industrial establishment would howl bloody murder (which, it is). The banks have a long history of distorting legislation in their favor and, as Senator Durbin recently said, they "frankly own the (Senate)."