California Dreamin': How the State Can Beat Its Budget Woes

"As goes California," says the adage, "so goes the nation." All eyes are therefore on the Golden State as it attempts to solve its $26 billion budget deficit. The world's eighth largest economy is not going quietly into that pit of debt and devastation that has devoured Third World countries whole. The State's voters have drawn a line in the sand against further tax hikes, while Democratic leaders have drawn a line at further cuts in services or selloff of public assets. State legislators are deadlocked, caught between the rock of tax ceilings and the hard place of debt limits.

"Expect the best and accept nothing less," says another adage that typifies the attitude sometimes called "California dreaming." You create your own reality. Instead of trying to prop up an old model that has failed, you can dream up a new one. If anyone can come up with an original solution to the problem, Californians should be able to. But what? While waiting for developments, Governor Arnold Schwarzenegger has started paying the State's bills with IOUs ("I Owe You"s evidencing debt, technically called "registered warrants").

Hmm . . . Pay the bills with IOUs. Not a bad idea! That was, in fact, the original innovation that got the American colonists out of their financial straits back in the 18th century, when they lacked the silver and gold used in the Old World for conducting trade. Money, after all, was just a medium of exchange, an acknowledgment of goods and services delivered or a debt owed. The notion that the government could pay in paper receipts was first hit on by the governor of the province of Massachusetts in 1691, when he needed money to fund a local war. The use of a paper currency had been suggested in an anonymous British pamphlet in 1650, but the proposal was modeled on the receipts issued by London goldsmiths and silversmiths for the precious metals left in their vaults for safekeeping. The problem for the colonies was that they were short of silver and gold. The Massachusetts Assembly therefore proposed a different kind of paper money, a "bill of credit" representing the government's "bond" or IOU. The paper money of Massachusetts was backed only by the "full faith and credit" of the government.

Other colonies followed suit with their own issues of paper money. Some were considered government IOUs, redeemable later in "hard" currency (silver or gold). Others were issued as "legal tender" in themselves. They were "as good as gold" in trade, without bearing debt or an obligation to redeem the notes in some other form of money later. The new paper money not only made the colonies independent of the British bankers and their gold but actually allowed the colonists to finance their local government without taxing the people. Colonial assemblies discovered that provincial loan offices could generate a steady stream of revenue in the form of interest income by taking on the lending functions of banks.

The same solution was employed in other countries later. When Argentina's government workers were faced with massive layoffs, their unions persuaded six state governments to pay them instead with state bonds or IOUs in small denominations. The IOUs could then be used to pay for state services and taxes, and everyone in the local economy accepted them in trade.

There's Just One Problem . . .

Why couldn't California do the same thing? The problem with calling its IOUs "legal tender" today is that the ruse violates the U.S. Constitution. Article I, Section 10, says, "No State shall . . . coin money [or] emit bills of credit." The Cornell University Law School Annotated Constitution gives this definition:

Within the sense of the Constitution, bills of credit signify a paper medium of exchange, intended to circulate between individuals, and between the Government and individuals, for the ordinary purposes of society.

U.S. Supreme Court cases are cited from the 1830s, in which "interest bearing certificates, in denominations not exceeding ten dollars, which were issued by loan offices established by the State of Missouri and made receivable in payment of taxes or other moneys due to the State, and in payment of the fees and salaries of state officers, were held to be bills of credit whose issuance was banned by this section."

That all seems pretty clear cut, until you read a bit further. Article I, Section 10, also says that no State shall "make any Thing but gold and silver Coin a Tender in Payment of Debts." When was the last time any State paid its bills only in gold and silver coin? The States could argue that the Constitution needs to be updated.

They could make some other compelling arguments. The States agreed to give up their right to issue their own currencies because they delegated that power to Congress. Article I, Section 8, enumerates among the powers given to Congress, "To coin Money [and] regulate the Value thereof." Scholars continue to argue about the meaning of "to coin money," but the Constitution clearly gives no entity except Congress the power to create money and regulate its value, and Congress failed to properly husband that authority. It issued coins, but it allowed privately-owned banks to issue "banknotes," which soon made up the bulk of the nation's money supply. Bankers, not Congress, thus "regulated the value" of the currency, through the laws of supply and demand: the more notes they created, the smaller the value of each. In 1913, Congress went so far as to allow a privately-owned central bank called the Federal Reserve to issue its own Federal Reserve Notes and call them the exclusive national paper currency. These notes were then lent to the U.S. government, at interest.

Today, however, Federal Reserve Notes compose only about 3% of the money supply (M3). The other 97% is issued by private banks in the form of loans. "Bank credit" is created simply by entering numbers into the accounts of borrowers, as many authorities have attested. One of the most clear statements of this process came from Graham Towers, Governor of the Bank of Canada from 1935 to 1955, who acknowledged:

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created -- brand new money.

Congress has not only reneged on its agreement to create the national money supply, but it has refused to front the funds to bail out California from its relatively modest $26 billion budget shortfall. Californians are justifiably upset, since Congress hardly batted an eye before earmarking some $700 billion in bailout money for the private banking system, and the Federal Reserve has committed trillions more for that dubious purpose. Nearly ten times the sum needed by California was allotted to bailing out AIG, a private insurance company; and half the sum needed by California went to pay off the gambling debts of AIG to Goldman Sachs, a single bank. California underwrites a substantial portion of the federal government's budget, sending a dollar in tax revenue for every 80 cents it gets back. Yet the federal government has even rejected California's request for a loan guarantee, which could have saved the State hundreds of millions of dollars in interest. The clear message is, "You're on your own."

Creative Problem Solving

The situation looks pretty dire, but it may just need some thinking outside the box. The law does not allow the States to issue "bills of credit," but it does allow them to create another form of money called "checkbook" money. All a State has to do is to form its own bank. Quoting again from the Cornell University Law School Annotated Constitution:

Bills issued by state banks are not bills of credit; it is immaterial that the State is the sole stockholder of the bank, that the officers of the bank were elected by the state legislature, or that the capital of the bank was raised by the sale of state bonds.

If private banks can create credit on their books, so can the world's eighth largest economy. Indeed, there is longstanding precedent for this approach. The State of North Dakota has owned its own bank for nearly a century. North Dakota is one of only two States (along with Montana) that are not currently facing budget shortfalls. North Dakota has beaten the Wall Street credit freeze by generating its own credit. By law, ever since 1919 the State's revenues have been deposited in its own bank, the Bank of North Dakota (BND). Using the "fractional reserve" lending scheme open to all banks, these deposits are then available to be used as the "reserves" for creating many times their face value in loans. Other banks in the State do not see the BND as a threat, because it partners with them and backstops them, serving as a sort of central bank for North Dakota. BND's loans are not insured by the Federal Deposit Insurance Corporation (FDIC) but are guaranteed by the State.

If California followed suit, it would not need to meet the FDIC's capital requirements but could designate state-owned property (parks, buildings and so forth) as its capital base. Applying the "multiplier effect" by which capital is lent and relent many times over, this base could then generate hundreds of billions of dollars in "credit." The State could deposit its revenues in the State bank and pay its payroll through it, generating an even larger deposit base for making new loans. Enough credit could be generated to allow the State not only to meet its short-term budget needs but to buy back its outstanding bonds (or debt). Bond interest and redemption costs on California's General Fund for the current year are estimated at nearly $5 billion -- about 20% of the budget shortfall. All of that money could be saved in interest, since the State would be paying interest to itself.

The State could do more than just chase the wolf from its door. It could generate enough credit to engage in the sort of economic "stimulus" being undertaken by the federal government. It could create jobs for the 11.5% of the State's population that are currently unemployed, augmenting the tax base and supplying the incomes necessary to prop up the languishing housing market. Loans for income-producing projects (transportation, energy, housing) could be repaid with the profits generated by the funded projects. And if some of the newly-issued loans were not paid back, they could simply be refinanced. The federal government has been rolling over its loans ever since 1835, the last time the federal debt was actually paid off (under Andrew Jackson).

In boom times, this approach could result in unwanted inflation. But today the economy is suffering from a serious shortage of money, because virtually all of our money comes from bank loans, and bank lending has dried up. Since neither the federal government nor the Federal Reserve has stepped in to fill the void, the States must do it themselves; and like the 18th century colonial governments, they can do it by taking on the lending functions of banks.

California's taxpayers and legislators are doing the right thing digging in their heels and drawing the line at further austerity measures. California is being watched not only by the nation but by the world. We the people did not precipitate this credit crisis; the banks did. We should not have to pay for the damage with increased taxes or decreased services or our public parks and parking meters. Like the American colonists, we can replace the old model with something better. If California legislators act quickly, they can have a State-owned bank up and running before their 45-day IOUs run out. With today's new online banking possibilities, the State would not even need to invest in a "brick and mortar" building. The whole business could be done by computer. Weary legislators trying to agree on a budget could all shake hands and go home, without budging an inch from their respective platforms. They could have it all, and so could we the people.

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Comments

[JereLHough]

Continued:

And you are also correct that the states had the power to create (coin) money prior to delegating that power to the US Govt. Since the USGov gave that most sovereign and awesome power away (so they could borrow it back at an enormous cost to taxpayers) the states have every right to insist on taking back that authority. In the alternative, they have the right to insist that the USGov take back its own right to create money. That right and all such rights were delegated up to the states and national governments by the people.

The US Constitution is now being “interpreted” in ways that dismantle its original democratic intent to empower the people through properly representative government. Instead of a government of, by and for the people, we now have one of/by/for the international central bankers. The only real issue now is whether we the people can reclaim our democracy and make it truly representative or not. Is our government going to continue to serve the special interests of the bankers and corporations, or is it going to serve the interests of the people?

For one, I am outraged that the future of our children is being mortgaged by the international central banksters. Person by person, community by community, state by state, we are going to have to reclaim our rights, and assume our responsibilities as free citizens, or we will surely lose our cherished freedoms.

Thanks for another excellent article, Ellen.

[JereLHough]

Brilliant Ellen! Simply brilliant. Unfortunately it will go right over the heads that most need to understand the concepts you present. That probably includes the California legislative and executive leaders, including Schwarzenegger.

That is too bad, because there are several ways California, or any state (ND is already doing it) could and should create their own debt-free money. Regardless of whether it is called an IOU, promissory note, legal tender, bills of credit, or receipts or claims against the existing or future wealth of the state and its assets/goods/ services/resources, the state as well as the federal government should and does have the power to create money.

To argue otherwise is to defy logic and reason, much of which you have advanced in your excellent article. It is not logical that a state would have the power to grant corporate charters to private entities that it would not first possess unto itself. Since banks chartered by states are given the power to create debt-based money, then the states must first possess that power themselves.

[MunnyFarmOrg]

CNN just announced.­.. No can do IOU's!

primeronmoney maybe they will not ignore you if you deliver the solutions again now!

Maybe if an open "pass it around" copy is also given to staff (since their jobs may be on the line,) they might nudge their bosses to actually take a look, and be more accepting of Ellen's proposals now!

[MunnyFarmOrg]

Part 4 of now 4...
As we have witnessed lately...
Just because the banks have money to lend (create) does not mean that in times of fear or for other reasons, businesses, and other "persons' will assume the risk of collateralizing their assets to it, so that they can spend money and grease the wheels of the economy.

Governments can spend money into the economy to those who will spend it. And individual people tend to spend it and benefit the economy if they have money... especially if they know that more money is coming in...

If "persons" do not have direct immediate incentives to go WAKE UP their friends, family, and neighbors, the distractions will likely continue to control their lives...

Although Ellen's State created credit proposal is a great partial solution..­. There are other solutions that would almost instantly solve so many peoples lack of money problems, and we do not have to wait for, or trust the politicians and bankers to accept such systems, regardless of how much it benefits their long-term interests.­..

As the Blue Oyster C sang... "Don't Fear The Reaper"...
(No relation to Oysters Rockefeller? ...Always room for another conspiracy theory out there!) ;>}

THE END (part 4 of now 4)

[MunnyFarmOrg]

Part 3 of now 4… Maybe that's why "persons" choose to be distracted by other numbing activities, and remain "asleep"..­.

RE: bkay's comment about people being distracted (either intentionally by some conspiracy­... or by their own life circumstan­ces.)...

Maybe the average "person" (including media outlets) do not have enough personal instant incentives yet to cause them to take action! Including forwarding information about the true problems, causes, and Ellen's excellent proposed solutions.

Ellen's solutions look like they will work for California and all States' financial shortfalls, and the downstream economic benefits of putting money in the accounts of employees, contractors, and other suppliers.

...And all of their downstream economic beneficiar­ies... who can then use this money to qualify for more "Money As Debt" and "borrow" more money from the private banks (& Credit Unions) to prop up the housing, auto, education, etc. industries. And cause the consumers in the global economy to "demand" more goods, and the economy can boom again...

However, this form of money creation still does NOT solve the lack of money problems for hundreds of millions of people! If they had money to spend, the "confidence" in the global economy would be pandemic!

As we have witnessed lately... End part 3 of now 4

[MunnyFarmOrg]

Part 2 of 3...
Also, it may help solidify your arguments to explain the federal government agencies that already create credit for specific purposes. The latest Obama Admin. SBA adjustments; and in Canada, the EDC (Export Development Corporation) and FCC (Farm Credit Corporation) for examples. And how these programs work with, and benefit the existing consumers and financial systems (banks and credit unions.)

This is more evidence that the excuse that the banking system should SOLELY be in private control, to avoid government interference and manipulation and is "Bad Big Government" may not always be true. (I wonder who propagates that theory?)

With at least one State Commercial bank in each State, (even if it is online accessible only) the government (that can be voted and rioted out of office,) would have an incentive to cause the private commercial banks to compete on interest rates, qualification criteria for loans, and other elements of banking.

To ensure free market competition, fair rules to prevent the State from creating rules to kill competition against it's State owned Commercial bank, would rationally be required to prevent "Big Brother" conspiracy theory objections.

Your proposed solution would be great for California and all State (including country) governments to fulfill their obligations to their citizens. However, it would not likely immediately solve so many peoples financial problems..­.

Maybe that's why End part 2 of 3...

[MunnyFarmOrg]

Thank you so much Ellen for yet another excellent article! ...and your more detailed explanations of this solution!

It is great to have rational proponents that enlighten people about the real problems and some actual solutions, without distracting people with some lizard/mammal people, or other conspiracy theories (whether they may be the truth, or false... just to sell their info products.)

It is also appreciated that you do not propose some form of basing money on some form of dirt (gold, silver... or even the original Babylonian grain) that can be controlled by some monopoly or oligopolistic cartel! ...that still requires "confidence" (or "belief" or "faith") in the value of a form of money!

... it doesn't matter if money is digits on a computer screen, or pieces of wood with notches in it, printed pieces of paper, gold, silver, or anything else! ...as long as the parties agree to it's value!)

Please keep up your excellent information campaign Ellen!

For other examples to study and write about, I suggest the State owned commercial bank of India. Yes India (like all countries) has it's own problems. However, it is the worlds' largest democracy, with about 4 times the US population, and about 40 times the Californian population.

Also, End Part 1 of 3...

[primeronmoney]

Ellen Brown has offered a great program based on proven successful actions by other goverments.

How is it that such impeccable logic is being ignored?

Three weeks ago, I hand delivered a report from Ellen Brown urging Governor Schwarzenegger to start a State-owned bank for the specific purpose of creating real American dollars in the interest of the State's citizens.

Copies were hand delivered to the offices of (1) The Governor, (2) Kevin Johnson -- Mayor of Sacramento, (3) Bill Lockyer -- State Treasurer, (4) Michael Genest -- Director, Department of Finance, (5) John Chiang -- State Controller, (6) Ray Kerridge -- City Manager -- City of Sacramento, (7) William S. Haraf -- Commisioner of Financial Institutions, (8) The County Board Of Supervisors and about ten others. Not one of these responded in any way.

I can't blame them for not thinking up this solution to our money problems -- but I can blame them for ignoring the solution when a citizen hands it to them in the form of a logical report.

Keep on punching Ms. Brown -- they can't ignore you forever.

Martin Carbone

[bkay]

John Sherman, quotes about Rothschild:
The few who could understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of the people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.

Time to realize what is happening. Time to stop being distracted by "entertainment," and take back the government from these hucksters.

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[world2steven]

This should be the response of ordinary people everywhere:
We the people did not precipitate this credit crisis; the banks did. We should not have to pay for the damage with increased taxes or decreased services or our public parks and parking meters.
- except I would change "should not have to" to "WILL NOT ...!".

As for creating a bank, why not? It is likely to be a heck of a lot more solvent than those big money-center
Eastern banks loaning money to hedge funds and Wall Street to sustain their asset bubbles - and for Goldman Sachs to complete its acquisition of the US government.

[bkay]

As usual, ellen is thoughtful, insightful, and logically gets to to the answer to california's, and indeed, each state's budget woes. The question arises why does the federal government get to pick favorites to shell out money to while the citizens of the various states go wanting...­because of some constitutional law that was clearly violated in 1913 when hustler banksters took over the government and, in their ignorance and greed, created a system in which all the riches of the earth could be tilted in their favor. We share one planet, and the only reason a medium of exchange exists is to facilitate exchange so everyone doesn't have to do everything. Consider everything else a means of control and power. It has reached its limits, and possibly the children of these hucksters should expose this family tradition for what it is or they will be doomed also.
My wish is that this article could be reprinted in the sunday section of the los angeles times, reprinted in the sunday section of the new york times, and in every state magazine so people will start to question the money system,Consumer spending is good, it makes the world continue spinning and producing. Lack of money in the system if manipulated.

[Ellen Brown]

Thanks! It makes absolutely no sense that neither the Fed nor the Feds will extend a paltry $26 billion to help California, when they are literally TRYING to create TRILLIONS to fill the hole created by the $14 trillion in assets that have disappeared with the collapse of the credit system. (Since ALL money is "credit" or "debt," when credit collapses, the money supply collapses with it.) Supposedly the argument is that if California got a helping hand, all the states would expect it; but even if all 50 states got $26 billion, the total would only be $1.3 trillion, the sum the Fed just created on its books in the last year to bail out the banks. And the Fed could do that ten times over before the sum would reach $14 trillion. It makes no sense that this money is being withheld from the states, unless the POINT is to cripple the states and bring them in line, just as third world countries have been crippled and brought in line. Third world countries have had to go begging for dollars rather than printing their own currencies to pay off their debts (as the U.S. can do), because their debts are in dollars. Likewise the states have had to go begging because they delegated the power to create money to Congress, and Congress then gave that power away to a private banking corporation that is using it only to serve its own banking constituents.

[John Sundby]

Excellent!

The unique thing with Ellen Brown's proposal is that, differently from other solutions that have been proposed, it has a solid experiential basis.

It is based on the analysis of a number of cases where the proposed solution has been applied. Here she mentions just one successful example, but it has been repeatedly successful in different countries and times, as demonstrated in her excellent book "Web of Debt" where she describes several cases, including Lincolns successful financing of the Civil War with the greenbacks he got printed.

It is time for politicians to stop dreaming up fanciful and untested solutions. It is time to stop using measures that never have worked. As Einstein said: "It is madness to repeatedly try the same solution although it has never worked before". The situation is much too serious for that.

It is high time to apply a time-tested practical solution that has always worked! A solution that has a fully predictable outcome - the successful solution of California's problems without any further accumulation of the debt burden!

There is no excuse for not applying it!

[bkay]

Quote from John F. Hylan

"The real menace of our Republic is the invisible government which like
a giant octopus sprawls its slimy legs over our cities states and nation.
At the head is a small group of banking houses generally referred to as
'international bankers.' This little coterie... run our government for
their own selfish ends. It operates under cover of a self-created
screen...[­and] seizes...o­ur executive officers..­. legislative bodies...
schools... courts... newspapers and every agency created for the public
protection­."