"Our wallet is empty, our bank is closed and our credit is dried up."- Governor Arnold Schwarzenegger, June 2, 2009
California State Controller John Chiang has warned that without a balanced budget in place by July 1, he will begin using IOUs to pay most of the state's bills. On June 25, California Governor Arnold Schwarzenegger rejected a plan that would save the state $3 billion by cutting school spending, saying he would rather see the state issue IOUs than delay the funding problem with a piecemeal approach. The state's total budget deficit is $24.3 billion.
Meanwhile, other funding doors are slamming closed. The Obama administration has said it will not use federal stimulus money to prop up California; and Fitch Ratings, a bond rating agency, announced that it was downgrading the credit rating of the state, which already has the lowest in the nation. Once downgraded, California's rating is likely to fall below the minimum level legally required for most money market funds, forcing the funds to sell their California bonds. The result could be a cost of millions of additional dollars in higher interest rates for the state.
What to do? Perhaps California could take a lesson from the island state of Guernsey, located in the English Channel off the French Coast, which faced similar funding problems in the 19th century. Toby Birch, an asset manager who hails from there, tells the story in Gold News:
As weary troops returned from a protracted foreign war [the Napoleonic Wars ending in 1815], they encountered a land racked with debt, high prices and a crumbling infrastructure, whose flood defenses were about to be overwhelmed . . . While 1815 brought an end to the conflict on the battlefront, . . . severe austerity ensued on the home front. The application of the Gold Standard meant that loans issued over many years were then recalled to balance the ratio of money to precious metals. This led to economic gridlock as labor and materials were abundant, but much-needed projects could not be funded for want of cash.
This led to a period of so-called "poverty amongst plenty". . . The situation seemed insoluble; existing borrowing costs were consuming 80% of the island's revenues. What was already an unsustainable debt burden would need to be doubled to fund the two most essential infrastructure projects. This was when a committee of States members was formed . . . The committee realized that if the Guernsey States issued their own notes to fund the project, rather than borrowing from an English bank, there would be no interest to pay. This would lead to substantial savings. Because as anyone with a mortgage should understand, the debtor ends up paying at least double the amount borrowed over the long-term.
To prevent an unwanted inflation of the money supply, the Guernsey States issued the notes with a date due, and on that date the bearer was paid in gold. The money came from rents on the finished infrastructure, supplemented with a tax on liquor. Birch goes on:
The end result of the Guernsey Experiment was spectacular -- new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. What started as a trial led to a string of construction projects, which still stand and function to this day. Money was used in its purest form: as a convenient mechanism for oiling the wheels of commerce and development.
Like Guernsey, California is facing "poverty amidst plenty." The state has the eighth largest economy in the world, larger than Russia's, Brazil's, Canada's and India's. It has the resources, labor, and technical expertise to make just about anything its citizens put their minds to. The only thing lacking is the money to do it. But money is merely a medium of exchange, a means of getting suppliers, laborers and customers together so that they can produce and exchange products.
As has been explained elsewhere, today money is simply credit. All of our money except coins is created by banks when they make loans. The current crisis stems from a credit freeze that began on Wall Street in the fall of 2007, when banks were required to revalue their assets due to a change in accounting rules, from "mark to fantasy" to "mark to market." Banks that were previously considered in good shape, with plenty of capital for making loans, suddenly came up short. Lending fell off, and so did the available money supply.
Just understanding the problem is enough to see the solution. If a private bank can create credit on its books, so can the mighty state of California. It merely needs to form its own bank. Under the "fractional reserve" lending system, banks are allowed to extend credit -- or create money as loans -- in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it like this:
[F]or every $1 or $1.50 which people -- or the government -- deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it. What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland. With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5). And since the state would actually own the bank, it would not have to worry about shareholders or profits. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and on loans the bank made to the state, the state would ultimately get the interest, making the loans essentially interest-free.
Precedent for this approach is to be found in North Dakota, one of only three states currently able to meet its budget. North Dakota is not only solvent but now boasts the largest surplus it has ever had. The Bank of North Dakota, the only state-owned bank in the nation, was established by the legislature in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. The bank's surplus profits are returned to the state's coffers.
The bank operates as a bankers' bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It makes 1% loans to startup farms, has a thriving student loan business, and purchases municipal bonds from public institutions.
Looking at California's budget figures, projected state revenues for 2009 are $128 billion. At a reserve requirement of 10%, if California deposited all $128 billion in its own state-owned bank, it could issue $1.28 trillion in loans, far more than it would need to cover its $23 billion budget shortfall. To lend itself the money to cover the shortfall, it would need only $2.3 billion in deposits and about $2 billion in capital (assuming an 8% capital requirement). What Sheldon Emry wrote of nations is equally true of states:
It is as ridiculous for a nation to say to its citizens, "You must consume less because we are short of money," as it would be for an airline to say, "Our planes are flying, but we cannot take you because we are short of tickets."
As a card-carrying member of the banking elite, California could create all the credit it needs to fund its operations, with money to spare.
Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown
Loading comments… 
Ellen’s proposed solutions are not ‘pure’; they simply try to game the current debt-based
That said, there is reason to be concerned that such tinkering with the system might just succeed – and supplant the conspicuou
Time is getting short.
Time is getting short.
G-I-C correctly says that money coming from the Fed/Reserv
But both multiply the loans/mone
Adding the recent Deposit Sweeping trick, etc, and classing Derivative
The USA private banks are all leveraging Money - by at least 90 times - with compoundin
California is probably suffering worse due to years of Payola. But all states could own banks, multiplyin
He clearly dislikes anything other than Reserve controlled currency saying this is government
Sexual favours are not money - they are services for barter or money.
The Guernsey promissory notes were not private bank notes - they had the true authority of the island Gov, while the Bank of England was private ( half nationalis
Jefferson was not arguing for a government
Reagan was governor from 1967-1975. He left a surplus in the coffers and a budget in the black.
Further, in 2004 California was sixth largest in the world; in 2008, it's 8th. It's shrinking. Businesses are leaving (I moved mine from CA). Enterprisi
To understand free markets, look at the United States from 1800-1900. Despite no less than seven economic panics that wiped out thousands of businesses and banks, and a civil war, the $1 INCREASED in value during that century, from $1 to $1.50 in purchasing power. We exploded on the world scene.
By contrast, $1 in 1900 was worth less than $0.04 at the end of 2008. On the surface, this latter period seems more prosperous
Free markets are imperfect, and highly sustainabl
To last, we must abandon collectivi
How do we get this started? Send this article out everywhere you can. We know the power of social media to spark an idea and this is an idea whose time has come.
Thanks Ellen--kee
http://www
Coining money and setting its value is a sovereign right, no question.
But here's the problem: Creating money as you're proposing shifts the focus from a lack of assets to the medium of exchange. Scarcity of currency is almost universall
Your airplane analogy is neat, but incorrect. California has no seats.
The universal message from our financial condition is that we're spending more than we make. This is not a problem that can be fixed simply by changing the currency or creating your own money. The problem will return so long as spending exceeds income. No amount of quantitati
To North Dakota, it runs in the black only because roughly 40% of its operating budget comes through federal matching funds. Maybe that's true of every state, I don't know.
I suggest a reading of two of Nobel prize winning scientist Frederick Soddy's books.
The Role of Money.
Wealth, Virtual Wealth and Debt.
The universal message from our financial condition is that we have been operating on a scientific
No matter the political party, nor the socio-econ
The debt-money system of the private federal reserve bankers is insolvent.
It has FAILED to create the money that is absolutely essential to make the payments due on the debt-money that has been created.
Not rocket science.
More like math and a little physical laws at work.
Please call your best friend at the FED and tell them what I wrote, requesting a brief reply to shut me the F up.
Otherwise, ask them to put you in touch with the "Exit Strategy Office".
respectful
I'm all for both the abolition of the federal reserve and a return to a gold standard.
My point simply: setting these things right without first solving our spending problem -- which is a direct result of putting too many rights of citizens in the hands of government -- will only result in equal destructio
So first, we must hack government back like a hedgerow. Otherwise, it'll just bankrupt us all over again, even with sound money.
We may be too far gone already.
Until the monetary system is reformed there is little practical value in tinkering with fiscal policy. Because the issue will always be, "From whence will dollars flow and at what cost?"
What Ellen and others argue is that money is no more than a tool, it serves us, not the other way around. Goldman Sachs, et. al., would have us believe otherwise since they make the rules on how we are to treat money.
http://ron
Everyone on a budget, most of us, have to cut out things that we don't need but want. The government has to do the same thing.
http://www
Also, regardless of what businessin
But how relevant are the benefits to solving the instant problem that California faces?
Guernsey needed a source of funds for civil projects, and decided to issue its own monies - in whatever form anyone may describe those moneys.
California
California
California is a victim of its own success - the rapid, unsustaina
California is saddled with $USD-denom
Along with the debt-money system, California is broke.
Exit strategy?
Both unemployme
I don't think this CAN happen as a timely reform, and could be a distractio
We have a $13 Trillion economy that should nominally grow 2-3 percent per year. We need maybe $350 Billion in "New Money" to provide the medium of exchange for that growth.
With 12 percent of the population
Nassim Taleb appears close to figuring out the debt-money "defects" as Robert Hemphill called them. The second wave of commercial and residentia
That could lead to identifyin
I wouldn't necessaril
Rather, it is all up front and above board.
The Congressma
"So, you create the money, right there on the spot?"
The banker: "All money is created in this manner, and it is in your power to change this method".
Maybe some part of that dialogue is fiction.
But the way that money is created by the banker on the spot, lending something into existence that it does not first possess, is a truth that some claim stranger than fiction.
"Banks create money. That is what they are for. . . . The manufactur
-- Graham Towers, Governor of the Bank of Canada from 1935 to 1955
“[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, Treasury Secretary under Eisenhower
“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
– Congressma
What is special about money is not that it is a medium of exchange. Anything can be a medium of exchange, commoditie
The purpose of money is to pay taxes and to pay debts. That such purpose makes it a natural medium of exchange, so much so that we now depend on money in this role, and our economy would seize up without it, is not to say that money's purpose is as a medium of exchange, or merely so.
If money did not have the purpose of paying taxes and debts, it would neither function as a medium of exchange.
Pennsylvan
Like I said, anything can act as a medium of exchange, not just money. One could not use Pennsylvan
But, if you'd rather the government charged you interest for supplying a medium of exchange rather than taxing you using money, that's you, not me.
And what is the relevance? Why not just have all the farmers store their grain in the banks and use the grain receipts as medium of exchange, like we did at the very very start...
If a state was to set up a bank and deposit $1 billion in the bank, with a reserve of 10%, the bank could lend out $900 million and must keep $100 million in reserve.
Typically, borrowers do not borrow money to deposit it into the same bank, and so the multiplica
Continuing the loop to the end, the bank would end up with $1 billion in reserve and $9 billion in assets. The state would owe $9 billion and have $10 billion in demand deposits. The state would have no cash on hand, and it if tried to withdraw even $1 from the bank, the bank would violate the reserve requiremen
Without this scheme, the state would still have $1 billion on hand, and no debt.
And oh, the idea that the reserve requiremen
A 2002 article posted on the website of the Federal Reserve Bank of New York noted that today, few banks are constraine
“Since the beginning of the last decade, required reserve balances have fallen dramatical
1992 to 2002 is not today. And your quote was not a statement of fact, it was a theory being argued in a paper. And that theory was not arguing about the theoretica
A bank does not issue 900% of their deposits as loans, if the reserve is 10% a bank can lend 90% of deposits.
The figure of 900% in a 10% reserve algorithm is what applies to brand new money created by the US government and loaned out. By the time $1 is deposited and loaned and deposited and loaned under the algorithm if it maxes out, which it never does in reality, there will be $1 in bank reserves and $9 in loans and $10 in demand deposits.
This multiplica
And this multiplica
And I don't know what you have against double entry bookkeepin