[R-G] [BillTottenWeblog] California's Empty Wallet

[Bill Totten]

Turning Crisis into Opportunity

by Ellen Brown

webofdebt.com (June 30 2009)


"Our wallet is empty, our bank is closed and our credit is dried up".
-- Governor Arnold Schwarzenegger (June 02 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 {1}:

"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 eighty
percent 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." {2}

The ten 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 eight percent capital requirement {3} imposed by
the Bank for International Settlements, the head of the private global
central banking system in Basel, Switzerland. With an eight 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 {4}. At a reserve requirement of ten percent, 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 eight percent 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.

Links: 

{1}:
http://goldnews.bullionvault.com/guersney_experiment_credit_creation_gold_standard_051920083

{2}
http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html

{3} http://www.webofdebt.com/articles/creditcrunch.php

{4} http://www.ebudget.ca.gov/BudgetSummary/BSS/BSS.html

_____

Ellen Brown developed her research skills as an attorney practicing civil
litigation in Los Angeles. In Web of Debt (2007), her latest book, she
turns those skills to an analysis of the Federal Reserve and "the money
trust". She shows how this private cartel has usurped the power to create
money from the people themselves, and how we the people can get it back.
Her earlier books focused on the pharmaceutical cartel that gets its power
from "the money trust." Her eleven books include Forbidden Medicine
(1998), Nature's Pharmacy (1998), co-authored with Dr Lynne Walker, and
The Key to Ultimate Health (2000), co-authored with Dr Richard Hansen. Her
websites are www.webofdebt.com and www.ellenbrown.com. (c) Copyright 2007
Ellen Brown. All Rights Reserved.

http://www./articles/california_wallet.php


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