[R-G] [BillTottenWeblog] Establish a State Bank

[Bill Totten]

by Ron Morrison

Prosperity (August 2002)


The Nation's money comes from two primary sources, first the State which
prints paper money and mints the coins (and also raises bonds) and
second from the commercial banks which provide credit.

Up until the early fifties the ratio of notes and coins to bank-created
credit was roughly one to one. In 1948 for instance, the State had
issued and spent debt-free into circulation GBP 1.3 billion notes and
coins, and the banks had out on interest-bearing loans to their
customers GBP 1.4 billion.

The only cost of money created by government is that of minting - a
small fraction of its face value. This physical cash is spent into
circulation when it is sent to the clearing banks and the government
account is credited with its full value.

This is called "seigniorage". In the old days it was a perk of the
Sovereign, hence the name, but in a modern democracy this value accrues
to the People, as it is credited debt-free to the public purse.


End the Monopoly of Private Banks

This article proposes legislation to end the virtual monopoly of private
commercial banks and to establish a Seigniorage (Seignior) Bank - you
could call it a "State Bank" - which will provide a source of debt-free
money to the State, enabling it to finance the creation of public assets.

This bank will be 100% owned by the State, and chartered to act
exclusively as the State's bank.

It will participate in the commercial bank clearing system. It will be
additional to the Bank of England, which will continue to function as at
present.


How a Seignior Bank Will Work

Instead of the Treasury issuing government bonds (which are, in effect,
government IOUs to the banking system) the Treasury will issue Treasury
Credits to the Seignior Bank.

These "Treasury Credits" will be denoted in sterling - and be equivalent
to the National Currency.

They will be legal tender in the hands of the commercial banks and have
the same status as coin and paper of the Realm.

The same security which renders government bonds 'as good as gold'
endows the same credibility upon the government's issue of "Treasury
Credits" to the Seignior Bank.

As Thomas Edison said: "If our nation can issue a dollar bond, it can
issue a dollar bill. The element that makes the bond good makes the bill
good … It is absurd to say that our country can issue $30,000,000 in
bonds and not $30,000,000 in currency". [Quoted in The New York Times, 6
December 1921]

The "Treasury Credits" will be equivalent to the notes and coins to
which Edison refers.

This money will only be available for government backed projects. It
should be regarded as a supplement to taxation income.

Just as seigniorage on newly issued cash is credited to the Public
Account, so are "Treasury Credits" - both are money in the hands of the
public and the banks.


How This Money Will Enter Society

Say, for example, the government says, "We need one billion GBP to pay
the contractors to build new hospitals".

The Treasury will create one billion GBP in "Treasury Credits" and lodge
them with the Seignior Bank.

The money will move from the Seignior Bank, into society in the
following manner.

The appropriate Government Department will write a cheque to pay a
particular contractor.

The cheque is drawn on the Seignior Bank.

The contractor then takes it along to his own bank, and pays it into his
private bank account. The cheque is then cleared through the Association
for Payment Clearing (APAC) system, as usual.

The private bank is paid in the "Treasury Credits" which are, in all
respects, equal to cash, and the contractor's private bank account is
credited with the appropriate amount in sterling.

Administered responsibly, just as the State has issued debt certificates
and debt-free cash responsibly for donkey's years, the ability of
Government to create its own debt-free money could create real economic
activity, employment and wealth.

This would go a long way towards eliminating the present anomaly of the
nation's unemployed human and material resources stagnating due to a
lack of money. We could dispense with the eternal 'either or' debate and
start work on the tasks and desirable projects currently awaiting public
funding.

If we ever did get back to the two or three per cent unemployment of the
fifties and early sixties, that would be time enough to debate the
'either or' priorities again.

The State would also have the ability, or "discretion", to intervene on
those not infrequent occasions when the private financial sector
overheats and needs to contract its lending to protect its shareholders
from a perceived risk.



How Much Should Be Created?

The conservative view might be to argue that the volume of money to be
created should relate to no more than the loss of past seigniorage,
calculated back to an arbitrary date, say 1960, when the 'natural' rate
of seigniorage started to decline.

This could be released progressively and thereafter new money would be
linked to the Bank of England's assessment of the annual increase in the
total volume of commercial bank credit which would have been projected
for the coming year.

James Robertson and Joseph Huber calculated in their book Creating New
Money (See Prosperity, August 2000) that the loss of seigniorage - that
is, the loss of the value of the new money which would otherwise have
been credited to the public purse - costs the UK government around GBP
49 billion per annum.

This might be a good guide to the amount of new State money to be
created initially.

However, it's easy to be obsessed with numbers and the 'amount' of new
money to be created.

The right amount is sufficient to finance that which is socially desired
but insufficient to devalue spending power and induce inflation.

There is no formula for this, any more than there is a formula for the
amount of bank credit which currently provides 97% of our money supply.
Given adherence to its Charter and the over-riding stability imperative,
the extent of the Seignior Bank's money creating powers would be
reviewed, having regard to any surplus or shortfall in the Nation’s
human and natural resources.

Thus would government find the money to finance the public sector and,
given responsible management, maybe even reduce taxation and give a
boost to the real economy.


Commercial Bank System Could Be Left As Is

The commercial banks may not appreciate losing their monopoly on the
annual round of increasing Bank Created Credit to the new Seignior Bank.

However, there may not be any need to restrict the traditional credit
creating power of the commercial banks.

They create credit according to demand, and the amount of that credit is
limited by the normal banking constraints of security and repayment.

Moreover, there is likely to be additional economic activity created by
increased public spending which will compensate them to an extent.

No doubt the banks would prefer to lend new credit at interest to the
Private Finance Initiatives and Partnerships virtually secured on
government bonds - but there will now be no need for such schemes, and
the banks will just have to accept the loss of that particular
profit-making opportunity.


Benefits of Breaking the Banking Monopoly

Monetary reform of this nature is prompted by a desire to re-establish a
reasonable public sector presence in a mixed economy.

If the new debt-free income is not used for additional public investment
then the social benefits will not accrue. If, for example, the new
debt-free income is simply offset by an equivalent private sector tax
cut then all will have been in vain and nothing new will have been created.

There is a good argument that the nature of this investment should be
precisely defined. It is easy to make the case for public buildings and
infrastructure, perhaps less so for investment in 'social' capital, such
as training more doctors, teachers and nurses or increasing certain
social security benefits. This will require some basis in legislation
and is perhaps also a constitutional matter for the judiciary.

In the final analysis, it is the administration which the voters empower
which will make the decisions, not the unelected bankers.

A Bill to break the monopoly of the banks and establish a State Bank
would spark a debate which would lay bare the stranglehold the banks
hold over public investment.

Perhaps the most important side effect would be to stymie the ambitions
of huge financial and multi-national conglomerates to reduce democratic
government to their own private puppet show.

The discovery that there might indeed be another way to run an economy
may be sufficient to bring back the apathetic, who absent themselves in
increasing numbers from the voting process.

Understanding the potential of Monetary Reform is only one factor in
helping the honest politician resist the corruption of Money Power.

There is bound to be resistance to such changes, but managing the
monetary system must be effected in the interest of the Nation. Given
the will, there is no shortage of money for public services.

On this, at least, the IMF had it right.

_____

Please print out, photocopy and distribute these articles. Also copy and
paste them to emails, and circulate widely, and please include all the
essential contact information below. Thank you.

Essential Further Reading:

Prosperity: Freedom from Debt Slavery - is a four-page quarterly journal
which campaigns for publicly-created debt-free money, edited and
published by Alistair McConnachie. A four-issue subscription is
available for GBP 10 payable to Prosperity at 268 Bath Street, Glasgow,
Scotland, UK, G2 4JR
Tel: 0141 332 2214                   Fax: 0141 353 6900
admcc at admcc.freeserve.co.uk       http://www.ProsperityUK.com
Or you can follow this link to our subscribe page:
http://www.prosperityuk.com/get_involved/subscribe/index.php

The Grip of Death: A study of modern money, debt slavery and destructive
economics by Michael Rowbotham [Jon Carpenter Publishing, 1998] and
Goodbye America! Globalisation, debt and the dollar empire by Michael
Rowbotham [Jon Carpenter Publishing, 2000] both available from the
address above.

http://www.prosperityuk.com/articles_and_reviews/articles/statebank.php


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