When I picked up Chalmers Johnson’s Blowback: The Costs and Consequences of American Empire what I was expecting was an elaboration of the term ‘blowback’ and some examples of the negative consequences of US military operations. What I got was much more. The book shines when it dies into financial machinations centered in the East Asian pacific region, blending gruesome stories of what goes on in US military bases with complex currency manipulations designed to keep those countries from growing too strong economically. Written before the events of September 11th, 2001 and the subsequent war on terror the book lets us see the workings of US imperialism from a less spectacular era. The Cold War having been won and US global dominance assured, the full power of dollar diplomacy and economic intervention is brought to the fore.Continue reading “Blowback: The 1997 East Asian Financial Crisis”
What the Whiskey Rebellion Can Teach Us About Using Cannabis Money for Public BankingContinue reading “Public Banking and Taxing the Wild Frontier”
As the twenty-first century drags on, we face an uncertain road ahead. To catch a glimpse of hope we need not look that far back into history to find working models for both prosperity and sustainability. It has been encouraging to see activists working hard on forming public banks, for these banks can change the fortunes of every member of the economy in a time of vast wealth inequality. The times call for practical-minded solutions to big problems like climate change and economic stagnation. To seize the moment, we need only look to our own past for models that work.
Out west, cannabis is one of the biggest economic drivers of the region. Its coming into the fold of taxation and regulation at the state level offers a turning point that could lift up far more than just the people involved in the industry. By chartering a public bank in California, the cannabis industry can use banking services where once they could only use cash. It solves the problem of paying taxes in large suitcases full of dollar bills and a lack of small business loans for cannabis businesses with less start up capital. But the really exciting part comes with what the state can do with its own bank once that revenue is drawn in from pot funds. Financing large scale infrastructure projects that can transition the economy from one based on fossil-fuels and freeways into a renewable economy with clean energy all but requires that we utilize public banks. Nothing else can bring all of the funds together for such a massive undertaking that so many people believe must be done.
The pioneers of cannabis farming sought to escape from a society that suffocated their creativity and freedom of expression. They were so successful that others followed them out there in a curiously similar movement to other historical movements that brought people out west in droves. The California Green Rush, like the Gold Rush and the Timber Boom before it, brought billions of dollars to the further reaches of the American west in a hurried and chaotic fashion. It is likely that the Back-to-the-Land cannabis farmer will be mythologized in a similar way that the gold panning pioneer was in the nineteenth century. With the Redwood Curtain lifted and profits soaring, rugged individuals and hippy communes are sure to get the romanticized treatment of yet another distinct culture subsumed by modern business. Public banking offers a way out of this predicament. With its public financing model, we no longer have to play the game rigged by Wall St to benefit the already well-off. Hippies get to put a dent into the capitalist machine after all – just not the way they expected 50 years ago.
Small farmers and landed peasants have always born the brunt of specialized industry marching forward. It’s a fact that has torn apart people’s relationship with the earth for over 200 years now. It has also created enormous prosperity, especially at the national level. Innovations in banking, worker specialization, and increased scales of production set off irreversible processes into motion that need to be reckoned with democratically instead of with a blanket rejection. Alexander Hamilton’s vision won out but the implementation has gone way off course. If we hearken back to the eighteenth century, we can see a virtuous project too far ahead of its time to be appreciated in the Bank of the United States. The man wasn’t perfect (in fact, he was down-right elitist), but Hamilton did have the common good in mind when he conceived a national public bank in his mind and willed it into existence. With a quick crash course in public banking, one can grasp just how necessary establishing new banks are to creating an economy in which everyone wins.
Currently, cities and states must borrow money from Wall St banks to finance their projects. The payments made to municipal and state bondholders, plus interest payments made to banks from loans doubles the cost of any large project. Public worker’s hours and pensions are being slashed, facilities are downsizing and getting privatized, and the investor class is making off with the profits like bandits. Money that could be circulating within the public sector and distributed equitably is drying up. Fringe finance is replacing banks that no longer deem it profitable to do business with the poor, extracting wealth for basic services that could be done easily by the post office. The money pie is shrinking because access to credit has been consolidated by extraordinarily wealthy financiers in their private bank accounts and tax shelters. Public finance is the key to unlocking the economic potential just waiting to be let loose. [What We Could Do with a Postal Savings Bank: Infrastructure that Doesn’t Cost Tax Payers a Dime]
Public banking has a proven track record. Everywhere you look, from Germany to China to early America, linking governments to the technologies of banks is a proven winner. It is not only profitable for governments but the private individuals involved in financing and borrowing from it. The only ones who lose are the already ultra-rich 1%, the ones who want to keep their monopoly on the lending/money-creation powers of banks. With the sudden availability of funds opened up by the cannabis industry’s wave of legalization, the time is now to turn high profits into big ideas for a sustainable future. [Dave Dayen: The Ultimate Cash Crop: How a Pot Crisis Restarted a Public Banking Conversation in America]
In the period following the ratification of the federal US Constitution, the financial course for the new nation had yet to be charted. Alexander Hamilton had a dream to turn the former colonies into a modern mercantilist nation on a model he borrowed from the British and its Bank of England. His idea would succeed with flying colors, but few truly understood just what he had done to make banking so indispensable to the health of this new form of economics. It would take decades for the nation to warm up to the idea of banks as an everyday feature of American life, but by that time, private banks would dominate the landscape and the old civic-minded banks would be a distant memory.
People were highly suspicious of the purity of Hamilton and other speculator’s motives, and rightfully so. Populist anger the elite eastern “stockjobbers” was well-founded, the blanket rejection of banks and all financial schemes was, however, foolish. Banking (especially of the public variety) would prove to be so successful that its detractors would come around in the long run, but the damage would already be done by that time. The option for government involvement in banking was besieged and destroyed in the first decades of the United States, that is, until the populist farmers realized that bringing banking into the government was the best and perhaps only defense against the insatiable greed of Wall Street bankers and industrialists in the antebellum nineteenth century. In hindsight, keeping public banks around was the best way to prevent gross economic hardship, but the battle-lines were drawn differently in these very different times.
The revolts and minor uprisings that occurred in this time period were all debt related. Traditional debt relations were far more fluid and amenable to the needs of common villagers before modern economics took a hold of them. The soldiers and suppliers of the Revolutionary War had not been paid. Their expedients for trade were dashed. Their protests were quelled. Before 1787, farmers outside of the merchant city regions had the benefit of the state’s former issuance of paper money to stimulate business. They began as a war-time expedient during the seven-years-war but remained afterward to everyone’s joy. In a frontier land lacking in specie (metal coin currency), paper money was a godsend. But the new constitution forbade the states from issuing any more colonial scrip and centralized the money-making function within the new federal government. The very first articles of the US Constitution are explicitly designed to prevent states from issuing their own ‘bills of credit’ and instead enshrine the return of the economy to a hard currency basis. The framers worried about the inflation these bills created, but paper money would come to dominate the economy anyways in the form of bank notes.
If bills of credit or paper money could no longer be used by farmers, then they were stuck with hard specie scarcity. Their business was less connected to the world at large, so metal money was harder to get their hands on.On top of that, exploitation by speculators, who sensed their desperation only to capitalize on it, added to their affective loathing of all things financial coming from the coastal port cities. Upon reading accounts of the financial hardships of American farmers and poor debtors, laid out in the previous post, it’s easy to see why they would be driven to such hate. But every actor needs a circulating medium of exchange to lift their fortunes. The distrust of a banker-government partnership inculcated during this period of history went a long way towards eliminating the necessary checks against the money-creating power of private banks. The banks role in controlling the increase or decrease in the overall supply of money could only be effectively curtailed and controlled by a central governing body endowed with financial powers like that of a bank. Distrust and anger at central government and public banks actually hurt prospects for economic justice by empowering private banks to carry on this highly profitable enterprise free of restraint.
Bray Hammond sticks the point well at the beginning of his grand history of banks in Banks and Politics in America: From the Revolution to the Civil War:
“The agrarian demand for paper money and easy credit which did at last appear in the States in the latter part of the 19th century arose from tardy recognition by the agrarians that they lived in a modern economy, not in dreamland, and in order to hold their own must use credit as business men did. It arose from a slow realization that farming must be a means of making money, not of withholding oneself from the world… But in the face of business enterprise and industrialization, it became impossible for farming to remain unchanged. Stock had to be improved. Machinery had to be acquired. The elements of farm capital became diversified, the land itself ceasing to be the one ingredient of weight. Money and credit forced their way into the farmer’s reckoning.” (Hammond, p.33)
It’s at this point that a shift in emphasis must ensue. A different country than the one Jefferson envisioned was taking shape around the turn of the 18th to the 19th century and we cannot simply remain pitted against all financial concoctions wherever they crop up. The future involves banks and they need to be made to work for the people or the vast majority instead of fought at every turn. The makings of a modern economy were shaping up at this time; increased specialization in the workplace and the overriding importance of overseas trade in the international game of political economy was drowning out the small farmer’s hope for New World of freeholders. The cat was out of the bag.
The scars leftover from Federalist era lingered on into the Jacksonian era of Democratic entrepreneurialism until the producing farmers figured out how debt, monetary policy, and banks effected them on the national level many decades later. The populist party sought to take over control of the money supply away from banks in the late eighteenth century with their ‘sub-treasury’ system and the non-partisan league would successfully lobby for a state-owned bank in North Dakota. But no movement in America has been able to sustain a public-oriented financial school of thought in the tumultuous times that capitalist industrialism wrought at the end of the 19th century, 20th and up until today. We have a moment right now to establish new public banks with the growing momentum of the public banking movement. It is high time that certain truths about banking become a part of common wisdom and used for the benefit of the 99% instead of the exclusive gain of the 1%.
Hamilton’s Bank of the United States was lauded by all those who understood it. It not only flipped a liability in high war debts into an asset (quite literally), it spread new money out into the economy whenever loans were dispersed. It’s bank notes functioned just like money, similar to the paper money of colonial scrip but more like state bank notes also circulating, so it increased the amount of business that could be done in two separate ways simultaneously. It offered credit for new projects in a typical lending fashion and then, as a result, bank notes could be drawn on representing the promise to repay the debt. These notes were basically paper IOU’s for the original loan/deposited coin (more on this later), but they would inevitably change hands many times in the course of business and effectively enter circulation as money. This is the what makes banks so hotly contested: they don’t just offer loans and act as special intermediaries for future business (though they do that also), they increase the amount of money in the system as a whole so long as they remain solvent (i.e. have enough hard currency to back up the notes that come back in for redemption, or withstand the depletion of specie from their vaults). That these bank notes could be used to pay federal taxes enhanced their acceptability as legitimate money.
Absent regulation, this operation is fragile and private banks are incentivized to extend credit wherever they can profit. The increase in available paper bank notes/IOU’s increases the amount of money passing from hand-to-hand in the general economy, even if you as an individual do not have an account at that bank or any bank. Those paper bank notes can always be redeemed at a local branch of the corresponding bank for hard coin in the vaults, that is, unless too many notes come in for redemption at once and the vaults are depleted.Provided the bank remains solvent, the net effect on the economy at large is immense. Having more things getting passed around as money lifts up the general economic prospects of every actor in the system, provided that the amount of notes issued are commensurate with the overall level of real economic activity. Issue too many and you get price inflation, too little and prices drop but there is less money around to get your hands on.
The national public bank of Hamilton was able to check the excessive issuance of bank notes in the way that a central bank does now. Today central banks are independent of government and merely transfer money from one bank within its system to another in the form of reserves in their central bank accounts. The first and second Bank of the United States operated slightly differently but also kept private banks and state banks that existed before them from collapsing in a heap of panic, rendering its notes useless and its contribution to the overall money supply vanishing in a flash. It made sure that the ratio of bank notes to reserves didn’t get too high and private banks couldn’t print way more notes than they could back up with coins. The first Bank of the United States, Hamilton’s bank, operated in a time when the split between public and private sectors was not so pronounced. Many believed that private investors were needed to lend credibility to the institution in the first place, the government being too young and fragile to instill any confidence. But it was a public bank that served the needs of the people at large by servicing the new and fragile government’s debt and hence its credibility as a future borrower. It increased the supply of money to stimulate industry by issuing its own US Bank Notes that had a wide circulation.
Banks whether public or private wield enormous power by controlling the size of money in the economy at any given time. This is not always well-understood by economists but when banks make loans they increase the amount of money flowing through the economy. Bank loans create more money, paying back those debts created by the loan destroys it. It’s an extraordinary tool within a modern economy and there is no reason why governments shouldn’t be involved in banking when it plays such a vital (and lucrative) role. This is what Hamilton’s bank did before private businessmen and entrepreneurs started opening up their own banks and attacking the national bank. In another one of histories ironies, it was farmer’s opposition to the Hamilton’s policies that killed the second Bank of the United States when Andrew Jackson swept into power. Little did they know that this national, central bank was the only thing preventing private banks from wildly profiting off of the economy’s need for credit, in turn playing havoc on the money supply. The full story is told in Bray Hammond’s standard financial history book in Banks and Politics in America from the Revolution to the Civil War.
According to Hammond, Hamilton did understand this crucial function of banking. It’s quite possible that only a handful of individuals grasped this operation and its significance and few understand it still today. The fact that banks create money, control its supply (in a more-or-less/marginal sort way of increases or decreases from day to day instead of absolutely), and perform a systemically vital function to a dynamic modern economy escapes contemporary economic textbook definitions of banks as mere “intermediaries.” If we replace the terms of 21st century economics with ones from the 18th century, we can still detail the same banking function:
“…[I]n the sentence before his explanation of specie deposits, Hamilton had made the observation that every loan which a bank makes is in the first instance a credit on its books in favor of the borrower and that, unless withdrawn in specie, it remains a liability of the bank till the loan is repaid. In these words he explained 20th century banking as will as 18th, and how bank lending creates bank deposits, with the difference that he did not call them “deposits” but reserved that term for specie transactions, distinguishing credit for specie from credit for the proceeds of loans. He did so because he observed banking in terms of the individual bank and not of many banks constituting a system. He was writing at a time when there were three banks only in America, each sole in its community. The effect each bank’s lending had on its own positions was in those circumstances direct and unobscured; its loans obviously increased what would now be called its deposits; for the checks drawn on it were not being deposited in other banks nor were the checks drawn on others being deposited in it. Each bank was a closed and separate system. Hamilton simply noted what in the then situation was plain and required no unusual discernment. The records of the Massachusetts Bank indicate how common it was at the very beginning to credit borrower’s accounts with the amounts lent them; and the known figures of deposit liabilities are plainly too large to have arisen from specie alone. Such credits seem in practice to have been included with deposits proper but in discussion to have been kept distinct. A deposit was of something tangible, whether for safekeeping or to apply on a capital subscription. The liability for amounts lent was called credit or book credit, as by Hamilton in the passage in which he described the procedure.
Though exempting specie deposits from the restriction could scarcely have given a bank any more inducement than it already had to acquire specie; it doubtless seemed logical to Hamilton that the liability arising from deposits of specie be distinguished from the liability representing the proceeds of loans and that it be excepted from limitations on an expansion that could occur only when liabilities were assumed in excess of the specie held. The issuance of notes and the crediting of customers’ accounts might and did entail the assumption of liabilities in excess of specie holdings, but not when the issuance of the credit resulted from a deposit of specie.” (Hammond, p.138-9. Emphasis mine.)
In other words, when a loan is made by a bank it doesn’t matter that there isn’t enough corresponding metal coin specie to match it one-for-one. Taking in deposits or specie to store in its vaults and making loans to those seeking credit are two separate functions of banking that work in tandem but don’t require a steadfast equivalence. When a loan is made, the amount of money requested by the borrower is written into their account, which they can then draw on regardless of how much specie that individual has deposited on their own. The only thing that matters is that people don’t rush in and grab all of the hard currency all at once in a panic. As long as the bank is believed to be trustworthy, it is. The bank can then keep on lending as much as it likes (more or less), printing more of its bank notes (no doubt to change hands many times), and profiting off of the regular interest payments coming in from the borrower. It’s this ambiguity that leads people to call banking a monster of instability playing fast and loose with our money. Within the accounting format called ‘double-entry bookkeeping’ is the ability to measurably increase the overall money supply by entering numbers on a piece of paper during the loan making process. Whether those two sides read ‘asset/liability,’ ‘credit/deposits,’ or ‘bank credit/specie capital’ is insignificant. It’s in the proportion of one to the other that the fluctuations in money supply increase or decrease, but the ratio itself was fluid in the early days of banking.
“The practice then was less conventional than now, for then, taking advantage of the fact that every item on a bank’s books has both an asset and a liability aspect, it might be called either; whereas now every item belongs rigidly on one side or the other. Thus deposits were sometimes what a bank held and sometimes what it owed; and circulation represented money lent as much as money owed. There is a modern parallel in the fact that bank credit may be measured either in assets or in liabilities, and though the statistical practice of measuring it in loans and investments is now well established, deposits are often taken informally as its measure, and the law provides for its control through the ration of reserves to deposit liabilities.” (Hammond, p. 141)
Banking reform would later come in the form of reserve ratios to restrict the amount of loans on one side of the page to the reserves on the other side. Playing with this ratio became the way to check bank’s influence on the economy at large and prevent collapse of banks who greedily issued to many notes without having enough coin to back them up. But fixing reserve ratios as a universal standard did not and does not provide an effective restraint upon the banking system in general. This method assumes, falsely, that issuance of loans comes attached to the specie in the vault when they are actually two separate functions within a bank. The ratio can go up or down and still be left in tact. What matters is that the confidence trick in the bank’s vaults is upheld and people don’t collectively make a run on the bank. As Hammond explains above, it doesn’t really matter if you focus in on the amount of deposits at the bank or the amount of book credit granted by a loan. They are two separate things that have been joined together within the marble walls and pillars of the bank so that a single thing (money) can be multiplied and dispersed where businesses wants it to go.
The Bank of the United States performed this function in a controlled, centralized manner that serviced a fledgling nation. It’s not so absurd to say that without it, the United States might have crumbled in its infancy under the surrounding colonial European powers and its own war debts. Hamilton’s Bank serviced the interest on the debt, enhanced the credibility of the United States of America abroad, stimulated business, and acted as an early-modern regulator of the banking system.
“its prominence as one of the largest corporations in America and its branches’ broad geographic position in the emerging American economy allowed it to conduct a rudimentary monetary policy. The bank’s notes, backed by substantial gold reserves, gave the country a relatively stable national currency. By managing its lending policies and the flow of funds through its accounts, the bank could — and did — alter the supply of money and credit in the economy and hence the level of interest rates charged to borrowers.
These actions, which had effects similar to today’s monetary policy, can be seen most clearly in the Bank’s interactions with state banks. In the course of business, the Bank would accumulate the notes of the state banks and hold them in its vault. When it wanted to slow the growth of money and credit, it would present the notes to banks for collection in gold or silver, thereby reducing state banks’ reserves and putting the brakes on their ability to circulate new banknotes. To speed up the growth of money and credit, the Bank would hold on to the state banks’ notes, thereby increasing state banks’ reserves and allowing those banks to issue more banknotes by making loans.
The Bank’s branches were all located in the fledgling nation’s port cities. This made it easier for the federal government to collect tax revenues, most of which came from customs duties. Locating the branches in ports also made it easier for the Bank to finance international trade and help the Treasury fund the government’s operations through sales of US government securities to foreigners. Furthermore, the Bank’s branch system gave it another advantage: it could move its notes around the country more readily than could a state bank. The Bank’s branches also helped to fund and encourage the country’s westward expansion, particularly with the establishment of a branch in New Orleans.” [Federal Reserve History Website]
So the utility of this bank is without question. More than a money-making machine for a handful of investors getting fat off collecting interest payments, it actually prevented the excesses of banks from spiraling out of control and wrecking the greater economy – as would happen many times after the two banks were killed. In its virtuous civic function, The Bank of the United States was almost an “anti-bank bank” that looked after all actors within the bounds of the nation instead of a small faction of wealthy investors. The number of those kinds of banks would multiply very soon and the network of private banks would come to dominate the American economy to this day. Had the Bank survived, industry would have progressed much more steadily and without the chaos of epidemic bank failures, greatly reducing the severity of depressions that jaded so many Americans. One can imagine the despair and resentment of a population left holding worthless pieces of paper that used to be as good as money, failing to understand what exactly had gone wrong.
It’s worth looking at how this bank was incorporated, if only to admire the grandeur of an intelligent plan conceived on paper but willed into reality. With the war debts exceeding $150 million from the federal and state treasuries combined, interest payments would need to be effected soon. Direct payment with taxes would have crippled an economy that didn’t have as much specie available to do business as is, with outlying farmers feeling this pain exceptionally. The bank would offer to the public a subscription for future stock of the bank to the limit of $8 million, with the federal treasury owning $2 million for a total of $10 million. The federal government would own one-fifth of the bank and private citizens would make up the remaining four-fifths, drawing interest from the scrips they bought. Once enough specie was collected (which it was almost immediately), the game was in play and debt servicing could commence on the basis of that hard currency.
“Though the authorized capital of the Bank was $10,000,000, of which $2,000,000 was to be paid in specie, the Bank was permitted to organize as soon as $400,000 had been received from the subscribers. Whether much more was ever got from them on successive installments is doubtful, though the Bank subsequently accumulated a treasure much in excess of what the stockholders were supposed to pay. Payment for the government’s stock was accomplished under an authorizations in the charter that was taken over almost intact form Hamilton’s proposal and was presumably intended by him to give the appearance of a cash payment. In effect the Treasury drew for $2,000,000 on the United States commissioners engaged in selling government securities in Amsterdam, deposited the drafts with the Bank, and then drew against the deposit to pay for the stock. Technically this consummated the purchase of the stock with funds borrowed in Europe. But it was not desired to have the drafts go through and the specie shipped from Europe, because it would have had to be shipped back for other purposes. So the Treasury borrowed $2,000,000 from the Bank and used the amount to take up the drafts on the commissioners, with which the whole transaction had opened. The net effect was therefore to leave the government in possession of $2,000,000 of Bank stock and in debt to the Bank for $2,000,000, though technically the money owing to the Bank had not been used to buy the stock but to “restore” the funds in Amsterdam which had been “used” for that purpose.” (Hammond, p.123-4)
It was a kind of trick that can work with the use of a public bank and the stability of a government combined. Only enough specie needed to be acquired so that those who needed it could draw on it when they needed it. The rest of the subscribers, including the treasury, kept their accounts on the books and waited for the interest payments to come in from regular installments. The one-fifth of the bank that the government owned it didn’t actually pay for, it borrowed the money from Dutch financiers already keen on these machinations. Instead of physically transferring specie hand-to-hand, agents of the treasury gave to the Dutch paper promises to pay later. They then used this borrowed money to buy bank stock (which earns interest) and pay off the imbalances of the account as time goes on. It all works because there is enough specie to be drawn out of the bank on occasion, allowing the pretense of convertibility between metal money and paper money to persist. People trusted that there would be enough business in America for these accounts to be settled in the end because there was so much nascent potential on the American continent, the bank allowed them to push paying off debts forward into the future by playing with this divergence in forms of money. Essentially, it was a leap of faith on everyone’s part:
“The early Americans were short of capital, particularly capital in the form of gold and silver. If that dearth of gold and silver had been allowed to hold up their formation of banks, the circle would never have been broken; instead they resorted to arrangements which had the practical virtue of establishing the proper procedure in principle if not in fact. And in time, because the pretenses worked, they accumulated the gold and silver and made the principle a reality. It is a case where a pious lifting of oneself by the bootstraps is preferable to cynical realism or conscientious passivity. And for the most part a saner and more honest practice in capitalization established itself as soon as a surplus of wealth made it possible. Without the initial act of faith, so to speak, the surplus would have been slower in coming. The Americans had declared their political independence before it was a reality, not after; and what they did in the matter of financial competence was much the same.” (Hammond, p.124)
It’s the complexity of the move, the juggling of many different obligations all at once, that makes people resort to religious terminology to explain what in the world just happened before their eyes. But all parties simply had enough trust in the ability for a national government to persist in a stabilized capacity, collect enough taxes, pay investors their installments of interest, and receive the required initial subscription to kick things off. Hamilton was also an eloquent speaker and assured congress that his plan would work. He was right and he knew it.
The Bank of the United States brought together private business and public regulation together at a time when both needed each others help. The bank and public banks like it expanded the total money supply in a controlled and regulated fashion, while giving the government the means to pay off its own debts. When the treasury was forced to liquidate its bank stock, it profited for “$672,000 or 30 per cent, and the dividends it received while shareholder were $1,100,000.” (Hammond, p.207) Public banks are very profitable for the governments they represent, but they partner with the other banks and keep them from stashing these profits all to themselves. If large projects are to be effected without a public bank to borrow from, private banks pocket the interest from that demand for funds. Since banks create money, owning one means you can essentially borrow from yourself, like the confidence trick of the Bank of the United States.
The expediency of the bank can be mimicked in our own day and at the state level. Having a public bank for each state would stabilize the rest of the banks of that state by providing additional money to borrow at lower interests. Interests rates could be lowered across the board, or raised if too much business activity is causing inflation and over-extension of credit; and there lies the great hope: a regulated banking industry unbeholden to the insatiable demands of unchecked private banks. This is not a faux-public central bank like the federal reserve, but one that really works for the people by relieving the strangle hold that private banks have on the creation of money. Governments don’t have to be debtors begging for money to start their projects, slashing public worker hours and benefits, stagnating wages, and paying huge amounts of interest to private bankers when they own their own bank.
Much More than a Whiskey Bottle
The cannabis farmers who found the road to economic self-reliance in the redwood forests of northern California suddenly find the road closed. As the pioneers of the most lucrative industry in California and the first to take the risk nationwide, they are now being cast aside by entrepreneurs with plenty of start-up capital. Multilayered taxes, including a big excise, now threaten the small farmer haven that once was the emerald triangle. [East Bay Express: Nipped in the Bud]
When the back-to-the-land hippies fled a stultifying mainstream American culture, they discovered an older America: the Jeffersonian vision of the self-reliant yeoman farmer. They will likely share the fate of that vision however, trampled upon by industrial and efficient Hamiltonian businessman. Battles for a sustainable use of land and resources, as well as an equitable share in the industry, can and should be fought for. But the biggest battle will be fought over which version of the Hamiltonian vision will be instated in the aftermath. With the new tax and regulation of this massively lucrative industry will come the opportunity to revisit the better side of Hamilton’s legacy: his championing of public-oriented financing in the form of the first Bank of the United States.
Before we get to the first public bank in America, it’s worthwhile to explain the economic situation facing the frontier farmers of that time. Their plight at the hands of Hamilton mirrors the plight of the small cannabis farmer when you substitute weed for whiskey.
The aftermath of the revolutionary war saw a period of radical economic transformation, to say nothing of the unprecedented political innovations. Soon after the revolutionary war and the signing of constitution, congress approved of Alexander Hamilton’s funding scheme to assume all of the debts that the states had incurred and centralize them in the new United States government. This would result in a huge windfall for the bondholders of American war debt: over time they would received both the accrued interests and the principle of these bonds at face-value. Taking on this debt would be the engine that propelled the first Bank of the United States into working order and, in turn, set the country off on the right footing with respect to the rest of the world.
All seems well on the face of it, after all, ordinary farmer-soldiers bought paper war bonds too. But the economic conditions in the west were vastly different than those in the wealthier east. The long time that had elapsed since the issuance of the bonds rendered them useless to farmers in need of metal coins or specie to conduct trade. Years had gone by where nobody could be sure that these bonds would be paid back and people needed hard money to go about their lives. Most of the revolutionary war bonds ended up in the hands of the eastern merchants who could afford to hold onto them during the long wait before redemption. The lack of acceptable currency in the west convinced greedy speculators to scour the western lands and swoop them up on the cheap. Western farmers needed acceptable cash immediately and were desperate to sell these bonds and chits. This drove down the prices of to a fraction of their original worth. But when Hamilton’s financial plan was passed, the bonds suddenly gained their full value back and wealthy easterners reaped a huge windfall. Financiers of the east had swindled the frontiersmen of the west less than ten years after they had fought and defeated the British Empire.
And that’s just the tip of the iceberg. The greatest change took place when the new invention of paper currency, called colonial scrip, was taken away after the establishment of Constitution in Congress. No longer could states issue their own currency and make it easier for average person to conduct business. Paper money was the brainchild of Benjamin Franklin and a huge hit with the poor western farmers that lacked specie. It was a totally new brand of finance that facilitated inclusive economic activity, one of the most revolutionary of innovations in a time of so much revolutionary activity. The only problem was that it created currency value inflation due the ease of printing more whenever the occasion arose. The real conflict came, however, from the depreciation of the bonds that wealthy merchants held. Increasing the money supply by printing of more paper money meant that the return on the bonds came back with weaker money than it was lent with. Creditors took a reduced return on their investment but everyone else (the vast majority of Americans) benefited from the ease of doing business. The more money available, the more poor farmers could conduct trade. It was a clear class conflict between debtors and creditors: creditors hated the uncertainty of price fluctuations and taking a bath on war bonds, debtors wanted more money in the economy at large and therefore more economic equality.
Populist finance in America has a long history that rarely makes its way into mainstream canon. A number of authors have written on the subject and deserve praise for their efforts. So much of the historical activity of a people that claims such a democratic heritage was directed at wealthy financiers who got rich at the expense of the vast majority. These democratic actors had potent critiques, alternative ideas that could work, and sound minds for political economy. They simply lost the important battles of history and history, as we all should know, is written by the victors. As William Hogeland put it (the first author who opened my eyes to the history of missed opportunities for American democratic finance in Founding Finance: How Debt, Speculation, Foreclosures, Protests, and Crackdowns Made Us a Nation): “It’s Hamilton’s America… we all just live in it.”
Summarizing the economic grievances of western Pennsylvanians, Terry Bouton writes,
“During the 1780s state leaders had eliminated paper money, which was the primary medium of exchange, especially in the back country, where gold and silver coins were always scarce. They had killed a government loan office that had offered long-term low-cost credit to small farmers and craftsmen – and replaced it with a private bank that offered loans only to merchants and land speculators. The state government had adopted a plan to repay the Revolutionary War debt that taxed the soldiers and farmers who had fought and supplied the war effort so that wealthy men who had speculated in once-worthless war bonds and IOUs could make a financial killing. Those new taxes were often to be paid in gold and silver. All of these policies stripped the countryside of cash and left thousands of farmers unable to pay debts, mortgages, or taxes. The result was waves of sheriff’s auctions that swept the state, a floodtide of misery that, in [William] Findley’s home county, foreclosed about 40 percent of the taxable population.
At the same time that ordinary Pennsylvanians were losing cows, tools, and farmland at auction, state leaders were making it increasingly hard for them or their children to acquire new land. Officials at the land office gave preferential treatment to big speculators (including themselves). Revenue officials refused to prosecute large speculators who had not paid their taxes at the same time that they pushed to foreclose ordinary taxpayers. Judges ruled in favor of wealthy speculators over settlers in nearly every land conflict. In 1792 the state supreme court turned a clear anti-land-speculation law into a pro-speculator one. The law had put caps on the amount of land anyone could purchase to limit speculation. Defying the law’s stated objectives, however, the supreme court ruled that the limits applied only to small farmers and that wealthy speculators could buy as much land as they could afford[.]” (Bouton, ‘William Findley, David Bradford, and the Pennsylvania regulation of 1794,’ in Revolutionary Founders, p.237-8)
With the war over, it seems that the Federalist who took charge of the new government felt the poor farmers of the west were expendable. The new measures crippled the financial base of the liberty-loving rabble-rousers and bolstered the already wealthy speculators that Hamilton championed, setting a precedent that has more-or-less held up throughout American history. Populist direct action had been the bread-and-butter of the movement for independence in the colonies and the new government now regarded them and their proponents as a threat to the new order. This was all very painful for untamed patriots, with this pattern of financier-oriented policy fostering two previous militia formations before the whiskey tax, but when the excise tax came it added insult to injury. The whiskey tax struck at the livelihoods of the very people who joined Hamilton in fighting the British and creating a new republic.
What makes the whiskey tax so hurtful is not that it kept uneducated farmers in the wilderness from getting drunk, distilling and selling whiskey (often to those with the money to buy it out east) was a cost-effective strategy for earning an income through trade. After all of the financial attacks that drained the economic base of the western farmers, now their last profitable trade was being hit by an excise tax. Whiskey distilling drastically reduced the transportation costs in comparison to other goods. It allowed subsistence tenant farmers and self-sufficient landowners alike to sell a valuable product from the periphery back to core market at a reasonable profit. Hogeland explains this dynamic the best: whiskey was exceptional,
“… for being a cash crop, with eager markers both within the region that produced it far away. A gallon of good rye whiskey might sell for only twenty-five cents in the west; easy of the mountains, it could bring from fifty cents to a dollar. Hauling twenty-four bushels of milled rye over the Alleghenies took three pack animals with projected revenues of a mere six dollars; costs outran revenues. Reducing those bushels, at home or at a community still, to two eight-gallon kegs of whiskey amplified their value almost three times while reducing transport requirements to a single animal.
So with a value nearing the absolute, whiskey became currency in places where coin wasn’t seen. Always exchangeable for cash somewhere down the line, whiskey maintained good value against metal. That tended to democratize western economies… The product gave cash-starved segments of society opportunities for small-scale commercial development that might begin freeing ordinary people from debt and dependency.” (Hogeland, p.178)
So whiskey distilling kept these humble farmers economically afloat. Distilling whiskey and selling it back east, just like growing cannabis from the 1970’s to the present, kept communities moderately prosperous without going big and corporate. Their distilleries were often used communally and seasonally. The excise tax on spirits disproportionately effected those smaller distillers because the larger distillers closer to the eastern core could pay a lower tax rate by keeping the stills churning out whiskey bottles all year long. The tax was calculated with an assumption that the stills would be used year-round: impossible for seasonal independent farmers but advantageous to business-oriented distillers seeking to maximize the profits from their investment in their distillery. Large distillers could lower their prices and push out the smaller ones hit harder by the excise. This was complicated macroeconomic tinkering and Hamilton was smart enough to understand the consequences of his legislation. Frontier farmers must have seen this move as yet another targeted attack by financial aristocrats.
Resistance to the first excise taxes in Britain, as Thomas Slaughter describes early on in his The Whiskey Rebellion: Frontier Epilogue to the American Revolution, was one of the quickest and angriest responses ever engendered by a government’s tax scheme. Excise taxes are also called “inland taxes” or “internal taxes” and levy a percentage of the value of a commodity at the point of production. High war costs during the English Civil War forced seventeenth century British governments to seek more revenue. “Opposition was immediate, violent, and persisted in some regions for over a century thereafter… a mob burned down the London excise house during the 1650’s.” (p.12) The core-periphery dynamic was at play here, with London and other central regions of the empire being easier to administer than the farther reaches. “Resistance was always greatest in Scotland, Ireland, Wales, and the outlying rural parts of England.” (p.12) Yet, despite their unpopularity, excise taxes remained a feature of life in the empire. “Indeed, despite pockets of resistance, the excise surpassed the land tax and customs duties to become the single most lucrative source of government income between the years 1713 and 1799. For much of that period it constituted over 40 percent of all Treasury receipts”. (p.13) American farmers no doubt had a collective memory of these tax measures and did not wish to see a repeat in their new country. To add on top of the financial hardship and pro-speculator policies drying up their wealth an excise tax that disproportionately affected their most lucrative business would have seemed like a declaration of war. After all, the impulse to independence and revolution in 1776 was summed up by the slogan “no taxation without representation.” Thousands of farmers did not wish to see the same enemy that they had fought so hard against suddenly reappear under a different guise.
Somewhere between 7,000 and 10,000 men descended upon Braddock’s Field near Pittsburgh, Pennsylvania in 1794 to formulate a response to the excise tax. (Slaughter, p.234) These regulators came from all over the peripheral lands in an orderly and deliberate fashion. Similar actions had occurred recently in the Newburg Crisis and Shay’s Rebellion (or the Massachusetts Regulation) and they drew from a history of populist tax and creditor resistance from the traditional Anglo-Saxon past. The Whiskey Rebellion was a series of mass actions that sprang up all across the countryside – sympathy demonstrations even took place in the big eastern cities. Debt courts were shut down, road blocks were created to stall property foreclosures, and tax collectors were tarred and feathered. (Bouton, p.241) Resistance was a widespread phenomenon that a great deal of the western culture took part in. Though mostly peaceful, tarring and feathering is no benign action – these people were serious about protecting their participation in a trade that became essential to their livelihoods.
Though mass assemblies brought some orderliness to the tax-resistors, they remained divided on how to continue in the face of the impending military campaign to round them up. Some wanted to meet Hamilton’s volunteer/mercenary militia head on or even secede from the republic and found their own nation. Others like William Findley wanted to organize the people into a new party and win seats in congress. There inability to unite, together with the presence of Hamilton’s army enforcing official national law, caused them to disintegrate. Added to this were reports coming in of the atrocities committed by liberty-loving revolutionaries in France, souring the public opinion of widespread disorder and generating well-founded anxiety. The private army raised to put down the rebellion arrested what regulators they could, sometimes indiscriminately seizing individuals at will. To his credit, president Washington pardoned every person imprisoned for their seditious activity, the damage to the movement having been done. Memories of this event and other events like it led to the political collapse of the Federalist party in just a few years. The excise tax followed them out the door when Jefferson’s Democratic-Republican party repealed it.
As Hamilton’s army approached, thousands could see the writing on the wall and fled farther west into the wilderness. Resistance to rich eastern elites would thereafter be fractured or be duped into picking the wrong targets. The coalition that got Thomas Jefferson elected and shook up the electoral shape of America understandably reviled Hamilton’s bank and the means he used to establish it. As prominent figures like James Madison learned of the financial might of villainous speculators, he too turned on his Federalist ally. Madison tried to distinguish between rightful or original owners of government bonds so as not reward rich speculators, but Hamilton’s plan was complete and Madison’s plan infeasible. No records were kept for the sale of these bonds that had changed hands many times. Such was the double-edged genius of Alexander Hamilton: his mastery of finance came at the cost of alienating those around him. He could personally rout the frontiersmen and create many enemies in Washington yet still be revered for the extreme utility of his public bank.
Much to their frustration, neither Jefferson nor Madison could deny the utility of a public bank. Jefferson never understood how debt kept the money system stable and acquiesced to his Treasury secretary Albert Gallatin’s level-headed advice. The agrarian sentimentality cultivated in Virginia and reflected in much of the population of America left Jefferson unable to shape the economic future of the country he did so much to inaugurate. Madison chartered a new Bank of the United States himself to handle the debts from the War of 1812. When that bank was up for recharter, Andrew Jackson, swept into office on popular anger against the financial elite, vetoed it. It would take another 50 years or so for populist agrarian crusaders to realize that government/state owned banks were viable institutions that could protect their interests.
The scars left by rich speculators lingered on for some time after whiskey tax and subsequent repression. From then on, distrust of banks would be a feature of oppositional political thinking in America. Banks would win the future however and without a public option in the banking sector, wealthy businessmen could simply charter their own private versions. For the better part of the nineteenth century, all banks would be viewed by farmers as monstrosities that use a baffling magic trick to mess with their fortunes. But banks are not necessarily evil institutions, the measure of their social utility depend on who is in control of them. Today banks are mostly private corporations with shareholders that demand the maximization of profits as a matter of principle. It need not be this way though and, ironically, Hamilton himself illustrated the best populist alternative to the machinations of the wealthy 1% of today with the Bank of the United States.
The next piece will examine this functioning of this bank and public banking more generally.
What the Whiskey Rebellion Can Teach Us About Using Cannabis Money for Public Banking
Something big is stirring out west. Since the California voters passed Proposition 64, cannabis use and cultivation has been made legal for all adults over 21 years old and the consequences of this law are far reaching. When we contrast the history of cannabis cultivation with the new practices resulting from Prop 64, a story emerges that is at once new and old. What is new is a centralized, regulated, and taxed cannabis industry replacing the decentralized small farmers of the past, what is old is a story of taming frontier economies with high taxation. It’s a story that is liable to provoke romantic sentiments for the plight of the small-time farmer in the face of unstoppable capitalist progress but we can do better. With the right degree of activist lobbying the cannabis industry can lead the charge in demanding a California state public bank – a bank that would solidify the populist legacy of the outlaw pioneer cannabis farmer.
Something similar was accomplished in the first years of the republic. During the so-called ‘Whiskey Rebellion’ (a term invented to discredit the uprising) farmers on what was then the wild frontier formed militias to resist the new taxation policy of Alexander Hamilton. These rowdy ‘regulators’ protested against a financier-oriented tax plan that was onerous and unfair even though it ended up financing a beneficial new institution. Their anger was justified: western farmers had been targeted by the wealthy easterners before and now further economic burden would befall them where they could afford it the least. Protesting in those days had a different meaning than it does today. We haven’t seen someone tarred-and-feathered in centuries, nor have we seen spontaneous armed uprisings in quite some time. Instead, we should look at what all of this tax revenue generated by the whiskey tax was used for and what all of this money generated by the Cannabis industry could be used for now.
Despite the absence of tax-resisting militia-men today, the similarities between the changes taking place within the cannabis industry and the Pennsylvania regulation of 1794 are striking, especially when we look into the realm of banking. Although the new cannabis tax revenue for California can’t go towards funding a public bank (the funds generated by prop 64 will go into a special fund predesignating where the money will go), the cannabis industry needs a place to safely store its profits and a public bank is the only kind of bank that can fit the bill. Marijuana is still a schedule one illegal substance at the federal level (amazingly, given its proven medicinal properties), so businesses operating in cannabis do not have access to nationally chartered banks under FDIC requirements. A huge industry generating many billions of dollars is forced to operate with duffle bags full of cash. A state owned and operated bank, on the other hand, bypasses this oddity and creates a win-win for both Californians and the cannabis industry.
Public banks have an enormous benefit for the economy within which they operate. Hamilton conceived the first Bank of the United States and the means to fund it entirely on his own. It helped stabilize the finances of the nation in its infancy after it had accumulated massive war debts both foreign and domestic. By a stroke of genius, those debts were parlayed into a system that convinced investors to do business with the unproven new nation and continue to allow the government to borrow on favorable terms. War debts became the basis of the new economy under this program of ‘Assumption’ and bondholders would continue to hold confidence in doing business with the American government. The only problem was the start-up costs came from poor frontier farmers already beset by economic suppression. It was a giant slap in the face to the people who had fought for liberty and independence, but the bank that financed it stabilized a nascent country in precarious circumstances. Today we have much more willing tax base, in spite of the many resentful cannabis farmers getting edged out by the high cost of going legit, and with the help of persistent public banking advocates a Public Bank of California that benefits the entire state is within reach.
The differences between these two events separated by over 200 years are numerous but three important elements bring them together: a profitable yet unregulated agrarian economy suddenly besieged by taxes, a maligned commodity that is much more than what it seems, and the establishment of a public bank (potentially this time). Like the cannabis farmer on the west coast, the whiskey distiller on the frontier lands of western Pennsylvania, Massachusetts, Kentucky and elsewhere used distilled spirits as a cost-effective means for earning an income. Whiskey was downed by almost everyone in America and the frontier people could sell it to the easterners with a fraction of the transportation costs compared with other goods. At their high points both whiskey and weed were so valuable that they were used as money. [see Terry Bouton, ‘William Findley, David Bradford, and the Pennsylvania Regulation of 1974’ in Revolutionary Founders: Rebels, Radicals, and Reformers in the Making of the Nation]
The burdens of taxation hit communities like these particularly hard. The whiskey rebels turned to the traditional form of protest to try and stop the tax collectors from charging distillers: armed mob threats against tax collectors, shutting down courts, and erecting liberty poles for gathering points. We’re pretty far away from seeing people using such tactics in 2018. However, a public banking movement has been boiling up for years now in both cities and states from Oakland to New Jersey. [Public Banking Movement Gains Grounds in Cities and States across the US] If the cannabis industry can rally for a bank that would accept its money as deposits it would be a complete game-changer, offering a beacon of light to the similar public banking projects already underway in 20 other states. [How Public Banking Is Winning the West]
Populist finance has seen a resurgence since the Occupy movement put the spotlight on the greed of private banks and the vast disparity in wealth between the rich and the rest of us. [link from occupy.com] While frontier regulators of the late-eighteenth century opposed all financial schemes, today progressives understand that dealing with massive wealth inequality will take drastic measures at the state and national levels. Taking on Wall Street will require more than agrarian regulators marching against the tax man or, in other words, good-old-fashioned direct action. California State Treasurer John Chiang has been conducting public hearings after the formation of the Cannabis Banking Working Group and there the public made its desire for public banking known. Instead of giving them the brush-off, Chiang responded positively and it seems the lobbying by public banking advocates has been met with some success. [Activists Urge California Public Bank not Limit to Cannabis Revenue] The issue now is whether or not the prospective new bank will be extended beyond just the cannabis industry to cover the needs of general California business.
These developments are encouraging for populist finance. In an era beset by financial parasitism and high private debt levels, public-based solutions to money and banking point the way towards prosperity and equality. What will follow is a story about two moments in American history that connects the populist practices of the whiskey-fueled past with our pot-blazing present.
Both Socialism and Populism have been invoked during Bernie Sanders’ presidential campaign run and this has led to no small amount of conceptual confusion among the American people – myself included. His rhetoric and record as a senator has been overwhelmingly anti-Wall Street, pro-worker, and, well, popular, so when I heard the label “Socialist” coming from the more conservative side from the mainstream media I thought it was another scare-tactic and then embraced it as a possible cure for our neoliberal malaise of debt-fueled Superimperialism [Michael Hudson’s latest on US Neoliberal Empire]. His brand of Socialism isn’t the type that conservatives would have you believe though, many avowed Socialists have even distanced themselves from Sanders. It came as somewhat of a surprise, but more of a moment of clarity, when Douglas Edwards (@SebastosPublius) tweeted to me that he is not in fact a Socialist but still demands support from the left in the way he steers the conversation in the media away from compromise with wealthy financiers and corporate giants embedded within the political process [How Wall Street Is Burning Democracy]. Continue reading “Socialism and/or Populism in America”
I participated in talk on the overarching and less-understood workings of the monetary system at the US Social Forum in San Jose, California last week called Who’s Money? Our Money! We’re working on getting a draft of the talking points together into one document, but here is the list of references we draw from in our research (you know, to prove we’re not crazy):
Icelandic Proposal: http://tinyurl.com/pwzwzpo
Positive Money Website: http://positivemoney.org/
Positive Money “Creating a Sovereign Money System.”: http://tinyurl.com/kgkk8rv
Bank of London “Money Creation in the Modern World.”: http://tinyurl.com/nnd7wwq
IMF Working Paper: The Chicago Plan Revisited : http://tinyurl.com/9vuqh3p
Ellen Brown’s “Web of Debt.”: http://tinyurl.com/npsvkr4
Ellen Brown’s The Public Banking Solution : http://tinyurl.com/pj5vdkd
USPS Office of the Inspector General “Providing Non-Bank Financial Services for the Underserved.” : http://tinyurl.com/m6jufyf
USPS OIG “The Road Ahead for Postal Financial Services.”: http://tinyurl.com/l4ujhf4
Elizabeth Warren “Coming to a Post Office Near You: Loans You Can Trust?”: http://tinyurl.com/paslzfn
Bank of North Dakota: http://banknd.nd.gov/
Federal Reserve System: https://en.wikipedia.org/wiki/Federal_Reserve_System
Community Check Cashing, Oakland: http://communitycheckcashing.org/
I did a brief speech at the latest debtors’ assembly for Strike Debt Bay Area on both Fringe Finance and International Debt. With the time allotted I couldn’t get to nearly as much as I wanted to, so I will reproduce my notes here:
The Debt-System effects everyone, even people outside of the traditional banking system. It costs people who don’t have a bank account (the unbanked or underbanked) more money just to use their own money.
People choose not to use banks mainly because they don’t have enough money to meet the minimum balance requirements of banks and have had bad experiences with overdraft charges. They are primarily poor people.
The un- and under-banked people make up about one-quarter of Americans, that’s 25% of all people in America not being served by the banking system. These people must turn to Alternative Financial Services.
Check Cashing Outlets
Check Cashers take out about 4% of your pay check. For someone who uses Check Cashers their entire life, the average amount given over their lifetime is about $40,000.
Check Cashing stores have more than doubled in number this century, and the cost for using them has gone up by about 75% in the period 1996-2006.
Pre-Paid Cards have been getting popular, they are used by 13% of people in the US. They also charge you to access your own money, though a but cheaper than check cashers.
Examples of Pre-Paid Cards: GPR Cards and EBT Cards.
GPR (General Purpose Reloadable Cards) have many fees: monthly fees, activation fees, inquiry fees, and more.
EBT (Electronic Benefit Cards) are for funds given by governments to cut down on paper use (and extract fees). They are better for you when from the federal government than the state (like with Food Stamps and Unemployment Benefits). In California, fees and other costs of use are better than other states, but they’ll still hit you with lots of fees.
Welfare recipients paid $17 million plus in fees and ATM surcharges in CA alone in 2012. So fees add up with Pre-Paid Cards.
Pay Day Loans
12 million people took out a Pay Day Loan in 2012 and they’ve been getting more and more mainstream since the 2008 financial crash.
In the early 1990’s, there were less than 200 Pay Day Lenders, now there are 23,000 – that’s more than McDonalds for some perspective.
Pay Day Lenders give you money you need now at very high interest rates. Borrowers often end up paying back the Pay Day Lenders many times more than the original loan.
Most people (69%) take our Pay Day Loans to meet everyday expenses. So it’s not just emergencies that lead to Pay Day Loans, as some people believe.
The Pay Day Lenders’ game plan is to keep you in their Debt-Trap and keep the interest rolling over. They call it “Churning”: they don’t want you to pay do back the loan ASAP (only 2% of borrowers actually do). 75% of Pay Day Loans are for the purpose of this Churning and it nets them $3.5 billion.
Pay Day Loans are unsecured, meaning if you default they can’t repossess anything you own. No Debt Collectors, so don’t be frightened by them. They can contact a Credit Reporting Agency and lower your credit score, but they mostly use this as an empty threat.
There are also Pawn Shops, Auto Title Loans, and Rent-to-Own Stores which are more fringe finance institutions that extract fees, interest, and possessions primarily from poor people.
Solutions to Fring Finance:
Community Check Cashing exists in Fruitvale area if you can travel there conveniently. CCC works on a non-profit model which we are trying to extend in our working group. Join us if you like!
Postal Banking is the big one. It has already worked for over 50 years in the twentieth century very well. Postal Banking could perform just about all of the fringe finance business’ but on a cheaper public model, without the fees and usurious charges. Postal Banking is used in many countries now successfully, it is a kind low-level but far-reaching public bank.
Fringe Finance is perhaps the lowest level of the debt-system. People outside the banking system still get caught up in the debt-trap and are hit especially hard.
At perhaps the highest scale of the debt-system there is International Debt – the opposite extreme where entire countries are put under the control of financiers who weaponized debt.
This is how the standard explanation goes: A sovereign country must borrow money and go into debt if it spends too much money and doesn’t collect enough taxes.
But they do this because central banks and other international institutions prevent them from issuing their own currency and controlling its supply, so that these countries cannot control the supply and creation of their own currencies.
Control of the money in a country is in almost every case now controlled by private banks and their willingness to lend.
The Bank of International Settlements (the BIS) in Basel, Switzerland sets the rules of the global financial game for most of the countries on the planet. It was set up in 1929 as a way to shore up the power the international bankers were losing during the beginning of the Great Depression.
But it was right after a World War II that the main standards of the global financial system were set at the Bretton Woods Conference in 1944. This is where the IMF and World Bank were established.
When a country needs money to expand its economy, repay a previous debt, or gain more foreign currency reserves, it must appeal for credit from the IMF or World Bank, or issue bonds (92% of bonds are issued/sold at New York or London).
When countries take out loans from the IMF or World Bank, they must grow their economies mainly by increasing exports. This allows them to match their debt repayment with profits from exporting to consuming nations. If they cannot repay all of the debt from those loans by competing on the global export market, they are caught in the debt-trap.
The IMF and World Bank then impose structural adjustment programs that slash public institutions, public benefits, and public infrastructure. They force countries to privatize public goods like land and industry, because they have to pay the debt instead of their own people.
Privatizing public goods, land, and services gives countries a one-time boost in profit but cancels all further public profit to governments and the free use of the commons.
So, this is all about control, and debt-based finance is perhaps the primary tool for control today besides military intervention.
Any country that tries to break free and play by their own rules can attacked with currency raids and short selling on the foreign exchange market – which devalues an entire worth of a country’s economy.
Nations led by the US can also impose sanctions, saber-rattle, and fund revolutions within the dissenting country to establish sympathetic military rulers (or Juntas).
This is what happened in Chile in the 70’s, Libya a few years ago, what’s happening in Syria and Venezuela now, and what they are trying to do to Iran and Russia. There are many other examples in South and Central America, the Middle East, and Africa.
A good example with a happy ending is Argentina. 70’s – military dictatorship. 80’s – Neoliberal regime that led to a hyperinflation scenario of too much money borrowing. 90’s – massive privatization of natural resources (oil, roads, and banks). The interest in the loans and austerity conditions attached to them meant an uncompetitive, depressed economy.
So, in 1995, there was a run on the banks and massive capital flight out of the country – a major depression.
Now for the good part: without any kind of decent banking system, people turned toward alternative currencies (local communities made-up their own money).
Propel conducted massive, sustained protests that delegitimized the entire Argentinian government and made them fear for total loss of control. “Que se Vayan Todos” – “They can all go (to hell)” was their main slogan.
This pressure from below forced the Argentinian government to default on its International Debts. By re-nationalizing it’s once privatized industries, doubling social spending, and public investment, Argentina’s economy grew rapidly in the 2000’s. They went from negative growth to over 8% per year growth.
Recap on Argentina: by walking away from its debts, brought on by massive popular protest, and a re-nationalization of privatized goods, services, and land, Argentina saw major economic revival.
They were able to restructure their debt to far less than the original amount and paid off their IMF debt altogether. They did this by *issuing their own currency under their own control* and boosting public investment.
In the 2000’s, Argentina saw poverty drop from over 50% to under 15%.
Vulture funds bought some debt and refused to renegotiate it down, and there is an ongoing court battle over these culture funds right to collect the entirety of the debt that they bought from someone else.
The big one is Sovereign Money: to allow treasuries to print their own national currencies without borrowing it first from Private Central Banks or issuing bonds. The Central Banks would be public and under public control vs. for-profit private banks.
It happened in America during the civil war when Lincoln printed Greenbacks, which are the original design for the dollars we use today. Now, however, they are federal reserve notes, not treasury notes).
Canada is under a court battle for this right now and Iceland gained this after their revolution…
And Finally, Public Banks
Public Banks put money earned from interest on loans (profit) into the accounts of city and state governments instead of private banks because it would be a municipal, state, or regional bank.
They would partner with local banks and credit unions not compete with them.
Luckily we have one already in the State of North Dakota. The Great Recession and bank failure of 2008 had no effect on their economy whatsoever.
Most all major successful economies around the world today have a strong public banking sector: China, India, Brazil, Russia, and Germany (plus more).
The debt-system effects us all from big to small, from those outside of the banking system to entire countries, Fringe a Finance to International Debt. There are alternative models and solutions at each step, but we need major public pressure to recapture public goods, services, and land before these solutions can be put in place – like in Argentina.
The sources for this speech were The Debt Resistors’ Operations Manual [link], The Public Bank Solution by Ellen Brown [link], and The Democracy Project by David Graeber (for the bit about Argentina’s massive public protests of delegitimization)
Not only does the dollar enable the US empire, but also protecting the dollar’s status is a major reason for US imperial wars. American financial and military strength is based upon the fact that the dollar is the world’s reserve and international trade currency, creating a global demand for dollars which allows the US to print as many greenbacks as it likes. It then pumps them into the overbloated finance capital system and uses them to fund its criminal wars…
…Although it has so far been unsuccessful, the idea of rebalancing the world monetary system is extremely threatening to the US, and goes a long way toward explaining recent US wars and warmongering, which may otherwise seem irrational. The line of NATO bases in Eastern Europe and the coup d’etat in Ukraine are attempts to split Europe from Russia, trying to keep a subordinated Europe in the US sphere, prevent a single Eurasian economic area, and isolate and destabilize Russia. The Transatlantic Trade and Investment Partnership has the same goal. Weakening Russia and China (and the BRICS in general) on a military, economic and political level, with a regime change in mind, is a fundamental part of the US strategy for maintaining dollar hegemony. The US therefore has surrounded them with bases and continues to try to destabilize them. The US presence in the Middle East serves not primarily to gain access to its oil and gas (the US has its own, especially since the fracking boom) or even to control access to them (the Chinese are already there), but first and foremost to protect the petrodollar, to ensure that the global fossil fuel markets continue to be denominated in dollars. Iran has been talking about wanting to de-dollarize its oil and gas trade for years – thus, it and the Shia crescent are in the US line of fire…
…This is exactly in the interests of US financial imperialism: to economically undermine any rivals that question dollar hegemony. It is absolutely unacceptable that one country should arrogate to itself the right to set a wildly loose money policy for years and then tighten it at whim, giving the rest of the world a violent thrashing. It is unacceptable that any one country control the world’s reserve currency. As the above quote says, because of the circumstances created by QE and the zero interest rate policy, today if the US economy does well, the global South suffers. It’s a zero-sum equation. This is throwing burning obstacles in front of their process of de-dollarization, and making them suffer. On purpose? Again, it would be difficult to impute too much individual agency behind these effects, but they are predictable, necessary and not unprecedented consequences of the imperial monetary policy waged by the US for years. The question of agency in this case is moot: these policies serve the empire. They go along with and have similar effects to the more obvious forms of financial imperialism such as sanctions. The US should be held accountable for the disasters it sows, and the world should remove its imperial privileges, through the creation of a neutral world reserve currency.