Submission to the Select Committee on Lending to Primary Production Customers Department of the Senate, PO Box 6100 Parliament House, Canberra ACT 2600 [email protected] May 19, 2017 Chairman and members of the Committee, thank you for this opportunity to submit written materials in reference to your inquiry. I am a former civil litigation attorney living in Los Angeles, California, USA, and the founder of the Public Banking Institute, a non-profit research and educational organization that promotes public-interest banking and monetary reform. I am also the author of 12 books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free and The Public Bank Solution. I have written over 300 articles concerning monetary matters and public banking, available at http://webofdebt.wordpress.com. I wrote a chapter in The Public Bank Solution on the Commonwealth Bank of Australia, which in its early years was a remarkable example of a national bank using the power of banks to issue credit for the benefit of the nation and the economy, a power that later got usurped by a private international banking cartel. (Excerpts from that book chapter are appended below.) It is now widely acknowledged that banks, not governments, create the majority of the money supply. It is submitted that Australia would be well served to restore its earlier ground-breaking model of a truly public central bank, one dedicated to serving the interests of the economy and the people. Provincial governments could also reclaim the power to create credit for the benefit of their local economies, by establishing publicly-owned banks on the model of the Bank of North Dakota, discussed below. Economists even at the Bank of England and the Bundesbank now acknowledge that the money banks lend is simply created as accounting entries on their books. In a widely-noticed March 2014 paper entitled Money Creation in the Modern Economy, economists at the Bank of England wrote: The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits . Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.1 [emphasis added.] This was also acknowledged by the Bundesbank in an April 2017 report. The English-translation summary states: In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. [B]anks can create book money just by making an accounting entry: according to the Bundesbank's economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers.”2 In a January 2017 report by the New Economics Foundation (NEF) and Copenhagen Business School titled “Making Money from Making Money,” the researchers conclude that 73 percent of banks’ profits come from “seigniorage” – the profits generated through the creation of money itself. This is a huge drain on the economy. The hole could be plugged by returning the power to create money to the national government (which can issue the national currency directly) or to local governments (by forming their own banks, which can issue money on their books as all banks do). The NEF abstract states: There is now widespread acceptance that in modern economies, commercial banks, rather than the central bank or state, create the majority of the money supply. We show that in the UK, commercial bank seigniorage profits amount to a hidden annual subsidy of £23 billion, representing 73% of banks’ profits after provisions and taxes. In modern economies, such as the UK, . , money in circulation created by the state – physical cash – only represents around 3% of the total money supply. The remaining 97% is lent in to economies as the digital IOUs of commercial banks – the deposits that are entered in to our bank accounts when banks make new loans. [B]anks, unlike other financial intermediaries . , do not have to acquire funds in the first instance before making loans. This is because banks’ IOUs – bank deposits – have been privileged by the state as having the status of money which people must hold to make payments in the economy. The findings suggest that a large proportion of banks’ profits are underpinned by their control over the money supply, an essential piece of public infrastructure. A number of economists and civil society groups have argued that the central bank should create a higher proportion – or all – of the money supply. Commercial banks might argue that reductions in their seigniorage profits would lead them to contract their lending or charge higher interest rates. However, most bank lending in advanced economies flows in to commercial and domestic property and other financial assets rather than to businesses. Seigniorage profits could be seen as another form of public subsidy for the banking sector, supporting excessive pay and non-value-creating lending that contributes to rising house price and financial-asset prices.3 Recapturing the seigniorage for the benefit of the public would not only return massive profits to the government that could be used to increase services, build infrastructure, or cut taxes, but would allow lending to be channeled into those sectors of the economy where goods and services are produced and jobs are created. This could be done not just at the federal but at the local level. The stellar (and only) model of a publicly-owned depository bank that does this in the United States is the Bank of North Dakota (BND). It holds all of its home state’s revenues as deposits by law, acting as a sort of “mini-Fed” for North Dakota. According to reports, the BND is more profitable even than Goldman Sachs, has a better credit rating than J.P. Morgan Chase, and has seen solid profit growth for almost 15 years.4 The BND continued to report record profits after two years of oil bust in the state, suggesting that it is highly profitable on its own merits because of its business model.5 The BND does not pay bonuses, fees, or commissions; has no high paid executives; does not speculate on risky derivatives; does not have multiple branches; does not need to advertise; and does not have private shareholders seeking short-term profits. The profits return to the bank, which distributes them as dividends to the state. Interestingly, the goal of the BND is not actually to make a profit. It was formed in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. As noted in a November 2014 Wall Street Journal article: It traditionally extends credit, or invests directly, in areas other lenders shun, such as rural housing loans. [R]etail banking accounts for just 2%-3% of its business. The bank’s focus is providing loans to students and extending credit to companies in North Dakota, often in partnership with smaller community banks. Bank of North Dakota also acts as a clearinghouse for interbank transactions in the state by settling checks and distributing coins and currency. The bank’s mission is promoting economic development, not competing with private banks. “We’re a state agency and profit maximization isn’t what drives us,” President Eric Hardmeyer said.6 The BND passes its savings on to the community. In 2015, the North Dakota legislature established a BND Infrastructure Loan Fund program that made $50 million in funds available to communities with a population of less than 2000, and $100 million available to communities with a population greater than 2000. These loans have a 2 percent fixed interest rate and a term of up to 30 years.7 Compare that to a taxable rate on infrastructure bonds of 4 to 6 percent or more in other states.8 Moreover, the 2 percent interest the BND collects goes back to the state, so it’s a win-win-win for local residents. The proceeds of these 2 percent loans can be used for the new construction of water and treatment plants, sewer and water lines, transportation infrastructure and other infrastructure needs to support new growth in a community. The BND also has a loan program called Flex PACE, which allows local communities to provide assistance to borrowers in areas of jobs retention, technology creation, retail, small business, and essential community services.9 For more on all these issues, please see my website at http://WebofDebt.wordpress.com. Respectfully submitted, Ellen Brown Public Banking Institute http://PublicBankingInstitute.org _______________________________________________________________ Appendix: Excerpt from The Public Bank Solution on The Commonwealth Bank of Australia A much larger experiment in funding infrastructure and industry with “national credit” was conducted in Australia in the early 20th century. In 1912, a year before the Federal Reserve Act was passed in the US, the Australian government also established a central bank; but its bank was publicly owned and controlled. Australia, like the US, had suffered a devastating bank-induced depression in the 1890s. The private banking system having failed, the Labor Party decided that Australia needed a publicly- owned national bank backed by the assets of the government, one that could maintain the banking system in times of financial stress and guarantee that money could be found for home building and other needs.10 In 1911, the Labor government passed a bill establishing a national central bank on a radical new model: the bank would simply lend the nation’s credit, unbacked by either silver or gold.