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 of , 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 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

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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. It was a bold move at a time when the world was still on the . The Commonwealth Bank operated successfully in competition with private banks for most of the 20th century, conducting both savings business and general bank business.

In a 2001 article titled “How Money Is Created in Australia,” David Kidd described the Bank’s early accomplishments:

At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia’s first world war effort from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction of 1%, thus saving Australians some $12 million in bank charges. In 1916 it made funds available in to purchase 15 cargo steamers to support Australia’s growing export trade. Until 1924 the benefits conferred upon the people of Australia by their Bank flowed steadily on. It financed jam and fruit pools to the extent of $3 million, it found $8 million for Australian homes, while to local government bodies, for construction of roads, tramways, harbours, gasworks, electric power plants, etc., it lent $18.72 million. It paid $6.194 million to the Commonwealth Government between December, 1920 and June, 1923—the profits of its Note Issue Department—while by 1924 it had made on its other business a profit of $9 million, available for redemption of debt. The bank’s independently-minded Governor, Sir Denison Miller, used the bank’s credit power after the First World War to save Australians from the depression conditions being imposed in other countries. . . . By 1931 amalgamations with other banks made the Commonwealth Bank the largest savings institution in Australia, capturing 60% of the nation’s savings.11

The inside story of the Commonwealth Bank was told by Australian politician Jack Lang in a book titled The Great Bust: The Depression of the Thirties (McNamara’s Books, Katoomba, 1962). Lang attributed the remarkable success of the Commonwealth Bank to two extraordinary men: Denison Miller, its first governor; and King O’Malley, its first and most ardent proponent. Both had been bankers themselves and knew the great secret of banking: that banks create the money they lend simply by writing accounting entries into the deposit accounts of borrowers.

Lang wrote:

Chief advocate of the cause of a Commonwealth Bank was King O’Malley, a colorful Canadian-American . . . . Before coming to Australia, he had worked in a small New York bank, owned by an uncle. . . . He had been much impressed by the way that his uncle had created credit. A bank could create the credit, and at the same time manufacture the debit to balance it. That was the big discovery of O’Malley’s banking career. A born showman, he itched to try it out on a grand scale. He started his political career in South Australia by advocating a State Commercial Bank. In 1901 he went into the first Federal Parliament as a one-man pressure group to establish a Commonwealth Bank, and joined the Labor Party for that purpose.

O’Malley’s big discovery—that a bank could create positive money on one side of its ledger simply by balancing it with a negative sum on the other—was later confirmed by a number of Australian and British insiders.

Dr. H. C. Coombs, the first Governor of the Reserve Bank of Australia, said in an address at Queensland University in 1954:

[W]hen money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is therefore, an increase in the total amount of money available.12

The Right Honorable Reginald McKenna, former British Chancellor of the Exchequer, told shareholders of the Midland Bank in 1924:

I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks in increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit.13

Ralph Hawtrey, Assistant Under Secretary to the British Treasury in the 1930s, wrote in Trade Depression and the Way Out, “When a bank lends, it creates money out of nothing.”14 He called it “the mystical power of creating the means of payment out of nothing.” In The Art of Central Banking, Hawtrey wrote:

When a bank lends, it creates credit. Against the advance which it enters amongst its assets, there is a deposit entered in its liabilities. But other lenders have not the mystical power of creating the means of payment out of nothing. What they lend must be money that they have acquired through their economic activities.15

It was this “mystical power” that the Commonwealth Bank’s extraordinary founders harnessed in the service of the Australian people.

Lang wrote that Denison Miller was wary of going to the politicians or the banks for money, which would lock the new central bank in debt. He was convinced that it could get by without capital. (This was before capital requirements were imposed by the Bank for International Settlements, the central banker’s central bank in Switzerland, of which more later.) As Lang told the story:

[O]n January 20th, 1913 [Miller] made a speech declaring the new Commonwealth Bank open for business. He said:

“This bank is being started without capital, as none is required at the present time, but it is backed by the entire wealth and credit of the whole of Australia.”

In those few simple words was the charter of the Bank, and the creed of Denison Miller, which he never tired of reciting. He promised to provide facilities to expand the natural resources of the country, and it would at all times be a people's bank.

Miller proceeded to advance massive sums simply “on the credit of the nation.” Miller and his bank were a brilliant success—perhaps too brilliant. Like the American colonists’ paper scrip, the ready credit issued at will by the Commonwealth Bank threatened the hegemony of the London bankers. Their response was the privately-controlled global central banking system we have today.

The Birth of the Central Banking System

How was it that the privately-controlled central banking system became so powerful that it could override governments in printing their own money? In The Great Bust, Jack Lang traced the evolution of the central banking hierarchy to the British colonial system. The colonies had won political independence, but the City of London retained control as their creditor. Like the American colonists’ paper scrip, the ready credit issued by the new central banks of Australia, Canada and New Zealand threatened this hegemony. Lang wrote:

It was the City of London that had established what was known as the mercantile System out of the Industrial Revolution. . . . Their formula was to hand to the colonies the right to govern themselves, providing they did not break the financial nexus with the City of London.

The City of London provided all the capital required for the development of the colonies. The City controlled the ships, the wool and wheat exchanges, the insurance houses and all the other machinery of trade and commerce. Self government for the colonies did not mean financial independence. . . .The Old Lady of Threadneedle Street, as they called the bank of England, presided over the financial dynasty of the Empire.

Australia broke from this system in the First World War, when it financed its participation in the war with its own government-owned bank. It had also used its own bank to fund the Commonwealth Shipping Line, a rival poised to break the City of London’s shipping monopoly. After the war, wrote Lang, the Commonwealth Bank’s governor Denison Miller had gone to London and “had thrown a great fright into the banking world by calmly telling a big bankers’ dinner that the wealth of Australia represented six times the amount of money that had been borrowed, and that the bank could meet every demand because it had the entire capital of the country behind it”:

Such statements as these caused a near panic in the City of London. If the Dominions were going to become independent of the City of London, then the entire financial structure would collapse. The urgent problem was to find ways and means of re- establishing the financial supremacy that had been lost during the war.

. . . If London was to retain the monopoly of finance, it had to deal with such upstart competition as that threatened by Denison Miller. Canada, South Africa and other Dominions were causing a similar amount of concern.

. . . The financial experts studied the problem deeply. Out of their deliberations emerged the plan to centralize the control of all banking throughout the Empire by channeling it directly into the supervision of the Bank of England. . . .

The Bank of England took up the idea of Empire control most enthusiastically. It was even decided to aim at a World Bank, to be run by the League of Nations, which would control the credit of the world. The grand idea was that one single Board of Directors would make the decisions which would determine the economic policy of the world. . . .

. . . The Genoa Economic Conference in 1922 took up the idea of this grand form of central banking, and extended its approval.

“Naturally,” wrote Lang, “the Governor of the bank of England expected to be at the apex of the system.”

And thus was born the modern system of central banking, controlled in a hierarchical structure headed by a super-central bank in London (later transferred to Basel). The power to issue the national currency was shifted from national treasuries to a system of central banks controlled from abroad. In this way, wrote Lang, “the effective currency pool of the country could be operated like a bathroom tap, to be either allowed to run free or turned off entirely.”

In 1930 the apex moved from the Bank of England to the Bank for International Settlements, founded by the heads of the central banks of the UK, US, Germany and France to deal with reparations payments after World War I. In Tragedy and Hope: A History of the World in Our Time (1966), Georgetown University Prof. Carroll Quigley wrote of this evolving central banking network: [T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.

The key to their success, said Quigley, was that the international bankers would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The economic and political systems of nations would be controlled not by citizens but by bankers, for the benefit of bankers.

The goal was to establish an “independent” central bank in every country. But independent of whom? As law professor and Federal Reserve historian Prof. Tim Canova observes:

The trend in central banking throughout the world for the last few decades has been to follow the U.S. lead in having an independent central bank, a central bank that is independent of elected government on their day to day operations. The problem is that independence has really come to mean a central bank that has been captured by Wall Street interests, very large banking interests. It might be independent of the politicians, but it doesn’t mean it is a neutral arbiter.16

That is the trend today, but during the Great Depression and World War II, central banks actually served their governments. This was true even in the US. Canova writes:

During the Great Depression and coming out of it the Fed took its cues from Congress. Throughout the entire 1940s, the Federal Reserve as a practical matter was not independent. It took its marching orders from the White House and the Treasury—and it was the most successful decade in American economic history.

But no more. The goals of “financial capitalism” identified by Lang and Quigley have now largely been achieved. Central banks have the authority to issue the national currency in their respective countries, and governments and citizens alike must borrow this money to pay their debts and fund their operations. The result is a global economy in which money is created as debt by a network of private banks, headed by central banks independent of the dictates of government. Denison Miller died unexpectedly of heart disease in 1923, and the Bank of England took the helm. The governor of the Commonwealth Bank was replaced by a committee the Bank of England could control. The power to issue the national currency was transferred from the Australian Treasury to a central bank under the control of London bankers.

In 1930, the governments of Australia and New Zealand received a visit from Sir Otto Niemeyer, director of the Bank of England. According to The Australian Economic History Review (July 2004):

He was critical of Australia's overconfidence and essentially said that Australia was "living beyond its means" and had become prosperous through "mistakes"; that Australians would have to "accept a lower standard of living"; that Australia should continue to exist only as a means to supply Britain with goods; and that its protectionist attitude was deviating Australia from its true purpose.17

In 1937, Otto Niemeyer went on to become chairman of the Bank for International Settlements (BIS).

1 Michael McLeay, et al., Money Creation in the Modern Economy,” Quarterly Bulletin, 2014 Q1, accessed 2/17/17,http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycr eation.pdf

2 Deutsche Bundesbank Eurosystem, "How Money Is Created," Bundesbank.de, 25 April 2017, http://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html?startpageId=Start seite-EN&startpageAreaId=Teaserbereich&startpageLinkName=2017_04_25_how_money_is_created+397964

3 New Economics Foundation, “Making Money From Making Money: Seigniorage In The Modern Economy,” NewEconomics.org, 31 January 2017, http://neweconomics.org/2017/01/making-money-making-money/

4 Chester Dawson, “Shale Boom Helps North Dakota Bank Earn Returns Goldman Would Envy,” Wall Street Journal, November 16, 2014, accessed 2/17/17, https://www.wsj.com/articles/shale-boom-helps-north-dakota-bank- earn-returns-goldman-would-envy-1416180862.

5 Ellen Brown, “Bank of North Dakota Soars Despite Oil Bust: A Blueprint for California?” Web of Debt, May 2, 2016, accessed 2/17/17, https://ellenbrown.com/2016/05/02/bank-of-north-dakota-soars-despite-oil-bust-a-blueprint- for-california/; “2015 Annual Report,” Bank of North Dakota, April 20, 2016, accessed 2/20/17, https://bnd.nd.gov/2015-annual-report/. 6 Chester Dawson, "Shale Boom Helps North Dakota Bank Earn Returns Goldman Would Envy," Wall Street Journal, 16 November 2014, https://www.wsj.com/articles/shale-boom-helps-north-dakota-bank-earn-returns- goldman-would-envy-1416180862

7 BND Opens Second Application Period for BND Infrastructure Loan Fund,” 12 February 2016, BND.nd.gov, https://bnd.nd.gov/bnd-opens-second-application-period-for-bnd-infrastructure-loan-fund/

8 Justin Marlowe, “Municipal Bonds and Infrastructure Development – Past, Present, and Future,” ICMA.org, 2015 white paper, http://icma.org/en/icma/knowledge_network/documents/kn/Document/307554/Municipal_Bonds_and_Infrastructure _Development__Past_Present_and_Future 9 “Flex PACE Program,” Bank of North Dakota, 2017, https://bnd.nd.gov/business/flex-pace-program/

10 Jack Lang, The Great Bust: The Depression of the Thirties, McNamara’s Books, Katoomba, N.S.W., 1980, first published Angus and Robertson, , 1962

11 David Kidd, "How Money Is Created in Australia”, Commonwealth of Australia Bank, P2P Foundation, 14 Jul. 2001, http://p2pfoundation.net/Commonwealth_of_Australia_Bankp2pfoundation.net/Commonwealth_of_Australia_Bank ; http://web.archive.org/web/20010714001752/http:/dkd.net/davekidd/politics/money.html

12 Dr. H. C. Coombs, In an Address at Queensland University, 1954

13 Reginald McKenna, "Extraordinary Quotes for the Times We Live In", The Wall Street Journal: Market Watch, 27 Jul 2008, marketwatch.com. http://quotes.liberty-tree.ca/quotes_by/reginald+mckenna

14 Ralph George Hawtrey, Trade Depression and the Way Out, Longmans, Green and Company, 1933. (first published, London, 1931)

15 Ralph George Hawtrey, The Art of Central Banking, Longmans, Green and Company, 1932

16 “CBr: Federal reserve reform, Tim Canova (220),” YouTube, 31 Jan. 2012.

17 "Otto Niemeyer." Wikipedia (3 Aug. 2011), citing Alex Millmow Niemeyer, Scullin and the Australian Economists, Australian Economic History Review, vol 44 no 2, July 2004 p151; C.M.H.Clark A VI – 'The Old Dead Tree and the Young Tree Green' 1916–1935 University Press 1987 pp348 et seq.