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coins or counterfeit banknotes. Only the central bank could create
new money. Commercial banks would have to borrow existing money
and relend it, just as non-bank financial institutions do now. In
Robertson™s proposed system, new money created by the central bank
would not go directly to the commercial banks but would be given to
the government to spend into circulation, where it would eventually
find its way back to the banks and could be recycled by them as loans.4
It sounded good in theory, but when the plan was run past several
government officials, they maintained that the banks would go broke
under such a scheme. Depriving banks of the right to advance credit
on the “credit multiplier” system (the British version of fractional
reserve lending) would increase the costs of borrowing; would raise
the costs of payment services; would force banks to cut costs, close
branches and reduce jobs; and would damage the international
competitiveness of British banks and therefore of the British economy
as a whole. An official with the title of Shadow Chancellor of the
Exchequer warned, “Legislating against the credit multiplier would
lead to the migration from the City of London of the largest collection
of banks in the world. It would be a disaster for the British economy.”
Another official bearing the title of Treasury Minister argued that
“if banks were obliged to bid for funds from lenders in order to make
loans to their customers, the costs to banks of extending credit would
be significant, adversely affecting business investment, especially of
small and medium-sized firms.” This official wrote in an August 2001
It is evident that this proposal would cause a dramatic loss in
profits to the banks “ all else [being] equal they would still face
the costs of running the payments system but would not be able
to make profitable loans using the deposits held in current
accounts. In this case, it is highly likely that banks will attempt
to maintain their profitability by re-locating to avoid the
restriction on their operations that the proposed reform involves.5

Chapter 41 - Restoring Natonal Soverignty

And there was the rub: in London, banking is very big business. If
the banks were to move en masse to the Continent, the British economy
could collapse like a house of cards.
The 100 Percent Reserve Solution
A proposal similar to the Robertson plan was presented to the
U.S. Congress by Representative Jerry Voorhis in the 1940s. Called
“the 100 Percent Reserve Solution,” it was first devised in 1926 by
Professor Frederick Soddy of Oxford and was revived in 1933 by
Professor Henry Simons of the University of Chicago. The plan was
to require banks to establish 100 percent reserve backing for their
deposits, something they could do by borrowing enough newly-created
money from the U.S. Treasury to make up the shortfall.
“With this elegant plan,” wrote Stephen Zarlenga in The Lost
Science of Money, “all the bank credit money the banks have created
out of thin air, through fractional reserve banking, would be
transformed into U.S. government legal tender “ real, honest money.”
The plan was elegant, but like the later Robertson proposal, it would
have been quite costly for the banks. It died when Representative
Voorhis lost his seat to Richard Nixon in a vicious campaign funded
by the bankers.6
The 100 Percent Reserve Solution was revived by Robert de Fremery
in a series of articles published in the 1960s.7 Under his proposal,
banks would have two sections, a deposit or checking-account section
and a savings-and-loan section:
The deposit section would merely be a warehouse for money.
All demand deposits would be backed dollar for dollar by actual
currency in the vaults of the bank. The savings-and-loan section
would sell Certificates of Deposit (CDs)ii of varying maturities “
from 30 days to 20 years “ to obtain funds that could be safely
loaned for comparable periods of time. Thus money obtained
by the sale of 30-day, one-year and five-year CDs, etc., could be
loaned for 30 days, one year and five years respectively “ not
longer. Banks would then be fully liquid at all times and never
again need fear a liquidity crisis.

Certificate of deposit (CD): a time deposit with a bank which bears a specific
maturity date (from three months to five years) and a specified interest rate, much
like bonds.

Web of Debt

The liquidity crisis de Fremery was concerned with came from
“borrowing short and lending long” -- borrowing short-term deposits
and committing them to long-term loans -- a common practice that
exposes banks to the risk that their depositors will withdraw their
money before the loans come due, leaving the banks short of lendable
funds. Just such a liquidity crisis materialized in the summer of 2007,
when holders of collateralized debt obligations or CDOs (securities
backed by income-producing assets) discovered that what they thought
were triple-A investments were infected with “toxic” subprime debt.
The value of the CDOs crashed, making banks and other investors
either reluctant or unable to lend as before; and that included lending
the money market funds relied on by banks to get through a short-
term shortage. The other option for banks short of funds is to borrow
from the Fed, which can advance accounting-entry money as needed;
and that is what it has been doing, with a vengeance. Recall the $38
billion credit line the Fed made available on a single day in August
2007. (See Chapter 2.) This “credit” was money created out of thin
air, something central banks are considered entitled to do as “lenders
of last resort.”8 The taxpayer bailouts that used to cause politicians to
lose votes are being replaced with the hidden tax of a massive stealth
inflation of the money supply by the “banker™s bank” the Federal
Reserve, inflating prices and reducing the value of the dollar.
DeFremery™s 100 percent reserve solution would have avoided this
sort of banking crisis and its highly inflationary solution by limiting
banks to lending only money they actually have. The American
Monetary Institute, an organization founded by Stephen Zarlenga for
furthering monetary reform, has drafted a model American Monetary
Act that would achieve this result by imposing a 100 percent reserve
requirement on all checking-type bank accounts. As in de Fremery™s
proposal, these accounts could not be the basis for loans but would
simply be “a warehousing and transferring service for which fees are
charged.” The Federal Reserve System would be incorporated into
the U.S. Treasury, and all new money would be created by these merged
government agencies. New money would be spent into circulation by
the government to promote the general welfare, monitored in a way
so that it was neither inflationary nor deflationary. It would be spent
on infrastructure, including education and health care, creating jobs,
re-invigorating local economies, and re-funding government at all
levels. Banks would lend in the way most people think they do now:
by simply acting as intermediaries that accepted savings deposits and
lent them out to borrowers.9
Chapter 41 - Restoring Natonal Soverignty

A model Monetary Reform Act drafted by Patrick Carmack, author
of the popular documentary video The Money Masters, would go even
further. It would impose a 100 percent reserve requirement on all
bank deposits, including savings deposits. Recall that most “savings
deposits” are still “transaction accounts,” in which the money is readily
available to the depositor. If it is available to the depositor, it cannot
have been “lent” to someone else without duplicating the funds. Under
Carmack™s proposal, banks that serviced depositors could not lend at
all unless they were using their own money. If banks wanted to make
loans of other people™s money, they would have to set up separate
institutions for that purpose, not called “banks,” which could lend
only pre-existing funds. Banks making loans would join those other
lending institutions that can lend only when they first have the money
in hand. “Deposits” would not be counted as “reserves” against which
loans could be made but would be held in trust for the exclusive use of
the depositors.10

How to Eliminate Fractional Reserve Banking
Without Eliminating the Banks

If the power to create the national money supply is going to be the
exclusive domain of Congress, 100 percent backing will have to be
required for any private bank deposits that can be withdrawn on
demand, to avoid the electronic duplication that is the source of growth
in the money supply today. But like the Robertson plan proposed in
England, proposals for requiring 100 percent reserves have met with
the objection that they could bankrupt the banks. We™ve seen that
when a bank makes a loan, it merely writes a deposit into the
borrower™s account, treating the deposit as a “liability” of the bank.
This is money the bank owes to the borrower in return for the
borrower™s promise to pay it back. Under a 100 percent reserve system,
all of these bank liabilities would have to be “funded” with real money.
Federal Reserve Statistical Release H.8 put the total “loans and leases
in bank credit” of all U.S. banks as of April 2007 at $6 trillion.11 Since
banks today operate with minimal reserves (10 percent or even less),
they might have to borrow 90 percent of $6 trillion in “real” money to
meet a 100 percent reserve requirement. Where would they find the
money to service these loans? They would have to raise interest rates
and reduce the interest they paid to depositors, shrinking their profit
margins, squeezing their customers, and driving them into the arms

Web of Debt

of those non-bank competitors that have already usurped a major
portion of the loan market. Just the rumor that the banks were going
to have to incur substantial new debt could make bank share values
William Hummel is not actually in the money reform camp, but in
a December 2006 critique of the 100 percent reserve solution, he raised
some interesting issues and alternatives. Rather than borrowing from
the government, he suggested that the banks could sell their existing
loans to investors, getting the loans off their books.12 That is not actu-
ally a new idea. It is something the banks have been doing for a num-
ber of years. In 2007, “securitized” mortgage debts (mortgages sliced
into mortgage-backed securities) were reported at $6.5 trillion, or about
one-half of all outstanding mortgage debt (totaling $13 trillion).
“Securitized” debt is debt that has been off-loaded by selling it to
investors, who collect the interest as it comes due. In effect, the banks
have merely acted as middlemen, bringing investors with funds to-
gether with borrowers who need funding. This is the role of “invest-
ment banks” “ putting together deals, finding investors for projects
in need of funds. It is also the role played by bank intermediaries in
“Islamic banking.” The bank sets up profit-sharing arrangements in
which investors buy “stock” rather than interest-bearing “bonds.”
Where could enough investors be found to fund close to $6 trillion
in outstanding bank loans? Recall the nearly $9 trillion in bond money
that would be freed up if the federal debt were paid off by “monetiz-
ing” it with new Greenback dollars. People who had previously stored
their savings in government bonds would be looking for a steady source
of income to replace the interest stream they had just lost. Investment
fund managers, quick to see an opportunity, would no doubt form
funds just for this purpose. They could buy up the banks™ existing
loans with money from their investors and bundle them into securi-
ties. The investors would then be paid interest as it accrued on the
loans. In this way, the same Greenback dollars that had “monetized”
the federal debt could be used to monetize the $6 trillion in bank loans
created with accounting entries by the banks.
Investors today have become leery of buying securitized debt, but
this is due largely to lax disclosure and regulation. If the securities
laws were strengthened so that all risks were known and on the table,
at some price investors could no doubt be found; and if they couldn™t,
the banks could still turn to the Fed for an advance of funds -- which
is just what they have been doing, accepting a lifeline from the Fed in
the form of massive bailouts with highly inflationary accounting-entry
money. The difference under a 100 percent reserve system would be
Chapter 41 - Restoring Natonal Soverignty

that the Federal Reserve would actually be federal, operating its bailouts
in a way that benefited the people rather than just inflating their dollars
away. (More on this in Chapter 43.)

The Banking System Is Already Bankrupt

To the charge that imposing a 100 percent reserve requirement
could bankrupt the banks, the Wizard™s retort might be that the banking
system is already bankrupt. The 300-year fractional-reserve Ponzi
scheme has reached its mathematical end-point. The bankers™ chickens
have come home to roost, and only a radical overhaul will save the system.
Nouriel Roubini, Professor of Economics at New York University and
a former advisor to the U.S. Treasury, gave this bleak assessment in a
November 2007 newsletter:
I now see the risk of a severe and worsening liquidity and credit
crunch leading to a generalized meltdown of the financial system of
a severity and magnitude like we have never observed before. In this
extreme scenario whose likelihood is increasing we could see a
generalized run on some banks; and runs on a couple of weaker
(non-bank) broker dealers that may go bankrupt with severe
and systemic ripple effects on a mass of highly leveraged
derivative instruments that will lead to a seizure of the
derivatives markets . . . ; massive losses on money market funds
. . . ; ever growing defaults and losses ($500 billion plus) in
subprime, near prime and prime mortgages . . . ; severe problems
and losses in commercial real estate . . . ; the drying up of liquidity
and credit in a variety of asset backed securities putting the entire
model of securitization at risk; runs on hedge funds and other
financial institutions that do not have access to the Fed™s lender
of last resort support; [and] a sharp increase in corporate defaults
and credit spreads . . . . 13
The private banking system can no longer be saved with a stream
of accounting-entry “reserves” to support an expanding pyramid of
“fractional reserve” lending. If private banks are going to salvage
their role in the economy, they are going to have to move into some
other line of work. Chris Cook is a British market consultant who
was formerly director of the International Petroleum Exchange. He
observes that the true role of banks is to serve as guarantors and
facilitators of deals. The seller wants his money now, but the buyer
doesn™t have it; he wants to pay over time. So the bank steps in and
Web of Debt

advances “credit” by creating a deposit from which the borrower can
pay the seller. The bank then collects the buyer™s payments over
time, adding interest as its compensation for assuming the risk that
the buyer won™t pay. The glitch in this model is that the banks don™t
create the interest, so larger and larger debt-bubbles have to be created
to service the collective debt. A mathematically neater way to achieve
this result is through “investment banking” or “Islamic banking” --
bringing investors together with projects in need of funds. The money
already exists; the bank just arranges the deal and the issuance of
stock. The arrangement is a joint venture rather than a creditor-debtor
relationship. The investor makes money only if the company makes
money, and the company makes money only if it produces goods and
services that add value to the economy. The parasite becomes a partner.14


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