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market, profit-sharing basically means that savers would move their
money out of bonds and into stocks. Alternatives for taking the risk
out of retirement are explored in Chapter 44.

A Financial System in Which Bankers Are Public Servants

The religious objection to charging interest is that people who have
not labored for the money take it from those who have earned it by
the sweat of their brows. This result could be avoided, however,
without actually banning interest. In ancient Sumer, interest was
collected but went to the temple, which then disbursed it to the
community for the common good. (See Chapter 5.) A similar model
was created by Mohammad Yunus, the Muslim professor who
founded the Grameen Bank of Bangladesh. The Grameen Bank

Chapter 42 - The Question of Interest

charges interest, but at a significantly lower rate than would otherwise
be available to poor women lacking collateral; and the interest is
returned to the bank for their benefit as its shareholders. (See Chapter
35.) That was also the system successfully employed in colonial
Pennsylvania, where a public land bank collected interest and returned
it to the provincial government to be used in place of taxes.
Whether loans are extended interest-free or interest is returned to
the community, community-oriented models would work best if the
banks were publicly-owned institutions that did not need to return a
profit. Today government-owned banks are associated with socialism,
but they would not have raised the eyebrows of our forefathers. The
Pennsylvania land bank was a provincially-owned institution that
generated sufficient profits to fund the local government without taxes,
and in this it was quite different from the modern socialist scheme.
Even the most successful modern Western democratic socialist
countries, including Sweden and Australia, do not eliminate taxes.
Rather than funding their governments with profits from publicly-
owned ventures, they rely on heavy taxes imposed on the private sector.
Sweden developed one of the largest welfare states in Europe after
1945, but it had few government-run industries.9 India was off to a
good start, but it got sucked into massive foreign debts by the engineered
oil crisis of 1974 and a banker-manipulated Congress that took on
unnecessary IMF debt.10 The Australian Labor Party, while holding
public ownership of infrastructure out as an ideal, has not had enough
political power to put that ideal into practice, at least not lately. At
the turn of the twentieth century, Australia did have a very successful
publicly-owned bank, one of which Ben Franklin would have
approved. Australia™s Commonwealth Bank was a “people™s bank”
that not only issued paper money but made loans and collected interest
on them. When private banks were demanding 6 percent interest,
Commonwealth Bank financed the Australian government™s First
World War effort at an interest rate of a fraction of 1 percent. The
result was to save Australians some $12 million in bank charges. After
the First World War, the bank™s governor used the bank™s credit power
to save Australians from the depression conditions in other countries.
It financed production and home-building, and lent funds to local
governments for the construction of roads, tramways, harbors,
gasworks, and electric power plants. The bank™s profits were paid to
the national government and were available for the redemption of
debt. This prosperity lasted until the bank fell to the twentieth century
global drive for privatization. At the beginning of the twentieth
century, Australia had a standard of living that was among the highest
Web of Debt

in the world; but after its bank was privatized, the country fell heavily
into debt. By the end of the century, its standard of living had dropped
to twenty-third.11
New Zealand in the 1930s and 1940s also had a government-owned
central bank that successfully funded public projects, keeping the
economy robust at a time when the rest of the world was languishing
in depression.12 In the United States during the same period, Franklin
Roosevelt reshaped the U.S. Reconstruction Finance Corporation (RFC)
into a source of cheap and abundant credit for developing the national
infrastructure and putting the country back to work.13 Besides the
RFC and colonial land banks, other ventures in U.S. government
banking have included Lincoln™s Greenback system, the U.S. Postal
Savings System, Frannie Mae, Freddie Mac, and the Small Business
Administration (SBA), which oversees loans to small businesses in an
economic climate in which credit may be denied by private banks
because there is not enough profit in the loans to warrant the risks.

The Myth of Government Inefficiency

A common objection to getting the government involved in business
is that it is notoriously inefficient at those pursuits; but Betty Reid
Mandell, author of Selling Uncle Sam, maintains that this reputation
is undeserved. She says it has resulted largely because the only
enterprises left to government are those from which private enterprise
can™t make a profit. She cites surveys showing that in-house operation
of publicly-provided services is generally more efficient than contracting
them out, while privatizing public infrastructure for private profit has
typically led to increased costs, inefficiency, and corruption.14 A case
in point is the deregulation and privatization of electricity in California,
which met with heavy criticism as an economic disaster for the state.15
Complex publicly-provided services tend to break down with
privatization, just from the complexity of contracting and supervising
the contract. Privatization of the British rail system caused rate
increases, rail accidents, and system breakdown, to the point that a
majority of the British public now favors returning to government
ownership and operation. Catherine Austin Fitts concurs, drawing
on her experience as Assistant Secretary of HUD. She writes:
The public policy “solution” has been to outsource government
functions to make them more productive. In fact, this jump in
overhead is simply a subsidy provided to private companies and
organisations that receive thereby a guaranteed return regardless
Chapter 42 - The Question of Interest

of performance. We have subsidies and financing to support
housing programs that make no economic sense except for the
property managers and owners who build and manage it for
layers of fees.16
Government services may appear to be inefficient because public
funding is lacking to do the job properly; but this inefficiency is not
the result of a lack of motivation among government workers caused
by inadequate “competition.” Clerks working for the government
have to compete and perform to hold onto their jobs just as clerks
working for private industry do. To the clerk, there is not much
difference whether she is working for the government or for a big
multinational corporation. It is not “her” business. Either way, she is
just getting paid to take orders and carry them out. Beating out the
competition by cutthroat practices is not the only way to motivate
workers. Pride of performance, a desire for promotion and higher
salaries, and a belief in the team project are also effective prods. Recall
the Indian study comparing service and customer satisfaction from
private-sector and public-sector banks, in which the government-
owned Bank of India came out on top in all areas surveyed.17
Banks that are government agencies would have a number of
practical advantages that could actually make them more efficient in
the marketplace than their private counterparts. A government
banking agency could advance loans without keeping “reserves.” Like
in the tally system or the LETS system, it would just be advancing
“credit.” A truly national bank would not need to worry about going
bankrupt, and it would not need an FDIC to insure its deposits. It
could issue loans impartially to anyone who satisfied its requirements,
in the same way that the government issues driver™s licenses to anyone
who qualifies now. Interest-free lending might not materialize any
time soon, but loans could be issued at an interest rate that was modest
and fixed, returning reliability and predictability to borrowing. The
Federal Reserve would no longer have to tamper with interest rates to
control the money supply indirectly, because it would have direct
control of the national currency at its source. A system of truly
“national” banks would return to the people their most valuable asset,
the right to create their own money. Like the monarchs of medieval
England, we the people of a sovereign nation would not be dependent
on loans from a cartel of private financiers. We would not need to pay
income taxes, and we might not need to pay taxes at all . . . .

Web of Debt

Chapter 43

“Didn™t you know water would be the end of me?” asked the Witch,
in a wailing, despairing voice. . . . “In a few minutes I shall be all melted,
and you will have the castle to yourself. . . . Look out “ here I go!”
“ The Wonderful Wizard of Oz,
“The Search for the Wicked Witch”

I n the happy ending to our economic fairytale, the drought of
debt to a private banking monopoly is destroyed with the water
of a freely-flowing public money supply. Among other salubrious
results, we the people never have to pay income taxes again. That possi-
bility is not just the fantasy of utopian dreamers but is the conclusion
of some respected modern financial analysts. One is Richard Russell,
the investment adviser quoted earlier, whose Dow Theory Letter has
been in publication for nearly fifty years. In his April 2005 newsletter,
Russell observed that the creation of money is a total mystery to prob-
ably 99 percent of the U.S. population. Then he proceeded to unravel
the mystery in a few sentences:
To simplify, when the US government needs money, it either
collects it in taxes or it issues bonds. These bonds are sold to the
Fed, and the Fed, in turn, makes book entry deposits. This “debt
money” created out of thin air is then made available to the US
government. But if the US government can issue Treasury bills,
notes and bonds, it can also issue currency, as it did prior to the
formation of the Federal Reserve. If the US issued its own money,

Chapter 43 - Bailout, Buyout, or Corporate Takeover?

that money could cover all its expenses, and the income tax wouldn™t
be needed. So what™s the objection to getting rid of the Fed and
letting the US government issue its own currency? Easy, it cuts
out the bankers and it eliminates the income tax.1
In a February 2005 article titled “The Death of Banking and Macro
Politics,” Hans Schicht reached similar conclusions. He wrote:
If prime ministers and presidents would only be blessed with
the most basic knowledge of the perversity of banking, they
would not go onto their knees to the Central Banker and ask His
Highness for loans . . . . With a little bit of brains they would
expropriate all banking institutions . . . . Expropriation would bring
enough money into the national treasuries for the people not to have
to pay taxes for years to come.2
“Expropriation,” however, means “to deprive of property,” and
that is not the American way. At least, it isn™t in principle. The Rob-
ber Barons routinely deprived their competitors of property, but they
did it by following accepted business practices: they purchased the
property on the open market in a takeover bid. Their sleight of hand
was in the funding used for the purchases. They had their own affili-
ated banks, which could “lend” money into existence with an account-
ing entries.
If the banking cartels can do it, so can the federal government.
Commercial bank ownership is held as stock shares, and the shares
are listed on public stock exchanges. The government could regain
control of the national money supply by simply buying up some prime
bank stock at its fair market price. Buying out the entire banking
industry would not be necessary, since the depository and credit needs
of consumers could be served by a much smaller banking force than is
prowling the capital markets right now. The recycling of funds as
loans could be left to private banks and those non-bank financial
institutions that are already serving a major portion of the loan market.
Although buying out the whole industry would not be necessary, it
might be the equitable thing to do, since if the government were to
take back the power to create money from the banks, bank stock could
plummet. Indeed, if commercial banks could no longer make loans
with accounting entries, the banks™ shareholders would probably vote
to be bought out if given the choice.
Assume for purposes of argument, then, that Congress had decided
to reclaim the whole commercial banking industry, as an assortment
of populist writers have suggested. What would that cost on the open
Web of Debt

market? At the end of 2004, the total book value (assets minus liabilities)
of all U.S. commercial banks was reported at $850 billion.3 “Book
value” is what the shareholders would receive if the banks were
liquidated and the shareholders were cashed out for exactly what the
banks were worth. Shares trade on the stock market at substantially
more than this figure, but the price is usually no more than a generous
two times “book.” Assuming that formula, around $1.7 trillion might
be enough to purchase the whole U.S. commercial banking industry.
Too much for the government to pay?
Not if it were to create the money with accounting entries, the
way banks do now.
But wouldn™t that be dangerously inflationary?
Not if Congress were to wait for a deflationary crisis; and we™ve
seen that such a crisis is now looming on the horizon. The next
correction in housing prices is expected to shrink the money supply by
about $2 trillion. Fed Chairman Ben Bernanke suggested in 2002 that
the government could counteract a major deflationary crisis by simply
printing money and buying real assets with it. (See Chapter 40.)
Buying the banking industry for $1.7 trillion in new Greenbacks could
be just what the good doctor ordered.

Bailout, Buyout, or FDIC Receivership?

The government could buy out the banks™ shareholders, but it
wouldn™t necessarily have to. Enough bank branches to serve the
public™s needs might be picked up by the FDIC for free, just by
conducting an independent audit of the big derivative banks and
putting any found to be insolvent into receivership.
Recall Murray Rothbard™s contention that the whole commercial
banking system is bankrupt and belongs in receivership. (Chapter
34.) Banks owe depositors many times the amount of money they
have on “reserve.” They have managed to avoid a massive run on the
banks by lulling their depositors into a false sense that all is well, using
devices such as FDIC deposit insurance and a “reserve system” that
allows banks to borrow money created out of nothing from the Federal


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