May 2004: One-Man Initiatives

To change a country requires a sanction, to start a capital college does not. For the capital college, an able and confident and imaginative businessman could do it himself. It doesn't require a sanction, only persuasion. Over the past six months, I have been trying to devise a method of casting my net and capturing the right person. It only takes one.

The first thing I did was to create a sixteen-point outline of the capital college, getting the gist of the idea onto a page. Here it is:

The Capital College LLP: Sixteen-Point Outline

1. There is everywhere a huge potential energy of production just waiting to be released, which can be used to provide either more goods or more leisure. The proof is the compulsive growth and waste that we see on every side.

2. If we can release such energy in one county, that county will have a competitive edge in the marketplace. It becomes a little superproducer. The key is credit science.

3. Let a body of dedicated local people form a county LLP corporation.

4. Let it obtain the help of experts to assess types of useful primary production that the county is suited to and that are compatible with the desire and competencies of the people.

5. Let it acquire land, buildings, and equipment for such production by issuing shares. The shares are specifically claims to dividends from residential-rentals. Recipients of such shares are investor-members.

6. Let it make a new kind of credit-ratings of local producers and would-be producers based on ability to produce something the local public wants but without regard to financial considerations.

7. Let it invite the best producers to become members of the county LLP; or else let it open such membership to the highest local bidders for the use of the land, buildings, and equipment.

8. Thus, the county LLP has both investor-members and producer-members, and neither is "owner" to the exclusion of the other. Investor-members have rights to dividends from residential-rentals.

9. Producer-members have the right to lease the land, buildings, and equipment from the LLP indefinitely; the right to technical assistance; the right to assistance finding the best suppliers and contractors for their needs; the right to publicity of their products in the marketplace; and rights to 90% of net earnings.

10. The other 10% of net earnings are retained by the LLP.

11. Producer-members with their own land, buildings, and equipment could either exchange these assets for investor-shares in the LLP, or else a special producer-member category could be created for producers who retain their own land, buildings, and equipment.

12. The LLP also encourages producer-members to reward their own workers with shares that are claims to percentages of net earnings, rather than with fixed wages—giving everyone a stake in the enterprise.

13. This system eliminates the financial cross-purposes that plague the present system and takes full advantage of the innate creativity of every individual.

14. Thriving production will increase residential-rentals, providing dividends to investor-members.

15. Since this energy of production can also be used to provide leisure, the LLP should in time be in a position to pay a dividend to everyone in the county, whether working or not.

16. Such a system will attract investors, producers, buyers, and residents by its sheer economic superiority.

This outline is based on everything Ferguson wrote on the subject but also incorporates Chris Cook's innovative use of the LLP structure to create an association that really gains the increment of association for each and every one of its members.

The State of Ohio consists of eighty-seven counties, and each county has a county seat. I used the World Chamber of Commerce Directory to create a database of ninety-one area chambers of commerce based in the county seats. I did nothing further with this, however, for I soon devised another initiative I thought was superior.

The ideal capital college would be one that was also a commercial bank and therefore able to create money. So I thought it would be good to devise a way a commercial bank might use its money-creating power to do for the circle of its depositors what the central bank is supposed to do for the citizens of a country and, in so doing, benefit both itself and its depositors. I took a leaf from Tony Cooney in drafting a letter that took the form of questions—not so much to get answers as to insinuate an idea into the heads of the recipients. (I would like an answer to the question of legality, however.)

I used a business database called Reference USA to which my public library subscribes in order to create my own database of commercial bank headquarters in Ohio. I used a merge program to write customized letters to all fifty-nine of them, on the letterhead of the Barber House (my wife's business), of which the following was one:

Michael Lane to David Daberko, National City, Cleveland, Ohio, March 11, 2004

Dear Mr. Daberko:

As a business owner and consumer, I would appreciate answers to the following questions:

1. Is it true that according to the system of reserve requirements, a bank is permitted to make new book-money equal to its "excess reserves"—an amount that increases with every deposit and decreases with every loan or withdrawal?

2. Although this new book-money courtesy of the reserve system is typically expressed as loans, is there any law preventing it from going to expenses or dividends to stockholders, instead?

3. Could a bank use this new book-money courtesy of the reserve system to offer incentives for a Club of businesses and individuals who would keep their deposits in this bank and would agree to buy from one another, so that outflows from the bank came back as deposits, so as to maintain the bank's reserve base?

4. Could a bank restrict its loans to members of the Club, so that even while a loan was outstanding, the bank's reserve base would not be lowered?

5. Under current reserve requirements, a hypothetical bank that got 100% of its outflows back could create $44.23 million book-money from its first $1.16 million of reserves and nine million from every million of reserves after that?

6. Could a bank thus use the reserve requirement system to both make money for itself and benefit its clients?

Sincerely.

Out of fifty-nine letters I got three responses, only one of which was of interest:

Richard DeKaser, National City, Cleveland, Ohio to Michael Lane, March 17, 2004

Dear Mr. Lane:

I am responding to your letter dated March 11, 2004, on behalf of Mr. David Daberko, CEO at National City.

Regarding your questions on the topic of money creation, I only wish it were so. While the banking system may create money for the economy, we at National City (or any other bank) are unable to exploit the system to our advantage. First, consider the following example of how a fractional reserve banking system (i.e. one in which banks must keep only a fraction of its deposits "on reserve") creates money.

Suppose that a depositor—John—deposits $100 in cash at Bank A and this constitutes the bank's total cash deposits. The bank then lends $50 to Mike. By lending Mike $50, the bank creates a deposit of $50 that Mike can now use. This in turn means that John will continue to have a claim against $100 while Mike will have a claim against $50. This type of lending is what fractional reserve banking is all about. The bank has $100 in cash against claims of $150. The bank therefore holds 66.7% reserves against demand deposits. In short, the bank has created $50 out of "thin air" since these $50 are not supported by any genuine money.

While the $50 of created money may reside in deposits at Bank A, Bank A doesn't possess the money, the depositors do. Hence, Bank A cannot use the funds for operating expenses, as you suggest, or for stockholder dividends.

Additionally, you mention the possibility of a "club," wherein parties would agree to keep their money in Bank A. That would be good for Bank A insofar as profits are made on lending out the deposited funds, but new money is not created in the sense you imply. Rather, the literal implication is that an economy can operate with vast sums of money based only on a small level of currency. That is why the currency held as bank reserves is sometimes referred to as the monetary base.

I hope this has been helpful, though I regret your initial idea doesn't work out as hoped.

Respectfully.

Mr. DeKaser is "chief economist." His letter contains two valuable statements: (1) that "the bank has created $50 out of 'thin air'" and (2) that "an economy can operate with vast sums of money based only on a small level of currency." Further correspondence with both Mr. DeKaser and his assistant Mr. Bill Natcher failed to elicit anything else of interest.

On April 23, I telephoned DeKaser. In the ensuing conversation, which lasted about fifteen minutes, he said the $50 comes with "encumbrances" in that it must be "invested" for the bank to remain solvent, part of its obligation to John. He said it would be illegal for a bank to use this money in any noninvesting way, for example, for operational expenses. He said that paying interest to John directly out of that money would be "like a Ponzi scheme." He also agreed that John and Mike could both spend their money simultaneously by writing checks.

This last was the only really valuable fruit of the conversation, and I added it to the other two valuable statements to produce a new letter. I used Reference USA again to create a new database, this time of 126 commercial banking headquarters in Indiana, Michigan, and Kentucky, which are neighboring states to Ohio. The following is sample of the letter I sent out:

Michael Lane to Charles Viater, MFB Corp, Mishawaka, Indiana, May 1, 2004

Dear Mr. Viater:

As a business owner and consumer, I would appreciate answers to the following questions:

1. Can you confirm what the chief economist of a major bank wrote to me, that "an economy can operate with vast sums of money based only a small amount of currency"?

2. Can you confirm his statement that the way these vast sums are created is as follows? Joan deposits $100 cash. Based on these reserves, the bank lends $50 to Mike. Both can spend their whole sums at the same time by writing checks. Thus, "the bank has created $50 out of thin air."

3. Is the bank permitted to use this created money in other ways besides loans? Can you cite the relevant regulation?

4. Could it use it, for example, to offer incentives for a Club of businesses and individuals who would keep their deposits in this bank and would agree to buy from one another, so that outflows from the bank came back as deposits, so as to maintain the bank's reserve base?

5. Is it true that under current reserve requirements, a hypothetical bank that got 100% of its outflows back could create $44.23 million book-money from its first $1.16 million of reserves and nine million from every million of reserves after that?

6. Could the bank take advantage of this fact to benefit both itself and its clients?

Sincerely.

I did not receive any response to this mailing.

Conclusions

I still think this concept is viable provided the legal issue can be addressed. DeKaser in our phone conversation stated that what I had in mind would be illegal, but neither he nor anyone else has yet cited a regulation. First we need to know what the "encumbrances" are in regard to created money. Then we need to figure out how to work around them to accomplish our goals. Until a determined banker is wise as a serpent and tries his brain against this issue, the jury will remain out.

The total nonresponse to the second mailing of 126 suggests to me that the one good response to the first mailing of fifty-nine was a fluke, probably owing to the fact that this bank happened to have a position of chief economist. Unfortunately, there is no way in Reference USA to select banks that have an economist on staff.

The next step will be to build on the first mailing by writing to other entities in the same county—area chambers of commerce, county treasurer's offices, and newspapers—with a copy of the unresponded-to appeal to their bank. These entities feel the tightness of money and should have interest in setting up a new kind of bank that would get around existing constraints. The problem will be described as national in scope, but there is no reason for Ohio to wait for everyone else. Ohio can remedy her own problems here and now. The concept of "debt-zapping money" will be introduced as a simple and practical idea that can be implemented immediately and at any level and that can easily be tested in a "pilot program" by issuing a small amount of money that way to see what happens.

Another possible avenue would be to look further afield—worldwide—to identify progressive banks that have already shown themselves open to community-oriented experiment. For the time being, however, my instincts tell me to stick to Ohio.

It should be possible to implement a limited type of social credit in any clearly defined credit area, and the type of Club envisaged in these letters is a clearly defined credit area. The more exclusively the members agree to do business with one another, the more they will constitute a defined credit area. A defined credit area is economically a state within a state. It need not have geographic boundaries. It can consist of companies and individuals scattered across a nation or a continent. A defined credit area will have its own Consumer Prices and its own Consumer Purchasing-Power, and within this circle the A+B Theorem will apply because the defined credit area is a genuine slice of the economy; that is, Prices (including debt) will exceed Purchasing-Power.

If a commercial bank uses its money-creating power to issue a Consumer Dividend with the proviso that it must be spent within the credit area (that is, within the circle of the Club), such a dividend will act within the credit area exactly the same as the National Dividend would act within the nation.

If such an experiment were carried out and were successful and began to be imitated elsewhere, how long would it be before the national government stepped in and took it over, implementing social credit at the national level? A huge ox can be led about by a little ring in its nose. Social credit will be achieved in the same way. Any defined credit area can be the nose of the ox, and a "debt-zapping" Consumer Dividend is the ring.