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One-Man Initiatives, Part IIJuly 2004
I sent the same letter (mutatis mutandis) to ninety-two Ohio area chambers of commerce and ninety Ohio county treasurers' offices. The following is a sample:
Michael Lane to Daniel Talarek, Lorain County (Ohio) Treasurer, June 14, 2004
Dear Mr. Talarek:
As county treasurer, you are familiar with money constraints. But are you aware that your commercial bank is a money factory and that your commercial bank could use its money-creating power to benefit both itself and Lorain County far more than it does now?
According to the chief economist of a major Ohio bank, every time a bank lends $50, it "has created $50 out of thin air." That's why your bank has never told you, "Sorry, you can have your money as soon as So-and-so pays back his loan!" This process is the source, says the same authority, of the vast sums of money far in excess of currency that are in use simultaneously and constitute the life-blood of the economy.
Reserve requirements tell a bank how much money it is allowed to create. The more deposits it has, the more it is allowed to create. But loans are not the best investment a bank can make with this created money.
Let a bank organize a Club of businesses and consumers who would keep their deposits there and agree to do business by preference with one another. Let it create the maximum amount of money its reserves allow and invest them in the Club. Let the Club finance its business-members by selling them money at cost (i.e., next to nothing).* Let the Club also pay out free-and-clear to consumer-members a sum of money subject to two conditions: (1) the sum must first go to relinquish any debt of the consumer to the bank, and (2) any balance must be spent with business-members of the Club, who will in turn be subject to the same conditions. This is "debt-zapping money." By this means, the bank would facilitate both production and consumption within the circle of the Club and so raise the economic power of the Club to its maximum. The bank will take a cut of this increased economic power by virtue of its investment in the Club.
By offering such competitive terms to both businesses and consumers, such a bank and such a Club would grow by leaps and bounds. The more it grew, the more deposits the bank would have and the easier it would be to do business within the Club and maximize the bank's reserve base. The more deposits the bank had and the more it maximized its reserve base, the more money it would be allowed to create; and the more money the bank was allowed to create, the more economic power it would generate and the more attractive the Club would become. Under current reserve requirements, a hypothetical bank that got 100% of its outflows back in the form of deposits could create $44.23 million from its first $1.16 million reserves and nine million from every million of reserves after that!
I am writing both to you and to the Lorain County Chamber of Commerce and will shortly be writing to local media as well. If you could bring what resources you command to a further investigation of this idea, it would be good for Lorain County and good for Ohio and good for the country. I'd be most interested in hearing your thoughts.
*A bank doesn't really "lend" money, it sells it. The money you "pay back" is not the same money you borrowed, it is a price; and considering that money costs almost nothing to create, it is quite a high price. Thinking of it that way, money could be sold much cheaper.
Daniel Talarek to Michael Lane, June 23, 2004
Dear Mr. Lane:
Chapter 135 of the Ohio Revised Code, Uniform Depository Act, states the parameters in which banks in Ohio can do business.
Your letter brings up some interesting points but the "CLUB" that you describe seems very similar to the definition of Credit Unions.
Not being an expert myself, I appreciate your input and will share your letter with individuals more familiar with the Banking Code.
Michael Lane to Daniel Talarek, June 28, 2004
Dear Mr. Talarek:
Thank you for yours of June 23 in regard to my banking proposal. Since the time I wrote you, I have further refined the idea and submitted it as an op ed piece to the Morning Journal and Chronicle-Telegram (enclosed). I hope you'll forward this more detailed proposal to the colleagues you mentioned and share the results with me. If you're interested, a word to the papers mentioned might help get the op ed piece published and engender some public discussion.
I will follow up with the Uniform Depository Act and greatly appreciate the reference. Even if the club should fall under the definition of a credit union, the proposed relationship between it and a commercial bank would make it unique.
Two other short responses from county treasurers need not be reproduced. The op ed piece mentioned went with a cover letter to 126 daily and weekly newspapers in Ohio. From the PR firm that the company I work for employs I obtained an Ohio newspaper database that would normally cost $60. My contact also told me an op ed piece is 600 words (a letter to the editor is 250 or less) and informed me that most papers would not let me know if they used the piece. To find out, I would have to check each paper's website.
Cover Letter, June 22, 2004
To the Editor:
I submit for your consideration a guest op ed column entitled, "Reinventing Banking." I can also supply it in electronic format. I beg you to phone or e-mail me if you use it, as I have no clipping service. Highlights are:
A commercial bank creates money.
The more money it can keep getting back in deposits, the more it can create.
Money costs next to nothing to create.
Government and business debt exceeds the ability of consumers and taxpayers to liquidate it.
The more business the clients of a bank do amongst themselves, the more money the bank can create.
A bank can organize an LLP of business, consumer, and government clients to take advantage of that.
Through the LLP, it can give money to clients and make money by taking a cut that is a little over "next to nothing."
A government entity financed in this way will not have to collect taxes.
Debt to the bank can be mopped up by a consumer dividend tagged to do exactly that.
People would flock to such a bank.
Op Ed Piece: "Reinventing Banking"
We are all aware of money constraints. But how many of us are aware that their commercial bank is a money factory and that their commercial bank could use its money-creating power to benefit both itself and its customers and community far more than it does now? Four facts are key:
1. Most people think a bank lends its deposits. However, this is not true. According to the chief economist of a major Ohio bank, every time a bank lends $50, it "has created $50 out of thin air." That's why your bank has never told you, "Sorry, you can have your money as soon as So-and-so repays his loan!" This is the source of the vast sums in excess of currency that are the life-blood of the economy.
2. Reserve requirements tell a bank how much money it is allowed to create. The more received deposits it has, the more money it may create. A bank loses deposits whenever its depositors or borrowers spend money that then gets deposited in another bank. Money spent between fellow depositors and borrowers, however, stays in the bank, thus maximizing the amount of money the bank can create. A hypothetical bank that got 100% of its outflows back could create $44.24 million on its first $1.16 million reserves under current requirements!
3. Money costs next to nothing to create.
4. Consumer prices, personal debt, government debt at all levels, and business debt (which must ultimately be recovered from the public) taken together exceeds the ability of consumers and taxpayers to liquidate it: the economy is not self-liquidating.
These facts afford a remarkable opportunity to reinvent banking. A bank organizes a limited liability partnership (LLP) of businesses, consumers, and local government entities who keep their accounts with the bank and do as much business as possible within the circle. This maximizes reserves and therefore maximizes the amount of money the bank can create. The more that join, the better it works.
The bank creates the maximum money allowed and invests it in the LLP. The LLP allocates it to its membersbusinesses, consumers, and government entitieswith an eye to generating economic power, but it does not have to get it back. Instead, it takes a share of the fruits and passes it on to the bank as the bank's return on investment. Since the bank only requires a return on an investment that is next to nothing, it can offer money on better terms than anyone else. In addition, the banks reserves will increase by deposits of successful members.
The self-liquidating problem will infect the miniature economy of the LLP just as it does the national economy. To solve this, a debt-zapping consumer dividend is distributed to consumer members on condition that (1) it first goes to relinquish any debt of the consumer to the bank and (2) any balance remaining must be spent with member businesses, who would in turn be subject to the same conditions. This would also serve as a natural kind of social insurance.
A government entity financed by the LLP can pay off its debt and never have to collect taxes.
By offering such competitive terms to businesses, consumers, and government entities, the bank and its LLP will grow by leaps and bounds. Ultimately, the idea is national in scope; but the beauty of it is that it can also be implemented here and now by a single bank. Why don't we persuade a commercial bank to try it? Or why dont we set up a new bank for the purpose? It would be good for the community, good for Ohio, and good for America. (607 words)
I thought it too much trouble to check 126 websites. If the piece was used, I am unaware of it. I did eventually consult the Ohio Revised Codenot chapter 135, which seems to deal mainly with government entities as depositors, but chapter 1109, which deals with the powers of banks. Sections 31 through 49 of the latter deal with investment and mainly limit how much a bank can invest in different types of securities. The limits are in formulations like five or ten percent of its "paid-in capital and surplus," ten or twenty-five percent of its "assets," ten percent of its "capital" or "capital and surplus," fifteen percent of its "total assets," and so on. This would effectively vitiate my proposal as written, though I am still confident the concept can be retailored to conform to the Code. I am still looking for the person with the right knowledge and the will to try.
Section 47 says a bank can invest no more than fifteen percent of its capital in a single issuer. But there is an exception to this: "If a state or political subdivision of a state issues securities, acting solely as a conduit for the transmission of the proceeds of the sale of the securities to one or more private entities for economic development," then "(1) The securities are obligations of the private entity or entities . . . (2) The securities are not obligations of the issuing state or political subdivision." I take this to mean that a bank could channel all its investment money through a government entity as long as the various percentage limits were respected vis-à-vis the ultimate recipients.
Chapter 1109 of the Code repeatedly mentions a person called the "superintendent of financial institutions." This turns out to be an official of the Ohio Department of Commerce. I wrote to this official as follows:
Michael Lane to F. Scott O'Donnell, Superintendent of Financial Institutions, Ohio Department of Commerce, July 21, 2004
Dear Mr. ODonnell:
My attention has been drawn to the fact that a commercial bank creates money and that the cost of creating it is next to nothing. Has it ever occurred to you that herein lies a wonderful opportunity to do something that would be greatly beneficial to the State of Ohio?
That a commercial bank creates money was explained to me very clearly by Richard DeKaser, chief economist of National City Bank, Cleveland. John 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. This process is the source, he said, of the vast sums of money in excess of currency that are the life-blood of the economy. A bank would similarly create money if it invested the $50, as it is permitted to do under the Ohio Revised Code, Title XI, 1109.31-49.
The reason I think this a wonderful opportunity is that if the cost of creating money is next to nothing, then a bank investing money under the Ohio Revised Code is really only investing the cost, not the face-value of the money. Therefore, it does not have to recover the face-value of the money in order to make good on its investment. Therefore, the bank should be able to provide money for economic development on much better terms than we are used to.
If this reasoning is sound, wouldnt it be in the interest of the state to educate banks along these lines for the benefit of all Ohioans? Would it perhaps also be in the interest of the state to take advantage of its right to issue securities acting solely as a conduit for the transmission of the proceeds of the sale of the securities to one or more private entities for economic development purposes (1109.47) in order to lead the way to this change?
The idea has many ramifications that I wont go into here. I could elaborate on them at another time, and you will undoubtedly think of some yourself if you care to turn the idea over for a while. I look forward to your thoughts.