Brownian Schism
By Staff News & Analysis - December 27, 2010

Restoring Credit with a Publicly-owned Bank: The Model of the Bank of North Dakota … Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy. Only one U.S. state actually owns its own bank – North Dakota. As of last spring, North Dakota was also the only U.S. state sporting a budget surplus. It has the lowest unemployment rate in the country and the lowest default rate on loans. North Dakota has effectively escaped the credit crisis. – WebofDebt

Dominant Social Theme: Let sovereign money rule (at a state level).

Free-Market Analysis: This Saturday the Bell posted a column entitled The Rise of Brownianism, which focused on Ellen Brown (left) and her ideas regarding the government issuance of money (versus third-party entities such as the Federal Reserve). This was not perhaps quite fair to Stephen Zarlenga, director of the American Monetary Institute who can also lay claim to triumph (along these lines) with Congressman Dennis Kucinich's (D, Ohio, 10th District) introduction of the National Emergency Employment Defense Act of 2010, abbreviated NEED. The bill number is HR6550.

Zarlenga has been toiling arduously in the sovereign money pits, convinced, like Ellen Brown, that if the US government itself prints fiat-money that the problems of the day will gradually fade and prosperity will reign once more. The Kucinich bill calls for the Treasury to take over the functions of the Federal Reserve and basically issue debt-free money. It is a bill that parallels much of what Zarlenga has been campaigning for (along with Ellen Brown) for a number of years. Here, condensed, is what Zarlenga proposes for the US's monetary economy:

• Put the Federal Reserve System into the U.S. Treasury.

• Stop the banking system from creating any part of the money supply.

• Create new money as needed by spending it on public infrastructure, including human infrastructure, e.g. education and health care.

• Genuine monetary reform is the solution to the nation's fiscal problems and that can only be achieved at the national level.

In an email sent out on the 18th of December, Zarlenga celebrates NEED as follows: "While the bill focuses on our unemployment crisis, the remedy proposed contains all the essential monetary measures being proposed by the American Monetary Institute in the American Monetary Act. These are what decades of research and centuries of experience have shown to be necessary to end the economic crisis in a just and sustainable way, and place the U.S. money system under our constitutional checks and balances. Yes it can be done!"

While both Zarlenga and Brown agree that money ought to be issued debt-free, the two have had a falling out over Ellen Brown's advocacy of sovereign money at a state-banking level, which Zarlenga believes only confuses the issue. Actually the issue is made more confusing because Ms. Brown has been a proponent of Zarlenga's theories about money and has acknowledged his primacy.

In an interview with the Daily Bell, she stated: "We need to set up our own public banks, which cannot run short of ‘the full faith and credit of the United States' because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks."

Despite Ellen Brown's backing for his ideas, Zarlenga disagrees on this head. He does not believe that states ought to issue money (through any mechanism) and even believes the idea to be unconstitutional. Ms. Brown now returns fire. In a feedback yesterday was kind enough to inform us that she had abandoned her notion of sovereign money at the federal level because of the complexities involved. She is now focused specifically on states – especially North Dakota, see article excerpt above. Here is a little more from her article excerpted at the beginning of this article:

The Bank of North Dakota (BND) is a major profit generator for the state, returning a 26% dividend in 2008. The BND was set up as "North Dakota doing business as the Bank of North Dakota," making the assets of the state the assets of the bank. The BND also has a captive deposit base. By law, all of North Dakota's revenues are deposited in the BND. Municipal government and private deposits are also taken. Today, the BND has $4,000 in deposits per capita, and outstanding loans of roughly the same amount …

Governments everywhere are artificially constrained by having to borrow at market interest rates, which means whatever interest banks can extract. Governments can throw off the shackles of this scheme, in which private banks create the national money supply and lend it at interest, by forming publicly-owned banks. These banks can then advance the credit of the nation to the nation, interest-free. And if this credit is advanced against future productivity, prices will not inflate. Supply (goods and services) will rise along with demand (money), keeping prices stable.

And here is part of a previous rebuttal by Zarlenga's group:

Don't be fooled by what's happening in a low-population State. North Dakota has about 700,000 people, a strong community spirit based on farming in difficult conditions, and significant oil revenues. The model being presented is the Bank of North Dakota, which provides support services to some other banks in its area But this arrangement won't automatically translate to other States, as the banks in other States may not wish to engage in it, and requiring them to could be very unpopular. This could lead to significant risks to taxpayers. In 1931, the Government Savings Bank of New South Wales (a federated State of Australia), at that time the 2nd largest savings bank in the British Empire, was closed down by a run caused by a series of ‘scare' stories put out in the media as part of a ‘political' attack. If a similar action were possible against a State-run bank today, taxpayers might be called upon to pay for the aftermath (e.g. the Bank of North Dakota is not FDIC-insured(!), and is instead guaranteed by the State Government itself).

We've written in the past that Ellen Brown's version of sovereign money might be at least a little better than what the US has today (even though state-banking efforts would seem to be unconstitutional). But leaving aside legal issues, the idea of states issuing money is certainly preferable to the US Treasury doing it. Additionally, Ms. Brown, via her book Web of Debt and her general industriousness, seems to us to have made an impact that has aided Zarlenga even though he does not seem especially grateful.

We could go on about the various differences and similarities of the sovereign money movement. One can actually get lost in the dizzying technicalities, both legal and monetary. In times of monetary stress, these sorts of movements always arise. (Another such movement is Georgism – which propounds real-estate as a singular important asset) and one of its primary modern proponents Ingo Bischoff often posts here.) You can read an interview with Bischoff here:

Ms. Brown, of course, continues to be a good (and photogenic) spokesperson for sovereign money. In fact, she has added tremendous credibility to the sovereign money movement as a whole via her high-profile and media contacts. For this reason, we long-ago named the resurgent movement Brownianism (as opposed to Zarlenga-ism).

But no matter what it is called, we disagree with it. The basic premise of sovereign money is that the state itself can figure out how much money to print. The basic problem with this premise is that sovereign-money types do away with the market governor that limits how much paper money can be printed. In a free-banking system (including fractional reserve banking) the bank is alerted to an increase in redemptions (of paper for gold) as it occurs, in real time. This "early warning" feedback acts as a constraint on the lending. As stocks of gold and silver diminish, the bank contracts its lending until its owners reach a reserve level with which they are comfortable.

There is no feedback loop in sovereign money that we know of. No way for the individual state (in Ellen's case) or the US Treasury (Zarlenga) to receive market feedback as to how much lending is too much. We are aware of the Brownian argument that loans would be backed by real estate (enter the Georgists again) and that therefore the loans would be self-sterilizing and not cause inflation. But there is a problem with this as well, and it has to do with the VALUE of the real estate. How is the real estate (or even other assets) going to be assayed for purposes of collateral? Who is going to make the determination? The answer is, of course, HUMAN BEINGS.

Again, we see the Invisible Hand of the market is not to be a factor in this system of monetary utility. There are two problems immediately evident:

1) Price Inflation: As real estate begins to be in demand as collateral, it will eventually (artificially) inflate in price. The Brownian system will INEVITABLY cause a boom-bust syndrome. If a main way of obtaining money from a bank is through the use of real estate as collateral, we guarantee that there will be, eventually, an artificially high valuation for land. We shudder to think how high the price of land might go. And then how far down it might plunge during a cessation in economic vitality.

2) Collateral Corruption: Imagine the game-playing and corruption that will take place if land is to be the basic element securing a bank loan. Imagine the hand-washing and backscratching. And even if it is NOT to be land, but other sureties as well such as gold and silver, similar avenues for corruption offer themselves generously. Simply – artificially – making a loan deponent to sufficient collateral (in all cases) is an indelible distortion of the marketplace. In a free-market some loans might be subject to a surety, and some might not (depending on the opportunity). The point is, once the state is involved and once rules are in force, a distortion of the economy is inevitable. A boom of some sort is inevitable (beyond what the market would normally cause) and then a bust. And asset-inflation as well.

We are sorry to be the bearer of bad tidings. (And we have no doubt that Ms. Brown will rebut the above screed if she has the time and energy.) But that's how we see it. It is impossible to tamper with the market. It is impossible to create money artificially. Money is not land. Money is not collateral. Money is not paper. Money is gold (and silver) as history proves. The basic methodology of commerce in successful societies is bi-metallism freely entered into by a free people.

Bimetallism is self-regulating. People can tell if the supply of one metal or the other is being tampered with. If the price of one metal or the other goes down, mines close and hoarding begins. Eventually there is a lesser supply and the price goes back up and mines open up and dishoarding begins. This is the way the MARKET regulates supply and demand. THERE IS NO OTHER WAY. Every scheme of humankind will only lead to a distortion of the market sooner or later. The very best minds – Ms. Brown's and Mr. Zarlenga's and Congressman Kucinich's – even these minds as acute as they are, cannot outthink the market. They cannot win an arm wrestling contest with the Invisible Hand.

A final note: Just yesterday, we were accused by one dismayed feedbacker of providing negatives without positives. It is easy to tear down, he wrote us, but difficult to build up. Ms. Brown is out on the hustings proposing solutions. (Zarlenga, too credit where credit is due …) What are we doing? Our answer to that would be that we are educating people about free-markets and honest money to the best our abilities (or at least our Swiss elves'.) Should we be doing more: twisting political arms; using union muscle? … We've set up a non-profit foundation as well, but so far as we can tell, political and economic cycles have their seasons. We're not sure how much additional activism will be of benefit.

A power elite has driven paper money nearly as far as it is possible to go via central banking. For this reason, we have been somewhat suspicious of the sovereign money movement, while trying to promote market-based money. it seems, somehow, to be a backdoor way for the elite to regenerate government control of money, and then to take it over again! Our suspicion has not been eased by an almost ochestrated-seeming group of websites that have cropped up recently supporting various forms of sovereign money.

And yet … we anticipate (as we have written many times before) that because of the truth-telling of the Internet, the Anglo-American elite may eventually have to take a step backward; free-banking, or at least gold and silver, might surge to the fore as money once again. It would happen spontaneously, not necessarily as the result of some new Bretton Woods (no matter how much the elite would like that.) It would be preferable to sovereign money in our view.

After Thoughts

The sovereign money story grows more and more complicated. It is ever-thus when one tries to outwit the market. Thus, like Candide, we will till our own garden and wait for the day when the world changes. Hopefully, via articles, books – and our many fine feedbackers – we will have contributed to a solution when the world is ready to embrace free-market money once more.