Abstract
As a textbook on the post-golden age banking system in the United States, Ellen Brown’s The Public Bank Solution is ideal, a valuable antidote to commonly-used undergraduate money and banking texts. The latter are reflections of the deep denial on the part of many in the economics establishment that something important has actually occurred over the last thirty years or so. Brown clearly articulates the basic re-structuring of the banking system in the 1980s and ‘90s. She also contrasts the present U.S. system to others, notably those of Germany, Japan, and China.
The dismantling of Glass-Steagall–the legal pillar of golden-age banking–was completed in 1999. And it seems that the restructuring paradoxically has been subsequently validated by the current global crisis that it created. No longer is there a quarantining of financial speculation, protecting state-guaranteed demand deposits held by the oligopoly of commercial banks. Hence, the bank oligopoly is no longer compelled simply to function as an efficient intermediary, centralizing capital and minimizing risk, linking the personal savings of the public with the long-term investments of corporate oligopolies engaged in large-scale production.
While the amount of demand deposits held by the bank oligopoly has roughly doubled over the last decade (FDIC Summary of Deposits 2012; Charts 4 and 6: on-line), the so-called commercial banks have nonetheless come to play a relatively minor role in the financing of production. With the ongoing concentration of enormous oligopolistic industries, such financing predominantly comes out of retained profits and sale of stock. This–combined with the post-golden age corporate ethos of exclusively acting to maximize immediate share-holder value (Ho 2009)–mitigates long-term investment in production. Thus the bank oligopoly has become primarily one of enormous financial investment banks, but investment banks that continue to enjoy state-guaranteed demand deposits.
In the first chapter, Brown sets out how these banks have come to engage in the multiplication of money, which is then trapped in an almost purely monetary bubble, accumulating into enormous funds.
The problem with money created as private bank credit is that more is always owed back than was created, and this winds up in private coffers rather than being recycled back into the economy. . . . The lion’s share of bank profits go to wealthy CEOs, management, and shareholders. Little of this money is spent on goods and services. . . .Most of it goes into speculative “money making money” schemes that draw resources out of the economy without feeding them back in. (2013: 14-15)
A key to this is that new money appears on the banks’ books in the very act of acquiring debt. The money created makes its initial appearance in demand deposits added to the banks’ credits, composed of the new debt ownership. Perversely, in relation to golden-age banking, the borrower becomes the depositor, the bank the lender.
The second chapter provides a broad division of what McMurtry (2013) articulates in a finer grain as “money sequences,” the near-perpetual circulation and expansion of money through the circulation and expansion of debt ownership. At the base is the money market, which primarily serves as the bank of the bank oligopoly along with the Federal Reserve. More precisely, the money market is a collection of giant financial pawn shops filled with liquid assets priced over a range of risks.
The nature of the exchange in this market is that of a repurchase agreement (repo). It pivots on the conceptual ambiguity of financial assets as collateral. It is a very short-term debt, functioning as a second-order form of money. The most common collateral is short-run, state-guaranteed Treasury bills. But the money market also includes slightly more risky/less liquid certificates of deposit and commercial paper, and yet higher risk/less liquidity securitized loans, notably mortgage-based securities.
Each of these secondary forms of money, then, is used by the bank oligopoly as collateral on loans of liquid reserves, the debt held (as in a pawnshop) temporarily, by large private institutionally-held funds, reaping a rate of return on its near-liquid assets. In turn, the money lent is leveraged by the oligopoly into financial investment and speculation and, of course, to a much lesser degree, the more traditional financing of production.
The bank oligopoly, then, more or less circumvents the strictures of the central bank, enabling the oligopoly to perpetually multiply money as financial capital. In short, there is what Brown characterizes as a “shadow banking system.” She overstates, perhaps, its independence from the central bank, but nonetheless puts the essential matter in a nutshell:
To satisfy the demand for liquidity (funds available for ready withdrawal) the repos are one-day or short-term deals, continually rolled over until the money is withdrawn. This money is used by banks for other lending, investing or speculation . . . . Operating outside the prying eyes of bank regulators, the shadow system allows credit to be generated without regard to capital requirements, reserve requirements, or the need to balance loans (assets) against liabilities (deposits) as conventional banks must do. (2013: 25)
Brown divides the shadow banking system into two basic components, the money market and the derivatives market. The latter is the chief repository of the state-guaranteed money pouring out of the bank oligopoly, mediated by and continually lending into the money market. The specific exchange involved within the derivatives market itself is really an anti-exchange. Rather than increasing the well-being of both buyer and seller, the derivative swap has essentially a zero sum outcome.
Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets. (2013: 26)
The derivatives market circulates money exogenous to the realm of actual production, but capable of doing the real economy great harm. The market constitutes an enormous, extremely complex game (in the informal sense of game). Money is no more or less than chits, and relatively little of it drips out in the purchase of actual goods.
These two chapters, then, are the heart of the books’ first section, and one might say the book as a whole. The second section is taken up with perhaps an overly ambitious account of public banks within a variety of banking systems, spanning antiquity to contemporary economies. It sometimes has a whiff of one of those deadly high school and undergraduate world history (aka western civ.) textbooks. At the same time it is better than that, and does do service as a textbook by way of putting the contemporary banking system in something of a historical context.
A third section provides a more concentrated, less preachy and I found much more interesting treatment of public banks in the period from the Depression of the 1930s through World War II. This is extended to the postwar period in the fourth section.
Of note, in the third section Brown (2013; chs 18-20: 211-239) introduces the inter-war writings on money and banking of C. H. Douglas. She emphasizes his direct influence on the design of the Japanese banking system. She also points out its similarity to the design of the German system, itself directly influenced by Gottfried Feder, who in 1927 set out the basic ideas of money and finance that guided German economic policy under Hitler.
Neither Douglas nor Feder is generally acknowledged in the current literature, but with the weaknesses of the golden-age economy, exposed by its own collapse, the importance of both thinkers was bound to come into view. Douglas, in particular, put forward a clear macroeconomic approach decades before the word was in existence. His theory of money as purely “social credit” leads him to the inference that there can be (in the contemporary words of Randall Wray 2012; ch. 6: 187) no affordability constraint on the state. As Douglas writes succinctly, “The state should lend, and not borrow, purchasing power. . . .” (1922: 14) This insight alone pre-dates the post-Keynesian “Modern Money Theory” (MMT), of Wray and others, by nearly a century.
Unfortunately, for those looking for something more than a textbook in From Austerity to Prosperity, the concluding fifth section—entitled “Solutions: Banking as a Public Utility”—you will be left holding the bag. Given the historic collapse of the golden-age, and the threat to the very sovereignty of the state over money, Brown offers a litany of brief anodyne groups and subgroups of putative solutions, including, along with MMT and social credit, a return to the gold standard and quantitative easing. The result is so minced that one is left, in the end–a 4-page chapter entitled “Toward a New Theory of Money and Credit”–with little more than bits and pieces, nothing near a serious conclusion.
Given its many positive aspects, what is lacking is any fruitful critique of a social system that, in the words of John McMurtry, “has mutated into a transnational money-sequence system with all committed life-functions systematically overridden” (1913: 104). This is to say that a solution to the problematic nature of the contemporary global banking system cannot leave the very roots of the social system in place. And that is the chief difficulty with this book.
What money means to the lives of individuals and families is not what it means to corporations and financial funds. Any public banking system, whatever form it takes, must contain the fundamental division, then, between money as credit with respect to needed goods, and money as capital. Banking institutions must help establish a social system in which all individuals and families are guaranteed the money necessary to live a decent life.
The practical system of the whole economic and industrial system is to deliver not “more,” but the right quantity of the right goods to the whole of the people, with the minimum of discomfort to all concerned, . . . After [Douglas’s italics] that object has been attained, the productive organization may legitimately be an outlet for creative activity. At no time is it a legitimate object of the general productive process to “provide employment” [Douglas’s quotation marks] for the purpose of distributing wages—to make things which the public does not need, and the makers do not enjoy making, in order that some canon of obsolete theological morality . . . thereby be satisfied (Douglas, 1922: 12).