Friday, January 3, 2014

The Failure of Fiat Money

The 300 year old experiment in driving the economy by creating money is over. We've overpopulated the planet and consumed most of its resources. Creating more money to incentivize higher production, or growth – whether done fairly or not -- just won't work anymore.

The Federal Reserve may for a time be able to manage a money supply appropriate more or less to a plateaued economy, even an economy as unfair as the one it maintains. But from now on any economy will be less and less able to deliver the goods and services expected by ever greater numbers of people. We face at best a long, slow squeeze, a zero-sum game with a shrinking pie. At worse we face a more acute crisis participated by some trigger event: runaway global warming, a large terrorist event or war, another major financial crash.

This time it's different. We face a true economic/ecological depression, not another financial depression, as so often in the past. Back in the 1930s, as on earlier occasions, we had a financial depression, that is, a speculative boom followed by a financial crash. At that time we still had plenty of productive resources and potential, room for population growth, and relatively few externalized costs.

The problem then was the refusal of the central banks or their equivalents to carry out any kind of quantitative easing (QE) or deficit spending when it could have worked; they choose instead to accept insolvency and liquidation on a large scale. But when the necessary stimulus came – in the form of a world war – the resources were there for the economy to rebound and debts to be absorbed. Today the potential for growth is gone. We had a classic financial crash in 2008, but few have noticed that it coincided with a profound, if slow-motion, global eco-crash. Both are still unfolding, and are now deeply intertwined.

Some recent history will be useful to understand how we got to this point:

The Fed, since the 2008 crash, has been using its power to create money to do two things: first, to recapitalize banks which otherwise would have failed, and, second, to absorb the excess debt of the US government. As a result, the big commercial banks have avoided insolvency and the federal government has been able to run continued deficits without rising interest rates.

The Fed recapitalized the banks by buying their toxic assets (mostly worthless mortgage-backed securities), and it absorbed excess US government debt by direct purchase of long-term government securities (quantitative easing). But this monetary "cure" for the financial crisis has turned out to be worse than the disease.

Buying the banks' toxic assets rewarded their moral hazard, their propensity to take risks in hopes of greater profits for themselves while deflecting the responsibility for losses onto others. Buying long-term government debt from the banks further increased their liquidity. More importantly, it guaranteed a market for Treasury bonds -- which likely would not otherwise have found adequate buyers – keeping the government solvent, but artificially so.

As a result of Fed bond purchases, interest rates on government securities, which normally would have risen to attract more buyers, were kept artificially low. These low rates were expected to encourage lending by the banks and to restimulate the economy, while minimizing interest payments on the government's rapidly expanding debt. As we can now see, six years later, the economy has not responded. Banks found far fewer borrowers than expected to put that all money to work, and the debt burden has exploded.

Unable to offload their bloated balance sheets, banks invested much of their excess cash in new speculative bubbles, especially in the equity markets which have soared to all-time highs. Although the banks not only survived but prospered, and the government has so far been able to meet its obligations, this new wealth went mostly not to the general public but to the infamous 1 percent who were able, in one way or another, to participate in the speculative bubbles unleashed by the banks.

Defenders of QE and the Fed argue that this policy averted a much greater threat of financial collapse, and that in due course economic recovery will take advantage of all that pent-up money in the financial system. A growing economic pie, as so often in the past, they tell us, will more than make up for the increased debt burden necessitated by QE, and in the end benefit all.

Critics of QE and the Fed on the other hand argue that the system is inherently designed to concentrate wealth in few hands, that the primary motive of Fed policy is to bail out the big banks and their investors, not serve the public, and, above all, that an enormous amount of new debt is being created in the process, debt that will saddle future generations of taxpayers and which seems unlikely ever to be paid off.

A growing progressive movement proposes to take monetary policy away from the Fed and put it directly under government control, either through a system of national pubic banking, or through issuance of a government-issued currency, modeled on Civil War greenbacks. Rather than prop up big banks, as in 2008, the idea is to use the money-creating power of central government in various ways to bail out individuals and deserving enterprises.

For instance, all deposits could be guaranteed, even in insolvent banks, by extending FDIC as needed. Similarly, underwater mortgages, unpayable health-care bills, onerous student loans, and out-of-control liabilities could be paid off directly by a reformed Fed or a new public bank, relieving millions of citizens of crushing financial burdens. At the same time, vast government-funded infrastructure programs could pump even more money into the economy.

Similarly, Treasury bonds purchased by the Fed could be cancelled, as suggested by Congressman Alan Grayson and others. The money paid for those bonds would be put back into circulation, without any need to continue to service those obligations. These and similar approaches, it is claimed, would put trillions of dollars of assets directly into people's pockets. Social justice would be served and the economy would be reignited.

This progressive monetary agenda puts great faith in the ability of a centralized government to act in the public interest. It presupposes that the government is reasonably accountable to the public. Given the current corruption and dysfunction in Washington, however, it is doubtful that this faith is warranted. A government-run monetary system, without drastic political reform, would almost certainly reflect the interests of lobbyists, government contractors, and other special interests. It would almost certainly end up creating an elite, perhaps every bit as exclusive as the current crop of one per centers spawned by Wall Street.

Progressives might object that even an imperfect system of financial redistribution would be better than what we have now. But they have to show how that would be so, and recent attempts at financial "reform" on the national level, such as Dodd-Frank, have conspicuously failed to break the grip of the traditional "money power."

The deeper dilemma here is that the traditional and progressive approaches both presuppose that the creation in some form of top-down fiat money will stimulate the economy. The Fed would do it through the traditional banking system, with all its flaws; the progressive critics of the Fed would do it through direct action by big government, in spite of its lack of public accountability. Unfortunately, the common assumption they share -- that we can spend our way out of financial difficulty -- no longer obtains.

There are fewer economic opportunities not because of a lack of money, but because the global economy has bumped up against the limits of growth (resource scarcity plus increasing externalized costs like pollution, climate change, overpopulation, etc.). This isn't the place to argue for the limits of growth. A vast – and to this writer, persuasive -- literature on the subject has been developed since the 1970s.

Those limits – mostly dismissed by "growth" enthusiasts -- are the real problem. And it's a problem not only for the banking system and traditional lending, as well as for government spending, but for all of us. Tragically, it would remain a problem even if debt-free fiat money were funneled directly into the hands of certain consumers, or private investors, or into government sponsored infrastructure projects. Even if such policies leveled the economic playing field, which is unlikely, they would not address the larger ecological disaster before us.

It's the difference between the Titanic going down with first class passengers getting preferential access to the lifeboats vs. everyone on the ship getting equal access to those lifeboats. Our moral preference might be for equal access, but, in the absence of well established egalitarian procedures and customs, equal access is also like to mean chaos and pandemonium. In the meantime, no matter what, the ship is going down.

If the purchasing power now locked up in big bank financial statements would have been distributed among the general population, especially those most in need, they would have had a better shot, to be sure, at claiming their share of dwindling resources. And a better infrastructure – a smart grid, a modernized rail system, renewable energy, broadband for all, etc. – would have helped as well.

In the short run, all that would have meant a better economy and a real measure of social justice. But, in the absence of real prospects for renewed economic growth, it would also, in the longer run, arguably have exacerbated the larger crisis by piling further demands on an already stressed eco-system with finite resources. The inconvenient truth, the elephant in the room, is that we have plateaued as an economy, and are headed down, how far we do not know. The kind of financial system appropriate to a drastically different kind of life has yet to be contemplated either by defenders of the status quo, or most of their critics.

Friday, October 11, 2013

The Mythology of American Politics

It's conventional wisdom that politics has two faces: left-wing and right-wing. The issues of the day are routinely framed by experts and ordinary citizens alike as a conflict between left-wing liberals, progressives or Democrats on the one hand, and right-wing conservatives, libertarians, or Republicans on the other.

This presumption has become even more marked as ideological lines have hardened and one-time moderates and pragmatists have disappeared from the political landscape.

The fact is, however, that this left/right opposition represents a deep seated mythology which masks the true nature of American politics. Even worse, it serves the interests of the powers that be to the detriment of the public good.

Like any mythology, the idea that politics is essentially a conflict between left-wingers and right-wingers is significant because it is an article of faith, an unquestioned assumption which determines our thoughts and actions.

Unquestioned assumptions are beliefs which, by definition, resist refutation by ordinary argument. By framing how we think they determine what counts as valid evidence for or against them, rather than allowing evidence arising from general experience to determine valid thinking.

In the case of left-wing vs. right-wing thinking, we have a series of dovetailing half-truths which distort and obscure reality.

Conservatives rail against big government, yet are notoriously blind to the evils of big business. Liberals rail against big business, yet are notoriously blind to the evils of big government.

Rank and file conservatives, who often run small businesses, tend to have an understanding of what it takes to meet a payroll, fill inventories, satisfy customers, deal with competition, etc.. They naturally admire the success of larger corporations, and tend to identify with them.

For many such conservatives the government, with its regulations and taxes, is the natural enemy. They want "to get government off our backs." But they tend to give business a pass, largely ignoring abusive corporate power.

Rank and file liberals, by contrast, tend to be removed from the business world. If the favorite haunts of the conservative are groups like the Farm Bureau or the Chamber of Commerce, those of the liberal are often institutions, usually non-profits. These institutions – schools, universities, hospitals, foundations, etc. – are usually tied-in to government funding.

Most liberals therefore tend to take government for granted, and to see its regulation of business (health and safely, the environment, etc.) as a necessary check on bad practices. Since large corporations resist regulation and use their power to influence politicians and governments, liberals tend to see corporate power, not government, as the enemy.

The key point is that both big government and big business have benefited enormously from this pseudo-debate. Government has a poor record in curbing corporate power, but in areas like the military, homeland security, suspension of civil liberties, and surveillance it has gained almost totalitarian powers.

Similarly, though big corporations have been unable to shrink government, they are able, through campaign funding, to bind politicians into voting for extensive deregulation, while also supporting enormous corporate subsidies. Thus corporations have become largely unaccountable to the public, protected as too big to fail, and able to operate with virtual impunity.

Behind the apparent gridlock in Washington, both big business and big government are getting what they want – at public expense. The result is unprecedented growth of unaccountable political and economic power. Washington and Wall Street run the show, with little effective opposition. This is the real scandal of American politics, and the reason why no reform is possible.

This two-headed hydra of government and corporate power is the real radicalism of our time. It threatens our liberties, property, and communities. It serves powerful private interests at the expense of the public interest. Citizens have no meaningful input into corporate and government decisions. Our political parties – the maidservants mediated between big business and big government -- are part of the problem, not the solution.

Citizens and communities across the country are the real victims of corporate and government power – whether it's the taking of property through eminent domain for private uses, the preemption of local laws for corporate purposes, the use of subsidies to favor big corporations over local business enterprises, the externalization of environmental and other harms and costs of business onto the public, the bailout of the financial industry, or "free" trade agreements which have devastated the middle class. The list is virtually endless.

The defense of the public interest now relies on whatever resistance can be generated by local citizens and local governments to this unprecedented attack. Indeed, the only effective resistance to the tag-team onslaught of big business and big government has come from citizens working in their local communities. Whatever the destructive proposal may be – a polluting industry, a tax hike, outsourcing of jobs, a restriction of liberties – only spontaneously organized citizen resistance at the grassroots level has had any success in frustrating many of these initiatives.

It's important to be clear about this. Local spontaneous resistance is not organized from above. The environmental movement in the United States, for example, was not led to most of its success by the big environmental organizations such as the national Sierra Club, the Environmental Defense Fund, the National Resources Defense Council, or the Nature Conservancy. These groups have piggy-backed on public sentiment and largely sought to mediate between big business and big government, hoping at best to mitigate not roll back significant environmental harms. Most ended up taking corporate money and serving corporate ends.

Local spontaneous resistance by contrast is not institutionalized; it does not depend on non-profit status, large paid careerist staffs, or a passive donor base. It is populist in nature, local rather than national, messy and chaotic, angry rather than cool, adamant rather than compromising, and potentially revolutionary in nature. Its signature is the NIMBY attitude, the defense of one's own turf above all.

The real heroes of grassroots resistance are individuals and local decentralized groups – Julia Butterfly sitting in a redwood tree, the Clamshell alliance and other local anti-nuke groups, the Occupy movement, and the anti-fracking movement in New York State, which has banned fracking for natural gas in scores of local communities, among others.

This local populist resistance to the powers that be has gone largely unremarked by both the mainstream and alternate media. It echoes an earlier American localist tradition associated with Jeffersonian democracy, a tradition, it is worth recalling, which consistently resisted both big business and big government. We saw it in the Farmers Alliance and other populist movements of the nineteenth century, the early labor movement, the civil rights movement, the counterculture of the 1960s, and the Tea Party of the early twenty-first century.

The prospects are not hopeless. As big business and big government become more powerful than ever, they become less efficient, less able to deliver the goods and services upon which society relies. Not only does centralization and lack of accountability frustrate corrective feedback, ensuring a kind of stupidity of centralized power, but deeper ecological and financial problems work against centralization. Resource scarcity, overpopulation, ecological destruction, and an unpayable debt burdens all raise costs and threaten far-flung financial, production and distribution systems.

The current crisis is one of a slow but steady breakdown of centralized power. Communities increasingly will be thrown back on their own resources. Whether they can wrest enough control from increasingly desperate corporate and governmental authorities to manage their own affairs will be the key challenge of the future. If that devolution of power can be achieved peacefully, with new localized, more democratic institutions able to rebuild more viable, sustainable, downsized local communities, we will have done as well as we can to prepare for the coming crisis.

But if local efforts to manage a transition as orderly as possible to sustainable living and local control are frustrated by the stubborn resistance of centralized power, and/or by local reactions that are uninformed, incoherent, anarchic, and violent, then our prospects are worse than ever. This is our dilemma, and our challenge.

The article was published 10 October 2013 at Information Clearing House:

Thursday, September 26, 2013

The Ecology of Money: Debt, Growth, and Sustainability

"Modern economics must 'grow' because money borrowed for investment can be repaid only by expanding production and consumption to meet the burden of usurious rates of interest. The roots of this dynamic between debt and growth lay in the financial revolution of the late seventeenth and early eighteenth centuries in Britain, which establish a new usurious monetary system.

"For the first time in history credit was made widely available, but only on condition of an exponentially increasing debt burden. To pay back debts, production had to increase correspondingly, leading to the industrial revolution, economic 'growth,' and modernity itself. Though private creditors grained a monopoly over the creation of credit, and were disproportionately enriched, the resulting economic growth for a time was great enough to benefit most debtors as well as creditors, ensuring widespread prosperity.

"That is no longer the case. With today's eco-crisis we have reached the limits of growth. We no longer have the natural resources to grow fast enough to pay our debts. This is the real root of our current financial crisis. If we are to live sustainably, our system of money and credit must be transformed. We need a non-usurious monetary system appropriate to a steady-state economy, with capital broadly distributed at non-usurious rates of interest. Such a system was developed by an early nineteenth-century American thinker, Edward Kellogg, and is explored here in depth. His work inspired the populist movement and remains more relevant than ever as a viable alternative to a financial system we can no longer afford."

--  from the blurb on the back cover of The Ecology of Money

The Ecology of Money was published by Lexington Books in 2013 and is available at

A Summary of the Argument of The Ecology of Money in 10 Points:

1. Our ecological crisis is a consequence of the productive effort we must make to meet the demands of our financial system. This crisis is upon us since we no longer have the natural resources to sustain this effort.

2. The roots of this financial-economic dynamic lie in the financial revolution of the seventeenth and eighteenth centuries in Holland and England, where credit and finance as we know them were invented.

3. Unfortunately, this financial revolution as completed in England: a) privatized credit, giving bankers a legal monopoly over money creation through issuing loans; b) created a national debt and a central bank to backstop private lending; and c) allowed bankers to charge high (usurious) rates of interest on loans. The Bank of England became the symbol of this "English system," as Alexander Hamilton called it, which was subsequently exported to America and most of the modern world. American populists called it "the money power."

4. Once key sectors of the economy came to depend on money borrowed at usurious rates of interest, it became necessary to keep expanding economic output. The obligation to repay such debts is what forced modern economies into endless "growth." Traditional, steady-state, reciprocal, sustainable economies were displaced by economies relentlessly seeking out new markets, technologies, resources, and laborers, and the industrial revolution -- and what we call "modernity" -- was born.

5. More than two centuries of economic "growth" have given us the miracle of the modern world, with all its astounding wealth and technology. That miracle has also exhausted our planet, which now staggers under the cumulative effects of resource depletion, pollution, overpopulation, and climate change. Insofar as the limits to growth have been reached, we can no longer hope to repay our debts, as in the past, by growing our way out of the crisis.

6. Our "too big to fail" financial system has succeeded in transferring much of this excessive debt onto taxpayers, postponing and likely intensifying the final reckoning. We are further burdened by a dysfunctional political system -- largely corrupted by the same financial interests -- which is less and less responsive to the urgency of reform, which may now be impossible.

7. The now inter-woven ecological and financial crisis is likely to play itself out no matter what we do. If so, the survivors will need to adjust to a dramatic downsizing and a return to sustainable economic practices. If civilization survives, it will need a financial system compatible with a steady-state, non-growth economy.

8. The outlines of such a system actually exist: they were developed by a nineteenth-century American financial theorist, Edward Kellogg. He proposed a decentralized system of public banking, where citizens could borrow on good collateral at a non-usurious rate of interest fixed by law at one percent. Kellogg's system, which inspired American populists, is a model for financing a future sustainable economy.

9. To say that we can no longer tolerate exponential growth as we have known it is not to say that human ingenuity has no future, that profound innovations in human life are no longer possible, or that the vast store of scientific and technical knowledge born of the industrial revolution cannot be adapted to new circumstances. A sustainable, steady-state economy is not necessarily a static or primitive economy, though likely it will be a far more modest and prudent one.

10. Our immediate prospects, however, remain daunting. Human history has long swung between extremes -- boom and bust, feast and famine, peace and war, the rise and fall of civilizations -- and we have no reason to believe our era is exempt from that ancient dynamic. We are a resilient species, and the silver lining of any crisis has always been the opportunity to learn from our mistakes, an opportunity perhaps not otherwise possible. Let's make the best of it.

Pyrrhonism: How the Ancient Greeks Reinvented Buddhism

"Pyrrhonism is commonly confused with scepticism in Western philosophy. Unlike sceptics, who believe there are no true beliefs, Pyrrhonists suspend judgment about all beliefs, including the belief that there are no true beliefs. Pyrrhonism was developed by a line of ancient Greek philosophers, from its founder Pyrrho of Elis in the fourth century BCE through Sextus Empiricus in the second century CE. Pyrrhonists offer no view, theory, or knowledge about the world, but recomend instead a practice, a distinct way of life designed to suspend beliefs and ease suffering.

"Adrian Kuzminski examines Pyrrhonism in terms of its striking similarity to some Eastern nondogmatic soteriological traditions -- particularly Madhyamaka Buddhism. He argues that its origin can plausibly be traced to the contacts between Pyrrho and the sages he encountered in India, where he traveled with Alexander the Great. Although Pyrrhonism has not been practiced in the West since ancient times, its insights have occasionally been independently recovered, most recently in the work of Ludwig Wittgenstein. Kuzminski shows that Pyrrhonism remains relevant, perhaps more than ever, as an antidote to today's cultures of belief."

-- from the blurb on the back cover of Pyrrhonism: How the Ancient Greeks Reinvented Buddhism

Pyrrhonism was published in 2008 by Lexington Books; it is available at

Fixing the System: A History of Populism, Ancient & Modern

"Populism is the genuine 'third way' of politics . . . transcending both the 'big government' policies of the Left and the 'big business' policies of the Right. By decentralizing political and economic power, populism aims to replace top-down with bottom-up politics. This book is an attempt to present populism in its historical context, to retrieve it from the oblivion into which it has been thrust by its opponents, and to demonstrate the promise it holds for the future. At a time when our political process no longer represents ordinary citizens, when disparities of wealth and poverty are enormous and increasing, when irresponsible hubris goes increasingly unchecked among government and corporate leaders, when criminal wars of aggression undermine our international integrity, and when the environmental costs of economic growth threaten the planet itself, it is more important than ever to find alternative and more promising ways of thinking about our political and economic problems . . .

"How far do populists go? By 'property for all' populists means the widespread personal ownership of private capital sufficient to establish the relative economic independence of citizens vis-a-vis one another. Where none are rich enough to dominate others economically or poor enough to be so dominated, populists argue, the public interest rather than private interest is likely to be served. In an earlier agrarian era, populists called for the distribution of land (then the principal form of capital) among citizens, while in modern commercial economies they propose to distribute credit (now the principal form of capital) directly to citizens through various forms of public credit. The most comprehensive system of public credit -- developed by the nineteenth century American populist Edward Kellogg -- proposed to replace our privatized financial system with a decentralized but state-regulated monetary system based on direct low-interest loans to citizens.

"By 'democracy for all' populists mean full and direct participation in empowered local citizen assemblies -- such as those found in ancient city state, and in the town meeting of colonial and early federal America -- suitable confederated together into broader accountable representative bodies, as Jefferson outlined. In calling for a wide distribution and decentralization of both wealth and politics, populism offers a radical but plausible reform of the political and economic system found today in the United States and most other developed countries, where credit and property remain highly concentrated in private hands, and where representatives chosen in impersonal mass elections frustrate democracy by serving private interests rather than the public good. Populism seeks to complete a half-begun American revolution by establishing the full measure possible of individual political and economic liberty. In our time of crisis, this pragmatic program for fundamental social reform deserves serious consideration."

-- from the Preface to Fixing the System

Fixing the System, published in 2008 by Continuum Books, is available at

The Soul

"The Soul proposes a philosophy of reality in which we are souls distinct from our thoughts and our sensations. Imperceptual souls interact with, but cannot be captured by, perceptions. Recognition of the soul as self allows us to avoid reductions of self and reality to thoughts and sensations. Soulful self-recognition suggests instead a respectfully curious indifference to our perceptions, reminiscent of ancient Pyrrhonnian skepticism, sustained by a representationally opaque but mysteriously humanizing suggestion of non-perceptual immortality."

-- from the back cover blurb

"Adrian Kuzminski's The Soul places him in a very small circle of contemporary philosophers whoa re singular, original thinkers. Like a painter stipulating compositional form, subject, colors, and styles, Kuzminski 'stipulates' definitions of perception, sensation, thought, form, contrast, and a host of other notions that allow him to develop a philosophically precise system of the soul, the person and perceptions. Though stipulative in the beginning, the notions are so carefully defined with respect to the insights and oversights of other thinkers that the cumulative effect is a serious, dialectically engaged argument of contemporary philosophy. Kuzminski's approach picks up on the problematics of George Berkeley . . . it is one of the few works in Western philosophy to be healthily informed by Indian and Chinese philosophies. Kuzminski's criticisms of behaviorism (the reduction of thought to sensation) and solipsism (the reduction of sensation to thought) are worth the purchase and study of the book itself. The Soul proves that brilliant, original, philosophical genius has not died."

-- comment by Robert C. Neville

The Soul was first published by Peter Lang in 1994. It is currently out of print but a hard copy and/or pdf of the text can be obtained by contacting the author at

Thursday, August 8, 2013

The Bank of Vermont

Proposal for a Publicly-owned State Bank in Vermont

Adrian Kuzminski


Today Vermonters have no control over access to capital. Loans are available to them almost exclusively through an unfair and exploitative banking system.

Money can be borrowed for the most part only from private banks which enjoy unearned profits through their effective monopoly over lending money to Vermonters at usurious rates of interest.

As a result, most Vermonters, like most people in other states, find themselves in perpetual debt peonage. If they are able to obtain capital for personal or private investment from the banking system -- getting an education, buying a home, starting a business, etc. -- they end up owing far more than they borrow.

If Vermonters are ever to take charge of their destiny, they must gain control over and transform the financial system which serves them.

This brief essay proposes the establishment of a public bank for Vermont which would make available credit to Vermonters at a very low rate of interest, ensuring that the capital necessary for productive and sustainable living be available to all in a fair and just manner, with the benefits going to borrowers, not to creditors.

What follows is a proposal for a state-chartered, non-profit public bank in Vermont -- to be called the Bank of Vermont (BVM). Its purpose is to provide low-cost banking services to Vermont citizens, businesses, and governments.


The BVM would be chartered by an act of the state of Vermont as an independent public bank. It would be the only public bank in the state, and, though charged with promoting public benefit, it would be entirely free of control by the state government.

The principal mission of the BVM would be to provide banking services, including non-usurious credit, to Vermont citizens, to corporations chartered in Vermont, and to state and local Vermont governments, as described below. The BVM would extend no services or credit to any other parties.

The BVM would be wholly owned and operated by an independent Board of Trustees chosen through statewide elections by Vermont voters. This Board would be responsible for all activities of the BVM. It would be, in effect, a fourth, separate, financial branch of state government. Its activities would be confined to the state of Vermont.

By law, the BVM would be the fiscal agent of the state. All state and local Vermont government revenues would be deposited in the bank, and all state and local government expenditures would be satisfied by payments drawn on those deposits.

In addition, citizens of Vermont and corporations chartered in Vermont would be free to choose the BVM as their fiscal agent; they would be allowed to deposit funds in the bank, to apply for loans, and to carry out other traditional banking activities through the bank.

The BVM would, upon its discretion, purchase state and local Vermont government bonds; it would also act, for a fee covering necessary expenses, as sole agent for the state of Vermont, or for any municipality or government entity in the state, offering their bonds to the public.

Any and all loans by the BVM to Vermont citizens, Vermont corporations, or Vermont government entities, would be made at the discretion of the bank upon proof of adequate collateral according to uniform standards of credit-worthiness. Any and all loans would be issued at a permanently fixed at a rate of no more than one percent interest per year.

All loans would be issued by local branches of the BVM, at least one to be established in every county. Some branches would naturally be more capitalized than others. A branch in Montpelier, for instance, if it were the depository of state funds, would be larger than most others, though some other branches in economic centers, such as Burlington, would also likely be larger than most.

At the discretion of the Trustees of the BVM, the various branches would coordinate their activities, including such short-term inter-bank lending as may be necessary to facilitate operations.

The BVM would create money, like other banks, through fractional reserve lending, keeping a certain percentage of deposits (to be determined by the Trustees) on hand at all times.

All deposits would be fully insured by the state of Vermont.


Public banking is a serious alternative to our current, increasingly dysfunctional and exploitative private banking system. In the system we have, money is created not by the government, as is widely believed, but by a private banking network which was granted the monopoly to do so in various stages between the Civil War and the creation of the Federal Reserve in 1913.

In this private system, credit is made available by private banks to governments, corporations, and individuals at exorbitant -- that is, usurious -- rates of interest. The Federal Reserve is a privately owned bankers' bank -- with a veneer of public accountability -- run by the large commercial banks for their interest, not the public interest. Banks lend to one another at very low rates, but they lend to everyone else at high rates.

The money lent out by the banking system has seldom been money on deposit with the banks. Mostly it has been created by the banks lending out more than they actually had on hand. Since most depositors do not demand their money at any given time, bankers were safely able to lend out far more than they had in deposits. This is called fractional reserve banking and it is how virtually all the money in circulation was created for centuries.

This system -- in which money is created "out of thin air" -- seems shocking at first blush, but it in fact reveals where money really comes from. Since money today is no longer based on gold or silver held on deposit, but is simply issued as debt for collateral, it is the collateral not the deposits which are in effect the reserves. In other words, the economy as a whole is what's backing the system.
Since the crisis of 2008 the banking system has been openly supported by so-called "quantitative easing" by the Federal Reserve, in which money is freely created to keep the system liquid. Fractional reserve banking no longer really exists, but the innovation it introduced -- the creation of money out of thin air -- has become universal. We call it fiat or token money.

The difficulty is not with the creation of money per se, which is essentially the creation of credit, but with the usurious interest rates which have been added on to it.

Since the creation of money as we know it is a function of a privatized banking system, which is allowed to charge virtually whatever interest rates the public will bear, creditors everywhere today are able to enjoy the benefit of an unearned surcharge on loans which they have done nothing -- beyond a bookkeeping entry -- to earn. As a result, a large portion of the wealth of the nation has been and continues to be steadily transferred from debtors to creditors, that is, from the ninety-nine percent to the one percent.

This is the principal vehicle by which wealth is extracted from the many (debtors) and concentrated in the hands of the few (creditors). Most people do not have adequate capital to satisfy their needs and ambitions, and must borrow at usurious rates for the things they desire. They must take out mortgages, car loans, education loans, credit card loans, and many other kinds of loans, mostly from the privatized financial system, in order to live reasonable lives.

The price of this today is debt peonage for most people. As long as economic growth could be taken for granted, borrowers could hope to translate their debts into increased productivity sufficient not only to pay back the principle on those loans, but the usurious interest as well. It was not a fair system, since debtors were obliged to pay high interest rates which left them poorer than they otherwise would have been, but that they could at least hope to come out ahead allowed them to tolerate the system.

Today the conditions of endless economic growth -- which go back to the beginnings of the industrial revolution -- no longer exist. Massive population growth over two centuries coupled with the depletion of non-renewable resources on a finite planet have brought us to the limits to growth, to a global eco-crisis.

To continue, under these circumstances, with our current financial system is to invite serious social conflict. Debtors will find it increasingly difficult to meet their obligations while creditors will find themselves imposing ever harsher condition on debtors as they try to ensure that their loans will be repaid. Look at the Eurozone today.

What is necessary above all is a new financial system which supplies needed credit to individuals, corporations, and governments without imposing on them usurious rates of interest. Without such rates, there would be little if any profit in the business of debt creation, and little incentive for private banking as we know it to continue.

Under these circumstances, it follows that banking, like any other natural monopoly, ought to be a public not a private institution. It is high time to end the privileged control given over to private interests to manage and unfairly profit from our money supply.

Nothing would be gained, however, if money creation by the state ended up as another version of concentrated power which perpetuated the same evils as our current privatized system, particularly the charging of usurious interest rates. Indeed, some advocates of public banking recommend appropriating the interest-setting function - as an offset to taxes -- in the name of the public good.

Yet it is naive to think that this power in the hands of the state would necessarily be used for public benefit. Allowing the power of the state to expropriate wealth from its citizens through imposing usurious interest rates is likely only to exchange one master for another.

This is particularly the case in a age of powerful, centralized, and largely corrupt and unaccountable governments, even on the state level. Even without usurious interest rates, the power of the state to issue credit through a public bank would likely be subject to an endless range of pressures, pleadings, lobbying, and favoritism from interest groups and government contractors.

The best course is to establish, as suggested here, a truly independent public bank, one not accountable to politicians but directly to the voters. The role of the state government would be to draft and pass the bank's charter, and then leave its functioning to independently elected trustees, with no further interference.

No political solution is perfect, but this one at least avoids some of the obvious pitfalls in reforming the money and banking system. The essential points to be included in any charter for a public bank are 1) that it be the fiscal agent of state and local governments, 2) that it charge no more than one percent interest on any loan, and 3) that it's trustees be wholly independent of state government, something possible only if they are elected directly by the people.

One might wonder why a rigid limit on interest rates should be set at one percent. This principal was developed by an early nineteenth century American populist, Edward Kellogg, on whom I have written elsewhere.

The fundamental idea is that one percent interest establishes a rate of repayment in which the interest equals the principle only after 72 years, roughly a human lifetime. This in effect puts a cap on interest payments such that no borrower will ever pay interest in excess of the principal originally borrowed.

This ensures that for any borrower -- and so for society as a whole -- the interest rate shall be commensurate with what is needed over time to replenish the resources consumed with the borrowed money, no more and no less.

Why should there be any interest at all? Without interest the money borrowed and spent is not replenished, and it is necessary that there be some rate of interest so that money is replenished to stabilize the system. At higher rates of interest, the borrower must not only replenish the money, but must actually put more money back into the system than the equivalent of what he or she borrowed to begin with.

This is easily demonstrated: At two percent interest the borrower must repay interest equal to the principle in 34 years, at three percent, in 24 years, at four percent, 18 years, and so on exponentially. At ten years it takes 7.2 years for the interest to equal the principle, at twenty percent, 3.6 years, etc.

This is an established accounting principle, called the Rule of 72. It is perhaps the best measure of the debt burden of interest rates. The operative point is that at any rate above one percent the debtor is subject to exponentially increasing degrees of unnecessary exploitation by whoever may be the creditor. Whether the creditor is a public or private entity is irrelevant.

Finally, this bank is proposed for Vermont because of Vermont's human-scale and strong democratic traditions. The US Constitution forbids the states from issuing their own currency, but it does not forbid them from setting up a pubic bank; nor does it prohibit a public bank from being structured as we have proposed.

As described here the BVM would be in a position to create credit for the citizens, corporations, and governments of Vermont using US currency. Because at present states are prohibited by the US Constitution from issuing their own currency, the BVM would have to rely on deposits of US currency to create a reserve upon which, through fractional reserve banking, it could issue a quantity of loans sufficient to meet demand. The availability of low-cost credit would be a powerful tool to establishing the economic self-sufficiency and independence of Vermont. It's a proposal worth taking seriously.

This essay was originally published 9 April 2013 in the Vermont Commons: