Liberate America

8/6/2019 Liberate America

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How to Liberate America from Wall Street Rule

A Report from the New Economy Working Group

Participating OrganizationsBusiness Alliance for Local Living Economies

Capital Institute

Democracy Collaborative

Green America

Institute for Policy Studies

Living Economies Forum

New Economy Network

New Rules Project

Public Banking Institute

RSF Social Finance

YES! Magazine

How toLiberate

Americafrom

Wall StreetRulex

http://www.neweconomyworkinggroup.org/http://www.neweconomyworkinggroup.org/


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How to

Liberate Americafrom Wall Street Rule

AReportfr

omtheNewEconomyWorkingGroup

Primary Author: Daid Korten

Contributors: Alissa Barron, Gar Alperoitz, Sarah Anderson, Ellen Brown,John Caanagh, Chuck Collins, John Fullerton, Jared Gardner,

Alisa Graitz, William Greider, Fran Korten, Michelle Long, Stacy Mitchell, Doug Pibel,Don Shaffer, Michael Shuman, Sarah Stranahan, Gus Speth, and Sarah an Gelder

July 2011

New EconomyW O R K I N G G R O U P

Equitable Economies for a Living Earth

LivingEconomes

Forum

Participating Organizations

Business Alliance for Local Living Economies

Capital Institute

Democracy Collaborative

Green America

Institute for Policy Studies

Living Economies Forum

New Economy NetworkNew Rules Project

Public Banking Institute

RSF Social Finance

YES! Magazine

Edited by Doug Pibel. Designed byTracy Loeffelholz Dunn.

Coer photo by Snke Hartmann

This document is proided for educational purposes at no charge to the reader. Reproduction is encouraged in all forms,ecept that reproduction for sale or for any for-prot use is epressly forbidden.
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yworkinggroup.org/http://www.neweconomyworkinggroup.org/http://www.neweconomyworkinggroup.org/http://www.neweconomyworkinggroup.org/


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ACKNOWLEDGEMENTS

This report addresses issues and options largely ignored by the current public conersation

on nancial reform. It confronts the need to not simply or reform Wall Street but rather

to create a Main Street-based money and banking system accountable to local communities

and responsie to their needs. The intention is to redirect the conersation to deeper issues

and options that the establishment has so far kept off the table. The essential issues are

straightforward matters of alues and power readily understood by most eeryoneas thisreport intends to demonstrate.

This report is prepared and issued by the New Economy Working Group (NEWGroup), an

informal alliance coordinated by the Institute for Policy Studies (IPS) and comprised of IPS,

YES! Magazine, the Business Alliance for Local Liing Economies (BALLE), and the Li-

ing Economies Forum, plus indiidual members Gar Alperoitz, Stacy Mitchell, and Gus

Speth. It is co-chaired by John Caanagh and Daid Korten, and coordinated by Noel Ortega.

NEWGroups mission is to articulate and popularize a bold ision and implementing strat-

egy for a New Economy that works for all of Earths people and the liing systems on which

their well-being depends. See the Appendi for NEWGroups statement on what we mean by

a New Economy.

This report grows out of an ongoing New Economy Transitions discussion series organized

by NEWGroup and the New Economy Networkan informal alliance of indiiduals and or-

ganizations coordinated by Sarah Stranahan.

Many indiiduals and organizations played critical roles and contributed important ideas to

the etended conersation on which this report is based. Indiiduals who made signicant

contributions by way of concepts, proposals, and feedback include: Alissa Barron, Gar Alp-

eroitz, Sarah Anderson, Heather Booth, Ellen Brown, John Caanagh, Chuck Collins, John

Fullerton, Jared Gardner, William Greider, Fran Korten, Michelle Long, Stacy Mitchell, Doug

Pibel, Don Shaffer, Michael Shuman, Sarah Stranahan, Gus Speth, and Sarah an Gelder.

Participating organizations in addition to the New Economy Working Group partners include:

Capital Institute, Democracy Collaboratie, New Economy Network, New Rules Project of theInstitute for Local Self-Reliance, and Public Banking Institute, and RSF Social Finance.

All of these indiiduals and organizations hae reiewed the nal report. They do not neces-

sarily endorse all of the reports premises, conclusions, and recommendations. All, howeer,

agree on the need for a liely public conersation on the issues and options presented. All

are committed to adancing that conersation.

Final responsibility for the reports content, including errors and omissions, rests with

Daid Korten as the primary author. Korten is co-chair of the New Economy Working Group,

co-founder and board chair ofYES! Magazine, founder and president of the Liing Econo-

mies Forum, and a founding board member of the Business Alliance for Local Liing Econo-

mies (BALLE). His books include Agenda for a New Economy: From Phantom Wealth to Real

Wealth, The Great Turning: From Empire to Earth Community, and the international best

seller When Corporations Rule the World. He has MBA and Ph.D. degrees from the Stanford

Business School. In his earlier career he sered as a captain in the U.S. Air Force, a Harard

Business School professor, a Ford Foundation project specialist, and Asia regional adiser

on deelopment management to the U.S. Agency for International Deelopment.
http://neweconomyworkinggroup.org/http://www.ips-dc.org/http://www.yesmagazine.org/http://www.livingeconomies.org/http://livingeconomiesforum.org/http://livingeconomiesforum.org/http://livingeconomiesforum.org/davids-storyhttp://neweconomyworkinggroup.org/http://www.yesmagazine.org/http://livingeconomiesforum.org/http://livingeconomiesforum.org/http://www.livingeconomies.org/http://www.livingeconomies.org/http://livingeconomiesforum.org/http://livingeconomiesforum.org/http://www.yesmagazine.org/http://neweconomyworkinggroup.org/http://livingeconomiesforum.org/davids-storyhttp://livingeconomiesforum.org/http://livingeconomiesforum.org/http://www.livingeconomies.org/http://www.yesmagazine.org/http://www.ips-dc.org/http://neweconomyworkinggroup.org/


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RECENT QOTATONS

In policy terms, the success of the nancial sector is not an end in itself,but a means to an endwhich is to support the itality of the real economy

and the lielihood of the American people. What really matters to the life of our nation isenabling entrepreneurs to build new businesses that create more well-paying jobs, and

enabling families to put a roof oer their heads and educate their children.

Sheila Bair, FDiC Chair, MarCh 16, 2011

Financial systems are important serants of the economy, but poor masters.

Martin WolF, FinanCialtiMeSChieFeConoMiCSCoMMentator, april20, 2010

Of all the many ways of organizing banking, the worst is the one we hae today.

Mervyn King, governor, BanKoF englanD, oCtoBer 25, 2010

I dont think this is just a nancial panic; I beliee that it represents the failure of a wholemodel of banking, of an oergrown nancial sector that did more harm than good.

paulKrugMan, the MarKetMyStique, neW yorK tiMeS, MarCh 26, 2009

Bank of America protestBoston, 2010

Photo by Aaron Donoan
http://www.fdic.gov/news/news/speeches/chairman/spmar1611.htmlhttp://www.fdic.gov/news/news/speeches/chairman/spmar1611.htmlhttp://www.fdic.gov/news/news/speeches/chairman/spmar1611.htmlhttp://www.fdic.gov/news/news/speeches/chairman/spmar1611.htmlhttp://motherjones.com/kevin-drum/2010/04/quote-day-restructuring-financehttp://motherjones.com/kevin-drum/2010/04/quote-day-restructuring-financehttp://motherjones.com/kevin-drum/2010/04/quote-day-restructuring-financehttp://motherjones.com/kevin-drum/2010/04/quote-day-restructuring-financehttp://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdfhttp://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdfhttp://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdfhttp://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdfhttp://www.nytimes.com/2009/03/27/opinion/27krugman.htmlhttp://www.nytimes.com/2009/03/27/opinion/27krugman.htmlhttp://www.nytimes.com/2009/03/27/opinion/27krugman.htmlhttp://www.nytimes.com/2009/03/27/opinion/27krugman.htmlhttp://www.nytimes.com/2009/03/27/opinion/27krugman.htmlhttp://www.bankofengland.co.uk/publications/speeches/2010/speech455.pdfhttp://motherjones.com/kevin-drum/2010/04/quote-day-restructuring-financehttp://www.fdic.gov/news/news/speeches/chairman/spmar1611.html


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ACKNOWLEDGEMENTS 3

ExECUTIvE SUMMARY 6

How to Liberate America From Wall Street Rule 8

Finance for a 21st Century America 10

Money as a System of Power 12

The Case for System Redesign 14

A Well-Functioning Money System 14

A Proen Model 15

Wall Street Takeover 16

A Bipartisan Project 16

At the Epense of Community Banking 17

Subsidies for a Doomsday Machine 18

Moral Failure 18

Blaming the victim 19

Bad Science 19

Flawed Legal Doctrine 20

The Purpose of Business 21

Money System Design 22

Basic Market Principles 22

Money Creation in the Current System 23

Agenda for a Main Street Money System 24

1. Rebuild a National System of Community-Based

and Accountable Financial Institutions 25

2. Create a State Partnership Bank in Each of the 50 States 28

3. Restructure the Federal Resere to Limit Its Function

to Money Supply Management and Subject it to Federal

Oersight and Public Accountability 29

4. Create A Federal Recoery and Reconstruction Bank 31

5. Rewrite International Trade and Inestment Rules

to Secure National Ownership, Self-reliance, and

Self-determination 32

6. Implement Measures to Secure the Integrity

of the Money/Banking/Finance System 35

Citizen Action 36

APPENDIx:

Navigating the Transition to a New Economy 39

TABLE OF CONTENTS


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EXECTVE SMMARY

I

n 2008, Wall Street plunged the U.S. econ-

omy into the worst crisis since the Great

Depression. Wall Street receied a gener-

ous public bailout and quickly recoered.

Main Street continues to languish. Politi-cians and pundits rarely inquire into the rea-

sons for the disparity. Doing so would epose

the reality that the United States is ruled as a

plutocracy, not a democracy, and would focus

citizen anger on the structure of the institution-

al system that gies Wall Street bankers their

power.

The 2008 nancial crash was a direct and

ineitable consequence of a social engineering

eperiment conducted by Wall Street intereststhat allowed Wall Street nancial institutions to

consolidate their control of the creation and al-

location of money beyond the reach of public ac-

countability. The priority of the money system

shifted from funding real inestment for building

community wealth to funding nancial games

designed solely to enrich Wall Street without the

burden of producing anything of real alue.

The proper function of money is to facilitate

the sustainable and equitable utilization of re-sources to fulll the needs of people, commu-

nities, and nature. This calls for a community-

based and democratically accountable system

of money, banking, and nance that functions

to create and allocate money as a well-regulated

public utility.

Such a system would be remarkably similar

to the one that nanced the United States ictory

in World War II, produced an unprecedented pe-

riod of economic stability and prosperity, made

America the worlds industrial powerhouse, and

created the American middle classa system

that was working well until Wall Street launched

its nancial modernization eperiment.

Wall Street interests mobilized in the 1970s

to adance a host of policy initiaties that led to

the erosion of the middle class, an etreme con-

centration of wealth, a costly nancial collapse

high rates of unemployment, bankruptcy, and

housing foreclosure, accelerating enironmentasystems failure, and the hollowing out of U.S

industrial, technological, and research capacity

Wall Street proted all along the way and declared

its social engineering eperiment a great success

This report presents a si-part agenda fo

ending Wall Streets disastrous eperiment and

creating a community-based, publicly account-

able money and banking system responsie to

the needs and opportunities of the United States

in the 21st century.

1

Reverse the process of banking consolidation

and build a national system of community-

based, community-accountable nancial in-

stitutions devoted to building community

wealth. Break up the megabanks and imple-

ment ta and regulatory policies that faor ap-

propriate-scale community nancial institutionsand, in particular, community nancial institu-

tions organized as cooperaties or owned by non-

prots deoted to community wealth building.

2

Create a State Partnership Bank in each of

the 50 states to sere as a depository for state

nancial assets. State banks can keep these

funds circulating in state by partnering with

community deelopment nancial institutions

on loans to local home buyers and locally owned

enterprises engaged in construction, agricul-

ture, industry, and commerce.

3


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3

Restructure the Federal Reserve to limit its

responsibility to managing the money sup-

ply, subject it to federal oversight and pub-

lic accountability, and require that all newly

created funds be applied to funding public in-

frastructure. Assign responsibility for the regu-

lation of banks and so called shadow banking

institutions to specialized regulatory agencies.

4

Create a Federal Recovery and Reconstruc-

tion Bank to nance critical green infrastruc-ture projects designated by Congress. It would

be funded with the money that the Federal Re-

sere creates when it determines a need to e-

pand the money supply. Rather than introducing

that money into the economy through Wall Street

banks, it would instead be introduced through

the Federal Recoery and Reconstruction Bank.

5

Rewrite international trade and investment

rules to secure national ownership, self-reli-

ance, and self-determination. Bring interna-

tional rules into alignment with the foundational

assumptions of trade theory that the ownership of

productie assets belongs to citizens of the country

in which they are located and that trade between

nations is balanced. Hold corporations operating

in multiple countries accountable for compliance

with the laws of each country of operation.

6

Implement appropriate regulatory and scal

measures to secure the integrity of nancial

markets and the money/banking system

Such measures properly faor productie in-

estment and render nancial speculation and

other unproductie nancial games illegal and

unprotable.

Critics will argue that the proposed actions

represent unwarranted goernmental interfer

ence in the market. In reality, Wall Street insti-

tutions are themseles creations of goernment

and would not eist without goernmental in-

terention. virtually eery major Wall Street -

nancial institution is a corporation created by

a goernment-issued charter etending rights

and priileges not aailable to an indiidual The money that fuels Wall Streets speculatie

frenzies originates with the Federal Resere, a

creation of goernment. Most Wall Street cor-

porations would hae gone out of business in

the nancial crash of 2008 if not for a massie

bailout from the U.S. Treasury and the Federa

Resere.

It is fully appropriate, indeed mandatory, for

goernment to interene to hold to account in-

stitutions it bears responsibility for creating andsecuring against their own folly. The Federa

goernments practice of creating, subsidizing

and protecting priate institutions that sere

no alid public purpose and refuse to accept re-

sponsibility for the public consequences of their

actions must end.

Leadership in implementing the proposed

agenda will depend on citizens acting in concer

with their state and local goernments to adance

public understanding of the issues raised heremoing their business from Wall Street to Main

Street nancial institutions, promoting coopera

tie or nonprot ownership of nancial institu

tions, and adocating implementing legislation.


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Beginning in the 1970s, Wall Street

interests carried out a bold social

engineering eperiment in market

deregulation in the guise of pro-

moting market freedom and nan-

cial modernization. This eperiment remoed

most restraints on the concentration of corpo-

rate power and placed it beyond the reach of

democratic public accountability.

As a consequence, the banking system to

which We the People hae yielded the power to

create and allocate money is now controlled by a

small group of bankers, nanciers, and traders

accountable only to themseles and dedicated

only to maimizing their personal nancial re-

turn.

The ecesses of these largely unregulated

and unaccountable institutions resulted in thenancial crash of 2008 and plunged the United

States and the world into the worst economic

crisis since the Great Depression of the 1930s.

The U.S. Congress responded almost instantly

with some $700 billion to be quickly disbursed

by the U.S. Treasury to bail out the Wall Street

institutions responsible for the crash. The Main

Street economy receied $787 billion in stimu-

lus funding to be doled out oer seeral years.

It might seem that Main Street got the great-er support. Howeer, while Wall Street mobilized

its media PR machine to focus public anger on

the Main Street stimulus funding, the Feder-

al Resere was implementing a far larger Wall

Street bailout operation. An audit ordered by

the U.S. Congress produced a report released in

late 2010 documenting Federal Resere commit-

ments of $12.3 trillion in emergency funding for

Wall Street in the form of low or no interest loans

and the purchase or guarantee of distressed se-

curitiesall in addition to the Congressionally

authorized bailout.

The Fed proided nothing for the Main Street

economy on which the ast majority of people

depend for employment and the necessities of

daily life.

The Federal Resere funding brought th

Wall Street bailout total to $13 trillion. Yet Wall

Street itself produces nothing of alue and has

all but forsaken the primary purpose of a nan-

cial sectorto support the efcient, generatie

production and distribution of real goods and

serices.Wall Street took the bailout money, subse-

quently reported record prots, and rewarded it-

self with record bonuses. On April 26, 2011 the

Standard & Poors inde of 500 corporations hit

1,347.24, its highest leel since June 17, 2008

which was seeral months before the meltdown

The Main Street eperience is quite a dif

ferent matter. A primary rationale for the Wal

Street bailout was to get money owing to the

people and businesses that produce and distrib-ute real goods and serices to get them working

again. That is not what happened.

As of May 2011 some 13.9 million Ameri-

cans were formally classied as unemployed

and an additional 800,000 had gien up looking

HOW TO LBERATE AMERCA FROM WALL STREET RLE
http://www.bloomberg.com/news/2011-04-10/global-corporate-profits-rising-to-record-before-japan-quake-curbs-supply.htmlhttp://www.bloomberg.com/news/2011-04-26/u-s-stock-index-futures-advance-johnson-controls-gains.htmlhttp://www.bloomberg.com/news/2011-04-26/u-s-stock-index-futures-advance-johnson-controls-gains.htmlhttp://www.ncsl.org/?tabid=13307http://www.ncsl.org/?tabid=13307http://www.ncsl.org/?tabid=13307http://www.ncsl.org/?tabid=13307http://www.bloomberg.com/news/2011-04-26/u-s-stock-index-futures-advance-johnson-controls-gains.htmlhttp://www.bloomberg.com/news/2011-04-26/u-s-stock-index-futures-advance-johnson-controls-gains.htmlhttp://www.bloomberg.com/news/2011-04-10/global-corporate-profits-rising-to-record-before-japan-quake-curbs-supply.html


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for work. Gallup estimated that 19.2 percent ofthose Americans who wanted work were under-

employed. More than 656,000 Americanswere

homeless in 2009. Home foreclosures continue:

In May 2011, banks and lenders held 872,000

foreclosed homes and another million were in

the foreclosure process. Estimates of the num-

ber of food insecure people in the United States

run to more than 50 million. Eperts estimate

that $3 trillion would repair and rebuild Amer-

icas crumbling physical infrastructure, a smallportion of the $13 trillion the Fed and Treasury

showered on Wall Street.

The money system demonstrated its ability

to instantly generate whateer amount of money

was needed to restore Wall Street prots and bo-

nuses. It failed, howeer, to come up with the

money needed by the real-wealth Main Street

economy to put people to work proiding needed

goods and serices.

When skilled workers are unemployed andneeds essential to the future of our children are

unmet solely because of a lack of money, we

hae a defectie money system in serious need

of radical redesign.

A more functional money system would hae

directed the money that went to Wall Street tofunding good jobs rebuilding Americas physi-

cal infrastructure, retrotting our buildings for

energy and water conseration, and conerting

to renewable energy. We would now be eperi-

encing an economic boom, reducing our nation-

al dependence on foreign oil and enironmen

tally deastating coal and gas mining, reducing

household epenses for energy and transporta

tion, and securing the future of our children by

reducing the enironmental stress on Earth.The dysfunctional Wall Street money system

did none of this and those in charge show no

interest in oluntarily doing so. There is no pros

pect for a Main Street recoery so long as Wall

Street institutions continue to control the cre

ation and allocation of money.

The Wall Street crash and subsequent deas-

tation sparked a liely debate and led Congress

to pass much heralded, but largely toothless, -

nancial reform legislation. The focus was mainlyon reducing the risk of a future collapse.

Most proposals for Wall Street reform do not

address the foundational issue. Nor do propos-

als for a return to a gold standard or a system of

complementary community currencies.

Photo by Simona Monteleone
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The real issue is a failed system created by

a Wall Street-drien social engineering eperi-

ment. Main Street recoery depends on a bot-

tom-to-top restructuring of the institutions that

hold the power to create and allocate the money

on which modern economic life depends.

Our common human future depends on cre-

ating a New Economy that functions in sustain-

able balance with Earths biosphere, meets the

needs of each of Earths nearly 7 billion people,

and gies eery person a oice in making the

critical resource allocations that shape their

lies. See the Appendi Naigating the Transi-

tion to a New Economy.

It will require an accountable, serice-orient-

ed system of money, banking, and nance based

on alues, rules, and institutions ery different

than those currently in place.

The essential rst step is a national conersa-

tion about the institutions of money and nance

centered on a set of questions rarely raised in

the current national conersation:

1. What are our essential priorities for

our nation in the 21st century?

2. What is money? What is wealth? What

is the relationship between the two?

3. What are the proper institutional ar-

rangements for a money system designed to

serve our essential national priorities?

4. How can we replace the institutions of

the failed system we have with institutions

that serve the necessary priorities of a 21st

century nation?

While pundits and politicians may call the pro

posals recommended by this report unrealistic

they are not so for those of us of an older genera-

tion. The proposed system is in fact quite similar

to the sensible and easily understandable system

of predominantly local nancial institutions tha

pulled the United States out of the Great Depres-

sion, nanced the U.S. ictory in WWII, created

the American middle class, and built the worlds

most powerful and enied economy.

America at the beginning of the 21st

century is suffering the aftermath o

its ecesses in the last quarter of the

20th century. We are poorly prepared

to address the challenges and opportunities of a

21st century world that bears only passing re-

semblance to the one the United States domi-

nated for more than a half century. The com-

munications reolution that allows citizens to

communicate instantly and organize globallyis fast eroding the foundations of the modern

forms of imperial global rule at which the United

States ecelled, and the global economys bur-

den on nature already eceeds what the bio-

sphere can sustain.

FNANCE FORA 21ST CENTRY

AMERCA

Editorial cartoon by Tom Cheneyfor the New Yorker
http://neweconomyworkinggroup.org/http://neweconomyworkinggroup.org/


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The world has changed. We in America, how-

eer, cling desperately to memories of our role

as the worlds last superpower. We continue to

embrace the myth that a growing economy will

ultimately end poerty and heal the planet. We

organize our lies around a crumbling and out-

moded energy intensie infrastructure. We feed

our addiction to leels of wasteful consumption

the biosphere can no longer sustain with import-

ed oil and products we no longer hae the means

to manufacture, nanced by unpayable foreign

debts that mortgage our childrens future. Failing

to create jobs to employ Americans to do useful

work, we absorb the otherwise unemployed in an

outsized military establishment and as prisoners

and guards in oercrowded prisons. We reward

Wall Street speculators with ta breaks and pub-

lic bailouts while inner city communities struggle

to surie at the margins of an economy that of-

fers them no place or future.

We can recoer. We can embrace the impera-

tie to rebuild our infrastructure and economy

as an opportunity to re-establish our role as a

true world leader. We can create a 21st centu-

ry America with an energy efcient 21st century

green infrastructure and manufacturing base

We can renew the American Dream of a ibrant

middle-class nation in which those who are will-

ing to work hard and play by the rules can epect

to hae good jobs at a family wage with benets

food on the table, good schools for their children

a comfortable home, and a secure retirement.

We can create a New Economy that secures

the dream based on the efcient and sustainable

use of our own resources without the burden o

maintaining a massie military establishment

to secure our access to the resources of other

nations. We can simultaneously reduce our ma-

terial consumption and increase our happiness

and quality of life.

Success will require many changes. Among

them is the redesign of the institutional systems

by which money is created and allocated.

What is Money?

Money is essential to modern commerce as a medium of exchange. In earlier days, money took

the form of material objects. As commerce grew, certicates redeemable in gold became popular.

Most contemporary money is no more than a number stored on a computer hard drive and has

value only because people agree to accept it in exchange for things of real value, like their labor.

The fact that most money is nothing but a number is not necessarily a problem, so long as we

are clear that money itself has no intrinsic value and structure the money creation process to fa-

cilitate benecial exchanges that build the real wealth of individuals, families, communities, andnature. The fact that money is only a system of accounting entries becomes a serious problem

when the economy is managed to make the ination of nancial assets its dening purpose and

a few individuals are allowed to game the system to enrich themselves free from the exertions of

contributing to the production of real wealth.

Newly laid-off workers ina Missouri unemployment line


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MONEYAS A SYSTEM

OF POWER

Most people know that the structure

of political institutions determines

whether political power is con-

centrated in the hands of an elite

ruling class or is decentralized and distributed

through democratic institutions accountable to

the soereign people. There is far less discussion

and recognition of the fact that the structure of

a societys nancial institutions similarly deter-

mines whether economic power is centralized

and concentrated or decentralized and distrib-

uted. Yet the allocation of nancial power large-

ly determines the allocation of political power.

When nancial power is highly concentrated,

the ideal of a one person, one ote democracy is

almost ineitably trumped by a one dollar, one

ote plutocracy.

Most people use money eery day and rare-

ly think to ask: What is money? Where does

it come from? Who decides who gets it and for

what purpose?

Ask an economist What is money? and the

answer will likely be, A medium of echange, a

measure of worth, and a storehouse of alue.

Ask how it is determined who gets it and the

answer will likely be, the market. But gien the

current concentration of wealth in America, the

market seems to be doing a ery bad job of put-

ting the money where its needed.

Rarely, if eer, do we hear mention in the

public discourse that money is simply an ac-

counting entry of no intrinsic alueindeed

no eistenceoutside the human mind. Nor do

we hear mention that the illusion that money

is wealth and that people who make money are

creating wealth allows Wall Street to get away

with operating the worlds largest and most prof-

itable con game.

Phantom Wealth

Phantom wealth is anything that has exchange value, but no intrinsic value. Money

that exists only as a number on a computer hard drive is the prime example. It manifests

in nancial assets that appear or disappear as if by magic as a result of accounting en-

tries, debt pyramids, and the ination of asset bubbles unrelated to the creation of any-

thing of real value or utility. The high-tech-stock and housing bubbles created phantom

wealth in massive amounts.

Wall Street is highly procient at creating phantom wealth. Indeed, it takes pride in its abil-

ity to inate nancial assets without bearing the burden of producing anything of real value.

Real Wealth

Real wealth has intrinsic value, as contrasted to mere exchange value. Life, not money,is the measure of real-wealth value. Examples include land, labor, knowledge, and physical

infrastructure. The most valuable forms of real wealth are beyond price and are unavailable

for market purchase. These include healthy, happy children, loving families, caring commu-

nities, and a beautiful, healthy, natural environment.


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Wall Street has become ery cleer at com-

bining nancial games and creatie accounting

to inate its own nancial assets without the

burden of producing anything of real alue. It

promotes public policies that depress wages to

make money increasingly scarce for the people

who produce real goods and serices. It then

lures the folks who do real work and are strug-

gling to make ends meet into borrowing against

their homes and credit cards, locking them into

eer growing debt with hidden fees and usuri-

ous interest rates. Wall Street institutions thus

acquire an eer growing portion of the money in

circulation for their priate accounts, thereby

accumulating eer growing claims on societys

real goods and serices, and its material assets.In a society in which access to most of the

necessities of daily life depends on access to

money, the money system becomes the equia-

lent of a computers operating system. It deter-

mines how eerything else functions. The insti-

tutions that control the creation and allocation

of money shape the fate of nations, businesses

large and small, and the boom and bust cycles

of economic life. They determine who will lie in

opulence and who will face death by staration

Where money ows, there will be jobs; where it

doesnt ow, jobs will be in short supply and un-

employment will be widespread.

The money system is not a gien. It is a func-

tion of human-created design. It can be designed

to operate as a transparent public utility that

funds productie inestments to the benet of

all and is democratically accountable to the peo-

ple who depend on it to secure their lielihoods

Or it can be designed to facilitate the epropria-

tion of societys real wealth by the systems mostpowerful playersat an unconscionable cost to

people, community, and nature.

The eisting Wall Street-controlled mone

system is a powerful eample of the latter.

Markets Cannot Substitute for Caring

In modern societies, markets and money are important, but neither should rule

our lives.

In the earliest human societies, money was unknown. People organized their lives

around the relationships of family, clan, and tribe. They cared for one another andallocated resources to secure the well-being of all. Resource allocation decisions were

local and based on the needs of the community.

Over several millennia, money gradually became a substitute for mutual car-

ing as the foundation of the social, economic, and political fabric of society. This

process accelerated during the latter half of the 20th century.

In contemporary 21st century westernized societies, most of us now organize

our lives around earning, spending, borrowing, and saving money. Money is our

ticket to food, shelter, transportation, education, recreation, health care, and nearly

every other essential of daily life. This extreme dependence on money has sweep-

ing implications for values and the distribution of power in society.

To restore social health this process must be reversed to reduce our depen-

dence on money in favor of restoring caring relationships in the many critical as-

pects of our lives that best remain outside the market.


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This is not the rst time wee seen the

money system take down the economy.

The nancial collapse that brought

the Great Depression of the 1930s

was caused by an earlier ersion of much the

same Wall Street ecess that caused the crash

of 2008. The Rooseelt administration replaced

the phantom-wealth Wall Street system of that

day with the real-wealth Main Street money sys-

tem that nanced the United States ictory in

World War II, produced an unprecedented pe-

riod of economic stability and prosperity, made

America the worlds industrial powerhouse, and

created the American middle class.

America prospered. Wall Street, howeer, bri-

dled at the constraints on its power and prots

and mobilized in the 1970s to roll back the re-

forms. Wall Street now refers to nancial deregu-

lation as nancial modernization. In the pursuitof short-term nancial gain, Wall Street interests

adanced a host of policy initiaties that led to the

erosion of the middle class, an etreme concen-

tration of wealth, a costly nancial collapse, high

rates of unemployment, bankruptcy, and housing

foreclosures, accelerating enironmental systems

failure, and the hollowing out of U.S. industrial,

technological, and research capacity. Wall Street

proted all along the way and declared its social

engineering eperiment a great success.Reforms aimed at merely reducing unproduc-

tie Wall Street risk-taking do not address the

fact that we are eperiencing a system failure

like the failure of 1929. Ending the nancial chi-

canery and creating a functional nancial sys-

tem responsie to 21st century reality requires

a system restructuring comparable in scope to

that of the Rooseelt era.

A Well-FunctioningMoney System

A well-functioning money system would direct

money to where it connects underutilized re-

sources with unmet needs to proide jobs for

eeryone seeking employment. In so doing, it

would support a locally rooted New Economy

[See appendi, Naigating the Transition to a

New Economy] that aligns and integrates with

the structure and dynamics of Earths biosphere

and self-organizes toward four system condi-

tions:

1. Ecological Balance

2. Equitable Distribution

3. Living Democracy

4. Financial stability

This money system would:

Make credit readily aailable at faorable rates

in response to local needs and opportunities for

productie inestments that build real commu-

nity assets and enhance community health andhappiness.

Support family-wage jobs with benets that

eliminate the need to borrow to support basic

consumption needs.

Fund needed public inestment in physical

social, and enironmental capital.

Eliminate nancial speculation, usury, and

fraud.

Recirculate money within bioregional econo

mies. Manage the money supply to maintain full em-

ployment with minimal ination.

The current ofcial money system fails on e-

ery count.

THE CASEFOR SYSTEMREDESGN
http://livingeconomiesforum.org/life-as-teacherhttp://livingeconomiesforum.org/a-healthy-economyhttp://livingeconomiesforum.org/a-healthy-economyhttp://livingeconomiesforum.org/a-healthy-economyhttp://livingeconomiesforum.org/a-healthy-economyhttp://livingeconomiesforum.org/life-as-teacher


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A Proven Model

The system of community banks, mutual sa-

ings and loans, and credit unions put in place as

a result of the Great Depression is a system with

proen capacity to perform the desired func-

tions. It is a model still familiar to Americans

who lied through the 1940s, 50s, and 60s. Its

effectieness is a matter of historical record.

Those years were not good for eeryoneso-

ciety was riddled with discrimination based on

race, age, and gender. The discrimination contin-

ues to this day, with communities of color com-

monly targeted for predatory lending schemes.

The community-based system proposed here is

designed to support full and equal participation

by eeryone. This can be achieed through a

combination of regulation and effectie owner-

ship participation in nancial serices institu-

tions by members of ecluded communities.

Banking laws put in place in response tothe Great Depression strictly limited bank size,

functions, and interest rates. The Glass-Stea-

gall Act epanded the regulatory powers of the

Federal Resere, prohibited banks from trading

in corporate securities to preclude their taking

adantage of insider knowledge gained in their

roles as lenders, and created the Federal Depos-

it Insurance Corporation to guarantee deposits

in federally insured banks.

The Bank Holding Company Act of 1956 fur-

ther rooted the money system in local economies

by prohibiting a bank holding company head

quartered in one state from acquiring a bank in

another state and from engaging in non-banking

actiities or acquiring oting securities of non-

bank companies. These rules maintained loca

market accountability by limiting the concentra-

tion of market power and limited unproductie

risk taking by banks that enjoyed Federal guar-

antees and access to cheap credit from the Fed-

eral Resere.

These restrictions supplemented the stat

laws that generally goerned banks prior to the

1970s, and limited them to doing business with-

in their home state as regulated public utilities

proiding basic banking serices. Some states

outlawed branch banking altogether and limited

each bank to a single physical location.

Traditionally, local nancial institutions made

and held home mortgageswith local saings. Since

they and their depositors bore the risk of default

there was a strong incentie to assure that bor-

rowers were credit worthy and that the mortgagedproperties were sound.

This well-regulated, decentralized bankin

system proides a working model for the system

we need to restore nancial and economic integ-

rity and prosperity.

To better understand the wisdom of the post-

depression banking system, it is helpful to re-

iew where things went wrong oer the last 40

years.

Jimmy Stewart in Its a Wonderful Life,about a small community building and loan that

worked for the good of its depositorsand the town
http://topics.nytimes.com/top/reference/timestopics/subjects/m/mortgages/index.html?scp=8&sq=home%20foreclosures&st=csehttp://topics.nytimes.com/top/reference/timestopics/subjects/m/mortgages/index.html?scp=8&sq=home%20foreclosures&st=csehttp://topics.nytimes.com/top/reference/timestopics/subjects/m/mortgages/index.html?scp=8&sq=home%20foreclosures&st=csehttp://topics.nytimes.com/top/reference/timestopics/subjects/m/mortgages/index.html?scp=8&sq=home%20foreclosures&st=cse


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Erosion of the regulations that secured

the systems integrity began in the

1970s with a Supreme Court decision

that allowed banks to solicit custom-

ers across state lines and to charge whateer in-

terest rates were allowed by the state in which

the bank was physically located. This opened

the way to charging interest rates considered

usurious in the state in which a loan was made.

The Depository Institutions Deregulation and

Monetary Control Act of 1980 abolished caps

on mortgage interest rate charges. The Alterna-

tie Mortgage Transactions Parity Act of 1982

opened the way to the adjustable rates, balloon

payments, and interest-only loans that played a

major role in the 2008 nancial collapse.

The Wall Street-engineered system redesign

shifted the focus of the money/banking/nance

system from inestment in real wealth cre-

ation to a focus on using money to make money

through unproductie speculation, arbitrage,usury, deception, and market manipulation. As

community banks were bought up and consoli-

dated into larger regional and national banks,

banks began to transfer mortgage lending risks

to inestors in bond markets through mecha-

nisms that eliminated the incentie for them to

assure the creditworthiness of borrowers.

The redesign process was drien in part by

the ideology of market fundamentalism, which

claimed, in effect, that anything that makes aprot for Wall Street benets society and should

be legal. By the distorted Wall Street reckon-

ing, any goernment interference reduces public

benet.

The process was also drien by ta policies

that ta capital gains at a lower rate than or-

dinary income. This disparity droe a number

of changes. First, most corporations reduced or

eliminated diidend payments, which are taed

as ordinary income, and self-nanced growth

with retained earnings to inate share price

which produces capital gains. Corporations thus

had less need to borrow.

Furthermore, when corporations did bor-

row, they found it cheaper to borrow from the

bond market than from a bank. This shift cut

sharply into the earnings of Wall Street banks

Yet nancial institutions not subject to banking

rules, such as hedge funds and priate equity

funds, were making eye-popping returns. Con

sequently the banks lobbied to free themseles

from restrictions applied to them, but not to

other nancial institutions they iewed as their

competitors.

Wall Street claims that the re-engineered

nancial system increased nancial efciency

From its perspectie, it was more efcient be-

cause it increased prots and lowered borrowing

costs for Wall Street corporations. But from the

perspectie of public benet, it was highly inef-

cient. The costs of borrowing for small busi

nesses, home buyers, and consumers increased

The systems priorities shifted from funding pro-

ductie inestment to nancing speculationSpeculators proted and major Wall Street play-

ers swelled the ranks of Forbes magazines list

of billionaires. The real economy and the less

wealthy bore the price.

A Bipartisan Project

The dismantling of regulatory safeguards began

with the Democratic Carter administration. TheRepublican Reagan administration droe it for-

ward as a dening ideological mission.

The Democratic Clinton administration later

picked up from Reagan to dismantle the remain-

ing constraints on Wall Street concentration and

WALL STREETTAKEOVER


17/41


18/41

18



Subsidies fora Doomsday Machine

The Wall Street takeoer has created a little-noted

anomaly. Public support and oersight pro-

grams for the banking sector, including deposit

insurance, mortgage guarantees, and liquidity

support, were put in place to support a system

of independent local banks that functioned as awell-regulated public utility to proide essential

nancial serices to local real-wealth economies.

It was a sensible and effectie public-priate

partnership.

Howeer, these once-sensible goernment

programs now guarantee and subsidize loosely

regulated too-big-to-fail priate banks that -

nance speculation, nancial bubbles, predatory

lending, asset stripping, and inestment fraud

actiities that goernment should be regulating

and taing out of eistence. The result is the -

nancial doomsday machine that dries toward

eer more risky and unproductie nancial e-

cessand will continue to do so until either it is

restructured, or goernments nancial capac-

ity is ehausted and the entire nancial system

goes into terminal, unrecoerable collapse.

The Wall Street crash reealed a system-

ic pattern of etreme greed, deception

and disregard for any consequence oth-

er than personal nancial gain. With

the continued absence of adequate regulatory

oersight, the deception and fraud continue at

great cost to hard-working Americans who are

trying to play by the rules.

For eample, there hae been persistent re-

ports of banks foreclosing on properties without

proper documentation. Paul Krugman reportsthat more recently, inestigations by state at-

torneys general hae uncoered a persistent

practice of banks approaching owners of homes

scheduled for foreclosure with bogus offers o

mortgage modication they hae no intention o

actually approing. It is a tactic used to etract

additional payments and fees from the borrow-

ers to drain them dry nancially before ultimate-

ly kicking them out of their homes.

The crash also reealed the etent to whichthe Wall Street system created pererse incen-

ties for top management to make decisions that

generated risk-free gains for themseles by shift-

ing risks to othersincluding their own share

holders. See the inset, Shareholders Beware!

MORALFALRE

Editorial cartoon by Eric and Bill Teitelbaumfor Tribune Media Services

Editorial cartoon by Ingram Pinnfor the Financial Times
http://www.nytimes.com/2011/03/14/opinion/14krugman.html?_r=3&src=ISMR_AP_LO_MST_FBhttp://www.nytimes.com/2011/03/14/opinion/14krugman.html?_r=3&src=ISMR_AP_LO_MST_FB


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Blaming the Victim

Adding insult to injury, Wall Street interests

hae sponsored well-funded campaigns to con-

ince the public that goernment scal crises

created by the nancial crash, the subsequentbank bailouts, and ta breaks for people with

incomes oer $250,000 are actually due to

greedy teachers, police, reghters, and public

unions rather than greedy bankers.

Bad Science

Wall Streets guiding market fundamentalist

ideology rests on the empirically, logically, and

ethically awed premise that society does best

when each indiidual and enterprise seeks to

maimize nancial return without regard to the

consequences for other people, the health of

society, or the biosphere. This eleates greed

long considered a deadly sin, to the status of a

moral imperatie and legitimates a system that

attracts and promotes to top management po-

sitions sociopathic personalities who feel com-

fortable with the systems pererse moral code The system in turn afrms their psychologica

disability and rewards it as an asset.

The nancial instability, enironmental de

struction, etreme inequality, and political cor-

ruption created by Wall Streets eperiment in

market fundamentalism should hae put this

logical and moral perersion to rest long ago. The

healthy function of society depends on indiidu-

als acting with integrity and accepting responsi

bility for the consequences of their actions. This

is a foundational moral teaching of eery major

faith tradition and is within the means of eery

morally and psychologically mature adult to up-

hold. It is the standard to which we should all be

held, including corporations and their managers

Editorial cartoon by Pat Bagley for the Salt Lake Tribune
http://livingeconomiesforum.org/seven-deadly-sinshttp://livingeconomiesforum.org/seven-deadly-sinshttp://livingeconomiesforum.org/seven-deadly-sins


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Flawed Legal Doctrine

In The Failure of Corporate Law, (pp. 73-74) Pro-

fessor Kent Greeneld of Boston College obseres

that the law normalizes, and een defends, cor-

porate law breaking. He summarizes the recom-

mendation of widely quoted legal scholars Fran

Easterbrook and Daniel Fischel that corpora-tions should, with some eceptions, seek to

maimize prots een when they must break the

law to do so . As long as the epected penalties

from illegality are less than the epected prots,

the corporation should act illegally. According

to Professor Greeneld there is not a single con-

temporary eample of a court nding that man-

agers breached their duciary duty by causing

a rm to break the law when it was protable to

do so.

Such pererse legal interpretations afrm the

inclinations of the unscrupulous and gie them

moral and legal coer as they subert justice and

democracy by aoiding prosecution for a negoti-

ated fee and buy legislation to make their crimes

legal. It works well for the ethically challenged

for whom personal prot is the operant ethica

standard. It is obiously a disaster for society.

A pererse legal doctrine may absole indi-

idual corporate managers of legal responsibility

for their actions; it does not absole them from

their personal moral responsibility.

Shareholders Beware!

Corporate CEOs are often criticized for neglecting all interests other than those of

their shareholders. Those were the good old days. Corporate governance expert Robert

A. G. Monks explains how the structure of the incentive programs of top Wall Street bank

managers now leads them to place both shareholders and the public at risk to maximize

their personal nancial gain.

Compensation plans for top corporate managers are designed, in theory, to reward

them for maximizing shareholder returns. To this end, executive bonuses are commonly

tied to achieving a target increase in the percentage return on equity. As noted in a re-port of the federal Financial Crisis Inquiry Commission,

One way a rm can boost its return on equity is to buy back some of its own stock;

this reduces the size of its [equity] capital and means that its earnings get spread over a

smaller base. Another option is to increase its leverage, or borrowing.

Buying back shares reduces the number of shares in the market, thereby increasing

earnings per share and driving up the share price. To maintain its total capital base,

however, the rm needs to increase borrowing, which essentially means trading equity

for debt. The combination increases leverage, i.e., the debt-to-equity ratio, and thereby

increases the rms risk of default if markets turn down.

Pervasive across Wall Street prior to the crash, this pattern of system gaming bytop managers explains why Wall Street rms were so heavily overleveraged and had

no cushion when the market turned down. Some managers also took a hit, but most

walked away with personal fortunes. Shareholders, taxpayers, unemployed workers,

and foreclosed homeowners were left to absorb the losses when the bubble bust.


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The Purpose of Business

From a societal perspectie the primary reason

for any business to eist is to sere its commu-

nity by proiding useful goods and serices and

fullling, liing-wage employment. A fair prot

is a means to nancial iability and a reward for

saing and risk taking. There is, howeer, an important difference

between a fair prot and maimum prot. To

make prot the dening purpose of the enter-

prises is to conert a means to an end.

This distinction is particularly important for

banks and other nancial serices institutions.

Their power to determine who gets access to

credit and who does not is easily abused. Finan-

cial serices are as essential to the health and

well-being of a modern community as is the pro-

ision of water and electricity. It is essential that

they all be managed responsibly in the public

interest.

The ownership structure of nancial insti-

tutions plays a critical role in creating internal

incentie structures that can support either de-

structie or responsible behaior.

Michael Lewis, a former trader at Salomon

Brothers, once a prestigious Wall Street inest-

ment bank, obseres that when Salomon Broth-

ers conerted from a priate partnership into a

public corporation in 1981, the partners made

a quick killing and transferred the ultimate -

nancial risk from themseles to their sharehold-

ers. This inspired a wae of such conersions,

unleashing ecessie risk taking and helped set

the stage for the 2008 nancial crash. Lewis

notes in The Big Short,

No investment bank owned by its employees

would have leveraged itself 35:1, or bought andheld $50 billion in mezzanine CDOs [a high-risk

category of collateralized debt obligation]. I doubt

any partnership would have sought to game

the rating agencies, or leapt into bed with loan

sharks, or even allowed mezzanine CDOs to be

sold to its customers. The short-term expected

gain would not have justied the long-term ex

pected loss. (pp. 258-259)

When institutional structures incentiize im-

moral behaior, they cultiate a culture of ecess

and irresponsibility not just as a norm, but een

an ideal. Many Wall Street employees come to

their jobs with high personal moral standards

but the pressure put on them to set aside their

personal alues by the pererse incenties and

culture of Wall Streets defectie institutional de-

sign is enormous.

Cooperatie or local public ownership makes

a clear link between the rights and power o

ownership and the broader public interest. Loca

Dilemma of the Aspiring

Philanthropist

Many wealthy individuals are

donating substantial portions of their

fortunes to organizations working to

advance economic justice and envi-

ronmental sustainability. Few are

aware that the problems their philan-

thropy addresses are caused by the

same institutions through which they

build their fortunes.

Some young people take this as a

model and choose conventional Wall

Street careers as a way to build a per-

sonal fortune for the purpose of later

funding benecial philanthropies.

They might consider instead devoting

their careers to developing and serv-

ing ethical businesses that create real

value and contribute to eliminating

the systemic causes of injustice and

environmental destruction.
http://www.timesonline.co.uk/tol/news/world/article7069617.ecehttp://www.timesonline.co.uk/tol/news/world/article7069617.ecehttp://www.timesonline.co.uk/tol/news/world/article7069617.ecehttp://www.timesonline.co.uk/tol/news/world/article7069617.ece


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businesses owned by indiiduals who recognize

their responsibility to the community in which

they lie and work also make that connection.

The link is broken, howeer, when ownership

shares are publicly traded in distant nancial

markets and subject to speculation by owners

who hae no personal connection to the enter-

prise or to the community it seres.

Our common future depends on re-

designing the money/banking sys-

tem to:

1. Shift the locus of control over money

creation and allocation from Wall Street to

Main Street.

2. Assure public accountability and instill

a culture of service and moral responsibility.3. Direct the ow of money to produc-

tive real-wealth Main Street investments

that create family wage jobs and produce es-

sential goods and services in response to the

self-dened needs of people and community.

4. Harness the Federal Reserves money

creation powers to nance investment in es-

sential public goods rather than to fuel Wall

Street nancial bubbles.

The measures proposed here will likely draw

criticism from market fundamentalists, who e-

press alarm at any restraint on Wall Street pow-

er, but they will in fact sere to restore respon-

sible market discipline.

Basic Market Principles

Wall Street presents itself as the champion o

democracy and market capitalism. It in fact rep-

resents a concentration of economic and politi-

cal power that is both anti-democratic and anti-

market. The antidote for Wall Streets distorted

alues and abuse of power is a system thataligns with four basic market principles.

1. SizeIt is common sense that no bank should be too

big to fail. More to the point, no bank should be

too big to be held accountable by the place-based

community it seres. The market ideal is a con-

dition of perfect competition among numerous

small enterprises that function within a frame-

work of community alues and compete for con-

sumer faor and community support based on

price and serice. Competition among numerous

community-based nancial institutions offering

essential banking serices would subject them

all to positie market discipline and eliminate

the risk that the failure of an indiidual insti-

tution would seriously damage een the loca

economy, let alone the entire global economy.

2. OwnershipWhen ownership is rooted in the community o

place in which a local nancial institution is lo-

cated, owners hae a natural stake in assuring

that management decisions reect the nancial

social, and enironmental interests of the com

munity rather than the nancial interests o

anonymous absentee owners. There are many

appropriate models, as discussed below.

3. Transparency

A foundational principle of market economicsspecies that markets work best when both buy-

er and seller act with full information. Democ-

racy also requires that decisions bearing on the

public interest be open to public iew and that

MONEY SYSTEMDESGN


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oters be fully and accurately informed. Gien

that the ow of money determines the ow of

power in modern society, democracy requires

that the nancial system be transparent at eery

leel from the Federal Resere to local commu-

nity banks and credit unions. Secrecy creates a

barrier to essential public scrutiny and inites

corruption and insider dealing contrary to the

public interest.

4. RegulationMarkets need rules to maintain the conditions

of efcient market function. No rm can be al-

lowed to acquire monopoly power. Full costs

must be internalized in market prices. Deci-

sion makers must be legally accountable for

the harms they do. Decision making bearing on

the public interest must be open to public scru-

tiny. Setting and enforcing appropriate rulesthrough transparent and publicly accountable

political processes is an essential goernmental

function.

These are all well-tested, common-sense

principles much like those implemented in the

design of the nancial system that once made

the U.S. economy the eny of the world. As a

general rule, the more the power to create mon-

ey is decentralized, equitably distributed, trans-

parent, focused on productie inestment, and

subject to clear and appropriate market rules,

the greater the leel of public accountability

the less the potential for abuse, and the less the

need for goernment oersight to assure system

stability and integrity.

Money Creationin the Current System

Under our current money system, the Federa

Resere is responsible for managing the money

supply and has a ariety of tools for epand-

ing and contracting it. The tool of immediate

releance to this discussion is the Feds ability

to create new money with a simple accounting

entry and then put that money into circulation

by etending credit to member banks or buyingtreasury bonds or other public or priate securi-

ties. This money then becomes aailable to the

banking system to lend to borrowers.

By the rules of fractional resere banking, a

bank must maintain an amount in resere equa

to a set percentage of its deposits. Assuming a

10 percent resere requirement, the new money

introduced into the system by the Federal Re-

sere allows the banking system to epand the

Money Without Growth

Critics of the bank-credit money system commonly observe that the demand to repay

newly created bank-credit money with interest creates an articial imperative for the

economy to grow simply to generate demand for new debt to create the money required

to pay the interest due on prior debt and prevent systemic default. This is an accurate

criticism of a Wall Street money system controlled by a privileged class of nanciers who

in effect rent the money supply to the rest of the society.

The problem, however, is not inherent in interest. It is inherent in the division of

society between a nancial oligarchy that lives from returns on money and those whomust borrow to make ends meet. A system of cooperatively owned nancial institutions

that allow members to rotate between borrower and lender roles and to essentially pay

interest to themselves does not create an aggregate growth imperative. Nor does it lead

to an inevitable concentration of wealth.


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money supply by 10 times as credit ows from

one bank as a loan to another as a deposit. The

reality is more comple, but for current purpos-

es we will assume that each new dollar intro-duced into the banking system by the Fed een-

tually multiplies to $10 of new credit circulating

through the economy.

This arrangement can work to the benet of

the society; if the banking system directs the

money it creates into the real-wealth economy to

fund productie inestment and echange.

When, howeer, this power is monopolized by

a nancial oligarchy solely for self-enrichment,

it becomes a form of theft, the ultimate instru-ment of tyranny, and an intolerable and unsus-

tainable burden on society.

In her forthcoming book tentatiely titled Pri-

vate Ownership for the Common Good, Marjo-

rie Kelly, author ofThe Divine Right of Capital,

makes a crucial distinction between generatie

and etractie economic systems and inest-

ments. A Main Street banking system that seres

and is accountable to a community of place for

funding productie inestment is an eample o

a generatie system. A Wall Street banking sys-

tem controlled by an unaccountable nancia

oligarchy deoted solely to maimizing nancia

returns for its eclusie benet is an eample

of an etractie system. The purpose of the fol-

lowing agenda is to replace the etractie Wal

Street money system we hae with the genera-

tie Main Street money system on which a pros-

perous national and human future depend.

Most nancial reform proposals fo-

cus on regulatory measures in-

tended to limit the damage causedby the current system. Such mea-

sures are necessary, but inadequate.

To create economic health, the banking sys

tem must be restructured to direct the focus

away from etractie nancethe predatory e-

propriation of real wealthto generatie nance

that epands the pie of real wealth to the ben-

et of all within the limits of healthy biosystem

function.

The desired transition will require a sustained and orderly process of rebuilding the

money/banking system from the bottom up as

a well-regulated community-accountable pub-

lic utility. Necessary measures include restor-

ing ta and regulatory rules that 1) restrict bank

AGENDA FORA MAN STREETMONEY SYSTEMFarmers Market, Madison, Wisconsin.

Photo by Mingfong Jan
http://www.yesmagazine.org/issues/art-and-community/book-review-the-divine-right-of-capital-by-marjorie-kellyhttp://www.yesmagazine.org/issues/art-and-community/book-review-the-divine-right-of-capital-by-marjorie-kelly


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size, 2) limit public guarantees and subsidies to

nancial institutions engaged eclusiely in per-

forming basic banking functions, and 3) render

etractie nance illegal and/or unprotable.

The following are some specic proposals

suggestie of the possibilities, working up from

the community to the global leel.

Rebuild a National System ofCommunity-Based and Accountable

Financial nstitutions

The well-regulated system of locally rooted and

accountable nancial institutions that we had

prior to the 1970s proides a reasonable rst ap-

proimation of the system we must now create.Local nancial institutions proide the commu-

nities they sere with a capacity to mobilize oth-

erwise idle productie resources in response to

local needs and opportunities. Fortunately, we

still hae remnants of this system on which to

rebuild.

The New Rules Project reports that the Unit-

ed States still has about 8,000 credit unions and

more than 7,600 community banks ($1 billion in

assets or less). Partly as a result of the successof the Moe Your Money campaign, which en-

courages people to transfer their bank accounts

to local nancial institutions, credit unions are

thriing and eperiencing a major epansion in

deposits and lending.

Local nancial institutions can be just as cus-

tomer unfriendly, discriminatory, and predatory

as any Wall Street bank, but they are more likely

to dene themseles as serice proiders to the

communities in which they are located. They tooneed regulations that discourage socially dam-

aging behaior. A select few are eperimenting

with innoatie ownership structures that sup-

port a strong community-serice, social-mission

orientation. These include a number of inspiring

eamples of institutions committed to sering

communities of color and other groups that the

banking industry has historically undersered

or targeted for eploitation.

As a group, these smaller community-based

nancial institutions proide a foundation

on which to rebuild a system of community-

oriented, real-wealth nancial serices institu-

tions that operate within a strong regulatory

framework as transparent public utilities.

There are opportunities to achiee real econ-

omies of scale and the benets of risk diersi-

cation without absorbing or driing out competi-

tors or losing accountability to the communities

sered. We might begin with the rule of thumb

that for-prot community banks with conen

tional priate ownership should be limited to $1

billion in assets.

A larger limit may be appropriate for banks with cooperatie ownership structuresfor e

ample credit unions and mutual saings and

loansthat rmly link them to the interests

of the places in which they do business. There

might also be eceptions for for-prot nancia

institutions owned by nonprot foundations that

reinest prots in the community either through

epanded lending or grants to community orga-

nizations. The inset Financial Innoators for a

21st Century America describes some promis-ing eperiments.

The nancial innoations that will build

21st Century America are found on Main Street

not Wall Street, and center on creating a sys-

tem of Community Deelopment Financial In-

stitutions (CDFIs), also known as Community

Deelopment Banks, that gie priority to build-

ing and sharing community wealth. These are

priately held, federally insured for-prot banks

and thrift institutions supported by socially mo-tiated inestors who beliee that nancial insti-

tutions should put community serice ahead o

maimizing prots, and who accept a less than

market return for the satisfaction of putting

their personal and institutional wealth to work

1
http://moveyourmoneyproject.org/http://www.newrules.org/banking/news/credit-unions-hang-tough-see-surge-depositshttp://www.newrules.org/banking/news/credit-unions-hang-tough-see-surge-depositshttp://www.cdbanks.org/http://www.cdbanks.org/http://www.cdbanks.org/http://www.cdbanks.org/http://www.newrules.org/banking/news/credit-unions-hang-tough-see-surge-depositshttp://www.newrules.org/banking/news/credit-unions-hang-tough-see-surge-depositshttp://moveyourmoneyproject.org/


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building a future they can be proud to leae to

their children.

CDFIs nance affordable housing, small busi-

nesses, community facilities, consumers, and

mied use and commercial real estate in low in-

come communities. They also support the deel-

opment and application of green technologies.

The basic standards of integrity and commu-

nity serice to which CDFIs are held are properly

applied to all nancial serices institutions in a

moral economy, including those sering more

afuent communities.

According to the Social Inestment Forum,

the combined assets of community deelopment

banks, community deelopment credit unions,

community deelopment loan funds, and com-

munity deelopment enture capital funds in-

creased from $5 billion in assets in 1999 to $41.7

billion in 2010.The Forum calls community in-

estingthe unsung hero in thousands of towns

and neighborhoods across America, where it qui-

etly has added jobs, local serices, and support

for small businesses where traditional lenders

hae been unable or unwilling to do so.

The following actions are recommended at the

federal leel to break up concentrations of nan-

cial power and restore and support a system of

Main Street nancial institutions as the founda-

tion of Americas 21st Century Banking System:

Implement strict anti-trust enforcement to

restore market competition and assure that

no bank is too big to fail or to be held ac-

countable to market forces and democratic

public oversight.

Scale bank taxes, fees, equity and reserve

requirements, and all public subsidies and

guarantees for the banking sector to favorsmaller community banks over larger Wall

Street banks. Introduce a graduated nancial

assets tax on banks with more than $10 bil-

lion in assets to motivate the voluntary

breakup of large banks and the deconcentra-

tion of the banking system.

Strengthen and expand the community re-

investment act that requires banks to meet

a minimum standard for reinvesting in the

communities in which they are located, rec-

ognizing that this should be the primary pur-

pose of any state or federally chartered bank

Create a Cooperative Community Bank-

ing Institute to provide technical support to

groups interested in establishing member-

owned nancial services and to manage the

restructuring of banks closed by the FDIC to

break them up and convert them to coopera-

tive community nancial institutions. Give

particular priority to previously underserved

communities.

Instruct the FDIC that when it takes over a

failed bank, rather than facilitating the merg-

er into a larger competitor bank, it will turn

the failed bank over to the Cooperative Com-

munity Banking Institute to restructure and

reorganize.

Implement an updated version of Glass-

Steagall to prohibit banks from trading in,

creating a market for, brokering, or nanc-ing the purchase of securities, and holding

securities for their own account other than

federally guaranteed U.S. Treasuries.

Close the tax loopholes that allow prot-

able Wall Street banks to avoid U.S. taxes.

All banks that operate in the United States

should be chartered and pay taxes in the

United States on all prots properly attribut-

able to U.S. operations.
http://ussif.org/http://ussif.org/resources/research/documents/2010TrendsES.pdfhttp://ussif.org/resources/research/documents/2010TrendsES.pdfhttp://ussif.org/news/releases/pressrelease.cfm?id=173http://ussif.org/news/releases/pressrelease.cfm?id=173http://ussif.org/resources/research/documents/2010TrendsES.pdfhttp://ussif.org/resources/research/documents/2010TrendsES.pdfhttp://ussif.org/


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Main Street Financial Innovators

We need to look to Main Street for examples of the kinds of nancial innovation required to secure Americas

future. Here are four examples of community banks that are pioneering unconventional community service mod-

els of ownership and governance.

The Bremer Bank, featured in David Brancaccios PBS documentary Fixing the Future, is owned 90 per-

cent by a nonprot foundation that returns all prots to the community. The banks employees own the other 10

percent. The Bremer Bank operates in Minnesota, North Dakota, and Wisconsin, manages $8 billion in assets,

and specializes in serving the nancial needs of local farms and businesses.

One PacicCoast Bankwas founded asOneCalifornia Bankto serve low-income communities. Financier Tom

Steyer and his wife, Kat Taylor, made an initial philanthropic investment of $22.5 million to create the nonprot

One PacicCoast Foundation. The foundation maintains control of the banks mission focus as the legal owner,

receives all nancial benets, and engages in charitable and educational grant making in support of the banks

social goals. In 2010, OneCalifornia Bank acquired ShoreBank Pacic, which specialized in providing loans for

local businesses engaged in the restoration and sustainable management of environmental resources. The com-

bined banks now operate as One PacicCoast Bank.

Southern Bancorp, with over a billion dollars in assets, is one of Americas largest and most protable devel-opment banks. It is a for-prot bank, but with unusual restrictions on ownership participation. Most of itsshare-

holdersare foundations and corporations that invested with an expectation of social rather than nancial returns;

most of them have no rights to receive dividends, share in prots, s

Liberate America

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Transcript of Liberate America