States’ Budget Woes: Transforming Crises into Opportunity

From the article, “California Budget Dilemma: Turning Crises into Opportunity” by Ellen Brown — modified for Ohio by the LV Editors.

Many states such as California, Pennsylvania and Illinois are in the midst of financial chaos. Ohio is among them. With a proposed budget that is already more than $3 billion out of balance, Governor Strickland seeks to fix Ohio’s woes by using over $5 billion in one-time “bailout” dollars, increasing fees (taxes) by $1.3 billion and burning through the entire rainy day fund. The creation of dozens of new government programs sets Ohio up for even greater deficits in the future when the bailout dollars end but the costly programs remain.

What to do? Perhaps Ohio could take a lesson from the island state of Guernsey, located in the English Channel off the French Coast, which faced similar funding problems in the 19th century. Toby Birch, an asset manager who hails from there, tells the story in Gold News:

“As weary troops returned from a protracted foreign war [the Napoleonic Wars ending in 1815], they encountered a land racked with debt, high prices and a crumbling infrastructure. . . There was economic gridlock as labor and materials were abundant, but much-needed projects could not be funded for want of cash. This led to a period of so-called ‘poverty amongst plenty’ … existing borrowing costs were consuming 80% of the island’s revenues. This was when a committee of States members was formed . . . The committee realized that if the Guernsey States issued their own notes to fund the project, rather than borrowing from an English bank, there would be no interest to pay. To prevent an inflation of the money supply, the Guernsey States issued the notes with a date due, and on that date the bearer was paid in gold. The money came from rents on the finished infrastructure, supplemented with a tax on liquor.

“The end result of the Guernsey Experiment was spectacular – new roads, sea defenses and public buildings were established, fostering widespread trade and prosperity. Full employment was achieved, no deficits resulted and prices were stable, all without a penny paid in interest. Money was used in its purest form: as a convenient mechanism for oiling the wheels of commerce.”

Like Guernsey, Ohio is facing “poverty amidst plenty.” It has the resources, labor, and technical expertise to make just about anything its citizens put their minds to. The only thing lacking is the money to do it. But money is merely a medium of exchange, a means of getting suppliers, laborers and customers together so that they can produce and exchange products.

In today’s world, money is simply credit. All of our money except coins is created by banks when they make loans. Much of the current crisis stems from a credit freeze that began on Wall Street in the fall of 2007, when banks were required to revalue their assets due to a change in accounting rules, from “mark to fantasy” to “mark to market.”

Just understanding the problem is enough to see the solution. If a private bank can create credit on its books, so can the mighty State of Ohio. It merely needs to form its own bank. Under the “fractional reserve” lending system, banks are allowed to extend credit – or create money as loans – in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it substantially like this:

“[F]or every $1 or $1.50 which people – or the government – deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.”

With a 10 percent capital requirement, a state with its own bank could fan its revenues into 10 times their face value in loans. It could lend to creditworthy borrowers at very low interest, and on loans the bank made to the state, the state would ultimately get the interest, making the loans essentially interest-free.

Precedent for this approach is to be found in North Dakota, one of only three states currently able to meet its budget. North Dakota is not only solvent but now boasts the largest surplus it has ever had. The Bank of North Dakota, the only state-owned bank in the nation, was established by the legislature in 1919. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. The bank’s surplus profits are returned to the state’s coffers thereby increasing revenue.

The bank operates as a bankers’ bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It makes 1% loans to startup farms, has a thriving student loan business, and purchases municipal bonds from public institutions. If created in Ohio, such a bank would be able to help finance business and development projects that would directly benefit Ohio.

In short, by starting a bank, Ohio could resolve its budget crises, increase its revenue, and support programs and projects benefiting all Ohioans, with money to spare.

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