{"id":119247,"date":"2014-05-19T16:15:42","date_gmt":"2014-05-19T16:15:42","guid":{"rendered":"http:\/\/rinf.com\/alt-news\/?p=119247"},"modified":"2014-05-19T16:15:42","modified_gmt":"2014-05-19T16:15:42","slug":"private-banks-unconstitutional","status":"publish","type":"post","link":"http:\/\/rinf.com\/alt-news\/breaking-news\/private-banks-unconstitutional\/","title":{"rendered":"Are Private Banks Unconstitutional?"},"content":{"rendered":"

Ellen Brown
\nRINF Alternative News<\/a><\/strong><\/p>\n

The movement to break away from Wall Street and form publicly-owned banks continues to gain momentum. But enthusiasts are deterred by claims that a state-owned bank would violate constitutional prohibitions against \u201clending the credit of the state.\u201d<\/p>\n

California\u2019s constitution is typical. It states in Section 17: \u201cThe State shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association, or corporation . . . .\u201d<\/p>\n

The language sounds prohibitive, but what does it mean? Hundreds of state and local government entities extend the credit of the state. State agencies make student loans, small business loans, and farm loans. State infrastructure banks explicitly leverage the credit of the state. Legally, state and local governments are extending their credit to private banks every time they deposit their revenues in those banks. When money is deposited, it becomes the property of the bank by law.\u00a0The depositor becomes a creditor<\/a>\u00a0with an IOU or promise to be repaid. The state or local government has thus lent its money to the bank.<\/p>\n

How can these blatant extensions of the state\u2019s credit be reconciled with the constitutional prohibitions against the practice?<\/p>\n

North Dakota\u2019s constitution has particularly strong language. Article 10, Section 18, provides:<\/p>\n

The state, any county or city may make internal improvements and may engage in any industry, enterprise or business, not prohibited by article XX of the constitution, but neither the state nor any political subdivision thereof shall otherwise loan or give its credit or make donations to or in aid of any individual, association or corporation except for reasonable support of the poor, nor subscribe to or become the owner of capital stock in any association or corporation.<\/p><\/blockquote>\n

Yet this prohibition has not prevented the state from establishing its own bank. Currently the nation\u2019s only state-owned depository bank, the Bank of North Dakota has been a stellar success and has been going strong ever since 1919. In\u00a0Green vs. Frazier<\/em>, 253 U.S. 233 (1920), the US Supreme Court\u00a0upheld the bank\u2019s constitutionality<\/a>\u00a0against a Fourteenth Amendment challenge and deferred to the state court on the state constitutional issues, which had been decided in the state\u2019s favor.<\/p>\n

In the nineteenth century, Mississippi, Arkansas, Florida, Kentucky, and Indiana all had their own state-owned banks. Some were extremely successful (Indiana had a monopoly state-owned bank).\u00a0These banks, too, withstood constitutional challenge<\/a>at the US Supreme Court level.<\/p>\n

Were the prohibitions against \u201clending the credit of the state\u201d simply ignored in these cases? Or might that language have meant something else?<\/p>\n

The Constitutional Ban on \u201cBills of Credit\u201d: Colonial Paper Money<\/strong><\/p>\n

Constitutional provisions against lending the state\u2019s credit go back to the mid-nineteenth century. California\u2019s is in its original constitution, dated 1849. There was then no national currency, and the National Bank Act had not yet been passed.<\/p>\n

Several decades earlier, the states had been colonies that issued their own currencies in the form of paper scrip.\u00a0Typically called \u201cbills of credit\u201d<\/a>, these paper bills literally involved the extension of the colony\u2019s credit. They were credit vouchers used by the colony to pay for goods and services, which were good in trade for an equivalent sum in goods or services in the marketplace.<\/p>\n

Prior to the constitutional convention in the summer of 1787, the colonies exercised their own sovereign power over monetary matters, including issuing their own paper money. After the collapse of the Continental currency during the Revolutionary War, largely due to counterfeiting by the British, the framers were so afraid of paper money that they expressly took that power away from the colonies-turned-states, and they failed to expressly give it even to the federal government. Article I, Section 10, of the U.S. Constitution provides:<\/p>\n

No State shall . . . coin Money; emit\u00a0Bills of Credit; make any Thing but\u00a0gold and silver Coin\u00a0a Tender in Payment of\u00a0Debts;\u00a0. . . .<\/p><\/blockquote>\n

Congress was given the power \u201cTo coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.\u201d But language authorizing Congress to \u201cemit Bills of Credit\u201d was struck out after much debate.<\/p>\n

The Supreme Court ruled<\/a>\u00a0in the Legal Tender Cases after the Civil War that the power to coin money implied the power to print money under the Necessary and Proper Clause, legitimizing the Greenbacks issued by President Lincoln. But in 1850, no state government had the power to extend its own credit in the form of bills of credit or paper money, and whether the federal government had that power was a subject of debate.<\/p>\n

However, the expanding economy needed a source of freely-expandable currency and credit, and when local governments could not provide it, private banks filled the void. They issued their own \u201cbank notes\u201d equal to many times their gold holdings, effectively running their own private printing presses.<\/p>\n

Was that constitutional? No. The Constitution nowhere gives private banks the power to create the national money supply \u2014 and today, private banks are where virtually all of our circulating money supply comes from. Congress ostensibly delegated its authority to issue money to the Federal Reserve in 1913; but it did not delegate that authority to private banks, which have only recently admitted that they do not lend their depositors\u2019 money but actually create new money on their books when they make loans. In\u00a0the Bank of England\u2019s latest Quarterly Bulletin<\/a>, it states:<\/p>\n

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower\u2019s bank account,\u00a0thereby creating new money<\/em>.<\/p><\/blockquote>\n

This broad exercise of the money power by private banks is nowhere to be found in our federal or state constitutions, but courts have managed to get around that wrinkle. In\u00a0Constitutional Law in the United States<\/em><\/a>, Emlin McClain summarizes the case law like this:<\/p>\n

A state cannot, even for the purpose of borrowing money, exercise the sovereign power of emitting paper currency (Craig v. Missouri). But this prohibition does not interfere with the power of a state to authorize banks to issue bank notes in the form of due-bills or of similar character, intended to pass as currency on the faith and credit of the bank itself, and not of the state which authorizes their issuance.<\/p><\/blockquote>\n

The anomalous result is that state-chartered banks are able to issue credit that passes as currency, while state governments are not. But so the cases hold, and they apply to public banks as well as private banks.<\/p>\n

Public Banks Held Constitutional<\/strong><\/p>\n

John Thom Holdsworth wrote in\u00a0Money and Banking<\/a><\/em>\u00a0(1937) that in the mid-nineteenth century, \u201cseveral of the states established banks owned entirely or in part by the state. There was some question as to the right of these state institutions to issue circulating notes, but the Supreme Court held that such notes were not \u2018bills of credit\u2019 within the meaning of the constitutional prohibition.\u201d<\/p>\n

In\u00a0Briscoe v. Bank of Kentucky<\/em>, 36 U.S. 257 (1837)<\/a>, the Court observed that the charter of the challenged Kentucky state bank contained \u201cno pledge of the faith of the state for the notes issued by the institution. The capital only was liable; and the bank was suable, and could sue.\u201d\u00a0The Court \u201cupheld the issuance of circulating notes by a state-chartered bank<\/a>\u00a0even when the Bank\u2019s stock, funds, and profits belonged to the state, and where the officers and directors were appointed by the state legislature.\u201d<\/p>\n

The Court narrowly defined the sort of \u201cbill of credit\u201d prohibited by Article 1, Section 10, as a note issued by the state, on the faith of the state, designed to circulate as money. Since the notes in question were redeemable by the bank and not by the state itself, they were not \u201cbills of credit\u201d for constitutional purposes. The Court found that the notes were backed by the resources of the bank rather than the credit of the state. Moreover, the bank could sue and be sued separate from the state.<\/p>\n

These cases are still good law. A state bank \u2014 or city bank or county bank \u2014 is not in violation of state constitutional prohibitions against lending the credit of the state.<\/p>\n

Other Ways to Avoid Constitutional Challenge<\/strong><\/p>\n

In light of those Supreme Court cases, it hardly seems necessary for a city to become a\u00a0chartered city<\/a>\u00a0before establishing its own publicly-owned bank; but that is another way to circumvent this debate. The California Constitution\u00a0gives cities the power to become charter cities<\/a>; and while General Law Cities are bound by the state constitution,\u00a0cities organized under a charter have broad autonomy<\/a>. They can bypass large swaths of state law, including asserting their independence from the state\u2019s supposed\u00a0restrictions on lending<\/a>.<\/p>\n

For county-owned banks, the case is not as clear. In California, Government Code 23005 forbids counties from giving their \u201ccredit to or in aid of any person or corporation. An indebtedness or liability incurred contrary to this chapter is void.\u201d But the US Supreme Court rulings validating state banks should be equally applicable to county banks; and in any case, enabling legislation can be crafted to allow public banks at any level of government.<\/p>\n

There is another way to bypass this whole legal debate: by pursuing the initiative and referendum process pioneered in California. It allows state laws to be proposed directly by the public, and the state\u2019s Constitution to be amended either by public petition (the \u201cinitiative\u201d) or by the legislature with a proposed constitutional amendment to the electorate (the \u201creferendum\u201d). In California, the initiative is done by writing a proposed constitutional amendment or statute as a petition, which is submitted to the Attorney General along with a modest submission fee. The petitionmust be signed by registered voters<\/a>\u00a0amounting to 8% (for a constitutional amendment) or 5% (for a statute) of the number of people who voted in the most recent election for governor.<\/p>\n

Before sufficient signatures could be collected, a widespread educational campaign would need to be mounted; but just informing the public on this little-understood subject could be worth the effort. Recall the words of Henry Ford:<\/p>\n

It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.<\/p><\/blockquote>\n

When enough people understand that private banks rather than governments create our money supply, imposing interest and fees that constitute an enormous unnecessary drain on the economy and the people, we might wake up to a new day in banking, finance, and the return of local economic sovereignty.<\/p>\n

Ellen runs\u00a0The Web of Debt Blog<\/a>\u00a0<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Ellen Brown RINF Alternative News The movement to break away from Wall Street and form publicly-owned banks continues to gain momentum. But enthusiasts are deterred by claims that a state-owned bank would violate constitutional prohibitions against \u201clending the credit of the state.\u201d California\u2019s constitution is typical. It states in Section 17: \u201cThe State shall not […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[487],"tags":[],"class_list":{"0":"post-119247","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-breaking-news"},"_links":{"self":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/119247","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/comments?post=119247"}],"version-history":[{"count":0,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/119247\/revisions"}],"wp:attachment":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/media?parent=119247"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/categories?post=119247"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/tags?post=119247"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}