The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

Those words, written by James Madison, principle author of the Constitution and Bill of Rights, are perhaps most suited to the following topic.  It is those very words which will set the tone for many of the subsequent editorials to follow in this series.  After all, it is probably most appropriate to begin our political economic analysis with the applicability of the fundamental solutions which exist in our nation’s Constitution.  For the sake of discussion, let’s consider that the Tenth Amendment of the U.S. Constitution, which is where the inquisitive reader will find the aforementioned passage, is written as a protective measure for the states with respects to a large and encroaching central government.   To maintain a level of state sovereignty suitable to the well-being of any good republic, there must be the necessary “checks and balances” on powerful centralized government; as tyranny usually follows as a result of such regimes.  The Tenth Amendment serves as that final check by reserving any power not mentioned in the U.S. Constitution to the respective states.  Though, one will not find popular discourse on the matter today in terms of real economic solutions, we can analyze the utility this clause provides for our beloved republic in terms of addressing the current fiscal crisis.

The Problem:

To begin, we must first consider Article 1, Section 8 of the U.S. Constitution, which outlines all the enumerated powers delegated to the Legislative Branch of the federal government.  Specifically, the power to coin money and borrow on the credit of the United States is clearly outlined as one of the delineated powers of the U.S. Congress.  Unfortunately, the clause addresses nothing on the matter of printing money; as printed money takes the primary form of U.S. currency today.   This has led to a peculiar dilemma with respects to economic accountability with our nation’s money supply.  You see, since the founding of our country, a debate has ensued over the printing of our currency. The language outlined in the Article 1, Section 8 clearly permits for the coinage, but not the printing and regulation of any fiat currency.  This small, but significant, defect has allowed for the privatized monopoly of U.S. dollars and the modern debt based economy currently driving our nation into economic serfdom.

To better understand, we must first examine how our Nation’s money supply is actually delivered to the financial market.   The popular misconception held by many Americans today is that money is created by the Federal government. To an extent this is true, but the problem lies in where money actually derives its value.  The U.S. Treasury, the institution which prints and allocates the government’s physical money supply, must partner with the Federal Reserve to generate the value of printed money.   The Federal Reserve, a private centralized banking institution, creates value by buying up U.S. Treasury Bonds from the federal government with credit it creates. These transactions give value to the new credit, as the value then becomes solely based on the government’s promise to repay its bonds.  After all, the government’s borrowing power is backed by the “Full Faith and Credit of the United States”.  Therefore, the new credit is not backed by any tangible assets, but merely the debt inherently created as a result of its very existence.   Simply put, the Federal Reserve creates money out of thin air and loans it to our government (with interest), giving us money backed by the promissory obligation of the debtor.  In this case, the debtor has a Constitutional provision that provides for an indefinite line of credit.  The system is so incredibly stable in terms of perpetuity, the world depends on it as a reserve currency.  The Federal Reserve then leverages this new credit with other lending institutions through fractional reserve lending.  Fractional reserve lending is the process by which financial institutions lend money based on a fraction of on-hand assets and deposits. Generally, this is done to free up capital and produce liquidity, but fractional reserve lending merely leverages this newly created money many times over; which then adds to the debt previously mentioned.  Overall, extreme usury can be used to describe what takes place between the Federal Reserve and the United States Treasury.

This has led to the current political fiasco taking place on Capitol Hill with respects to the ongoing budget debate. You see, it is completely absurd to believe that the U.S. can ever repay its debt without obstructing the nation’s money supply; it is simply too large!  What’s more, Wall Street has a major incentive to maintain the current system, as it has generated quadrillions of dollars in derivatives for stock traders…but we’ll get to that later.  Therefore, to raise the debt ceiling would essentially equate to increasing the nation’s money supply under the current financial system. The problem lies in the fact that this is privately controlled and accountable to no one, which is a significant problem in terms arbitrary rates of inflation. The system is so fundamentally flawed that an enormous portion of the nation’s money supply goes directly towards the interest on the debt created with new money; contracting a significant portion of capital that would otherwise circulate in the economy.  Conversely, placing extreme austerity measures on the backs of the tax payer i.e. the American public is just as absurd given the current economic climate and high levels of unemployment.  Thus, the solution will require an entire reevaluation of our nation’s current monetary policies.

In addition to this financial spectacle of sorts, threats of default and lower rating reports by Moody’s, or any other rating agency for that matter, on U.S. Treasury bonds amount to nothing more than political theater amongst law makers to grandstand some provisional solution to the ongoing budget dilemma.  It is also perhaps worthy of note that those very credit rating agencies were giving AAA scores to the major lending institutions generating the enormous housing bubble in 2007 with credit default swaps; consequently leading to the financial collapse of Wall Street.  One might ask where the accountability and oversight lies with respects to the reporting agencies and their relationship with Wall Street lending institutions. Ultimately, this complex system of moneylending remains relatively unchecked due in large part to the privatized nature of the Federal Reserve.

The Financial Wild West

In recent years we have seen drastic and painful cuts to our Nation’s money supply, which has caused one of the most significant recessions in modern history.  Many financial experts trace the cause of the great financial crisis to Congress’ repeal of the Glass–Steagall Act in 1999. By essentially eliminating the separation between regular deposit banks and Wall Street financial investment firms, free reign was given to leverage mortgage-backed securities with credit default swaps and speculative-based investments i.e. derivatives.  As a result of this repeal, Fannie Mae, Freddie Mac and other lenders, were able to generate a massive housing bubble by buying up all the toxic assets held by other lending institutions.  These efforts proved to be so highly unsustainable with respects to the amount of unpaid loans that it led to the financial collapse and massive bailout of Wall Street.  The bailout was essentially necessary, as the urgency to prop up the various institutions that provide liquidity to the U.S. economy was now jeopardizing the entire system used to create the nation’s money supply.  These efforts have, in effect, caused a substantial contraction of the nation’s money supply: as conventional means to control inflation have been offset by efforts to stimulate the economy with massive injections of capital by the U.S. Government.   As a result, the nation has faced its slowest period of economic growth and unprecedented levels of unemployment.  This effect has undoubtedly trickled down to individual state economies, as many of the federal subsidies used to support state budgets have been drastically reduced or eliminated altogether. Ultimately, the country is trapped in this deflationary downward spiral that will persist for as long as the Federal Reserve continues to artificially manipulate the country’s money supply in favor of private lending institutions. Therefore, as alluded to previously, calls for austerity by reactionary GOP leaders and higher taxes on an already over tax-burdened populace by Democrats, places the solution to our nation’s fiscal woes outside the control of the Federal Reserve and the dubious Wall Street banksters under their control.

So why the Tenth Amendment?

The fact that our nation’s money supply is out of control due to an unchecked Federal Reserve, the answer rest with one solution many states are now seriously considering.   Hawaii, Illinois, Massachusetts, Michigan, Missouri, New Mexico, Vermont, Virginia, Washington and now California all have proposals in their respective state legislatures to charter their own state banks.  The concept of a state bank is nothing new.  In fact, North Dakota has operated the Bank of North Dakota for well over 100 years.  It is also worth mentioning that North Dakota has not endured the same setbacks as many other states with respects to budget deficits and high unemployment ratings.  As a matter of fact, North Dakota is the only state to have a budget surplus as well as the lowest unemployment record in the country; all while the country faces the largest economic recession in modern times.  It is worthy of investigation with respects to understanding this peculiarity and review the applicability of a state bank in terms of financial sovereignty.  What’s more, the U.S. Constitution does not forbid any state from actually chartering its own state bank.  In fact, it says nothing on the matter.  The clause in the Tenth Amendment, clearly states that, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people”.  Therefore, the function the Tenth Amendment could serve to any state economy with respects to claiming financial sovereignty in the form a state bank is most worthy of analysis.  Firstly, by building up reserves, backed also by state assets, a state bank could provide the necessary capital for lending in terms of state infrastructure projects or redevelopment etc.  Through the fractional reserve lending process outlined earlier, a state bank could leverage a money supply of its own to offset the contraction influenced by the Federal Reserve; thus, providing enough liquidity to the market to maintain a stable economy and fuel economic growth.  Moreover, by focusing the state’s lending on productive activities, such as manufacturing and infrastructure development, a state can provide its own economic boom by generating high employment as a result of new development.  It is important to understand that production is the key to any economic growth, as new development fosters the necessary capital for any economy.  Therefore, by providing loans necessary for production, the stranglehold that Wall Street lenders have on state economies would be eliminated or drastically reduced.  Further, a state bank would be held accountable to the people by way of elections or through appropriate representation: lifting the shroud of secrecy currently enjoyed by the Federal Reserve. The transparency in lending practices at the state level would also eliminate reckless investment strategies by state Treasuries that often result in negative returns.  Anyone currently enrolled in California’s CalPER’s system understands this all too well. Therefore, it seems relatively feasible to undertake this concept, which clearly comport with the principles outlined in the Tenth Amendment, and reclaim economic sovereignty by eliminating California’s dependency on Wall Street.

Interestingly enough, there is a bill in the California State Legislature which has currently made its way to the Senate Rules Committee.  Assemblyman, Ben Hueso, representing California’s 79th District, has introduced a bill that would establish the Investment Trust Blue Ribbon Task Force to consider the viability of establishing the California Investment Trust.  The California Investment Trust would, in effect, operate as a state banking institution. It would receive deposits of state funds for the purposes of community and infrastructure development (among a whole host other programs).  As outlined above, the benefits of such an institution are incalculable, as it would sever California’s dependence on federal subsidies and development grants that fund a significant portion of the state’s programs.  So, as we move into a summer of uncertainty in terms of tax extensions, we can also begin looking into alternative ways to rebuild our state’s economy.  A.B. 750 does just that.   We can continue to scramble and find funds in existing programs to plug massive holes in our budget, or we can reclaim economic sovereignty and usher in a new period of growth by fueling production with state funds.  It may not be a matter of cutting programs or increasing tax revenue that’ll lift California from the economic doldrums, as what is currently suggested by Gov. Jerry Brown.  Brown, who has desperately sought out ways to extend the current increased tax rates, has already severely cut redevelopment funds that go to CA veterans’ programs and others like First Five that serve to benefit the health of our communities.  It is time to reevaluate the State’s financial methods and focus on the economic potential the Golden State can unleash on the world.

Thank you for taking the time to read this. I appreciate any comments or feedback you may have, as it will help me develop my approach for future analysis. Please, do not hesitate to respond to any of the material presented, as the best ideas usually develop and evolve with rigorous scrutiny. So, I encourage any and all feedback.

Truth will bear its bounty if appropriately tested and countered by opposing viewpoints