30 Years Ago, the Soviet Union Collapsed, But Socialism Was Worth Saving

BY GLENN SACKS

 DECEMBER 24, 2021
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Thirty years ago, the Soviet Union dissolved. On a superficial level, events vindicated the longtime American assertion that socialism “doesn’t work”–Soviet consumer goods lacked both quality and variety, Soviet agriculture was a continual disappointment, and, in the USSR’s later years, labor discipline grew very lax, and corruption flourished.

Yet Soviet socialism had more economic successes than failures. The US-USSR comparison used to demonstrate “capitalism good, socialism bad” was apples-to-oranges, and should never have been accepted.

British economist Angus Maddison estimates that in 1913 the US’ Gross Domestic Product per capita was the highest in the world at $5,301 (in 1990 dollars). That of the Russian Empire—the future USSR—was only $1,488–17th in world, less than Mexico. Sixty years later, the US figure had risen to $16,689 and the USSR’s to $6,059, the USSR narrowing the gap by 23%–a considerable achievement considering the extremely different circumstances faced by each nation.

The US entered World War I late and lost 115,000 men. By contrast, between WWI (1914-1918), the Russian Civil War (1918-1921), and the consequent famine, Russia/USSR lost over 10 million citizens. The country the communists inherited was so poor, wrecked, and starved that cannibalism was widespread. This is the starting point of Soviet socialism.

During World War II the USSR faced Nazi Germany’s Operation Barbarossa–the largest military action in human history–and suffered a staggering 27 million deaths, 70 times America’s WWII losses. The USSR lost 1/3 of its national wealth and ended the war with millions starving and 25 million homeless.

By contrast, the US came out of WWII physically unscathed with 6% of the world’s population and 50% of its GDP. To have expected the USSR to catch up–all the while matching the US in military spending and in aid to Cold War allies–was never realistic.

Nonetheless, what the Soviet economy did achieve was still considerable:

+ During the 1930s the USSR industrialized faster than any nation in history. This remarkably rapid transition from an agricultural to an industrial society was accomplished despite the destruction and chaos of Soviet dictator Joseph Stalin’s murderous purges and farm collectivization.

+ The USSR inflicted 85% of Germany’s wartime casualties and was principally responsible for Nazi Germany’s defeat.

+ Despite the massive loss of the young men critical for industrialization and heavy industry, the USSR re-industrialized rapidly during the 1940s and 1950s, and retained robust economic growth rates into the 1960s. It is only then that the Soviet economy–under the weight of bureaucracy and mismanagement–began to slow down. One study noted that while between 1950 and 1976 the advanced capitalist economies grew 4.4% annually and the poorer capitalist economies grew 5% annually, the centrally planned economies of the USSR and the Eastern bloc grew 7.7% annually—75% and 54% higher respectively (Scientific American, September 1980).

The USSR’s large Muslim regions, once as poor and backward as neighboring Afghanistan, saw tremendous progress in improving living standards, eliminating illiteracy, and reducing infant mortality. The Soviets also achieved a remarkable rise in the status of women, and women came to make up a significant portion of the region’s doctors, engineers, and teachers.

The USSR also managed to keep up with the US in both the nuclear arms race and the space race, as the comprehensive list of Soviet space “firsts” is as impressive as the US’.

The USSR’s main problem was not its economic system but the ruling bureaucracy’s mismanagement, corruption, parasitism, and cynicism, all of which sapped Soviet working people’s morale and work ethic. But what if the USSR in the 1970s and 1980s–during its “Era of Stagnation”–had been an open society such as ours?

Factory managers and political leaders responsible for the shoddy consumer goods offered to the Soviet people would’ve been skewered alive in the media, and they or their successors would quickly have whipped production into shape. Working people–benefitting from both an economy planned to meet people’s needs and from democratically controlling their workplace and their society–would have seen their creative energies unleashed.

Competing economic plans with varying priorities would have been debated and dissected, and passed democratically, instead of being imposed from above. With popular buy-in, there would have been much more popular commitment to meeting the targets and fulfilling such plans.

For decades the alleged failure of the Soviet economy has been used to shut down any substantive questioning of the necessity of the free market economic system. The performance of the USSR’s economy instead shows that a planned, socialist economy—if built in a free society with democratic institutions—is a viable alternative model.

Glenn Sacks teaches social studies at James Monroe High School in the Los Angeles Unified School District. He was recently recognized by LAUSD Superintendent Austin Beutner for “exceptional levels of performance.”

What is a Wilderness Without Its Wolves?

BY FRANZ CAMENZIND

COUNTERPUNCH

DECEMBER 24, 2021
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Wolf in greater Yellowstone. Photo: Franz Camenzind.

For millennia, wolves have occupied nearly all the lands now designated as Wilderness in the western US, with the exception of coastal California. Yet today, fewer than two score of the approximately 540 Wildernesses west of the 100^th meridian (not including Alaska’s 48) can claim some number of wolves as residents and only a dozen or so harbor wolves in numbers sufficient to be considered sustainable—in either the Greater Yellowstone Ecosystem, Central Idaho Wildlands or Montana’s Northern Continental Divide Ecosystem. Arguably, the long-term sustainability of wolves in other Wilderness areas is at risk due to the limited security provided by those smaller, often isolated landscapes.

The Wilderness Act defines Wilderness as a place where the earth and its community of life are untrammeled by humankind, retains its primeval character and where natural conditions are preserved. Simply stated, Wilderness is meant to exist with minimal human interference. Yet within the vast majority of Wilderness areas, the wolf, the apex species with profound ecosystem influence, is now absent—an absence due entirely to the relentless killing by humankind.

We need look no farther than Yellowstone National Park to witness the influence wolves have on an ecosystem. The park’s wolves were exterminated by the early 1900s, ostensibly to protect the park’s favored elk herds. What followed was not surprising—an overabundance of elk which led to deleterious impacts to vegetation, particularly lower elevation riparian and willow communities.

Since the reintroduction of wolves to the park in the mid-1990s, elk numbers have dropped to levels most ecologists agree resemble something near carrying capacity. Similarly, park wolf numbers stabilized around 100, after initial highs of 150-170. With the wolf’s return, the park ecosystem is showing signs of reaching a dynamic equilibrium beneficial to all components. It’s not an exaggeration to say that wolves were instrumental in returning the park’s wildlands nearer to their primeval conditions.

Wolves hold apex status, in part, because of their far-ranging hunting behavior. Yellowstone-area wolf packs hunt in territories ranging from 185-310 square miles. Besides being smaller, the Yellowstone elk herd is more dispersed and spends less time in the lower elevation meadows and riparian-willow communities.

Most ecologists agree that the wolf’s collective impact on elk is contributing to the resurgence of the willow communities, which in turn is witnessing an increase in avian biodiversity and density. The revitalization of Yellowstone’s northern range willow communities has also enabled an increase in the beaver population, leading to positive changes to stream ecology, thus benefitting aquatic invertebrates and the fisheries.

Many of the ecological changes brought about by the wolf’s return may take years if not decades to recognize and fully understand. But one thing is clear, today’s Yellowstone and the Wildernesses harboring robust wolf populations more closely resemble their primeval character than those lacking wolves. Wolves may just be nature’s best wilderness stewards.

Three states now account for the majority of the west’s wolves: Idaho (1,556), Montana (1,220) and Wyoming (347). Another 351 are tallied for Washington (178) and Oregon (173). Mexican Gray Wolves occur in two states: New Mexico (114) and Arizona (72). Combined, approximately 3,660 wolves currently reside west of the 100^th meridian—a number that pales to the 250,000 to 2 million estimated to have resided in the entire United States before the European invasion. However, the current numbers are better than the few dozen residing in northwest Montana three decades ago, which were a result of wolves immigrating from Canada.

Today’s bad news is that wolves in Idaho and Montana are once again facing the vigilante actions of the 1800s. Both state legislatures recently passed draconian legislation with the stated objective of reducing wolf numbers to near 150—the number at which the U.S. Fish and Wildlife Service (USFWS) will take over wolf management as per the states’ wolf management agreements in effect since Endangered Species Act protections were taken away from wolves.

The new legislation authorizes the state commissions to allow wolf-killing by pretty much any means imaginable: the use of traps and snares, unlimited quotas, extended hunting and trapping seasons, and in Idaho, night time hunting, aerial gunning and killing pups in dens. Idaho also designated $200,000 dollars to “cover expenses incurred” by private individuals while killing wolves—essentially imposing a bounty on wolves.

Idaho’s and Montana’s aggressive wolf-killing legislation has been temporarily dampened a bit by the states’ wildlife commissions which have some leeway when setting annual wolf hunting and trapping regulations. For instance, this season, Montana is limiting the open-ended quotas written into their legislation. But the intent and goals remain unchanged—it may just take a few more years to achieve those goals. Ironically, that means more wolves will be killed because each year the survivors will produce young, thus replenishing their numbers, resulting in “a need” to kill more wolves to reach the 150 goal.

State wildlife agencies manage wolves by the numbers, ignoring the fact that wolves are one of the most social species on the planet, and function and survive not as individuals, but as members of highly structured packs. Consequently, intense, random killing can cause packs to break up, resulting in diminished hunting efficiency and pushing wolves toward easier prey, such as livestock.

Today, wolves and the wilderness ecosystems they inhabit are imminently threatened by these irresponsible state efforts to kill upwards of 90 percent of their wolf populations, including within Wilderness. A weakened or removed apex species inevitably results in a weakened ecological system. If this barbaric killing is allowed to proceed, ecosystem function and wilderness protection will be pushed back decades.

Wilderness Watch continues to fight for Wilderness and its wolves. On December 6, Wilderness Watch and a dozen allies filed a lawsuit and a motion for a temporary restraining order/preliminary injunction against the State of Idaho over its barbaric new wolf-killing laws. This followed a June 2021 Notice of Intent to sue Idaho and Montana for their new anti-wolf statues. We’ve petitioned the US Department of Agriculture to promulgate rules or issue closure orders preventing certain killing methods, hired killers, and paying bounties in Wilderness. Wilderness Watch also joined a petition authored by Western Watersheds Project to relist wolves under the Endangered Species Act in light of the new, aggressive wolf-killing statutes. In response, the US Fish and Wildlife Service announced that it will undertake a status review of the gray wolf over the next 12 months.

A Wilderness denied of its wolves is a wounded Wilderness. If wolves can’t be allowed live in Wilderness, where can they live? Wilderness Watch will continue to do all it can to protect this critical, symbiotic relationship and the ecological integrity of Wilderness itself.

Warnings from the Far North

BY ROBERT HUNZIKER

COUNTERPUNCH

DECEMBER 27, 2021
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“Forces profound and alarming are reshaping the upper reaches of the North Pacific and Arctic oceans, breaking the food chain that supports billions of creatures and one of the world’s most important fisheries.”(Source: Susanne Rust, Unprecedented Die-offs, Melting Ice: Climate Change is Wreaking Havoc in the Arctic and Beyond, Los Angeles Times, December 17, 2021)

“Breaking the food chain that supports billions of creatures” is horrific to contemplate. It sends a powerful signal of trouble dead ahead. In that regard, scientists agree that what happens up North signals what’s in store to the South, and what’s happening up North is a gut-wrenching reality of life on a knife’s edge of catastrophe.

It’s never been more urgent and timely for the world to change its ways and abandon the current economic maelstrom that haunts all life on the planet. The pros and cons of capitalism’s experiment with neoliberal tendencies that enrich the few and bury the many should be debated in the context of strained resources throughout the biosphere, including all life forms. The GDP-to-infinity paradigm is barreling towards a wall of impending extinction. It’s already on a fast track.

In the aforementioned LA Times, aka The Times, article: “Kuletz, the U.S. Fish and Wildlife biologist who has been observing birds in Alaska since the late 1970s, said she’s never before seen the large-scale changes of recent years. In 2013, the dead birds did not show signs of being emaciated, but in 2017, hundreds to thousands more began to wash up dead on beaches with clear signs of starvation.” Ibid.

A team from The Times traveled to Alaska and spoke with dozens of scientists conducting field research in the Bering Sea and the High Arctic from whence they describe the harsh reality of a vastly/rapidly changing climate system that threatens basic food resources for marine life, as well as for humanity.

The fingerprints of anthropogenic global warming are all over the discernable shifts of sea life and/or loss of species captured in a whirlwind of unpredictability. According to boots-on-the-ground scientists in the far north, these radical shifts in the ecosystem have… “ramifications that stretch far beyond the Arctic. Moreover, the Bering Sea is one of the planet’s major fishing grounds.”

Janet Duffy-Anderson, a marine scientist who leads surveys of the Bering Sea for the National Oceanic and Atmospheric Administration’s Alaska Fisheries Science Center said: “Globally, cold-water ecosystems support the world’s fisheries. Halibut, all of the cod, all of the benthic crabs, lobsters, this is the majority of the food source for the world.”

She emphasized the fact that the ripple effect of what’s happening in the far north could shut down fisheries as well as leave migrating animals starving for food, which, in fact, is already omnipresent. And, of concern: “Alaska is a bellwether for what other systems can expect.”

The top of the marine food chain is in deep trouble. Since 2019 hundreds of gray whales have died along North America’s Pacific coastline. Many of the whales appeared skinny or underfed.

Addressing the whale issue, another scientific study from a year ago stated: “It is now the third year that gray whales have been found in very poor condition or dead in large numbers along the west coast of Mexico, USA and Canada, and scientist have raised their concerns. An international study suggests that starvation is contributing to these mortalities.” (Source: Mary Lou Jones and Steven Swartz -Aarhus University- A Large Number of Gray Whales are Starving and Dying in the Eastern North Pacific, ScienceDaily, January 22, 2021)

When the top of the marine food chain (whales) starve, it’s only too obvious that the lower levels are failing. This one fact is cause for serious concern and thus demands action by the leaders of the world to commit to a series of international studies of marine life and ocean conditions with recommendations on how to solve the anthropogenic cause of excessive greenhouse gas emissions.

Yet, it appears that as some species in the far north struggle, some do adapt and even thrive. Thus, there may be some tradeoffs on a slightly positive note, but still, it’s the emaciated animals en mass that cannot be overlooked. The fact of the matter, stated in The Times: “Data from a Bering Sea mooring shows the average temperature throughout the water column has risen markedly in the last several years: in 2018, water temperatures were 9 degrees above the historical average.”

It should be noted that if overall global temperatures averaged 9 degrees above average, it would be “lights out” for terrestrial life.

Warmer waters appear to be at the heart of the problem, e.g., as the planet warms both humans and wildlife become more vulnerable to infectious diseases that were previously confined to certain specific locations and environments. Additionally, toxic algae that kills marine life thrives in warmer waters. Plus, marine animals do not naturally mature, and reproduce as waters warm far above historical averages. Furthermore, ocean acidification, caused by excessive CO2, is already threatening sea life by reducing carbonate, a key building block in seawater.

Only recently, a death march of extreme heat hit the Pacific. A study in Canada showed the enormous impact of heat, as an estimated one billion sea creatures off the coast of Vancouver died because of excessive ocean heat. According to professor Christopher Harley, University of British Columbia: “”I’ve been working in the Pacific Northwest for most of the past 25 years, and I have not seen anything like this here. This is far more extensive than anything I’ve ever seen.” (Source: Heat Wave Killed An Estimated 1 Billion Sea Creatures, And Scientists Fear Even Worse, NPR Environment, July 9, 2021)

The oceans are suffering a triple whammy, and as a result scientists believe it is distinctly possible that life in the wondrous blue seas could be gone by mid century, unless humanity changes course. Overfishing, pollution, and climate change are battering the oceans. It’s all human-caused. The question then becomes, if humans have caused the onslaught, can they reverse it, or at least stop?

In all, it’s becoming only too apparent that to maintain life on the planet, the world economy needs to stabilize by massive reduction of greenhouse gases accompanied by flat-line economic activity, forget the death wish of GDP up and up “whatever percent every quarter,” which runs roughshod over the planet’s ecosystems. Worshipping GDP growth is akin to idolatry, and its moral corollary is greed. Maybe try worldwide socialism and see how that works for the planet’s life-sourcing ecosystems.

Not only that, but plain and simple, we’re running out of nature’s resourcefulness. “Today’s seas contain only 10% of the marlin, tuna, sharks and other large predators that were found in the 1950s… Overfishing puts the whole ocean ecosystem out of balance.” (Source: Katie Pavid, Will the Ocean Really Be Dead In 50 Years? Natural History Museum, London)

Of additional interest, the documentary Seaspiracy/Netflix by Disrupt Studios, March 2021 is an eye-opener on the goings-on of marine life, what’s left of it, in the oceans.

Museum scientists have studied past periods of climate change: “Research leader Prof Richard Twitchett says, ‘We have a really good idea of what oceans look like when the climate warms. It has happened to Earth many times before, and here in the Museum we have collections of fossil animals and plants that date back millions of years, so we can see how they responded. The rocks and fossils show us that as temperature increased in the past, oxygen levels fell and huge areas of the seafloor became uninhabitable,” Ibid.

“The same oceans that nourished human evolution are poised to unleash misery on a global scale unless the carbon pollution destabilizing Earth’s marine environment is brought to heel.” (Source: Oceans Turning From Friend to Foe, Warns Landmark UN Climate Report, Agence France Presse, August 29, 2019)

Robert Hunziker lives in Los Angeles and can be reached at rlhunziker@gmail.com.

Government Action, Not Consumer Action, Will Stop Climate Change

BY CHRISTOPHER ORLET

 COUNTERPUNCH
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 DECEMBER 27, 2021

Photograph by Nathaniel St. Clair

Pointing the finger at individual consumers has been the default strategy of powerful corporations since the 1950s. Deflect blame for smog or litter or polluted waterways or carcinogens or gun violence away from manufacturers and onto John Q. Public. Make the issue about personal responsibility. “People start pollution, people can stop it,” said the famous crying Indian ad from the early 1970s, the brainchild of a can and bottle manufacturers trade group.

The strategy has worked like a dream because Americans prize personal responsibility. Ronald Reagan was speaking for many of us when he said: “It is time to restore the American precept that each individual is accountable for his actions.”

Which brings us to climate change. Once again, it is individual consumers and not the fossil fuel industry who are being blamed for the potential destruction of our planet. Only this time it isn’t just powerful corporations and their trade groups wagging the finger at individuals for not doing enough to halt global warming. It is also many climate change activists, who continue to press individuals to do more, to, for instance, purchase expensive solar panels for their homes.

This shaming of individual consumers seems to be working, too; despite high start-up costs, and the fact that some public utilities are slashing the amount of credit solar users get for selling power back to the grid, while tacking on all kinds of fees to retain their profit margins, sales of residential solar is growing.

But while there have been countless government subsidies to boost residential rooftop solar, there has been less of a push to get utility companies to switch from fossil fuels to solar or wind. We saw what happened when the Biden Administration proposed the Clean Energy Performance Program as part of the Build Back Better Act. CEPP would have paid electric utility companies that switch from fossil fuels to renewable or clean energy sources, while penalizing those that don’t. Unsurprisingly, rotating villain Sen. Joe Manchin (D-WV) blocked the program, saying he didn’t want to pay utility companies for doing something they are already doing. But while some utility companies are making modest investments in clean energy, it is not happening nearly fast enough to prevent catastrophic climate change.

The Bulletin of the Atomic Scientists has been very skeptical of this strategy of pinning our hopes on residential solar:

“Placing the responsibility for climate action on individuals, and encouraging an every-man-for-himself approach, may actually work against some energy solutions and do little to reduce overall greenhouse gas emissions…[B]y focusing their considerable resources on individual empowerment rather than on systemic issues, they make global warming a matter of consumer choice rather than of political mobilization and community involvement. (Emphasis mine.)

This phenomenon, which goes by the name “consumer responsibilization,” is a close cousin to personal responsibility. The difference being personal responsibility, its current form, was created by conservatives as a way to undermine the Welfare State, while consumer responsibilization was invented by powerful corporations to allow them to continue to rake in profits while undermining people’s health and the health of the planet.

One problem with making individual consumers accept responsibility for climate change is that, because of conservative and corporate misinformation, a lot of Americans don’t believe climate change is an existential crisis. Only a little more than half of the country (57 percent) believe climate change is caused by human activity, while nearly 6 in 10 voters believe that maintaining energy independence is more important than reducing carbon emissions if the two are in conflict.

This is a recipe for disaster. As seen with guns or single-use plastics, without serious government regulation the problem only worsens.

Meanwhile, too many climate change activists continue to harp on the idea that YOU can make a difference if you just put down that cheeseburger and eat a salad instead, if YOU use a metal straw instead of a plastic one, if YOU ride your ten speed instead of driving alone to the office, all of which is a bunch of feel-good nonsense.

What is needed is a focus on systemic change, on dramatic government action, and political mobilization. I know, expecting government to do the right thing is problematic too. One of the main political parties treats climate change like a hoax. The other—thanks to a razor thin majority in Congress —cannot come together to take any decisive action.

This may be why residential solar continues to grow. Americans have given up on government doing what needs to be done.

But while it may give us the warm fuzzies to teach our children that they can save the planet if they put single-use plastics in recycling bins, or carry around a metal straw, the more important lesson we should be imparting is that we must hold powerful corporations accountable for the damage they inflict on humans, our natural resources, and our planet. And that we must learn to recognize consumer responsibilization and other corporate propaganda when we see it.

The Real Antidote to Inflation

BY ELLEN BROWN

 DECEMBER 28, 2021

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The Federal Reserve is caught between a rock and a hard place. Inflation grew by 6.8% in November, the fastest in 40 years, a trend the Fed has now acknowledged is not “transitory.” The conventional theory is that inflation is due to too much money chasing too few goods, so the Fed is under heavy pressure to “tighten” or shrink the money supply. Its conventional tools for this purpose are to reduce asset purchases and raise interest rates. But corporate debt has risen by $1.3 trillion just since early 2020; so if the Fed raises rates, a massive wave of defaults is likely to result. According to financial advisor Graham Summers in an article titled “The Fed Is About to Start Playing with Matches Next to a $30 Trillion Debt Bomb,” the stock market could collapse by as much as 50%.

Even more at risk are the small and medium-sized enterprises (SMEs) that are the backbone of the productive economy, companies that need bank credit to survive. In 2020, 200,000 more U.S. businesses closed than in normal pre-pandemic years. SMEs targeted as “nonessential” were restricted in their ability to conduct business, while the large international corporations remained open. Raising interest rates on the surviving SMEs could be the final blow.

Cut Demand or Increase Supply?

The argument for raising interest rates is that it will reduce the demand for bank credit, which is now acknowledged to be the source of most of the new money in the money supply. In 2014, the Bank of England wrote in its first-quarter report that 97% of the UK money supply was created by banks when they made loans. In the U.S. the figure is not quite so high, but well over 90% of the U.S. money supply is also created by bank lending.

Left unanswered is whether raising interest rates will lower prices in an economy beset with supply problems. Oil and natural gas shortages, food shortages, and supply chain disruptions are major contributors to today’s high prices. Raising interest rates will hurt, not help, the producers and distributors of those products, by raising their borrowing costs. As observed by Canadian senator and economist Diane Bellemare:

Raising interest rates may cool off demand, but today’s high prices are tightly tied to supply issues – goods not coming through to manufacturers or retailers in a predictable way, and global markets not able to react quickly enough to changing tastes of consumers.

… A singular focus on inflation could lead to a ratcheting up of interest rates at a time when Canada [and the U.S.] should be increasing its ability to produce more goods, and supplying retailers and consumers alike with what they need.

Rather than a reduction in demand, we need more supply available locally; and to fund its production, credit-money needs to increase. When supply and demand increase together, prices remain stable, while GDP and incomes go up.

So argues UK Prof. Richard Werner, a German-born economist who invented the term “quantitative easing” (QE) when he was working in Japan in the 1990s. Japanese banks had pumped up demand for housing, driving up prices to unsustainable levels, until the market inevitably crashed and took the economy down with it. The QE that Werner prescribed was not the asset-inflating money creation we see today. Rather, he recommended increasing GDP by driving money into the real, productive economy; and that is what he recommends for today’s economic crisis.

How to Fund Local Production

SMES make up around 97-99% of the private sector of almost every economy globally. Despite massive losses from the pandemic lockdowns, in the U.S. there were still 30.7 million small businesses reported in December 2020. Small companies account for 64 percent of new U.S. jobs; yet in most U.S. manufacturing sectors, productivity growth is substantially below the standards set by Germany, and many U.S. SMEs are not productive enough to compete with the cost advantages of Chinese and other low-wage competitors. Why?

Werner observes that Germany exports nearly as much as China does, although the German population is a mere 6% of China’s. The Chinese also have low-wage advantages. How can German small firms compete when U.S. firms cannot? Werner credits Germany’s 1,500 not-for-profit/community banks, the largest number in the world. Seventy percent of German deposits are with these local banks – 26.6% with cooperative banks and 42.9% with publicly-owned savings banks called Sparkassen, which are legally limited to lending in their own communities. Together these local banks do over 90% of SME lending. Germany has more than ten times as many banks engaged in SME lending as the UK, and German SMEs are world market leaders in many industries.

Small banks lend to small companies, while large banks lend to large companies – and to large-scale financial speculators. German community banks were not affected by the 2008 crisis, says Werner, so they were able to increase SME lending after 2008; and as a result, there was no German recession and no increase in unemployment.

China’s success, too, Werner attributes to its large network of community banks. Under Mao, China had a single centralized national banking system. In 1982, guided by Deng Xiaoping, China reformed its money system and introduced thousands of commercial banks, including hundreds of cooperative banks. Decades of double-digit growth followed. “Window guidance” was also used: harmful bank credit creation for asset transactions and consumption were suppressed, while productive credit was encouraged.

Werner’s recommendations for today’s economic conditions are to reform the money system by: banning bank credit for transactions that don’t contribute to GDP; creating a network of many small community banks lending for productive purposes, returning all gains to the community; and making bank behavior transparent, accountable and sustainable. He is chairman of the board of Hampshire Community Bank, launched just this year, which lays out the model. It includes no bonus payments to staff, only ordinary modest salaries; credit advanced mainly to SMEs and for housing construction (buy-to-build mortgages); and ownership by a local charity for the benefit of the people in the county, with half the votes in the hands of the local authorities and universities that are its investors.

Public Banking in the United States: North Dakota’s Success

That model – cut out the middlemen and operationalize community banks to create credit for local production – also underlies the success of the century-old Bank of North Dakota (BND), the only state-owned U.S. bank in existence. North Dakota is also the only state to have escaped the 2008-09 recession, having a state budget that never dropped into the red. The state has nearly six times as many local banks per capita as the country overall. The BND does not compete with these community banks but partners with them, a very productive arrangement for all parties.

In 2014, the Wall Street Journal published an article stating that the BND was more profitable even than JPMorgan Chase and Goldman Sachs. The author credited North Dakota’s oil boom, but the boom turned into a bust that very year, yet the BND continued to report record profits. It has averaged a 20% return on equity over the last 19 years, far exceeding the ROI of JPMorgan Chase and Wells Fargo, where state governments typically place their deposits.  According to its 2020 annual report, in 2019 the BND had completed 16 years of record-breaking profits.

Its 2020 ROI of 15%, while not quite as good, was still stellar considering the economic crisis hitting the nation that year. The BND had the largest percentage of Payroll Protection Plan recipients per capita of any state; it tripled its loans for the commercial and agricultural sectors in 2020; and it lowered its fixed interest rate on student loans by 1%, saving borrowers an average of $6,400 over the life of the loan. The BND closed 2020 with $7.7 billion in assets.

Why is the BND so profitable, then, if not due to oil? Its business model allows it to have much lower costs than other banks. It has no private investors skimming off short-term profits, no high paid executives, no need to advertise, and, until recently, it had only one branch, now expanded to two. By law, all of the state’s revenues are deposited in the BND. It partners with local banks on loans, helping with capitalization, liquidity and regulations. The BND’s savings are returned to the state or passed on to local borrowers in the form of lower interest rates.

What the Fed Could Do Now

The BND and Sparkassen banks are great public banking models, but implementing them takes time, and the Fed is under pressure to deal with an inflation crisis right now. Prof. Werner worries about centralization and thinks we don’t need central banks at all; but as long as we have them, we might as well put them to use serving the Main Street economy.

In September 2020, Saqib Bhatti and Brittany Alston of the Action Center on Race and the Economy proposed a plan for stimulating local production that could be implemented by the Fed immediately. It could make interest-free loans directly to state and local governments for productive purposes. To better fit with prevailing Fed policies, perhaps it could make 0.25% loans, as it now makes to private banks through its discount window and to repo market investors through its standing repo facility.

They noted that interest payments on municipal debt transfer more than $160 billion every year from taxpayers to wealthy investors and banks on Wall Street. These funds could be put to more productive public use if the Federal Reserve were to make long-term zero-cost loans available to all U.S. state and local governments and government agencies. With that money, they could refinance old debts and take out loans for new long-term capital infrastructure projects, while canceling nearly all of their existing interest payments. Interest and fees typically make up 50% of the cost of infrastructure. Dropping the interest rate nearly to zero could stimulate a boom in those desperately needed projects. The American Society of Civil Engineers (ASCE) estimates in its 2021 report that $6.1 trillion is needed just to repair our nation’s infrastructure.

As for the risk that state and local governments might not pay back their debts, Bhatti and Alston contend that it is virtually nonexistent. States are not legally allowed to default, and about half the states do not permit their cities to file for bankruptcy. The authors write:

According to Moody’s Investors Service, the cumulative ten-year default rate for municipal bonds between 1970 and 2019 was just 0.16%, compared with 10.17% for corporate bonds, meaning corporate bonds were a whopping 63 times more likely to default. …[M]unicipal bonds as a whole were safer investment than the safest 3% of corporate bonds. … US municipal bonds are extremely safe investments, and the interest rates that most state and local government borrowers are forced to pay are unjustifiably high.

… The major rating agencies have a long history of using credit ratings to push an austerity agenda and demand cuts to public services …. Moreover, they discriminate against municipal borrowers by giving them lower credit ratings than corporations that are significantly more likely to default.

… [T]he same banks that are major bond underwriters also have a record of collusion and bid-rigging in the municipal bond market. … Several banks, including JPMorgan Chase and Citigroup, have pleaded guilty to criminal charges and paid billions in fines to financial regulators.

… There is no reason for banks and bondholders to be able to profit from this basic piece of infrastructure if the Federal Reserve could do it for free. [Citations omitted.]

To ensure repayment and discourage overborrowing, say Bhatti and Alston, the Fed could adopt regulations such as requiring any borrower that misses a payment to levy an automatic tax on residents above a certain income threshold. Borrowing limits could also be put in place. Politicization of loans could be avoided by making loans available indiscriminately to all public borrowers within their borrowing limits. Another possibility might be to mediate the loans through a National Infrastructure Bank, as proposed in HR 3339.

All of this could be done without new legislation. The Federal Reserve has statutory authority under the Federal Reserve Act to lend to municipal borrowers for a period of up to six months. It could just agree to roll over these loans for a fixed period of years. Bhatti and Alston observe that under the 2020 CARES Act, the Fed was given permission to make up to $500 billion in indefinite, long-term loans to municipal borrowers, but it failed to act on that authority to the extent allowed. Loans were limited to no more than three years, and the interest rate charged was so high that most municipal borrowers could get lower rates on the open municipal bond market.

Private corporations, which the authors show are 63 times more likely to default, were offered much more generous terms on corporate debt; and 330 corporations took the offer, versus only two municipal takers through the Municipal Liquidity Facility. The federal government also made $10.4 trillion in bailouts and backstops available to the financial sector after the 2008 financial crisis, a sum that is 2.5 times the size of the entire U.S. municipal bond market.

Stoking the Fire with Credit for Local Production

Playing with matches that could trigger a $30 trillion debt bomb is obviously something the Fed should try to avoid. Prof. Werner would probably argue that its policy mistake, like Japan’s in the 1980s, has been to inject credit so that it has gone into speculative assets, inflating asset prices. The Fed’s liquidity fire hose needs to be directed at local production. This can be done through local community or public banks, or by making near-zero interest loans to state and local governments, perhaps mediated through a National Infrastructure Bank.

This article was first posted on ScheerPost.

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com.