“Doubtful it stood, as two spent swimmers that do cling together, and choke their art.”
–Shakespeare, “Macbeth”

 The Greek bailout was supposed to be an isolated case, a test of the EU’s ability to quarantine an infected member, preventing it from spreading “debt contagion.”

But that was before Ireland failed. Ireland was the poster child for how to conduct a successful austerity program. Unlike the Greeks, who were considered profligate spendthrifts, the Irish did everything their creditors asked. The people sacrificed to pay for the excesses of their banks, but still the effort failed. Ireland was the second domino to fall to an IMF/EU bailout. On December 17, Moody’s Investors Service rewarded it for voting to accept the “rescue” package with a five-notch credit downgrade, from AA2 to BAA1, with warnings that further downgrades could follow.

Spain is rumored to be the next domino poised to fall. If it falls, it could bring down the EU.

A Design Flaw in the Euro Scheme?

Richard Douthwaite is co-founder of an Irish-based economic think tank called FEASTA (the Foundation for the Economics of Sustainability). He reports that the collective deficit of eurozone countries was a very acceptable 1.9% in 2008. It shot up to 6.3%, exceeding the cap imposed on EU members (3% of GDP), only in 2009. This spike was not due to a sudden surge in government spending. It was due to the global financial crisis, which shrank the money supply globally. Douthwaite writes:

[A] shrinking money supply means shrinking business profits simply because there is less money available to appear in corporate accounts at the end of the year. This means less tax is paid.

When taxes go down, revenues go down; but budgets don’t.

In an article called “Understanding Modern Monetary Systems,” Cullen Roche explains that the Euro system is the modern equivalent of the gold standard. Both are “revenue constrained.” Countries on these restrictive systems cannot expand their revenues because there is nowhere to get the money. They cannot get more Euros except by borrowing from each other, and all the member countries are in debt. In June 2010, 26 of 27 EU countries – all but Luxembourg — were on the “debt watch list” for exceeding the 3% cap. Euros can get shuffled around to keep the game going; but in the end, as Shakespeare said, the eurozone countries are “as two spent swimmers that do cling together,” pulling each other down.

Douthwaite writes:

[I]ndividual eurozone countries [cannot] create money out of nothing by quantitative easing. Only the European Central Bank has that power but it has not yet used it to inject money into the system without withdrawing an equal amount. Consequently, every cent in use in eurozone economies has to have been borrowed by someone somewhere, at home or overseas. As a result, while countries with their own currencies can handle a debt-to-GDP ratio of over 100% because they have the tools to do so (Japan’s is approaching 200%), countries using a shared currency must keep well below that figure unless they can agree that their shared central bank should use its interest rate, exchange rate and money creation tools in the way that a single country would.

Roche comments:

The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed.

By a “single currency system,” Roche means multiple nations sharing a single currency (whether Euros or gold). Governments need the ability to expand their own money supplies as required to meet the needs of their own economies. Without that flexibility, they are reduced to trying to balance their budgets through brutal austerity measures. In a November 19th article in the UK Guardian called “There Is Another Way for Bullied Ireland,” Mark Weisbrot observed:

The European authorities could . . . allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF . . . calls an “internal devaluation”. This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs. . . .

Aside from huge social costs and economic waste involved in such a strategy, it’s tough to think of examples where it has actually worked. . . .

If you want to see how rightwing and 19th-century-brutal the European authorities are being, just compare them to Ben Bernanke, the Republican chair of the US Federal Reserve. He recently initiated a second round of “quantitative easing”, or creating money – another $600bn dollars over the next six months. And . . . he made it clear that the purpose of such money creation was so that the federal government could use it for another round of fiscal stimulus. The ECB could do something similar — if not for its rightist ideology and politics.

Deficit Easing

For Ireland, Douthwaite recommends a modified form of quantitative easing he calls “deficit easing.” He explains:

Both approaches involve central banks creating money. With quantitative easing, the new money is generally used to buy securities from the banking system, thus providing the banks with more money to lend. Unfortunately that is where problems have been arising in the US and the UK. Because the public has been unwilling to borrow, or the banks have been unwilling to lend, quantitative easing has not increased the supply of money in circulation in the US, where M3 began to decline in the second half of 2009 and was still falling a year later. . . .

Deficit-easing avoids this ‘won’t-borrow-won’t-lend’ bottleneck by giving the new money to governments to spend into use, or to pass on to their citizens to reduce their own debts or to invest in approved ways.

The U.S. Federal Reserve may be considering a similar approach. So says Professor David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, who stated on October 18 that he had been at the Fed in Washington for one of its occasional meetings with academics.

“Quantitative easing remains the only economic show in town,” he said, “given that Congress and President Barack Obama have been cowed into inaction.”

What will the Fed buy with its quantitative easing tool?

They are limited to only federally insured paper,” said Blanchflower, “which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing.”

The Fed could buy short-term municipal bonds from the states, easing the states’ budget crises. It could set up a facility for bailing out the states at very low interest rates, along the lines of those facilities set up to bail out the Wall Street banks.

A similar plan might be pursued in the eurozone. The European Central Bank (ECB) has already engaged in something equivalent to “quantitative easing.” In a post titled “ECB credit easing by buying debt from Greece and Spain analogous to Fed buying California and Illinois munis,” Ed Harrison remarks:

When the European experiment threatened to unravel, the ECB chose the nuclear option and stepped into the breach to start buying up the debt of its weakest debtor states. Now, the ECB claims these actions are unsterilized i.e. it is not just printing money. But I have my doubts. In any event, the ECB is the New “United States of Europe” as Marshall Auerback puts it.

Douthwaite adds:

The neatest solution would be for the European Central Bank to create money and to give it (rather than lend it) to governments in proportion to their populations. This would allow further public spending cuts to be avoided and, in countries with relatively small budget deficits, national debts to be reduced.

Printing Euros and giving them rather than lending them to the member countries would be akin to the “Greenback solution” – simply allowing governments to issue the money they needed directly, interest-free and debt-free. As Thomas Edison observed:

If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way.

To avoid inflating prices when the economy reaches full employment, the money could be taxed back to the government or returned as user fees for public services.

Restoring Credit with a Publicly-owned Bank: The Model of the Bank of North Dakota

There is another possible solution to this dilemma. Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy.

Only one U.S. state actually owns its own bank – North Dakota. As of last spring, North Dakota was also the only U.S. state sporting a budget surplus. It has the lowest unemployment rate in the country and the lowest default rate on loans. North Dakota has effectively escaped the credit crisis.

The Bank of North Dakota (BND) is a major profit generator for the state, returning a 26% dividend in 2008. The BND was set up as “North Dakota doing business as the Bank of North Dakota,” making the assets of the state the assets of the bank. The BND also has a captive deposit base. By law, all of North Dakota’s revenues are deposited in the BND. Municipal government and private deposits are also taken. Today, the BND has $4,000 in deposits per capita, and outstanding loans of roughly the same amount.

Extrapolating those figures to Ireland’s population of 4.2 million, a publicly-owned Irish banking system might generate credit of $16.8 billion. That would be enough to fund most of Ireland’s deficit of 14.4 billion Euros (19.6 billion USD), and this money would effectively be interest-free, since the government-owned bank would return its profits to the state. Funding through its own bank would remove most of Ireland’s deficit from the private bond market, which is highly vulnerable to manipulation, speculation and crippling downgrades.

Alternatively, this bank credit for building sustainable infrastructure and putting people back to work.

Governments everywhere are artificially constrained by having to borrow at market interest rates, which means whatever interest banks can extract. Governments can throw off the shackles of this scheme, in which private banks create the national money supply and lend it at interest, by forming publicly-owned banks. These banks can then advance the credit of the nation to the nation, interest-free. And if this credit is advanced against future productivity, prices will not inflate. Supply (goods and services) will rise along with demand (money), keeping prices stable.


Ellen is an attorney and the author of eleven books. In Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, she shows how the Federal Reserve and “the money trust” have usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are,, and

23 Responses

  1. I have tried to post this comment at Huffington Post without success:

    “One doesn’t hear much about Iceland’s solution to the financial crisis. I wonder why? The people of Iceland decided to let the bankers go hang themselves at their own little bondholder picnic in hell. And guess what? The Iceland economy began to grow again in the last quarter without any need for quantitati­ve easing, which has so far in the US benefited only the financial players who created this mess in the first place. It has been a bail out of the financial rogues, considerab­ly easing their distress over their lack of quantities of money. We shall see if the Wizard Bernanke will choose to ease the distress of the states over their lack of quantities of money. And, in the end, what will we have?

    Best case scenario is that we will have pretty much what we had before fecal matter encountere­d the fan. And that’s why we need to listen to what the bird is singing, the bird being Ellen Brown. The tune: public banking.

    If this financial crisis is resolved without some fundamenta­l reform, then we have lost the true opportunit­y this crisis offered, and we will go sailing obliviousl­y into the next financial storm. The next one will be a perfect storm. This has been decreed by the gods of common sense. ”

    Now, is this comment offensive, Ellen?

    • I’d like to know more details about what happened in Iceland. Can you recommend any good links?

      The only offensive part is that Iceland is, as far as I know, the only country that has allowed the banks to realize the risk that they will happily charge a “risk premium” for. I still can’t buy the rhetoric that failing banks will throw an economy into turmoil. It must be the other way around: a tumultuous economy will cause banks to fail. Let ’em fail and lets get on with it.

      • Birch, no doubt that the incestuous interconnections of the big players would have brought the system down. The terror of the situation for them was the potential loss of control which they ( the oligarchs ) have maintained in this country since its inception. Unlike the Icelanders, the American people, middle class and up, are tied into the speculative casino. Iceland is small and the speculative class rather isolated so that their failure was not the “two spent swimmers” scenario for them as it would have been here.

  2. This all seems like the fable of “The Emperors New Clothes” Somehow the general public have been bamboozled into accepting austerity as necessary. It is only necessary to protect the wealth of those who have lent money to the bankrupt governments and banks. These are the very ones who deserve to lose out on the poor lending decisions they have made.
    Go Iceland.

  3. We once had 2 state banks in Ireland – the Agricultural and Industrial credit corporation.
    I had advocated the creation of a new infrastructural bank using our surplus state pension fund as a deposit base and therefore reducing the fiscal spend on all state investment projects but unfortunately the ECB,IMF deal has insured that most of these funds get sucked into recapitalising black holes – I am now really concerned that the state equity pumped into these dead institutions will be junior to the ECB purchases and the remaining senior private bonds when the inevitable collapse happens.
    I believe the ECB has a policey of superiority of Bank bonds over “sovergin” debt as they have now exchanged cash to banks to pay bonds off and prevent rollover- they have received mortgage collateral in return – this shows up in the asset side of their balance sheet. I believe they now have 135 billion of irish crap while the irish central bank has bought 40 billion + while the total purchase of goverment bonds is in the region of 70 billion for all of Europe !
    The limiting mechanism for Euro monetory inflation seems to be the price of Gold which appears on its asset side of its balance sheet , also the mechanisms used for cash injection for banks in exchange for collateral are also on their assets , obviously Euro cash and other liabilties are on the other side.
    If the ECB wants to reliquify its host economies then it needs to buy or bid up the price of euro gold and therefore be in a postion to take a hit on assets purchased and extend more cash into the system.

  4. The lesson of the BND is so dramatic;I’m happy to see it in another article. It needs to be emphasized and emphasized until people finally get it.

  5. Another possibility for community banking is the JAK interest free banking model pioneered in Sweden. I first read about it in the book, Short Circuit by Richard Douthwaite. It was quite an eye opener in 2004 and it still is today.

    An overview of the JAK banking model can be found at:

    • Thanks for the link, 777. While Christmas dinner is cooking, this is a pleasant appetizer. If there is sufficient savings in a group of people, the JAK model seems like a good system of cooperative finance. But it is only for those who have savings, isn’t it?. It does not seem to offer a way out for those caught in the web of debt. But, as the writer says, it has the potential for being part of broader financial reform. Strictly speaking, the JAK substitutes annual user fees in the place of interest charges, which could be figured as minuscule interest charges on the total of all loans made……the larger the number of JAK members, the lower these fees would be, since the operating cost of the system would be relatively stable.

  6. Nice article. I have just one question for you. Richard Koo, chief economist of Japan’s largest consulting firm, explains that we are in a “balance sheet recession” and that no amount of liquidity injection by the Fed will get the economy back on its feet because over-leveraged business and households are paying off their debts to correct their balance sheets. So although the banks (state or commercial) have greater reserves of cash to lend as a result of quantitative easing, few businesses and households will actually be willing to take on new debts. Given his experience during the Japanese lost decade, what do you think about his thoughts?

    Thanks and keep up the great work.

    • Thanks! I’ve been out of town and slow to respond to these. Japan was originally advised to aim their “quantitative easing” directly at productive enterprises, but instead they beefed up the banks, which then failed to lend for the reasons you’ve stated. QE1 had the same effect. QE2 is more promising, since the money at least goes to the federal government for its deficit. Better yet would be to fund municipal bonds, but it looks like that won’t happen.

  7. J.D., you are correct. The JAK system does include fees. An examination of how those fees differ from interest can be found here:

    The JAK banking model does not offer an immediate way out for those caught in the web of debt. The web of debt is based on policy decisions by businesses and governments. These two sectors are in the final stages of integrating into one sector that considers the opinions of citizens irrelevant. For that to change would require either revolution or evolution.

    I prefer evolution. In a 1995 book by Margrit Kennedy, Interest and Inflation Free Money, ( Kennedy ends her book with how to evolve or transition into a monetary system that takes into account the needs of disparate groups: the poor, the rich, women, farmers and the natural world itself.

    This evolution will take time. After all, the current system was built up over the course of decades. It will take decades to replace it with a system that is more equitable. There are steps that can be taken over the next five years to lay the foundation for deep change.
    State banks, Local Exchange Trading (LET) Systems, Insurance Cooperatives and Community Land Trusts could all be a part of the mix. We have to start somewhere. Perhaps the deepening pain of our concurrent crises will provide the impetus we need.

  8. The JAK bank sounds like an amazing way to save up for starting a small business. I hope it catches on an spreads.

    I like the other Feasta idea: Cap and Share. Way to combine carbon emission reduction and equitable wealth re-distribution

  9. ELLEN BROWN on the Keiser Report with MAX and Stacey Herbert on RT recently shows that people around the world want to know more about the American made crash of 2008. The case of the Bank of North Dakota is not included in WEB of Debt which provides some light into the cracks in the whole rotten facade . Ron Paul seems to be gaining momentum in his crusade to unwrap the mystery of the FED controlled by the former Wall Street investment bankers fraternity. Maybe 2011 will be the big test if GERMANY is prepared to carry the rest of EUROPE. That ungrateful lot….

  10. Ellen,
    According to this article Spain will not become another looted and privatized IMF austerity victim like Ireland:
    China and Spain: A brighter future through win-win cooperation

    I suspect that there are still many Spaniards alive today who remember all too well the fascist brutality and austerity of the Franco regime. Spaniards apparently aren’t accepting citizen suffrage for bankster gambling debts. The cult-like embrace of free-market profiteering is not their willing, ideological commitment. And of course, seeing decades of poor Latin American countries ravaged in the same manner to privatize pensions and natural resources didn’t go unnoticed by so many Spaniards who maintain some degree of kinship with their former colonies.

    Also, given that in 1957, Luxembourg – a tiny country with around 500K citizens became one of the six founding countries of the European Economic Community (later the European Union), it’s no small coincidence that it is the only EU country that isn’t in debt. As a global banking center, it profits from others’ debt obligations.

  11. […] Brown of Web of Debt blog writes on the eurozone crisis picking up on ‘Deficit Easing’ and some MMT links… She concludes with a novel […]

  12. Sat, January 8, 2011 3:49:23 PMFw: states need to issue their own currency
    From: Randy Newland View Contact


    Subject: states must create and issue their own money
    the only fix is to abolish the illegal federal reserve banksters money monopoly and it can be done without an E.O. or a Congressional vote..
    the 49 statwes must establish a state/ national honest money system similar to N.Dakota’s
    where unemployment is 3% and the state controls,issues,and creates their own money/currency
    the fix is so simple it really boggles the mind..
    we absolutely must get back control of OUR money/currency
    state by state by state
    scew the fed and the criminal politicians in the Washington D. C. district of criminals..

    all the individual 49 states[minus N.Dakota] must do is create their own currency/money which they CAN LEGALLY do based on each states individual constitution..
    yes…every state has their own constitution and CAN ISSUE,CONTROL,and create their own state currency..
    it doesn’t even need be backed by anything..
    lend the money out at 2% interest and put the interest payments right back into the states coffers, just as N’Dakota is doing to pay for social programs,road repair,Medicaid,food stamps…etc ,etc ,etc..

    as the states return to prosparity,the outflow of money for social programs will slow down drastically as good new jobs return, and new factories are built as we modernize our manufacturing and goods/products into the 21st century..America doesn’t need one dam thing from the 3rd world!

    PROSPARITY can be returned to every single state and the Federal reserve will wither away on its own..
    the fed doesn’t even have to be abolished with an executive order or by a Congressional vote
    we the people simply stop using the non-federal no-reserves parasitic conterfeit debt notes as the new state issued currency becomes available.. its so simple a 5 year old could do it..

    there is 6,500,000,000 of us on the planet..
    and 100,000 of the master elite..maybe
    you one of the 100,000 elite?
    chances are 60,000 to 1 YOU ARE NOT!
    that means you and your children and your childrens chilren[if the NWO lets you survive as they plan on elimination 6 billion of us] will be a slave
    in the elites new world order/one world government/one world religon/one world leader L hole they are putting in place at this very moment..

    and another incredible plus to the states controlling their own currencies is
    inflation will be a thing of the past,
    just as it was from 1800-1913 when there was ZERO inflation..

    • The U.S. Constitution prohibits the states from issuing their own currencies – unfortunately…

      Short of real monetary reform, the next best thing is to copy North Dakota’s model for a state owned bank. This would let those states issue U.S. Dollars the same way as the banks do. It would take a large chunk of the private profit from the big banks and return it to the states, allowing everyone to benefit.

      • Agree about Bank of North Dakota. I had a very unexpected need to drive back and forth the length of ND in early 2008, before the global financial crisis. I was astonished at the bustling and obvious recent prosperity of a state that still was being called a ghost town that people fled from. If one understands banking, the extent modern economies leave this state function in private hands seems absurd.

        There is one more thing that can and should be done. States could issue financial instruments like California IOUs which could be used by the bearer to extinguish their tax liabilities.

        With the current crazy ideas of what money is, this might pass the courts’ constitutional muster, and to all intents and purposes the states would be issuing their own dollars.

        If the courts ruled the other way, then there would be a legal ruling that dollars are nothing but tax credits – which should be seen as a win too in the long run.

        • I recall reading an article about someone trying to challenge the constitutionality of those IOUs. I never saw a followup article, so I don’t know what happened.

  13. Great blog here! Also your web site loads up very fast! What web host are you using? Can I get your affiliate link to your host? I wish my site loaded up as fast as yours lol.

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