From State Debt to State Money: The Bank Reform

January 24th, 2012
in Op Ed

by Guest Author Rudo de Ruijter, Court

[Note:  This is Part 2 of yesterday's post From State Debt to State Money: Today's Money System which described how monetary systems work.]

The solution is simple. Instead of pouring dozens of billions more into a Euro that is doomed to disappear sooner or later and instead of letting us prescribe cuts in public spending by the undemocratic European Commission and the ECB, we can introduce state money, also called public money. (This is NOT the same thing as the money we used to have before the Euro! That would not solve our problems!)

Technically this can be done rather simply. Instead of today's central bank, a new central bank will be established, that is to say, a central bank of the state. It will fall under the responsibility of the Ministry of Finance and be controlled by the Parliament. A commission of well formed people will watch over the long term interests of the money system.

Follow up:

This state bank will be the only bank authorized to create money. All loans will be supplied in state money, be it in electronic form or in cash. It will be prohibited for commercial banks and financial institutions to create balances out of thin air. All new balances must be fully backed by state money. Today's banks stay responsible for the loans in Euros they have outstanding at the moment of the reform. As far as they wish, they can become middlemen between the state bank and the public for the supply of loans and they can manage the customers' accounts in name of the state bank. In this case nothing changes for the public in their existing accounts. The balances in Euros will be transformed 1:1 to state money. As middlemen the banks don't receive interest but a fee for their services.

Emission of state money

The emission of state money delivers a comparable amount of Euros. These can be kept by the state bank for the payment of debts and also as enormous strategic reserve. I think it is not unthinkable that at some point of time the new state money will be attacked on the exchange markets. We would be about the only country in the world with its own state money and the mighty private bankers will not gratefully accept that.

No spending cuts

The motive for today's spending cuts are the gigantic loans that the IMF, the EC and the ECB have mischievously loaded on Greece, while the country was already struggling with severe debts. It was foreseeable that after the seizure of power of the IMF, the EC and the ECB the loans would be declared unrecoverable and that the losses would be loaded on the eurocitizens in other countries.

Not so long ago the rescue funds EFSF had a lending capacity of 440 billion Euros. That was an average of 1320 Euros per eurocitizen. On 27 October 2011 250 billions were left, when the heads of state of the euro-countries made one trillion (1,000 billions) out of it, thanks to a bookkeeping trick. (Yes indeed, the thin air formula.) Of course we are now guarantors for these 1,000 billion Euros, or to put it otherwise, an average of 3,300 Euros for each and every eurocitizen. When the following emergency funds, the ESM, will get ratified by the national parliaments, an additional obligation comes on top of it of 700 billion Euros (2,100 Euros per euro-citizen). Subsequently, this ESM funds can be raised indefinitely without the approval of the national parliaments.

So the motive for the spending cuts doesn't lay in the national situations of the euro-countries. Of course, each country has its particular problems that ask for appropriate measures, but that does not necessarily mean we would have to give up our government and our social, cultural and other achievements.


Let us end the Euro, end the EU and end the spending cuts.

Pension funds

You can save money during your entire life for your pension, but what you can do with it greatly depends on the situation at that moment. Already before 1980 it was obvious that around 2015 a huge grey wave would arrive of people of 65 years and older, that would be faced by an ever decreasing portion of working people. Pension funds have made the premium payers believe, they would receive a value guaranteed pension, something they should never have promised with this predictable situation.

The last generation of pension receivers, by the favorable relation between a big working population and relatively few pensioned people, could be paid directly out of the collected premiums from the working people. That time is over.

Pension funds often have a portion of the paid in premiums invested in state obligations. So in fact, part of the pensions is already paid by the government with our tax money. Another part of the pensions comes from the income from foreign investments. To say it otherwise, from the profits of companies elsewhere in the world. To say it still otherwise, from the fact that workers elsewhere in the world execute part of their work to pay our pensions. So, a kind of financial colonialism.

Personally I would rather prefer we take care of ourselves and our elderly. In my opinion we have enough room for that, when, progressively we direct our economy towards sustainability and cooperation, in stead of competition and financial profitability.

Cheaper money system

The state money system can function much less expensively than the private money system we now have. In the first place all interest goes to the Treasury for the benefit of the population. Also, the interest can stay lower, because the state bank does not need to make benefits. (No fat salaries for financial boys, no bonuses, no expensive building up of capital.)

The state bank does not need a separate capital, because all money belongs to the community. In fact we, together, guarantee the value of our money. Defaults of payment can be treated the same way as tax debts.

Permanent money

At the moment all money in circulation consists of loans that must be replaced by new ones all the time. However, the state bank can decide to leave a part of all money in circulation permanently, to lower the need for loans. (This should be accompanied by appropriate fiscal measures.) In the new system the government can very easily create a portion of permanent money by spending an amount of money (=bring money into circulation) without levying the corresponding taxes.


The state money system, by itself, has no need for inflation. It can even continue to work perfectly in times of deflation. Borrowers will no longer know the relative advantage of the decrease of value of the installments. By contrast, the cost of interest can always be lower and for democratically wished investments that can even stay nil. (And if a low interest rate causes trouble in the international context, the cost of interest can be partly or completely compensated fiscally.)

State debt

Today's state debt comes from state expenses for which no taxes have/had been levied in advance. This state debt can be ended in the shortest possible way with newly created state money. That stops the interest payments. After that, the concept of state debt can go into the waste bin, because the state, when needed can simply use its own bank. For budget excesses the allowed cases and limits can be described, as well as conditions for exceptions, for which we can think of a requirement of 2/3 chamber majority. The rules can be anchored within the constitution.

Democratic influence

The decreased influence of bankers on the shaping of the society will open more room for democratic influence. That offers the possibility to engage in a transition towards a sustainable society. Information, involvement and dictate by citizens will be of high importance to succeed. I think this may need improved democratic structures.


The European Union, daily, offers a lot of ease in the international trade. But isn't the price getting too high? Do we want to exchange our sovereign democracies against the dictatorial rule of the European Commission that wants to cut to the bone all achievements and transform the whole society into a financial playground? Personally, I think these eases are paid way too dear then.

The cooperation with European partners will not stop when we step out of the EU. Real cooperation is based on trade, industry and tourism and on everything that serves mutual interest.

Link to original article:


Notes and references:


On 25 October 2011, in the Dutch talk show of Pauw en Witteman, Sunny Bergman was resolutely silenced by Ewald Engelen, who presents himself as financial-geologist and came to highlight the cisis-story from the mainstream point of view. After EE has presented the desaster tersely, Sunny Bergman notes: "But it is also correct to question the economic growth model by itself." EE, as if he were bitten by a dog: "Yes, that is a very pleasant, luxurious position. We really should do that. At the moment you drive in a very pleasant nice car" - SB: "I don't have a nice car" - EE: "No, okay, and you can buy tasteful food at Market, but for very many other people this is just an exercise that doesn't occur in their image of the world." (And thus, in particular, not in the image of the world of this Ewald himself.)

[2] In the studies about optimum currency areas we can distinguish those focusing on the needed conditions and those from after 1970 (when politicians had decided they wanted a single currency in Europe) focusing on cost and benefits.


“It is possible to distinguish two major streams of the optimum currency area literature. The first stream tries to find the crucial economic characteristics to determine where the (illusionary) borders for exchange rates should be drawn (1960s-1970s). The second stream (1970s-till now) assumes that any single country fulfills completely the requirements to make it an optimal member of a monetary union. As a result, the second approach does not continue in the search for characteristics, identified as important for choosing the participants in an optimum currency area. This literature focuses on studying the costs and the benefits to a country intending to participate in a currency area.”
, page 7.

Friedman put forward the advantages of flexible exchange rates between countries as follows: As it is commonly observed, the country’s prices and wages are relatively rigid and factors are immobile among the countries. As a result, under the negative demand or supply shock the only instrument to avoid higher inflation or unemployment is the change in the flexible exchange rate (that means appreciation or depreciation of the currency). This brings the economy back to the initial external and internal equilibrium. (...) Under the fixed exchange rate regime there would always be the unpleasant impact on unemployment or inflation.
, page 8.

[3] Yrd. Doç. Dr. Hüseyin Mualla YÜCEOL, Mersin Üniversitesi İktisadi ve İdari Bilimler Fakültesi, Maliye Bölümü, in “WHY THE EUROPEAN UNION IS NOT AN OPTIMAL CURRENCY AREA: THE LIMITS OF INTEGRATION”

Europe is not an optimal currency area. Although, On January 1, 1999, 11 EU countries initiated an EMU by adopting common currency, the euro, the EU does not appear to satisfy all of the criteria for an optimum currency area. Then, joining the EU is not identical with joining the euro for both old members and new members., page 66

[4] Paul de Grauwe, excerpts of  speech

“With up to twenty-seven members instead of the present twelve, the challenge for ensuring a smooth functioning of the enlarged Eurozone will be daunting. The reason is that in such a large group the probability of what economists call ‘asymmetric shocks’ will increase significantly. This means that some countries may experience a boom and inflationary pressures while others experience deflationary forces. If too many asymmetric shocks occur, the ECB will be paralyzed, not knowing whether to increase or to reduce the interest rates. As a result, member countries will often feel frustrated with the ECB policies that do not (and cannot) take into account the different economic conditions of the individual member countries. This leads us to the question whether the enlarged EMU will, in fact, be an optimal currency area.” (...)

“If a country is hit by negative shocks brought about by agglomeration effects, the wage cuts necessary to deal with these shocks will inevitably be very large. To give an example: If Ford Motor were to close down a plant in Belgium and to invest in Poland instead, the wage cut of Belgian workers that would convince Ford Motor not to make this move would have to be 50% or more given that the wage not feasible, then flexibility dictates that the Belgian workers be willing to move.”


ESM, the new European dictator! (article)

ESM, the new European dictator!  (video, 3:50)

ESM, a coup d'état in 17 countries!


About the Author

Rudo de Ruijter is an independent researcher from the Netherlands and creator of the multi-lingual informational website

Court Fool is an online publication with a fresh perspective and a mission to uncover truths behind many of today's important global events.

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1 comment

  1. Derryl Hermanutz says :

    Rudo has described the virtuous arithmetic that becomes possible when banker debt-money is replaced by government fiat money. I agree completely with the desirability of such a reform. It's probably politically impossible, as the existing money power controls the monetary, political, and industrial systems as well as the mass media and pretty much every major organ of power, except the internet, which is why we can still publish and discuss our heretical and seditious monetary reform ideas online. It is still possible that an awakened democratic majority can seize political power from the money masters and implement monetary reform, so the cause is not completely hopeless, though economic misery probably has to get much worse before people will be prepared to recognize the true source of the malignancy.

    One quibble: Rudo wrote,

    "The state money system, by itself, has no need for inflation. It can even continue to work perfectly in times of deflation. Borrowers will no longer know the relative advantage of the decrease of value of the installments."

    I agree that a state money system, unlike a for-profit banker money system, has no need for inflation. But a capitalist profit seeking economy does require constant increase in the money supply in order for producers to earn profits. Collectively, a nation's businesses pay out the nation's earned income (assuming balanced trade, no trade surplus to capture foreigners' money and add it to your domestic income stream). So the national income = the cost price of the national business output. But businesses have to sell their output at prices above cost in order to earn profits. So somebody has to add additional money into the final demand stream, whether it is consumer debtors like now who add to current demand by spending newly created banker money, or business debtors investing in new capital plant that adds current incomes without adding current goods for sale, or government deficit spending.

    In Rudo's public money scheme, the government could simply create the additional money and spend it into circulation. This would allow the economy as a whole to be "profitable", in money, which is the only kind of "profit" capitalist businesses are interested in earning. I.e. we don't produce goods for our own use. We produce goods and services exclusively "for sale", to get more money out of the economy selling our wares than we invested into the economy as our costs of production. We don't want "goods" in exchange for our products. We don't want to end up with more "goods". We want to end up with more "money". If we earn acceptable profits we will keep producing. If not, we will stop.

    Selling goods for more than they cost is "inflationary", so profit seeking capitalism is by definition inflationary, unless it is a zero sum competition where some producers earn profits only because other producers fail to even recover their costs. Governments can add debt-free public money into their economies to provide the possibility of systemic profitability, but we have to recognize that this will be inflationary, so savings of money will "spoil" and lose value just as savings of food and real commodities and goods in general deteriorate over time rather than magically 'gain' in value.

    The undiluted "virtue" of money saving is one of the moral values of a banker money system, where CPI deflation is desirable because it makes your money worth more in terms of economic goods. Tough luck for the producers. In a division of labor, trading economy where everything is bought and sold for money, money that is removed from the income-spending stream simply creates deflation, as that money was paid out as some business's "costs", and earned by some supplier or worker, and if it is not spent buying what the economy produces then businesses cannot recover their costs. Here again, governments can create and spend public money to replace the money lost to the income-spending stream by money savers.



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