The main reason that small business, including self-employed persons and farmers, find it difficult to remain in business is the lack of any bank financing suitable to small-business needs. Without financing, they cannot compete with big business, monopolies and multinational corporations, which are supported in a variety of ways, direct and indirect, by banks, universities, media, and government policies and subsidies [note 20-1].
Small business, in many instances, is unprofitable, if you rely upon annual income tax returns or profit and loss statements as in the case of most banks and other lending institutions. Of course, tax returns and financial statements generally fail to tell the whole story, and what may be breaking even from a tax or accounting standpoint may well be quite successful from the businessperson's standpoint, and provide a decent standard of living for the owner and employees of the business and their families.
Banks, meanwhile, rely upon financial statements of large and merging corporations, financial projections for unneeded shopping malls and tax-avoidance investments, trading schemes to leverage profits in financial markets, and global aspirations as to South American countries to lend their money, and rack up some of their greatest losses, which the U.S. taxpayer is repeatedly called upon to cover. There is an answer to this increasingly critical problem of financing for small business, and its is found in United States history.
This problem of lack of financing for small business dates back to at least the early or mid-1800's, when farmers were complaining about the lack of financing for their farming needs and a national farmers' movement began starting in 1877-78 (which later became known as the National Farmers' Alliance and then during the late 1880's became the Populist Movement).
What the Alliance and Populist Movement sought was a means of financing farmers which (i) would enable southern farmers to get away from the enslaving crop-lien system, and (ii) create independence from the national banks and eastern financial establishment, which devoted their efforts and capital to the financing of major corporations and government, but very little to the farmers.
The Alliance came up with its historic sub-treasury plan in which the right to create money would be given to the local sub-treasury against the deposit of harvested crops in a local federal warehouse (or sub-treasury) proposed to be built in most counties in the nation, and by-passing the requirement that new money be issued only against gold reserves. Farmers would be able to obtain money by borrowing up to 80% against the value of their deposited crops, or by selling their warehouse receipts for the crops. In this proposed way, there would be financing sufficient to finance the output of the farmers, without having to depend on the national banking system, which was controlled by the national banks and eastern financial establishment, or the hated crop-lien system in the south in which the advancing merchant advanced farmers' expenses and often wound up taking over the farmers' property for non-payment of the excessive and usurious loans.
There was no greater political revolt in the United States than this movement, but it failed, when the People's Party was fused with the Democratic Party during the 1896 election, with William Jennings Bryan as the fusion or joint nominee. Bryan is known for his cross of gold speech, which populists thought was really a double cross of their sub-treasury movement and aspirations. Bryan and the Democrats lost, McKinley and the Republicans won.
The lessons from this past era have been useful, however, because they point directly to something which can be done today by a DROPOUT COMMUNITY to provide needed financing to its small businesses. I call this a sub-treasury plan in honor of its predecessor, Alliance/Populist idea which during the 1890's came close to achieving success.
I'll explain what can be done today, in a DROPOUT COMMUNITY, to implement this new sub-treasury idea, to provide needed financing for small business. Then I'll discuss why the idea is now possible, and how this idea avoids the problems of the late 1890's when the sub-treasury plan failed, but in 1913 to some extent resulted in the creation of the present Federal Reserve Board [footnote 20-6].
Before going on to discuss this DROPOUT COMMUNITY financing program for small business, I want to summarize the Sub-Treasury plan: A local bank lending against a person's business or professional accounts receivable, up to a maximum of about 85-90%, secured by a daily or frequent assignment to the bank of the person's new accounts receivables, and further secured, possibly, by other assets of the person, by a small percentage (say 5%) of the receivables of all persons in the sub-treasury plan, and further secured by tax anticipation notes and a dedicated fund of the DROPOUT COMMUNITY; with the community providing at low cost the staff function of a collection agency to collect or arrange for the collection of overdue accounts receivables assigned to the bank. With enough volume and sufficient experience, one or more sub-treasury banks should be able to securitize the loans by packaging and reselling them to investors. The sub-treasury plan can be organized in a DROPOUT COMMUNITY by a single business or self-employed person, without any enabling legislation.
Here is how the sub-treasury can be implemented in a DROPOUT COMMUNITY without legislation, with the cooperation of the town and at least one local commercial bank: The sub-treasury plan pulls together local resources to make credit available to farmers, businesses and self-employed persons working from their homes, most of whom would not be able to obtain bank financing in a city of 5,000 population or above because of many factors, including the relatively small size of the loan; the bank's higher costs of servicing smaller loans; the higher loss problem; the failure of such loans to fit into any easy collateral or securitization programs; the higher cost of collection; and the greater amount of administrative time required by the lender for each loan dollar.
The sub-treasury bank lends money against accounts receivables, as revolving loan accounts, enabling the farmers, businesses and self-employed persons (each being a Debtor) to get paid on the same day that the job is done and the account receivable is created. Presently, many small businesses have to wait until the receivable is collected before they can spend the amount already earned and owed, which cripples the business in its efforts to expand and makes it difficult to finance normal, non-expanding operations as well.
The sub-treasury plan is an asset-based, revolving loan program and requires that the bank be properly secured by the Debtor (alone or with someone else) to make the lending bankable and avoid creating regulatory problems for the bank, such as impaired capital or insufficient net worth to support the bank's lending activities.
Debtors would borrow up to a certain percentage of the face amount of the receivable, such as up to 85% or 90% of the receivable, with the remaining 10% or 15% being a further safety factor for the sub-treasury bank.
To such extent, the following collateralization (with appropriate priorities) would or could be used, in such manner as agreed to by the bank, Debtor and town: (i) the assigned accounts receivable themselves, which is the primary asset for the loan; (ii) any real estate of the Debtor; (iii) stocks, bonds, or other marketable securities of the Debtor; (iv) any Debtor chattel mortgages or personal property assignments under the Uniform Commercial Code which are acceptable to the bank; (v) income or other tax refunds of the Debtor; (vi) security interest in the crops, inventory and equipment of the Debtor; (vii) a (cooperative) percentage of the security of the other Debtors, amounting to say 5% cross-collateralization with the other Debtors in the sub-treasury; (viii) local fund of the DROPOUT COMMUNITY set aside by voters for such purpose; (ix) tax anticipation notes of the DROPOUT COMMUNITY based on the DROPOUT COMMUNITY'S taxation of local real estate tax, with the approval of local voters; and (x) tax anticipation notes of the DROPOUT COMMUNITY based on the DROPOUT COMMUNITY'S taxation of local sales tax or other tax base, with the approval of local voters.
Appropriate software has to be designed (not a difficult task) for the local bank, the Debtor and the town (and any securitizing entity) to keep track of these security variables, to enable the bank to lend to the Debtor within the requirements of federal and state banking laws, and without having to obtain support from large financial center banks with whom the local bank corresponds. Large city banks are unable or unwilling to deal with the eclectic collection of assets available as loan security in a small town, which assortment will vary from town to town and Debtor to Debtor within a town. A person with database programming skills could create such a software system and program for the local bank to encourage the bank to participate in the sub-treasury plan. Anyone interested in learning about the availability of such software should contact the author first, at his New York, New York address, or the publisher of this book.
The Debtor may have to make a daily or weekly assignment of newly-created accounts receivable to the bank, to satisfy banking requirements which require more control over this type of lending asset to reduce the risks of fraud, and to meet bank regulatory requirements.
By reason of the new sub-treasury, the velocity or turnover of money in the town will grow dramatically, far faster than the national average, which will support faster expansion of the business activities for the members of the DROPOUT COMMUNITY.
An important feature of the sub-treasury is the DROPOUT COMMUNITY's collection agency department (another cooperative function). This agency is no more than one or more persons working for the DROPOUT COMMUNITY as a cooperative or shared staff for the various Debtors to initiate and carry out collection procedures for the unpaid and overdue accounts receivable. The staff will start with telephone calls and collection letters, and then escalate to the hiring of collection attorneys to commence collection lawsuits anywhere in the U.S., Canada or Mexico (or beyond). The importance of this cooperative activity is that it takes this technical, time-consuming burden off the back of the Debtor. It is analogous to having one person in a town plow all the streets instead of having each resident or businessperson plow the street in front of his/her house or store. This agency makes it unnecessary for each Debtor to reinvent the collection wheel, lose time and money from the substantial and continuing learning process, and be taken away from the main, income-producing activities of the business. It is this prompt, low-cost (cooperative, government-provided) collection activity which provides the added value to the assigned accounts receivable and gives them far more credibility as security in the sub-treasury plan, and enables the subordinate security interests (such as the 5% cooperative interest, and the tax anticipation funding) to be used with much less expectation of being used to repay the Debtor's debt to the sub-treasury bank.
It should be noted that if a prospective Debtor walked into any city bank with such a package of loan security interests, the bank would have little or no interest in listening to the prospective customer/Debtor, because the program is too complicated for the bank to learn and employ for a single small Debtor. But several or more small Debtors in a small town could put this sub-treasury together as a community cooperative or sub-treasury, with the various members of the community making their contributions to enable the businesses, farmers and self-employed persons in the town to grow their businesses; and for the community as a whole to grow including jobs (with more and higher paying jobs), the banks, the towns through increased tax base and improved economic conditions, and the town schools and other institutions, the Debtors, and the families of all.
The local bank would not have any problem in lending too much of its net worth to any one Debtor, country or industry (unlike the major city banks, which put too much of their loans into oil, real estate or less developed countries); the deposits of the Debtors and their families, and any needed deposits from the DROPOUT COMMUNITY, would provide the banking reserves and demand deposits to support the loans.
The new sub-treasury could use a cooperative entity (such as the DROPOUT COMMUNITY) to take an occasional assignment of non-performing accounts receivable, or perhaps the accounts receivable themselves), if the banking laws were construed by the bank regulators to prohibit bank loans (or part of such loans) in the foregoing fashion so that the bank itself (if necessary) would not be making loans directly against accounts receivable, or not having too high a percentage of its outstanding loans against accounts receivable. But this is just a way to fine-tune the sub-treasury plan, if necessary.
The idea is to gather the assets of the DROPOUT COMMUNITY in such a way as to give support to the small Debtors by giving them access to the money they earn, as soon as they earn it (i.e., at the creation of the account receivable for service businesses, or at the shipment of the product as to other businesses).
This sub-treasury plan would enable the DROPOUT COMMUNITY to attract any needed physicians to the community, because the physicians could receive their small-town medical fees (assuming they are not part of an HMO) on the day that they render their medical services by assignment to the bank of the account receivable.
It should be noted that local banks in the DROPOUT COMMUNITY are small banks and have been suffering from the very financial, economic and political evils which have endictated the writing of this book, and would be receptive to the sub-treasury plan as a way to survive and prosper, and free themselves from their subservient relationship with the large-city banks. Within the town, if there is more than one small bank, there would be competition among the small banks for this business; and in absence of bank competition, the single bank would find that cooperation (without pressure from a competing bank) would be profitable for the bank, as long as it was not a hog and forced the DROPOUT COMMUNITY to bring in or set up another bank. The DROPOUT COMMUNITY's collection agency would receive fair compensation for its services, although be expected not to extract more than recovery of its expenses and possibly a fair reserve to provide to the bank, if necessary, to offset losses on some of the accounts receivables, or to provide additional demand deposits for the bank to expand its sub-treasury lending activities.
The sub-treasury should be effective because it addresses the main need of the small-town Debtors: liquidity. It is not designed to provide investment capital, which is something else which the DROPOUT COMMUNITY is expected to do, through industrial revenue bonds, to promote new, high-paying jobs for the community, because the community cannot exist solely as one of Debtors; the Debtors, to grow, will need employees, which means jobs; and the Debtors themselves may need jobs to maintain themselves and their business activities during the initial phases of their business, or if things take a turn for the worse for a specific business. The plan is a cooperative (i.e., sub-treasury type) plan to pull the community's assets together to make them work for the whole community, such assets being: employees, banks, local government, farmers, businesses, self-employeds, DROPOUTS who come into town to start anew, families, and young persons starting out in life; the value of the local real estate; the tax power of the local community; the mortgagable personal property of the Debtors (including inventory, equipment, paintings, crops); the accounts receivables of the Debtors; the marketable (i.e., freely-tradable) as well as restricted stocks, bonds and other securities of the Debtors; and part of the growth and potential of the Debtors (e.g., through a 25% interest in the patents for which the community paid for the patent application and prosecution).
The reason that the U.S. and state governments and the hundreds or thousands of governmental agencies don't work for most Americans is that they are too large to be involved in these essentials needed by the members of the DROPOUT COMMUNITY, who are forced to provide these things for themselves, instead of hoping that the U.S. government, the state government or a large-city government would attempt to do what is needed for the Debtors. These larger government entities gravitate for various reasons to helping the rich get richer, and not to helping the smallest members of the community compete with the wealthy, multinational companies. A DROPOUT COMMUNITY provides the grass roots way by which big government and big business can finally have some effective competition.
The sub-treasury, when put together in a DROPOUT COMMUNITY, provides an easy system for all Debtors in the community to obtain needed liquidity, without having each Debtor waste time of lawyers, accountants and their own valuable time trying to find banking connections which probably could not be found for most Debtors, other than through this sub-treasury plan.
The sub-treasury plan uses the commercial bank's power to make asset-based loans against demand deposits and required reserves, so that Debtors should be required and/or encouraged to keep their moneys in the interest-free accounts at the bank as much as possible, and to make payments when due (or to take advantage of discounts granted for early payment of invoices), and for the community to keep balances (or compensating balances) on deposit with the bank. Normally, a bank uses demand (and other) deposits (even sale of the bank's own CD's) to make loans at higher interest rates than the bank is paying on its CD's and of course no-interest demand deposits, and the bank's profit structure is going to be changed and will have to be recast to take into account the following: (i) different loss ratio for accounts receivable financing; (ii) higher cost for dealing with smaller loans; (iii) higher cost for dealing with assorted loan security assignments; (iv) lower cost of money to the bank because of dealing with demand deposits rather than bank-borrowed funds; (v) captive, non-competitive business; (vi) future profits from fast growth of the town and bank's business; (vii) government guaranty of the loans to Debtors.
When enough banks and communities are lending under the sub-treasury plan, a bank or agent for the banks can securitize the accounts receivable loans (i.e., package the loans) for sale to investors or possibly the town as a last resort, to get the accounts receivable loans off the books of the bank, if desirable or necessary. Such securitization and sale (similar to real estate mortgages and similar debt financing packages, FNMA, GNMA, Sally Mae) would establish a national market for accounts receivable financing of small business, and would help to determine the rate of interest at which such financing should take place with the bank initially; the bank would in such instances (similar to FNMA) receive origination fees and debt servicing fees, and have some possible recourse liability for non-payment of the accounts receivable or underlying notes (similar to the FNMA which obligation is not clear but considered to exist by FNMA and the originating banks). How this is to take place within a revolving loan account has to be figured out, but seems to be no more than a bookkeeping problem, or at worst requiring a snapshot and division of a Debtor's account into the securitized part and into the continuing revolving account part at the time of securitization.
The sub-treasury plan for small business thus enables small business to have access to financing similar to the way that students, real estate and automobiles have financing.
Securitization of debt enables hundreds of loans to be packaged and resold by banks to investors to enable the banks to get rid of the loans from their books, get net capital, and make more loans than they could if they did not sell the loans in the first place. Securitization frees up the capital of the bank in the way that accounts receivable financing of small business provides liquidity to small business. Also, a bank could sell its Debtors' notes to local investors, at rates of interest significantly higher than investors would get if they bought the (or any) bank's CD's.
Small business has no ready ability to obtain financing, and the normal way is through small inheritance, employment termination payments, sweat equity, savings and credit card financings. Government programs (such as the SBA) to provide financing to small business are of less than no consequence; they seem to demand more input from applicants collectively than is lent to the few lucky businesses, and economically has been a negative for small business in the aggregate, similar to the effect of a million-dollar lottery on millions of persons who rely on the purchase of lottery tickets to obtain their fortune rather than saving the money and putting the savings to work in a small business opportunity or for self-improvement. With sub-treasury financing for small business on a national basis, giving immediate money for work performed, small business will obtain the needed financing, and be rewarded with immediate income for immediate work, something which will make small business more productive for the nation and be the improved source of new and higher paying jobs, and for opportunity, for persons who now have a declining standard of living due to the misallocation of credit into the financial market and away from the market which finances true business activities.
Recent federal statutes may help to make the new sub-treasury available as a mainstream community development program. See below.
The Alliance/Populist sub-treasury of the late 1800's would have worked, if given a chance. The failure of the Alliance/Populist sub-treasury idea has been discussed at length by historians, and the reasons for the past failure are not applicable to the present sub-treasury idea, for the reasons discussed below. It seems that the new sub-treasury idea has no hidden problems to make it unworkable.
Money no longer requires gold backing for issuance; banks (including country banks) can create money (legal tender) through compliance with reserve requirements. Thus, no legislation is needed to establish the new sub-treasury in a DROPOUT COMMUNITY.
Demand for silver backing (bimetallic standard) for issuance of new money is no longer needed to create the new money needed by farmers and other small businesses. The mechanics of the Federal Reserve System are adequate to create the needed money, if a local bank will cooperate.
A national political movement, whether Democratic, Republican or third party (Populist, Progressive, or similar to H. Ross Perot's party) is not needed because the issues can be focused and made effective at the lowest political levels in the U.S. and on a non-partisan basis, where the idea sells itself regardless of who controls local politics. The local banks are no longer the enemy because (similar to labor, small business interests and employees of manufacturing and farms, for example) they too have been swept away by the evils which are addressed by the new sub-treasury DROPOUT COMMUNITY movement. Local banks need the sub-treasury to remain in business, serving the local community instead of the major-city banks.
The need for farmers' sub-alliances throughout county, state and country are no longer needed because the reforms are within a single town, village and small city (perhaps a population of under 5,000).
The political pull of creditor/propertied and debtor/poor classes is reduced substantially or eliminated because the envisioned policies for and growth of a small town are not adverse to the interests of either class. There is no need for a national system of lecturers or political organizers (used by the National Farmers' Alliance) to explain and sell the sub-treasury idea throughout the country because only one small town need be convinced, which a single person can do to create his DROPOUT COMMUNITY. Just show the banker this chapter of this book.
There is no need to sustain any movement between elections or to build up any party apparatus or convention because the ideas can be implemented at any time in a single small town. There is no need to organize the nation's liberal press, such as through any counterpart to the People's Party's National Reform Press Association (which brought together and permitted dissemination of favorable journal articles to more than 1,000 sympathetic newspaper editors throughout the country) because of the ability of an individual DROPOUT to mobilize a single small town through whatever media are available in such small town (handbills, telephone solicitation, local newspaper, local radio, flyers in stores, door to door solicitation).
There is no need for any new legislation (which is why the national parties need to be used previously) because the sub-treasury idea today can be created by today's ordinary tools of creative financing, if done with appropriate regard for the requirements of the federal and state banking laws. Also, recent federal statutes have been enacted which should be considered when designing a sub-treasury for a DROPOUT COMMUNITY. These statutes are the the Riegle Community Development and Regulatory Improvement Banking Act of 1994 [footnote 20-2] (a statute intended to encourage economic renewal by investing in and assisting community development financial institutions (including the new sub-treasury, one would hope); the Bank Enterprise Act of 1991 [footnote 20-3], which provides for a revolving loan fund for credit unions; the Small Business Loan Securitization and Secondary Market Enhancement Act of 1994 [footnote 20-4], which encourages securitization of small business loans, similar to the securitization of real estate mortgages (which is the way the local bank can resell the sub-treasury loans if desirable); and the Community Development Revolving Loan Fund for credit unions, an amendment to the Federal Credit Union Act [footnote 20-5].
20-1. Publicly-supported and private universities for years, at public expense, have been training persons for employment with major corporations, through highly specialized courses, but have not done much to train persons for self employment. Government has always bailed out major banks from their unfortunate policies of lending in ways which undermine the U.S. economy (such as through the financing of oil deals which brought about the financial collapse of Illinois-Continental Bank). Media have done much to support, and little to change, these pro-concentration policies.
20-2. Enacted September 23, 1994.
20-3. P.L. 102-242, 105 Stat. 2308, enacted December 19, 1991.
20-4. P.L. 103-25, enacted September 23, 1994, 108 Stat. 2198, effective January 6, 1996.
20-5. P.L. 103-325, enacted September 23, 1994, 108 Stat. 2160; see 12 U.S.C. 1766 for Section 130 of the Federal Credit Union Act, 12 U.S.C. 1751, et seq.
20-6. The Federal Reserve Board has been widely criticized over the years for favoring bondholders and the wealthy at the expense of farmers, wage-earners and economic growth in the United States. See William Greider's SECRETS OF THE TEMPLE (Touchstone, paperback ed. 1987) at pp. 48-55 and 668-676. The constitutionality of the composition of the Federal Reserve Board, which favors private banking interests and bondholders, has not been resolved by the federal courts. See Riegle v. Federal Open Market Committee, 656 F.2d 873, 881 (D.C. App. 1981), cert. denied, 454 U.S. 1002; Horne v. Federal Reserve Bank of Minneapolis, 344 F.2d 725 (8th Cir. 1965); and Allen v. Wright, 104 S. Ct. 3315, reh. denied, 105 S. Ct. 51 (1984). There seems to be an opening for someone (such as a small business borrower who has suffered financial injury) to obtain a decision declaring part of the Federal Reserve Board Act as an unconstitutional delegation of legislative and/or executive power to private interests.
[Notes: for Author to Explore for Chapter 20 - determine if there is today any major difference in requirements for small federal and state banks, which differences in reserve requirements were eliminated back in the 70's or 80's to prevent banks from fleeing the federal reserve system.]
[End of Chapter 20.]
Carl E. Person, Author of DROPPING OUT, firstname.lastname@example.org