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Explanation of My Sub-Treasury Idea

I believe a sub-treasury (analagous to the Omaha Platform, Idaho Platform and National Farmers Alliance demands during the 1880's-1890's) can be achieved today whereas the demands failed back then:

The material differences are:

1. Money no longer requires gold backing for issuance; banks (including country banks) can issue money through compliance with reserve requirements

2. Demand for silver backing (bimetallic standard) is no longer needed for monetary expansion for farmers and others

3. National political movement, whether Democratic, Republican or third party (Populist, Progressive) is not needed because the issues can be focussed and made effective at the lowest political levels in the U.S. and on a non-partisan basis

4. The banks (local) are no longer the enemy inasmuch (similar to labor) they too have been swept away by the evils which are addressed by the new sub-treasury/DROPOUT COMMUNITY movement

5. The need for 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 - smaller than East Northport LI, NY, Kings Park, LI, NY; and McCook, Nebraska).

6. 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

7. There is no need for a system of lecturers to put the idea across because only one small town need be convinced, which one person can do to create his DROPOUT COMMUNITY

8. 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.

9. There is no need to organize the nation's liberal press, such as through any counterpart to the National Reform Press Association because of the ability 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).

10. There is no need for any new legislation (which is why the national parties were required previously) because the sub-treasury idea today can be created by the ordinary tools (for today) of creative financing, if done with appropriate regard for the requirements of the federal and state banking laws (idea: 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).

How the new sub-treasury would work:

1. The new sub-treasury 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 5000 population or above because of many factors, including the size of the loan, the cost of servicing the loan, the higher loss problem, the failure to fit into any easy collateral or securitization programs, the higher cost of collection

2. The new sub-treasury advances money against accounts receivables, as revolving loan accounts, enabling the farmers, businesses and self-employed persons (collectively, the Debtor) to get paid on the same day that the job is done and the account receivable is created.

3. The sub-treasury requires that the bank be secured to make the lending bankable, and to such extent the following collateralization (with appropriate priorities) would be used: (i) the assigned accounts receivable themselves; (ii) real estate mortgage of the Debtor; (iii) stocks, bonds, or other marketable securities of the Debtor; (iv) a (cooperative) percentage of the security of the other Debtors; (v) local fund of the DROPOUT COMMUNITY set aside by voters for such purpose; (vi) tax anticipation notes of the DROPOUT COMMUNITY based on the DROPOUT COMMUNITY'S taxation of local real estate tax; (vii) tax refunds of the Debtor; (viii) any chattel mortgages or personal property assignments under the UCC which are acceptable to the bank; (ix) tax anticipation notes of the DROPOUT COMMUNITY based on the DROPOUT COMMUNITY'S taxation of local sales tax or other tax base; and (x) assignment for security of crops, inventory, equipment of the Debtor.

4. Appropriate software has to be designed (not a difficult task) for the local bank to keep track of these security variables, to enable the bank to lend 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, because of the inability of the large bank to deal with the eclectic collection of assets available in a small town, which will vary from town to town and Debtor to Debtor within a town.

5. By reason of the new sub-treasury, the velocity 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.

6. An important feature of the new sub-treasury is the DROPOUT COMMUNITY's collection agency department (another cooperative function), which agency (really one or more persons working for the DROPOUT COMMUNITY and functioning as a collective staff for the various Debtors to initiate collection procedures for the unpaid accounts receivable, starting with telephone calls and collection letters, and escalating to retention of collection attorneys to commence collection lawsuits anywhere in the U.S. or Canada; the importance of this cooperative activity is that it takes this burden off the Debtor (such as having one person in the town plow all the streets instead of having each resident plow the street in front of his house or store) to reinvent the collection wheel, lose from the substantial and continuing learning process, and take away from the main, income-producing activities of the business. It is this prompt, low-cost (collective, goverment-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 enable the subordinate security interests (such as the 5% cooperative interest, and the tax anticipation funding) an opportunity to be used with much less expectation of being called upon by the Debtor's bank.

7. It should be noted that if a prospective Debtor walked into any city bank with a package of loan security interests described above, the bank would have no interest in listening to the prospective customer/Debtor, because the program is too complicated for the bank to employ for a single small Debtor. But numerous (perhaps a few hundred) small Debtors in a specific town could put this sub-treasury together as a community cooperative, 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.

8. 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 LDC loans); the deposits of the Debtors and their families, and any needed deposits from the DROPOUT COMMUNITY, would provide the reserves to support the loans.

9. 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 to prohibit bank 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.

10. 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).

11. 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.

12. It should be noted that local banks in the DROPOUT COMMUNITY are small banks and have been suffering from the very financial and political evils which have prompted 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 bank, there would be competition among the 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.

13. 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.

14. 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.

15. The sub-treasury plan finds 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).

16. 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, multi-national companies. A DROPOUT COMMUNITY provides the grass roots way by which big government and big business can finally have some effective competition.

17. 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.

18. The sub-treasury plan uses the commercial bank's power to lend 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 net 10 etc. discounts), and for the community to keep balances (or should I call them 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 a/r 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.

19. When enough banks and communities are lending under the sub-treasury plan, a bank or agent for the banks can securitize the a/r loans (i.e., package the loans) for sale to investors or possibly the town as a last resort, to get the a/r 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 a/r 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 a/r's 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 a/r 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.

[End of notes.]

Carl E. Person, Author of DROPPING OUT,
For the c.v. (resume) of Carl E. Person, click on Carl E. Person C.V.

Copyright © 1997 by Carl E. Person

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