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Yet we cannot do without the functions banks perform; and one of these is the creation of “money” as dollar-denominated bank credit when they make loans. This advance of credit has taken the form of “fractional reserve” lending, which has been heavily criticized. But historically, it is this sort of credit created on the books of banks that has allowed the wheels of industry to turn. Employers need credit at each stage of production before they have finished products that can be sold on the market, and banks need to be able to create credit as needed to respond to this demand. Without the advance of credit, there will be no products or services to sell; and without products to sell, workers and suppliers cannot get paid.
Bank-created deposits are not actually “unbacked fiat” simply issued by banks. They can be created only when there is a borrower. In effect, the bank has monetized the borrower’s promise to repay, turning his promise to pay tomorrow into money that can be spent today — spent on the workers and materials necessary to create the products and services that will be sold to repay the loans. As Benjamin Franklin wrote, “many that understand Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money; to trade with, when they have it at a moderate interest.”
If banks have an unfair edge in this game, it is because they have managed to get private control of the credit spigots. They have often used this control not to serve business, industry, and society’s needs but for their private advantage. They can turn credit on and off at will, direct it at very low interest to their cronies, or use it for their own speculative ventures; and they collect the interest as middlemen. This is not just a modest service fee covering costs. Interest has been calculated to compose a third of everything we buy.
Anyone with money has a right to lend it, and any group with money can pool it and lend it; but the ability to create money-as-credit ex nihilo (out of nothing), backed by the “full faith and credit” of the government and the people, is properly a public function, the proceeds of which should thus return to the public. The virtues of an expandable credit system can be retained while avoiding the exploitation to which private banks are prone, by establishing a network of public banks that serve the people because they are owned by the people.
The Stellar Example of the Bank of North Dakota
Publicly-owned banks can exist at many levels, from giant multinational infrastructure banks, to national infrastructure or postal banks, to local banks owned by states, counties, cities or tribes. In his 2021 book titled Public Banks, Professor Thomas Marois showed that 17% of banks are publicly owned, with collective assets just under $49 trillion. In the US today, many groups are working on establishing local public banks. But our only existing state-owned bank is the century-old Bank of North Dakota (BND).
The BND was founded in 1919, when North Dakota farmers rose up against the powerful out-of-state banking-railroad-granary cartel that was unfairly foreclosing on their farms. They formed the Non-Partisan League, won an election, and founded the state’s own bank and granary, both of which are still active today.
The BND operates within the private financial market, working alongside private banks rather than replacing them. It provides loans and other banking services, primarily to other banks, local governments, and state agencies, which then lend to or invest in private sector enterprises. It operates with a profit motive, with profits either retained as capital to increase the bank’s loan capacity or returned to the state’s general fund, supporting public projects, education, and infrastructure.
According to the BND website, more than $1 billion had been transferred to the state’s general fund and special programs through 2018, most of it in the previous decade. That is a substantial sum for a state with a population that is only about one-fifteenth the size of Los Angeles County.
The BND actually beats private banks at their own game, generating a larger return on equity (ROE, that is, net profit divided by shareholder equity) for its public citizen-owners than even the largest Wall Street banks return to their private investors (for figures, see below). These profits belong to the citizens and are generated without taxation, lowering tax rates. On October 3, 2024, Truth in Accounting’s annual Financial State of the States report rated North Dakota #1 in fiscal health, with a budget surplus per taxpayer of $55,600. Small businesses are now failing across the country at increasingly high rates; but that’s not true in North Dakota, which was rated by Forbes Magazine the best state in which to start a business in 2024.
Why So Profitable? The BND Model
For nearly a century, the BND maintained a low profile. But in 2014, it was featured in the Wall Street Journal, which reported that the Bank of North Dakota “is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. (JPM) and hasn’t seen profit growth drop since 2003.” The article credited this success to the shale oil boom; but North Dakota was already reporting record profits in the spring of 2009, when every other state was in the red and the oil boom had not yet hit.
The average ROE of the BND from 2000 through 2024 (its latest annual report) was 19.4%. Compare JPMorgan Chase (JPM), by far the largest bank in the country, with 2.4 trillion in deposits. Its average ROE from 2000-23 was 11.38% over the same period. For a detailed breakdown, see here.
The BND does not need to advertise or compete for depositors. It has a massive, captive deposit base in the state itself, which must deposit all of its revenues in the BND by law. Most state agencies also must deposit there. The BND takes some token individual deposits, but it does not compete with local banks for commercial deposits or loans. As for municipal (as distinct from state) government deposits, the BND generally not only reserves those deposits for local community banks but enhances their ability to secure municipal deposits. In many states, stringent collateral requirements are attached to municipal government deposits, such as a 110% collateral requirement with high quality securities. This essentially prevents local banks from using municipal deposits to fund local lending. In North Dakota, however, the BND provides letters of credit that guarantee the deposits of municipal governments and other public corporations, making collateral unnecessary and making municipal deposits available for local lending. In addition to its deposit base, the BND also has a substantial capital base, with a capital fund totaling $1.059 billion in 2023, along with deposits of $8.7 billion.
The State’s Deposits Are Safer in Its Own Bank
The BND is not only more profitable but also safer than JPM. In fact federal data show that JPM is the most systemically risky bank in the country. The BND, by contrast, has been called the nation’s safest bank. Its stock cannot be short-sold, since it is not publicly traded; and it will not suffer a run, since the state would not “run” on itself.
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Advantages of a State-owned Bank for the Public, Local Government and Local Banks
Like private banks, a publicly-owned bank has the ability to create money in the form of bank credit on its books, and it has access to very low interest rates. As a result, North Dakota banks were able to avoid the 2008-09 subprime and securitization debacles and the 2023 wave of bank bankruptcies.
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Serving the State as a Rainy Day Fund and for Disaster Relief
Unlike the Federal Reserve, which is not authorized to support state and local governments except in very limited circumstances, North Dakota’s “mini-Fed” can help directly with state government funding. Having a cheap and ready credit line with the state’s own bank reduces the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks.
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Progress and Challenges
In the past 15 years, groups across the country have worked diligently to establish publicly-owned banks in their states and communities. A big push came in 2011 with the Occupy Wall Street movement, demonstrating that even the dry subject of banking can incite large groups of people to take action in times of economic crisis. Many people moved their individual deposits out of big Wall Street banks into local community banks, but what about the large public deposits held by state and local governments? No community bank was large enough for their needs. The Bank of North Dakota demonstrated the feasibility of another alternative: the state or city could form its own bank.
Although more than 50 public bank bills and resolutions have been filed since 2010, the only new bank to emerge is the Territorial Bank of American Samoa, founded in 2016. Lobbying in opposition by big private banks has deterred politicians, who are reluctant to rock the boat when times are good and no immediate need is perceived. However, times are not so good today for the majority of the population, and they could soon get worse even for the wealthy.
To muster the political will to take action, politicians need a business plan in which the benefits of establishing their own banks clearly outweigh the costs; and public bank advocates today face hurdles that the BND avoided by being grandfathered in before the relevant agency rules were instigated.
One hurdle is that states today typically require uninsured public funds to be backed by pledged collateral (i.e. surety bonds or letters of credit) exceeding 100 percent of the value of the deposits. California, for example, has state tax revenues exceeding $80 billion. As a single deposit in a bank, only $250,000 of that sum would be covered by FDIC insurance, leaving the balance uninsured; so the state insures that balance with a collateral requirement that is 110% of uninsured deposits. The result is to tie up more liquidity than the deposits provide. Public banking advocates argue that the requirement is unnecessary and unfairly burdensome for state-owned banks. The deposits of the BND, which was chartered as “the State of North Dakota doing business as the Bank of North Dakota,” are backed by the state itself. Meanwhile, letters of credit, e.g. from a Federal Home Loan Bank, are a viable alternative.
Another hurdle is that most state constitutions prohibit the state from “lending its credit” to private parties. This has been construed as prohibiting the state from owning a bank, but legal memoranda have refuted that interpretation.
Besides a profitable business plan, politicians need a push from their constituents to take action, and most people haven’t heard of public banks and don’t understand the concept. Wider public exposure and education are necessary. Even many politicians are unaware of how banking actually works. Chartered depository banks have the power to create money as deposits when they make loans, expanding the local money supply and increasing the capacity for local productivity. Over 95% of our money supply today is created by banks in this way. This vast power to create money as credit is one that properly belongs in the public domain.
Times are changing, and public banking momentum continues to grow. By making banking a public utility, with expandable credit issued by banks that are owned by the people, the financial system can be made to serve the people and local enterprise without draining their resources away. Credit flow can be released so that industry and free markets can thrive, and the economy can move closer to reaching its full potential.
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Via https://www.globalresearch.ca/public-funds-deposited-publicly-owned-banks/5894659
US Attorney for the Southern District of New York Geoffrey Berman announces charges against Jeffery Epstein, New York City, July 8, 2019. © Stephanie Keith / Getty Images
The Most Revolutionary Act 