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This week’s court-ordered document dump by the Federal Reserve may reignite the debate over whether a new approach to reforming our monetary system is needed.  Instead of favoring international or foreign entities, one economist suggests that we should return banking to the local level:

Cut spending, raise taxes, sell off public assets—these are the unsatisfactory solutions being debated across the nation, but the budget crises that nearly all the states are now suffering did not arise from too much spending or too little taxation. The crises arose from a credit freeze on Wall Street. In the wake of the 2009 financial market collapse, banks curtailed their lending more sharply than in any year since 1942, driving massive unemployment and causing local tax revenues to plummet.

The logical solution, then, is to restore credit to the local economy…  One measure that is drawing increasing interest is the creation of a bank modeled on the Bank of North Dakota (BND), currently the only state-owned bank in the country. The BND has a 92-year history of safe, secure and highly profitable banking. North Dakota has the lowest unemployment rate in the country; and in 2009, when other states were floundering, it had the largest budget surplus it had ever had.

Across the country, legislation is being considered to replicate this success:

Eight states now have bills pending either to form state-owned banks or to do feasibility studies to determine their potential. This year, bills were introduced in the Oregon State legislature on January 11; in Washington State on January 13; in Massachusetts on January 20 (following a 2010 bill that lapsed); and in the Maryland legislature on February 4. They join Illinois, Virginia, Hawaii, and Louisiana, which introduced similar bills in 2010. The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for Washington and Oregon. Their conclusion was that state-owned banks in those states would have a substantial positive impact on employment, new lending, and state and local government revenue.

The theory behind the push is that a community is best served by creating and managing its own credit.

Credit needs to come first. We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest. We can avoid the pitfalls of privately-issued credit with a public credit system, a system banking on the future productivity of its members, guaranteed not by “things” shuffled around furtively in a shell game vulnerable to exposure, but by the community itself…

The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.

A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners.

For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see

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Comment Preferences

  •  Tip Jar (7+ / 0-)

    Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and your greatest weakness.

    by The Anomaly on Fri Apr 01, 2011 at 06:16:10 AM PDT

  •  The Fed will NOT like this. (0+ / 0-)

    Which is another reason to encourage it.

    I think that this approach will only spread, if only as part of the general disintegration of society, and the fragmenting of nation-states.  I still don't have a good grasp of 'money' as explained by Spengler, but this sentence jumped out at me:

    The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank.

    I expect to see, instead of the continued consolidation of money systems (i.e., euro, or the fabled Amero), a proliferation of new, regional money systems.  Like it wasn't confusing enough.

    I am become Man, the destroyer of worlds

    by tle on Fri Apr 01, 2011 at 07:41:18 AM PDT

  •  Banking as a utility (0+ / 0-)

    First of all, I do like the idea of viewing banking as a public utility.  Standard lending and taking deposits is so simple, it doesn't require a lot of creativity.  I think Paul Krugman once wrote that we need to make "banking boring again".

    That being said, I don't know about state's running their own bank would be such a good idea.  The reason is because it puts the tax payers of the state on the line if the bank fails.  That's what happened on the federal level.  We need to create a system where we can let banks fail without disrupting other banking institutes and their depositors.

    I think the best things is to divorce lending from deposits.  Eliminate fractional-reserve banking with full reserve banking.  In the age of fiat money, there is no reason to have fractional reserves.  That way, if the bank makes stupid loans and the bank fails, their depositors aren't affected and the FDIC insurance doesn't rise for other lending institutes.  How will the banks loan money if they have to save their deposits?  Borrow it from the fed at the fed fund rates.

    Our Dime Understanding the U.S. Budget

    by maddogg on Fri Apr 01, 2011 at 11:34:55 AM PDT

    •  BND has a 92 year history of Operation (0+ / 0-)

      See the wiki on BND

      The Bank of North Dakota (BND) is a state-owned and -run financial institution based in Bismarck, North Dakota. Under state law the bank is the State of North Dakota doing business as the Bank of North Dakota.

      The state and state agencies are required to place their funds in the bank, local governments are not required to do so. Previously, all public corporations in the state were also required to deposit their funds in the bank, but an initiative measure in 1919 eliminated that requirement[citation needed]. Other entities may also open accounts at the Bank; however, BND offers fewer retail services than other institutions, and has only one office, limiting its competitiveness in consumer banking.

      Instead, BND has taken a role more akin to a central bank, and has many functions, such as check clearing, that might be expected from a branch office of the Federal Reserve. The Bank does have an account with the Federal Reserve Bank, but deposits are not insured by the Federal Deposit Insurance Corporation, instead being guaranteed by the general fund of the State of North Dakota itself and the taxpayers of the State.

      BND also guarantees student loans (through its Student Loans of North Dakota division), business development loans, and state and municipal bonds.

      Though initially conceived by Non-Partisan League populists as a credit union-style institution to free the farmers of the state from predatory lenders, the Bank's functions were largely neutered by the time of its inception by the business-backed Independent Voters Association. The recall of NPL Governor Lynn Frazier effectively ended the initial plan, with BND taking a more conservative central banking role in state finance.

      Also from the BND website

      During the early 1900's, North Dakota's economy was based on agriculture. Serious in-state problems prevented cohesive efforts in buying and selling crops and financing farm operations. Grain dealers outside the state suppressed grain prices; farm suppliers increased their prices; and interest rates on farm loans climbed.

      By 1919, popular consensus wanted state ownership and control of marketing and credit agencies. Thus, the state legislature established Bank of North Dakota and the North Dakota Mill and Elevator Association.

      Bank of North Dakota (BND) was charged with the mission of "promoting agriculture, commerce and industry" in North Dakota. It was never intended for BND to compete with or replace existing banks. Instead, Bank of North Dakota was created to partner with other financial institutions and assist them in meeting the needs of the citizens of North Dakota.

      In other words, BND acts as a bank for state chartered banks. One of the results is to keep as much of the state money "in state" as is possible.

  •  I too (0+ / 0-)

    am all for State Banks. They give States much more flexibility in bad times to extend credit and keep businesses on even keel, and I'm sure help ND smooth out business cycles. BND is more highly regulated by the State than the big banks are by the Federal Government; and they have limitations about where they can put State money, so I don't think they'd be subject to things like the Crash of 2008.

    •  The bank in the video is interesting also (0+ / 0-)

      The Banks that BND supports are interesting as well. For example, the bank in the video above Bremmer Bank is 98% owned by a charity, with the charity giving back to the community at large. The other 2% is owned by the employees of the bank. Communism appears to be alive and well in North Dakota.

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