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Whose Bank? Public Investment, Not Private Debt

The public bank concept is gaining ground on the state level, attracting proponents across the political spectrum.
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Stivers sees the bank as a way to facilitate small business start-ups, end the ability of private banks to cream profits from the public treasury, protect key budget items, and stave off excessive influence from the federal government. He suggests the novel approach of expanding the role of Idaho’s Bond Bank authority into a full-fledged state bank. The current banking system, he says, causes inflation, one of the “greatest detriments to a living wage”:

Inflation is caused by the secret tax of the banking industry in which lenders use the multiplier effect to the benefit of their cronies.  This secret tax takes the form of a decline in the value of the dollar and results in higher prices. Wages never keep up with this process because its very purpose is to extract wealth from the wage earner to support the privileged classes who curry the favor of lenders. A state bank would restore this privilege to the people in a public trust and would give us the opportunity to back our deposits with the wealth from our public lands.

Illinois: Using a State-owned Bank to Fund Infrastructure

Instead of going into more and more debt, to further enrich private banks, we should be using our tax revenue to further invest in our own state and its people, for the enrichment of our own economy.
    -Rich Whitney, Illinois
     gubernatorial candidate

In Illinois, Green Party gubernatorial candidate Rich Whitney has other ideas for a state-owned bank. Illinois is listed by the Pew Center for the States as one of nine states confronting historic budget problems. In a recent response to the governor’s State of the State Address, Whitney said:

I am the only candidate in this race who proposes to fund public improvements, and promote economic health, without any further tax increases, through the establishment of a state bank, a progressive idea that North Dakota adopted years ago, and that has helped keep that state debt-free even in these troubled economic times. Instead of going into more and more debt, to further enrich private banks, we should be using our tax revenue to further invest in our own state and its people, for the enrichment of our own economy.

The bank would use tax revenues and pension contributions as the financial base to expand credit where it is most needed. Illinois’ bank would borrow from the Federal Reserve at the same one percent rate as commercial banks. Once the budget was balanced, Whitney’s top priorities would be to use the new money to modernize energy infrastructure and promote solar and wind power. To achieve this, property owners of land where wind and solar generators could be located would be lent money through the state bank at a minimal one percent interest rate. To secure repayment, Whitney would require utilities to buy power from the solar and wind-based producers at a premium rate. One option would then be to require part of this premium to be paid to the state bank until the loan is returned. This arrangement, says Whitney, would create a win-win situation:

The bank is paid back. The homeowner, farmer or business investing in solar or wind generation realizes immediate savings on energy costs and in many cases will go from being a net consumer to a net producer of energy. Their greater income will further stimulate the economy. The utilities will have to pay the cost of the premium rate but in the long run will realize the benefits of having a greater, stable, more diversified and decentralized energy grid, ultimately cheaper in the face of rising fossil fuel prices. As economies of scale are realized in wind and solar power generation, the costs will fall, as will the necessary premium rate. And we all benefit from the reduction in greenhouse gas emissions.

Florida: The Commercial Bank Model

Economist and author Farid Khavari, a Democratic gubernatorial candidate in Florida, proposes a state-owned bank that would lend directly to borrowers. The Bank of North Dakota usually uses a “lead lender” such as a bank, savings and loan company, or credit union rather than doing commercial lending directly. Dr. Khavari maintains that the Bank of the State of Florida could be launched at no cost to taxpayers by using the state’s assets as the reserves for making loans, employing the same fractional reserve lending rules used by private banks today. In this way, he says, the bank could drive an “economic miracle” in Florida, instigating massive job creation, cutting costs in half or more, providing low interest financing to homeowners and businesses, and improving teacher salaries and care for veterans and the elderly, while at the same reducing taxes. He explains:

The economy is collapsing due to lack of demand. The economy needs money, but the banks are cutting credit, and then sucking all the cash out of the economy by raising interest rates to make sure no one has any cash left at the end of the month. The cost of interest is built into the cost of everything. People already work ten years of their lives just to pay interest in one form or another. The Bank of the State of Florida will end that for Floridians. And this model will work for every state. . . .

We can pay 6 percent interest on savings. Using the same fractional reserve rules as all banks, we can create $900 of new money through loans for every $100 in deposits. We can loan that $900 in the form of two percent fixed rate 15-year mortgages, for example, and the state can earn $12 every year for every $100 in deposits. That means Floridians can save tens of billions of dollars per year while the state earns billions making it possible for them.

State and local government budgets will balance without higher taxes when the BSF cuts interest costs. Six percent BSF credit cards will save people billions per month, money that stays in Florida instead of going to the big banks—and the state will make huge profits on that, too. Saving billions in interest costs will create millions of jobs without subsidies just by keeping those billions circulating in Florida. Eventually the state will earn enough to reduce and eliminate state and local taxes while every Floridian has economic security in a recession-proof Florida.

The Federal Reserve states on its website that the banking system as a whole leverages $100 in deposits into $900 in loans, but whether a single bank can do it alone has been challenged. Critics say that while banks do create money as loans, they have to replace the deposits when the checks leave the bank in order for the checks to clear. How this all works is a bit complicated and will be the subject of another article, but suffice it to say here in response that if a bank does not have the deposits to cover its outgoing checks, it borrows from the interbank lending market at very low rates, or issues commercial paper or CDs; and the state bank could do the same thing. It would not be fighting with the other banks for old deposits. Loans create new deposits, which can be borrowed back from the pool of “excess deposits” thereby created. Ninety-seven percent of the money supply has been created by commercial banks by turning loans into deposits, but that credit machine has frozen up. A state bank could get it flowing again.

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California: Catching the Wave

California leads the nation in the sheer size of its budget gap. It, too, now has a gubernatorial candidate proposing to alleviate the state’s credit woes with a state-owned bank. Running on the Green Party ticket, Laura Wells is a former financial analyst who received 420,000 votes in her 2002 bid for State Controller, more than any other Green Party candidate has earned in a partisan statewide race.  Her website says that, "rather than drowning in debt and begging Wall Street for loans, California can institute a State Bank that invests in California's infrastructure, and future generations.”

She stated in a comment, “A state bank for California is part of my platform as a candidate for the Green Party nomination for Governor. I ran for State Controller to ‘Follow the Money.’ Now, we need to Fix the Money. A state bank would keep California's wealth in the state. Rather than invest in Wall Street (we've hit the wall on that one) we can invest in our infrastructure and our future generations.”

Legislative Proposals

It is not just political hopefuls who are exploring the public bank option. Therese Murray currently presides over the Massachusetts State Senate. She has introduced legislation that would study the formation of a state-owned bank with the principal aim of boosting job creation in the state. Massachusetts now faces a 9.4 percent unemployment rate. “It wouldn’t be in competition with our small community banks,” she says. “We’ve got to free up some credit, and mortgage companies and banks have got to do a better job of allowing people to redo their mortgages.”

In Virginia, Congressman Bob Marshall, a Republican, introduced a bill in January to study whether to establish a bank that was owned, run, and controlled by the state. However, the plan was tabled in committee.

On February 16, the front page of the Huffington Post featured an article on the Bank of North Dakota and the precedent it sets for financially-strapped states. Along with political candidates, the article noted that a Washington State legislator and a Vermont House committee were exploring it.

North Dakota hit the Wall Street wall in 1919, when the Bank of North Dakota was established by the state legislature specifically to free farmers and small businessmen from the clutches of out-of-state bankers. For over 90 years, it has demonstrated the success of the public banking model. Other credit-choked states are finally taking notice and devising their own variations on the theme.

Ellen Brown

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are,, and

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