On Friday, January 11, economist and New York Times columnist Paul Krugman urged the White House to mint a platinum coin worth $1 trillion, as a counter to what was then a threat to block federal spending that Congress had already approved. (Republicans made good on that threat yesterday, putting the United States in danger of default.)

We have forgotten the role that money issued directly by the government has played in our history.

The White House responded by saying the trillion dollar coin is off the table, because the Federal Reserve declared that it “wouldn’t view the coin as viable.”

Even Krugman called the coin idea “silly.” He just thought it was less silly—and less dangerous—than playing with the debt ceiling.

But it is not silly. We have forgotten the role that money issued directly by the government has played in our history. The American colonists did not think it was silly when they escaped a grinding debt to British bankers and a chronically short money supply by printing their own paper scrip, an innovative solution that allowed the colonies to thrive.

Many people believe that the U.S. government creates its own money. This is not true. Today, the Federal Reserve creates trillions of dollars on its books and lends them at near-zero interest to private banks, which then lend them back to the government and the people at market rates. We have been brainwashed into thinking that it makes more sense to do this than for the government to simply create the money itself, debt- and interest-free.

In fact, the trillion dollar coin represents one of the most important principles of popular prosperity ever conceived: nations should be free to create their own money without incurring debt. Some of our greatest leaders, including Benjamin Franklin, Thomas Jefferson, and Abraham Lincoln, promoted this essential strategy. They realized that the freedom to print money offers a way to break the shackles of debt and free the nation to realize its full potential.

While a commoner might get 10 to 20 years for robbing a bank, bank executives get huge bonuses for robbing us.

Money creation is an all-important power that has been fought over for centuries, in a largely secret battle between governments and private banks. For the last two and a half centuries, the banks have had the upper hand, making us forget that any other option exists. But we are learning the great secret of money: that how it gets created determines who has the power in society—we the people, or they the bankers.

It is no secret who has that power today. Witness the great bailout of 2008 that rewarded banks for making irresponsible and fraudulent gambles in the subprime mortgage scandal. None of the bankers responsible served time in jail. Then there was the robosigning scandal, in which banks skipped important steps in the process of foreclosing on the homes of ordinary Americans, and came away with a slap on the wrist. Now we are seeing the LIBOR scandal unfold, in which traders at the Swiss financial services company UBS were convicted of colluding with other banks to tweak interest rates for their own financial benefit. We can make an educated guess as to how this too will turn out for them (hint: well). While a commoner might get 10 to 20 years for robbing a bank, bank executives get huge bonuses for robbing us.

We may rail against the banks and demand change, but change will not come until we grasp the fundamental secrets that are the foundation of their power: those who create the nation’s money control the nation, and nearly the entire money supply today is created by banks in concert with the Federal Reserve.

Remembering our roots

Everyone knows that Benjamin Franklin played an important role in the founding of the United States. Fewer know his views on the printing of money. “Experience, more prevalent than all the logic in the World,” he wrote, “has fully convinced us all, that [paper money] has been, and is now of the greatest advantages to the country.”

When the British forbade new issues of paper scrip by the colonial governments, Franklin went to London and argued that issuing their own money was responsible for the colonies’ prosperity.

The response of the king, leaned on by the Bank of England, was to ban all issues of paper scrip. Without their paper money, the money supply collapsed, and the economy sank into a deep recession. The colonists then rebelled. They won the revolution, but the bankers retained the power to create money by setting up a banking system like that dominated by the Bank of England.

Fourscore and six years later, in 1862, President Abraham Lincoln boldly took back the power to create money during the Civil War. To avoid exorbitant interest rates of 24 to 36 percent, he decided to print money directly from the U.S. Treasury as U.S. Notes or “greenbacks.” The issuance of $450 million in greenbacks was the key to funding not only the North’s victory in the war but an array of pivotal infrastructure projects, including a transcontinental railway system.

After Lincoln was assassinated, however, the greenback program was quickly discontinued. Repeated popular attempts by farmers and laborers to revive it failed. They were opposed by a wave of banker activism to maintain the banks’ control over the printing of money, which had been established by the National Bank Act of 1863.

In 1872, New York bankers sent a letter to every bank in the United States. The letter, as quoted by Lynn Wheeler in Triumphant Plutocracy: The Story of American Public Life from 1870 to 1920, read in part:

Dear Sir: It is advisable to do all in your power to sustain such prominent daily and weekly newspapers…as will oppose the issuing of greenback paper money, and that you also withhold patronage or favors from all applicants who are not willing to oppose the Government issue of money. Let the Government issue the coin and the banks issue the paper money of the country. [T]o restore to circulation the Government issue of money, will be to provide the people with money, and will therefore seriously affect your individual profit as bankers and lenders .

Bank-created money, including paper bills and now electronic money, could be rented to the people at a profit. The people’s debt-free money was limited to coins, which today compose less than one ten-thousandth of M3, the broadest measure of the money supply.

Lincoln’s assassination and the abandonment of debt-free greenbacks marked the exchange of physical slavery for what has been called “debt peonage” or “wage slavery.” Today, as a result, the American government and American people are so heavily mired in debt that only a radical overhaul of the monetary system can free us.

Gimmick or game-changer?

This is the real context and backstory of the trillion dollar coin. The stakes are much higher than just fending off the debt ceiling. We the people need to take back the power to issue our own money, and we can’t do it with nickels and dimes. We’re going to need coins bearing some very large numbers.

The coin could put within the government’s grasp the power to solve its debt problems once and for all.

The idea of minting large-denomination coins to solve economic problems seems to have first been suggested by a chairman of the Coinage Subcommittee of the U.S. House of Representatives in the early 1980s. He pointed out that the government could pay off its entire debt with some billion-dollar coins. The Constitution gives Congress the power to coin money and regulate its value, and sets no limit on the value of the coins it creates.

That may have been true then, but in legislation initiated in 1982, Congress chose instead to impose limits on the amounts and denominations of most coins. The one exception was the platinum coin, which a special provision allowed to be minted in any amount for commemorative purposes.

An attorney named Carlos Mucha, who at the time was blogging under the pseudonym “ Beowulf ,” proposed issuing a platinum trillion dollar coin to capitalize on this loophole, after he heard me mention the trillion dollar coin in a Thom Hartmann interview. At first, he said, it was just an amusing exercise. But with the endless gridlock in Congress over the debt ceiling, it got picked up by serious economists as a way to checkmate the deficit hawks.

Philip Diehl , former head of the U.S. Mint and co-author of the platinum coin law, confirmed that the coin would be legal tender:

In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).

Warren Mosler, one of the founders of Modern Monetary Theory (MMT), reviewed the idea of the trillion dollar coin and concluded it would work operationally. And Joe Firestone pointed out that the trillion dollar coin has far greater game-changing potential than mere political maneuvering. The coin could put within the government’s grasp the power to solve its debt problems once and for all, replacing austerity with the abundance enjoyed by our forefathers.

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The invariable objection to government-issued money is that it will lead to hyperinflation. The trillion dollar coin can evoke images of million-Deutschemark notes filling wheelbarrows. But as economist Michael Hudson points out:

Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.

And as professor Randall Wray observes, the coin would not circulate in the general economy. Instead, it would be deposited in the government’s account and held at the Fed, so it could not inflate the circulating money supply.

As far as spending goes, the fact that the Treasury has money in its account doesn’t mean Congress could or would go wild spending the funds. The budget would still need congressional approval. To keep a lid on spending, Congress would just need to abide by some basic rules of economics. It could spend on goods and services up to full productive capacity without creating price inflation (since supply and demand would rise together). After that, it would need to tax—not to fund the budget, but to shrink the circulating money supply and avoid driving up prices with excess demand.

Time to take back the money power

The current political stalemate cannot be solved with the thinking that created it. There is simply not enough money in the system to fund the services that Americans desperately need, create full employment, pay down the debt, and keep taxes affordable. The money supply has shrunk by $4 trillion since 2008, according to the Fed’s own website.

The massive push from educational campaigns such as those organized by Occupy Wall Street, Strike Debt, and the Free University is starting to lift the veil from our eyes.

The only real solution to the unemployment created by this shrinkage is to add more money to the economy, and that means that someone needs to create it. Either the Fed does this in the way that it is currently done, by adding the money nearly interest-free to the balance sheets of banks to be lent to the government and the people at interest; or the Treasury does it and adds the money to the government’s account debt- and interest-free.

After a century of domination by the Federal Reserve, it is time we tried something new. In flatly rejecting the Treasury’s legal tender, the Fed as representative of the banks is asserting itself to be more powerful than the elected representatives of the people. If the Fed won’t acknowledge the coins created by the government, perhaps the government needs to charter a publicly owned bank that will.

We have a chance today to end the charade of big money gridlock politics, as well as the reign of the big banks. But the current government is so thoroughly captured by the bank-created money of our time that it is unlikely to take action without pressure from the people. Our ignorance on these issues has played into the hands of the 1 percent, who are dependent on the current system for their wealth and power. However, the massive push from educational campaigns such as those organized by Occupy Wall Street, Strike Debt, and the Free University is starting to lift the veil from our eyes.

We have the power to choose prosperity over austerity. But to do it, we must first restore the power to create money to the people.

Ellen Brown is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her bookThe Buck Starts Here: Restoring Prosperity with Publicly Owned Banks will be released this spring. Her websites are WebofDebt.com, EllenBrown.com, and PublicBankingInstitute.org.

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TAKE A PEEK INSIDE THE FALL 2011 ISSUE OF YES! MAGAZINE

One of the most significant, but least noticed, consequences of the rapid and dramatic consolidation of the banking industry over the last decade is how much it has hindered the U.S. economy’s ability to create jobs.

To begin to understand this, take a look at each end of the banking spectrum. On one end are the nation’s 6,900 small, locally owned, community banks. These institutions control $1.4 trillion in assets. That’s 11 percent of all bank assets. They currently have $257 billion in loans to small businesses and farms on their books.

On the other end, four giant banks—JP Morgan Chase, Bank of America, Citibank, and Wells Fargo—now command $5.4 trillion in assets, or 40 percent of the total. Given that they are nearly four times as large as all local banks combined, one might expect that they would have made four times the small-business loans, or about $1 trillion. In fact, these banks have a mere $85 billion in small-business and farm loans on their balance sheets.

Why do giant banks make so few small-business loans? Automation is the short answer. The only way these sprawling institutions can function efficiently is by taking a mass production approach to lending: Plug credit score, income, and appraisal into the computer—out comes the loan. That’s why the mortgage business was supposed to be so safe. The economic meltdown of 2007 shows that it’s actually very risky.

Small-business loans are not so easily mechanized. Each is a custom job, requiring human judgment to evaluate the risk associated with a particular entrepreneur, a particular business plan, and a particular market. Community banks excel at this. Their lending decisions are made locally, informed by face-to-face relationships with borrowers and an intimate understanding of their hometown economies. Big banks, whose decision-making is long-distance and dictated more by computer models than judgment, are pretty bad at it. So they don’t make many small-business loans.

It’s no wonder, then, that unemployment has been so persistent. Our financial system is top-heavy with big banks that are scaled to meet the needs of large multinational corporations. The Commerce Department estimates that U.S.-based multinationals have eliminated 3 million American jobs over the last decade. Meanwhile, small businesses, historically responsible for about two-thirds of new jobs, have found it harder and harder to obtain credit.

In short, we have a financial system that is mismatched to the economic needs of American communities. This mismatch will become more acute as we attempt to transition to a carbon-efficient economy, which, by its very nature, will be the domain of small-scale enterprises: local food producers, community-owned wind and solar electricity, neighborhood stores that provide goods within walking distance of homes, and so on. To take root, these businesses will need a robust array of community-based financial institutions capable of meeting their capital and credit needs.

What a State Bank Can Do for a State's Economy

Lots of lending by banks is a measure of a healthy economy.
1. Lending in North Dakota is consistently higher than nearby states that are economically similar. One reason? The support that the State Bank of North Dakota offers local banks. 
2 That’s also why North Dakota has nearly double the number of banks per 100,000 than its neighbors, and more than four times the national average. 

State Partnership Banks

Photo by Ellis Grafton.

There’s no single solution to the thorny problem of how to restructure our financial system, but one of the most promising strategies involves creating state-owned banks that can bolster the lending capacity of local banks, helping them grow and multiply.

North Dakota is the only state, so far, that has a publicly owned bank. Founded in 1919, the Bank of North Dakota (BND) was a populist response to dynamics similar to those we face today. The state’s struggling farmers, tired of being at the mercy of powerful out-of-state financial interests that controlled the availability and cost of credit, decided they needed a bank better aligned with their own interests.

BND is wholly owned by the state, which deposits all of its money, except pension funds, with the bank. BND does not compete with local banks; it does not solicit retail banking business and has no branch offices or ATMs.

Instead, BND partners with local banks to expand their lending capacity. Much of BND’s $2.8 billion loan portfolio consists of “participation loans.” These are business loans originated by local banks, which then invite BND to finance a portion of the loan (and share part of the risk). This enables local banks to make more loans and maintain more diverse portfolios.

Thanks largely to BND, North Dakota has a more robust community banking network than any other state. It has 35 percent more local banks per capita than South Dakota and four times as many as the U.S. average. Small local banks account for 60 percent of deposits in North Dakota, compared to only 16 percent nationally.

Over the last decade, lending by North Dakota’s local banks has averaged about $12,000 per capita (plus about $2,400 in participation lending by BND), compared to just $3,000 for community banks nationally. BND has also enabled local banks to maintain a higher loan-to-asset ratio than their counterparts in other states, which means they devote more of their assets to productive lending, rather than safer holdings like U.S. securities.

Although BND has some loan programs that accept a higher risk or lower return to meet specific economic objectives, such as its Beginning Entrepreneur Loan Guarantee Program, the vast majority of its lending decisions are made on a for-profit basis. It participates only in loans that make economic sense. As a result, BND has pumped $300 million in profit into the state’s general fund over the last decade. (In a state like Illinois that has a population of 13 million, the equivalent return would be about $6 billion.)

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Inspired by the North Dakota model, activists and small-business owners in more than a dozen states, including Oregon, Maine, Massachusetts, Montana, and Washington, backed bills this year to create state-owned banks. Although none of these bills passed on the first round, they did pick up a remarkable amount of support from lawmakers, given how unfamiliar most people, including most local bankers, are with BND.

To help educate lawmakers and counter misinformation put out by big-bank lobbyists, the Center for State Innovation has produced several reports analyzing how a public bank would function in various states. Its analysis of Oregon, for example, concluded that a state bank would help local banks expand lending by $1.3 billion, leading to 5,391 new small-business jobs in its first three to five years.

Many of these states, and others, are likely to take up the state bank idea again in the coming months. Although opponents like to suggest that these proposals would simply create yet another (unnecessary) state loan fund, the real power of a state bank lies not so much in its own lending, but rather in its capacity to support local banks and remake the financial landscape to better meet the needs of small businesses and communities.

Stacy Mitchell wrote this article for New Livelihoods, the Fall 2011 issue of YES! Magazine. She is a senior researcher with the Institute for Local Self-Reliance’s New Rules Project, where she heads up initiatives on community banking and independent business. Her latest book is Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America’s Independent Businesses.

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The dominant story of the current political debate is that the government is broke. We can’t afford to pay for public services, put people to work, or service the public debt. Yet as a nation, we are awash in money. A defective system of money, banking, and finance just puts it in the wrong places.

Raising taxes on the rich and implementing financial reforms are essential elements of the solution to our seemingly intractable fiscal and economic crisis. Yet proposals currently on the table fall far short of the need.

A newly released report of the New Economy Working Group, coordinated by the Institute for Policy Studies in Washington, DC, goes beyond the current debate  to call for a deep restructuring of the institutions to which we as a society give the power to create and allocate money. How to Liberate America from Wall Street Rule spells out the steps required to rebuild a system of community-based and accountable institutions devoted to financing productive activities that create good jobs for Americans and generate real community wealth.

Over the past 30 years, virtually all the benefit of U.S. economic growth has gone to the richest 1 percent of Americans. Effective tax rates for the very rich are at historic lows and many of the most profitable corporations pay no taxes at all. 

Despite the financial crash of 2008, the financial assets of America’s billionaires and the idle cash of the most profitable corporations are now at historic highs. Their biggest challenge is figuring out where to park all their cash.

Read the report: How to Liberate America from Wall Street Rule

Unfortunately, most of those who hold the cash and the corporations they control have lost interest in long-term investments that build and expand strong enterprises. The substantial majority of trades in financial markets are made by high-speed computers in securities held for fractions of a second. Business pundits still refer to this trading as investment. It bears no resemblance, however, to the investment required to put people to work rebuilding a strong America.

Corporations are using their stores of cash primarily to buy back their own stock, acquire control of other companies, invest in off-shoring yet more American jobs, and pay generous dividends to shareholders and outsized bonuses to management.

It was not always so. In response to the Great Depression, our country enacted financial reforms that put in place a system of money, banking, and investment based on community banks, mutual savings and loans, and credit unions. These institutions provided financial services to local Main Street economies that employed Americans to produce and trade real goods and services in response to community needs and opportunities.

This system, which Wall Street interests dismiss as quaint and antiquated, financed the U.S. victory in World War II, the creation of a strong American middle class, an unprecedented period of economic stability and prosperity, and the investments that made America the world’s undisputed industrial and technological leader.

David Korten's Agenda for a New Economy

-Buy the book.

-Read the blog series.

In the 1970’s Wall Street interests began pushing a deregulation agenda that led to a transfer of financial power from Main Street to Wall Street. Wall Street’s mega-banks lost interest in real investment and developed a new business model. They now specialize in charging excessive fees and usurious interest rates, providing leverage to speculators, speculating for their own accounts, luring the unwary into mortgages they cannot afford, bundling junk mortgages to sell them as triple-A securities, betting against the clients to whom they sell the overrated securities, extracting subsidies and bailouts from government, laundering money from drug and arms traders, and offshoring their profits to avoid taxes.

The consequences include the erosion of the middle class, an extreme concentration of wealth and power, a costly financial collapse, persistent high unemployment, housing foreclosures, collapsing environmental systems, the hollowing out of U.S. industrial, technological, and research capacity, huge public and international trade deficits, and the corruption of our political institutions.

Wall Street profited at every step and declared its experiment with deregulation and tax cuts for the wealthy a great success. It now argues for extending the same measures even further.

How to Liberate America from Wall Street Rule spells out details of a six-part policy agenda to rebuild a sensible system of community-based and accountable financial services institutions.

1. Break up the mega-banks and implement tax and regulatory policies that favor community financial institutions, with a preference for those organized as cooperatives or as for-profits owned by nonprofit foundations.
2. Establish state-owned partnership banks in each of the 50 states, patterned after the Bank of North Dakota. These would serve as depositories for state financial assets to use in partnership with community financial institutions to fund local farms and businesses.
3. Restructure the Federal Reserve to function under strict standards of transparency and public scrutiny, with General Accounting Office audits and Congressional oversight.
4. Direct all new money created by the Federal Reserve to a Federal Recovery and Reconstruction Bank rather than the current practice of directing it as a subsidy to Wall Street banks. The FRRB would have a mandate to fund essential green infrastructure projects as designated by Congress.
5. Rewrite international trade and investment rules to support national ownership, economic self-reliance, and economic self-determination.
6. Implement appropriate regulatory and fiscal measures to secure the integrity of financial markets and the money/banking system.

How to Liberate America from Wall Street Rule is the product of extended discussions among representatives of a diverse group of organizations committed to deepening and reframing the conversation on financial reform to focus attention on the serious financial system restructuring required to build a strong new American economy adequate to the social and environmental challenges of the 21st century. It may be freely shared, reproduced and distributed with appropriate citations.

Click here to read the report.

David Korten is co-founder and board chair of YES! Magazine and co-chair of the New Economy Working Group. He is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is principal author of How to Liberate America from Wall Street Rule, which shows how America can restore economic health and financial integrity by rebuilding a system of accountable local financial services institutions much like the one that financed the achievements that made America the envy of the world.

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“Wall Street banks have cut back on small business lending… [by] more than double the cutback in overall lending.… [Small business] options just keep disappearing.”

-Elizabeth Warren, Chair of the TARP Congressional Oversight Panel,
quoted in Judd and McGhee, “Banking on America”

Photo by Images Money

The Wall Street bailout of 2008 has radically altered the banking business. The bailout was supposed to keep credit flowing to Main Street, but it has wound up having the opposite effect. Small and medium-sized businesses have traditionally been the main engines for increasing employment, and they need bank credit for their working capital; but today credit to local businesses has collapsed nearly everywhere.

That’s why so many states—the total is now fourteen—are considering turning to state-owned banks to get local credit flowing again.

The Bailout that Missed Main Street

The credit collapse of September 2008 was triggered by the speculative activities of giant Wall Street banks. These profligate banks, which would have gone bankrupt without federal support, have emerged from the crisis bigger and more powerful than before. The federal government has supported and subsidized bank consolidation, resulting in the elimination of more than a thousand community banks by takeover or failure.

The five largest banks now hold 40 percent of all deposits and 48 percent of all bank assets. These banks—Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and PNC—currently control more deposits than the next largest 45 banks combined.

They are big, they are powerful, and they have lost interest in local lending. In the past three years, the four largest banks have cut back on small business lending by a full 53 percent. The two banks that were the largest recipients of TARP funds, Bank of America and Citigroup, have cut back on local lending by 94 percent and 64 percent, respectively.

Why? In 2010, the six largest bank holding companies made a combined $75 billion; and of this, $56 billion was in trading revenues—income from speculating in derivatives, futures, commodities, and currencies. If the too-big-to-fail banks win on these bets, they win big and can pocket the proceeds. If they lose, the federal government can be relied on to bail them out. In those comfortable circumstances, why lend to risky local businesses that might go bankrupt, or to homeowners who might default?

Why Banks Aren’t Lending Locally

Another aspect of the bailout that has put a tourniquet on local lending involves interest rates. The Federal Reserve dropped the Fed funds rate (the rate at which banks lend to each other) to an extremely low 0 to 0.25 percent. It was a very good deal for the big banks—too good to be wasted on local lending. As Dirk van Dijk, writing for the investor website Zacks.com, explained in April 2010:

Keeping short-term rates low should be good for the stock market, and is particularly helpful to the big banks like Bank of America (BAC) and JPMorgan (JPM). Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%.

On big enough sums of money, this can be very profitable, and will help to recapitalize the banking system (provided they don’t drain capital by paying it out in dividends or frittering it away in outrageous bonuses to their top executives).

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

How Banks Make Money
...out of thin air.

Investing in Treasury bills is an attractive alternative for banks, not just because it provides 2.25 percent of risk-free profit but because it requires no capital investment. The amount of capital a bank must hold against its assets (mainly loans) depends on how risky the assets are. Treasuries are considered “risk-free,” so there is NO capital requirement for holding them. Naturally, banks prefer investing in Treasuries under these circumstances over making risky loans, against which they must maintain capital reserves of 7 percent. The banks can borrow virtually for free and make a nice return at taxpayer expense without tying up their capital, which can be used instead to speculate in the market.

And speculation is particularly lucrative at these very low interest rates. As blogger Philip George explains:

The entities who really benefit from low interest rates are hedge funds and traders of financial instruments. Typically, they take advantage of mispricings of securities amounting to a few cents. And how do they parlay such tiny mispricings into incomes amounting to tens and hundreds of millions of dollars? By leveraging their equity ten, fifty, or a hundred times. And of course they can do that only if money is dirt-cheap.

Equally important, this hurts the producers of real goods and services who are looking for loans. At present the prime rate is around 3.25%. What self-respecting bank would lend at 5% or even 10% and wait a whole year when they can earn more in just a few weeks by trading in financial instruments?

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Even when banks do deign to use their nearly-interest-free funds to support loans, they typically do not pass these very low rates on to borrowers. For example, the Fed funds rate was lowered by 5 percentage points between August 2007 and December 2008, but during the same period the 30 year fixed mortgage rate dropped by less than 1 percent, from 6.75 percent to only about 6 percent; today it is still at 4.5 percent.

State-owned Banks to the Rescue?

With lending to Main Street still anemic, some states are taking matters into their own hands and considering legislation that would put local credit back into the local economy. Fourteen states have now initiated legislation for state-owned banks based on the model of the Bank of North Dakota (BND), which provides liquidity for local banks and credit lines for local government. North Dakota has not lost a single bank to insolvency over the last decade.

Other ways in which the BND supports local lending are detailed in an in-depth report by Jason Judd and Heather McGhee titled “Banking on America: How Main Street Partnership Banks Can Improve Local Economies.” They write:

Alone among states, North Dakota had the wherewithal to keep credit moving to small businesses when they needed it most. BND’s business lending actually grew from 2007 to 2009 (the tightest months of the credit crisis) by 35 percent. BND accomplished this through participation loans, in which BND contributes to a community bank’s loan, in order to free up the bank’s capital for more lending. Other tools that boost bank lending power and lower interest rates include purchases of community bank stock and—together with the state’s targeted economic development programs—interest rate buy-downs. As a result, loan amounts per capita for small banks in North Dakota are fully 175% higher than the U.S. average in the last five years, and its banks have stronger loan-to-asset ratios than comparable states like Wyoming, South Dakota and Montana.

While we wait for the Fed to reform its monetary policy and for Congress to break up the banking monoliths, we can follow the lead of North Dakota and set up our own local credit engines. State-owned banks can not only nurture and protect local lending but can provide cash-strapped states with new revenues—without raising taxes, slashing services, or selling off public assets.

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney, author, and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are webofdebt.com and ellenbrown.com. For information on specific state bank legislation, see here.

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California is the eighth largest economy in the world, and it has a debt burden to match. The state has outstanding general obligation bonds and revenue bonds of $158 billion, largely incurred for building infrastructure. Over $7 billion of California’s annual budget goes to pay interest on the state’s debt.

As large as California’s liabilities are, they are exceeded by its assets, which are sufficient to capitalize a bank rivaling any in the world. That’s the idea behind Assembly Bill 750, introduced by Assemblyman Ben Hueso of San Diego, which would establish a blue ribbon task force to consider the viability of creating the California Investment Trust, a state-owned bank receiving deposits of state funds. Instead of relying on Wall Street banks for credit—or allowing a Wall Street bank to enjoy the benefits of lending its capital—California may decide to create its own, publicly owned bank.

On May 2, AB 750 moved out of the Banking and Finance Committee with only one nay vote, and is now on its way to the Appropriations Committee. Three unions—the California Nurses Association, the California Firefighters, and the California Labor Council—submitted their support for the bill. The state bank idea also got a nod from former Secretary of Labor Robert Reich in his speech at the California Democratic Convention in Sacramento the previous day.

Why a State Bank?

California joins eleven other states that have introduced bills to form state-owned banks or to study their feasibility. Eight of these bills were introduced just since January, including in Oregon, Washington State, Massachusetts, Arizona, Maryland, New Mexico, Maine and California. Illinois, Virginia, Hawaii and Louisiana introduced similar bills in 2010. [For more information about these proposals, see here.]

How Banks Make Money

All of these bills were inspired by the Bank of North Dakota (BND), currently the nation’s only state-owned bank. While other states are teetering on the edge of bankruptcy, the state of North Dakota continues to report surpluses. On April 20, the BND reported profits for 2010 of $62 million, setting a record for the seventh straight year. The BND’s profits belong to the citizens and are produced without taxation.

The BND partners with local banks in providing much-needed credit for local businesses and homeowners. It also helps with state and local government funding. When North Dakota went over-budget a few years ago, according to the bank’s president Eric Hardmeyer, the BND acted as a rainy day fund for the state. And when a North Dakota town suffered a massive flood, the BND provided emergency credit lines to the city. Having a cheap and readily available credit line with the state’s own bank reduces the need for massive rainy-day funds (which are largely invested in out-of-state banks at very modest interest).

The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses of the Washington and Oregon bills. Their conclusion was that a state-owned bank on the model of the Bank of North Dakota would have a substantial positive impact in those states, increasing employment, new lending, and government revenue.

What California Could Do with Its Own Bank

Banks create “bank credit” from capital and deposits, as explained here. Under existing regulations, $8 in capital reserves can be leveraged into $100 in loans, drawing on the liquidity provided by the deposits to clear the outgoing checks. Assuming a 10 percent reserve requirement (the amount in deposits normally held in reserve), $8 in capital and $100 in deposits are sufficient to create $90 in loans ($100 less $10 held back for reserves).

In North Dakota (population 647,000), the Bank of North Dakota has $2.7 billion in deposits, or about $4,000 per capita. The majority of these deposits are drawn from the state’s own revenues. The bank has nearly the same sum ($2.6 billion) in outstanding loans.

California has 37 million people. If the California Investment Trust (CIT) performed like the BND, it might amass $148 billion in deposits. With $12 billion in capital, this $148 billion could generate $133 billion in credit for the state (subtracting 10%, or 14.8 billion, to satisfy reserve requirements).

Time for a New Theory of Money
When we recognize that money is simply credit, we can unleash it as a powerful tool for our communities.

There are various ways the state could come up with the capital, but one possibility that would not require new taxes or debt would be to simply draw on the treasurer’s existing pooled money investment account, which currently contains $65 billion in accumulated revenues dispersed to a variety of funds. This money is already invested; a portion could be shifted to the CIT. Since it would be an investment in equity rather than an expenditure, it would not cost the state money. Rather, it would make money for the state. In recent years, the Bank of North Dakota has had a return on equity of 25-26 percent. Compare the 25-30 percent lost in the two years following the 2008 banking crisis by CalPERS, the California Public Employees’ Retirement System, which invested its money on Wall Street.

There are many inviting possibilities for applying the CIT’s $133 billion in credit power, but here is one easy alternative that illustrates the cost-effectiveness of the approach. Assume the bank invested $133 billion in municipal bonds at 5 percent interest. This would give the state close to $7 billion annually in interest income—nearly enough to pay the interest tab on the state’s debt.

Choosing Prosperity

What California can do with its own bank, other states can do as well, on a scale proportionate to their populations and economies. North Dakota has a population that is less than 1/10th the size of Los Angeles; last year, the BND produced $62 million in revenue and $2.2 billion in loans. Larger states could generate much more.

We have been trapped in an austere neo-liberal economic model in which the only alternatives are to slash services, raise taxes, and sell off public assets, all in a futile attempt to “balance the budget” in a shrinking economy. We need to start thinking outside the box. We can choose prosperity, and public banks are a key tool for achieving that end.

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how people can reclaim the power to create money. Her websites are webofdebt.com and ellenbrown.com.

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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. But how? The Federal Reserve could provide the capital and liquidity necessary to create bank credit, in the same way that it provided $12.3 trillion in liquidity and short-term loans to the large money center banks. But Fed Chairman Ben Bernanke declared in January 2011 that the Fed had no intention of doing that—not because it would be too costly (the total deficit of all the states comes to less than two percent of the credit advanced for the bank bailout) but because it is not part of the Fed’s mandate. If Congress wants the Fed to advance credit to local governments, he said, it will have to change the law.

The states are on their own. Policymakers are therefore considering a variety of reforms designed to increase bank lending, particularly to small businesses, the hardest hit by tightening credit standards. 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.

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Own a Bank
An answer to state budget woes that doesn't need to involve sacrificing workers' rights.

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.

State-owned banks could be a win-win for everyone interested in a thriving local economy. Objections are usually based on misconceptions or a lack of information. Proponents stress that:

1. A state-owned bank on the BND model would not compete with community banks. Rather, it would partner with them and support them in making loans. The BND serves the role of a mini-Fed for the state. It provides correspondent banking services to virtually every financial institution in North Dakota and offers a Federal Funds program with daily volume of $330 million. It also provides check clearing, cash management services, and automated clearing house services. It leverages state funds into credit for local purposes, funds that would otherwise leave the state and be leveraged for investing abroad, drawing away jobs that could go to locals.
2. The BND not only does not compete for loans but does not compete for commercial deposits. Less than two percent of its deposits come from consumers. Municipal government deposits are also reserved for local community banks, which are able to use these funds for loans specifically because the BND provides letters of credit guaranteeing them. Virtually all of the BND’s deposits come from the state itself. All state revenues are deposited in the BND by law.
3. Although the BND is a member of the Federal Reserve system, it is insured by the state rather than by the FDIC. This does not, however, put depositors at risk. Rather, it helps avoid risk and unnecessary expense, since the BND’s chief depositor is the state, and the state has far more to deposit than $250,000, the maximum covered by FDIC insurance. FDIC insurance is not only very expensive but subjects members to FDIC regulation, making the state subservient to a semi-private national banking association. (The FDIC calls itself an independent agency of the federal government, but it receives no Congressional appropriations. Rather, it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.) North Dakota prefers to maintain its financial independence.
4. BND officials stress that the bank is run by bankers, not politicians bent on funding their favorite development projects or bestowing political favors. The bank is run very conservatively, doing only creditworthy deals and avoiding speculation in derivatives and risky subprime loans. By partnering with local banks, the BND actually shields itself from risk, since the local bank takes the initial loss if the borrower fails to pay.
5. The BND does not imperil state funds or tax money but is self-funding and self-sustaining. It keeps federally-guaranteed funds in the state that would otherwise go elsewhere, including VA and FHA loans and low-income subsidies. Profits on these federally-guaranteed loans can then be used to build a capital surplus from which riskier loans can be made to local businesses. The BND has a return on equity of 25-26 percent and has contributed over $300 million to the state (its only shareholder) in the past decade—a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. Compare California’s public pension funds, which entrust their money to Wall Street and are down more than $100 billion, or close to half the funds’ holdings, following the banking debacle of 2008.
6. Partnering with the BND allows community banks to fund local projects in which Wall Street is not interested, leveraging municipal government funds that would otherwise not be available for loans. Further, infrastructure projects can be funded through the state bank at substantially less cost, since the state owns the bank and gets the interest back. Studies have shown that interest composes 30-50 percent of public projects.
7. North Dakota has the most local banks per capita and the lowest default rate of any state. The North Dakota Bankers’ Association does not oppose the BND but rather endorses it.

Other states could realize similar benefits, if they were to form banks on the BND model.

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. 

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—Cartoon in the Houston Chronicle

There's an alternative to Wisconsin's budget deficit that doesn't involve taking away workers' rights.

Photo by David Hoefler.

As states struggle to meet their budgets, public pensions are on the chopping block, but they needn’t be. States can keep their pension funds intact while leveraging them into many times their worth in loans, just as Wall Street banks do. They can do this by forming their own public banks, following the lead of North Dakota—a state that currently has a budget surplus.

Wisconsin Governor Scott Walker, whose recently proposed bill to gut benefits, wages, and bargaining rights for unionized public workers inspired weeks of protests in Madison, has justified the move as necessary for balancing the state's budget. But is it?

After three weeks of demonstrations in Wisconsin, protesters report no plans to back down. Fourteen Wisconsin Democratic lawmakers—who left the state so that a quorum to vote on the bill could not be reached—said Friday that they are not deterred by threats of possible arrest and of 1,500 layoffs if they don't return to work. President Obama has charged Wisconsin’s Governor Scott Walker with attempting to bust the unions. But Walker’s defense is:

“We're broke. Like nearly every state across the country, we don't have any more money."

Broke Unless You Count the $67 Billion Pension Fund . . .

That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive Annual Financial Report) [pdf], the state has $67 billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities drawing a modest return.

A recent study by the Pew Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 million annually to meet pension payouts. Zach Carter, writing in the Huffington Post, notes that the pension program could save another $195 million annually just by cutting out its Wall Street investment managers and managing the funds in-house.

The governor is evidently eying the state’s pension fund, not because the state cannot afford the pension program, but because he sees it as a potential source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees.

North Dakota: Banking on the Locals
Video: David Brancaccio visits a bank that is invested in its community.

Fortunately, there is another alternative. Wisconsin could draw down the fund by the small amount needed to meet pension obligations, and put the bulk of the remaining money to work creating jobs, helping local businesses, and increasing tax revenues for the state. It could do this by forming its own bank, following the lead of North Dakota, the only state to have its own bank—and the only state to escape the credit crisis.

This could be done without spending the pension fund money or lending it. The funds would just be shifted from one form of investment to another (equity in a bank). When a bank makes a loan, neither the bank’s own capital nor its customers’ demand deposits are actually lent to borrowers. As observed on the Dallas Federal Reserve’s website, “Banks actually create money when they lend it.” They simply extend accounting-entry bank credit, which is extinguished when the loan is repaid. Creating this sort of credit-money is a privilege available only to banks—but states can tap into that privilege by owning a bank.

How North Dakota Escaped the Credit Crunch

The state-owned Bank of North Dakota (BND) has allowed North Dakota to maintain its economic sovereignty, a conservative states-rights ideal. The BND was established in 1919 in response to a wave of farm foreclosures by out-of-state Wall Street banks. Today, the state not only has no debt, but it recently boasted its largest-ever budget surplus. The BND helps to fund not only local government but local businesses and local banks, by partnering with the banks to provide the funds to support small business lending.

The BND is also a boon to the state treasury, having contributed over $300 million to state coffers in the past decade, a notable achievement for a state with a population less than one-tenth the size of Los Angeles County. In 2008, the BND returned a 26 percent dividend to the state. In comparison, California’s public pension funds are down more than $100 billion—that’s billion with a “b”—or close to half the funds’ holdings, following the Wall Street debacle of 2008. It was, in fact, the 2008 bank collapse rather than overpaid public employees that caused the crisis that shrank state revenues and prompted the budget cuts in the first place.

Seven States Are Now Considering Setting Up Public Banks

Faced with federal inaction and growing local budget crises, an increasing number of states are exploring the possibility of setting up their own state-owned banks, following the North Dakota model. On January 11, 2011, a bill to establish a state-owned bank was introduced in the Oregon State legislature; on January 13, a similar bill was introduced in Washington State; on January 20, a bill for a state bank was filed in Massachusetts (following a 2010 bill that had lapsed); and on February 4, a bill was introduced in the Maryland legislature for a feasibility study looking into the possibilities. They join Illinois, Virginia, and Hawaii, which introduced similar bills in 2010, bringing the total number of states with such bills to seven.

Why All Americans Should Care About Wisconsin

If Governor Walker wanted to explore this possibility for his state, he could drop in on the Center for State Innovation (CSI), which is located down the street in his capital city of Madison, Wisconsin. The CSI has done detailed cost/benefit analyses of the Oregon and Washington state bank initiatives, which show substantial projected benefits based on the BND precedent. See reports here and here.

For Washington State, with an economy not much larger than Wisconsin’s, the CSI report estimates that after an initial start-up period, establishing a state-owned bank would create new or retained jobs of between 7,400 and 10,700 a year at small businesses alone, while at the same time returning a profit to the state.

A Bank of Wisconsin Could Generate “Bank Credit” Many Times the Size of the Budget Deficit

Economists looking at the CSI reports have called their conclusions conservative. The CSI made its projections without relying on state pension funds for bank capital, although it acknowledged that this could be a potential source of capitalization.

If the Bank of Wisconsin were to use state pension funds, it could have a capitalization of more than $57 billion—nearly as large as that of Goldman Sachs. At an 8 percent capital requirement, $8 in capital can support $100 in loans, or a potential lending capacity of over $500 billion. The bank would need deposits to clear the checks, but the credit-generating potential could still be huge.

Banks can create all the bank credit they want, limited only by (a) the availability of creditworthy borrowers, (b) the lending limits imposed by bank capital requirements, and (c) the availability of “liquidity” to clear outgoing checks. Liquidity can be acquired either from the deposits of the bank’s own customers or by borrowing from other banks or the money market. If borrowed, the cost of funds is a factor; but at today’s very low Fed funds rate of 0.2 percent, that cost is minimal. Again, however, only banks can tap into these very low rates. States are reduced to borrowing at about 5 percent—unless they own their own banks, or, better yet, unless they are banks. The BND is set up as “North Dakota doing business as the Bank of North Dakota.”

That means that technically, all of North Dakota’s assets are the assets of the bank. The BND also has its deposit needs covered. It has a massive deposit base, since all of the state’s revenues are deposited in the bank by law. The bank also takes other deposits, but the bulk of its deposits are government funds. The BND is careful not to compete with local banks for consumer deposits, which account for less than 2 percent of the total. The BND reports that it has deposits of $2.7 billion and outstanding loans of $2.6 billion. With a population of 647,000, that works out to about $4,000 per capita in deposits, backing roughly the same amount in loans.

Wisconsin has a population that is nine times the size of North Dakota’s. Other factors being equal, Wisconsin might be able to amass over $24 billion in deposits and generate an equivalent sum in loans—over six times the deficit complained of by the state’s governor. That lending capacity could be used for many purposes, depending on the will of the legislature and state law. Possibilities include (a) partnering with local banks, as in the North Dakota model, strengthening their capital bases to allow credit to flow to small businesses and homeowners, where it is sorely needed today; (b) funding infrastructure virtually interest-free (since the state would own the bank and would get back any interest paid out); and (c) refinancing state deficits nearly interest-free.

Why Give Wisconsin’s Enormous Credit-generating Power Away?

The budget woes of Wisconsin and other states were caused not by overspending on employee benefits, but by a credit crisis on Wall Street. The “cure” is to get credit flowing again in the local economy, and this can be done by using state assets to capitalize state-owned banks.

Against the modest cost of establishing a publicly owned bank, state legislators need to weigh the much greater costs of the alternatives—slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed, and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-generating power away to Wall Street.

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. 

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Bills were introduced on January 18 in both the House and Senate of the Washington State Legislature that add Washington to the growing number of states now actively moving to create public banking facilities.

The bills, House Bill 1320 and Senate Bill 5238, propose creation of a Washington Investment Trust (WIT) to “promote agriculture, education, community development, economic development, housing, and industry” by using “the resources of the people of Washington State within the state.”

Currently, all the state’s funds are deposited with Bank of America. HB 1320 proposes that, in the future, “all state funds be deposited in the Washington Investment Trust and be guaranteed by the state and used to promote the common good and public benefit of all the people and their businesses within [the] state.”

The legislation is similar to that now being studied or proposed in states including Illinois, Virginia, Hawaii, Massachusetts, Maryland, Florida, Michigan, Oregon, California and others.

The effort in Washington state draws heavily on the success of the 92-year-old Bank of North Dakota (BND), currently the only state-wide publicly owned U.S. bank. The BND has helped North Dakota escape the looming budgetary disaster facing other states. In 2009, North Dakota sported the largest budget surplus it had ever had.

The Wall Street Credit Crisis Is Crippling State and Municipal Governments

That state budget deficits are reaching crisis proportions was underscored in a January 19 New York Times article:

[A]lmost everywhere the fiscal crisis of states has grown more acute. Rainy day funds are drained, cities and towns have laid off more than 200,000 people, and Arizona even has leased out its state office building…

“It’s the time of the once unthinkable,” noted Lori Grange, deputy director of the Pew Center on the States. “Whether there are tax increases or dramatic cuts to education and vital services, the crisis is bad.”

The “once unthinkable” includes not only draconian cuts in services, increases in taxes, and sale of public assets, but now filing for bankruptcy. States are not currently allowed to go bankrupt, but a move is afoot in Congress to change all that. Bankruptcy proceedings would allow states to escape pension and other contractual obligations, following the dubious lead of such megacorporations as General Motors and Continental Airlines.

Meanwhile, fears of state bankruptcy have caused state and municipal bond values to plummet and borrowing costs to soar. As with Greece and Ireland, rumors of bankruptcy become a self-fulfilling prophecy, bringing out the hedge funds and short sellers that turn prophecy into reality.

Addressing the Problem at Its Source: The North Dakota Model

While drastic spending cuts are being proposed and implemented, the states’ woes are not the result of over-spending. Rather, they were caused by loss of revenues and increased borrowing costs resulting from the Wall Street banking crisis. Jammed with toxic assets, derivatives, and the subprime mortgage debacle, the Wall Street credit machine ground to a halt in the fall of 2008 and has still not recovered.

And it is here, in generating credit for the state, that the Bank of North Dakota has been spectacularly successful. By providing affordable, low interest credit for business expansion, new businesses and students, the BND has helped North Dakota largely sidestep the credit crisis.

The BND partners with private banks, providing a secondary market for mortgages; offers “wholesale” banking services such as check clearing and liquidity support to private banks; and invests in North Dakota municipal bonds to support economic development. In the last ten years, the BND has returned more than a third of a billion dollars to the state’s general fund. North Dakota is one of the few states to consistently post a budget surplus.

Unlike private banks, public banks don’t speculate or gamble on high risk “financial products.” They don’t pay outrageous salaries and bonuses to their management, who are salaried civil servants. The profits of the bank are all returned to the only shareholder: the people.

North Dakota: Banking on the Locals
Video: David Brancaccio visits a bank that is invested in its community.

Washington State Representative Bob Hasegawa, a prime sponsor of the Washington legislation, called the proposal for a publicly-owned bank “a simple concept that will reap huge benefits for Washington.” In a letter to constituents, he explained, “The concept (is) to keep taxpayers’ money working here in Washington to build our economy. Currently, all tax revenues go into a ‘Concentration Account’ held by the Bank of America. BoA makes money off our money and we never see those profits again. Instead, we can create our own institution and keep taxpayers’ dollars here in Washington, working for Washington.”

Hasegawa said a key feature of the Washington banking institution is that it will work in partnership with financial institutions, community-based organizations, economic development groups, guaranty agencies, and others. He said the Washington Investment Trust will offer “transparency, accountability, and accuracy of financial reporting,” a welcome change from the accounting tricks common among the large Wall Street money center banks today.

A public hearing on HB 1320 is scheduled for Tuesday, January 25th. The bill is assigned to the Business and Financial Services Committee in the House and the Financial Institutions, Housing & Insurance Committee in the Senate.

Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. 

Interested?

• Visit PublicBankingInstitute.org for more information on the movement for publicly-owned banks.
• Whose Bank? Public Investment, Not Private Debt
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• 7 Ways to Transform Banking
  Each of us can help build a resilient financial system that will serve real people in real communities.
• Time for a New Theory of Money
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Fixing the Future is a one-hour PBS special, developed in collaboration with YES! Magazine, that profiles people and communities using innovative approaches to create jobs and build sustainable prosperity in our new economy.

In this segment, host David Brancaccio visits North Dakota to see how Bremer Bank is helping its customers survive and thrive in tough times by lending locally and giving grants to the community.

Video courtesy of NOW on PBS.

Interested?

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• Time for a New Theory of Money: When we recognize that money is simply credit, we can unleash it as a powerful tool for our communities.
• The Growing Movement for Publicly Owned Banks: The momentum toward creating state-owned banks is increasing as more states look for ways to bypass Wall Street, balance their budgets, and get local economies moving.

Are you as outraged as I am by the Wall Street bankers with their fat bonuses, shoddy mortgages, and financial shenanigans? With the gridlock in Washington, I wanted to know what “we the people” can do to turn our fury into constructive action. So I turned to my friend Jared Gardner for advice. Jared comes from the financial industry and thinks hard and well about how to change the system.

Here are seven things I gleaned from my discussion with Jared about what we can each do to build a resilient financial system that will serve real people in real communities.

Move your money.

You may have heard about the Move Your Money campaign. The idea is to move your deposits from a Wall Street bank to a community bank or a local credit union. This is a terrific first step to keep the banksters from playing games with your money. Check out Green America's Community Investing website for ideas on what to do.

Move your debt.

Don’t stop with just moving your deposits. Move your debt. It’s in servicing debt that banks make the big money. So if you have a credit card, a car loan, or a mortgage, consider moving them. Find someone at your local bank or credit union who can help you review your debt and see what you could move to a local institution. Your interest payments can build your local economy instead of fattening those Wall Street bonuses.

Persuade your institutions.

Do you belong to a church, synagogue, mosque, or temple? How about the place where you work? Or a club or nonprofit where you are a member? All of these institutions likely have money and debt. Talk with the leadership about where they do their banking and encourage them to explore what they could move to a local bank. The First Unitarian Church in Portland, Oregon is considering moving its entire banking relationship from a Wall Street bank to a local bank. And the Responsible Endowments Coalition is urging colleges and universities to do the same. We need to follow these examples and make this a nation-wide movement.

Advocate a state-owned bank.

Sadly for the nation, North Dakota stands alone in having a state-owned bank. But that may change. Ellen Brown reports that five states now have pending legislation to create state-owned banks, and more are studying the possibility. The advantages are tremendous. The Bank of North Dakota has kept credit flowing throughout the financial crisis. More important, the state bank keeps community banks thriving. North Dakota has more community banks per capita than any other state in the union. Those community banks serve local businesses, which in turn generate local jobs—a winning strategy in a job-starved market. According to Brown, last year North Dakota had the lowest unemployment rate in the country.

Form or join a group.

Working with others keeps motivation high. One good option is a Common Security Club. Chapters are forming in communities across the country. Members find ways to help each other with financial difficulties, discuss the roots of the economic crisis, and advocate policies that will turn the system around.

Learn more.

The New Rules Project has a community banking initiative that’s a fount of current information on breakthroughs for community banking. Ellen Brown provides regular insights into openings for transforming the banking system. Oregonians for a State Bank is developing allies across the political spectrum who want to strengthen their local economy. And the YES! Magazine website provides a steady stream of stories that spotlight the actions people are taking to build a new economy.

Share these ideas.

People of all political stripes are furious with the Wall Street banks. But they don’t know what to do. So tell everyone you know what you’re doing and why. And share this list. Together we can build a force strong enough to transform the banking system to one that will work for us all.

Fran Korten wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Fran is YES! Magazine's publisher. Jared Gardner is co-chair of Oregonians for a State Bank and can be reached at OregonStateBank[at]gmail[dot]com.

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The new headquarters of the Bank of North Dakota in Bismarck.

Image courtesy www.banknd.nd.gov.

Now, several states are either studying the prospects of a state-owned bank or are considering legislation to make one possible.

Five states have bills pending—Massachusetts, Washington, Illinois, Michigan, and Virginia. In April, documentary filmmaker and Virginia resident Bill Still showed his new award-winning documentary on the topic, The Secret of Oz, to the Missouri House of Representatives. Rep. Allen Icet, a candidate for state auditor, proposed using the Virginia proposal as part of a study on a state bank in Missouri and said he would hold committee hearings this summer.

Also in mid-April, the Hawai‘i House approved a resolution asking the state to study the possibility of establishing a state-run bank there. State Rep. Marcus Oshiro, a Democrat who chairs the finance committee, called a state-run bank a “reasonable public option” to spur development and hold state funds.

Other state legislatures entertaining proposals for forming state-owned banks include New Mexico and Vermont. Candidates in eight states are running on a state-owned bank platform: three Democrats, two Greens, two Republicans, and one Independent.

—Ellen Brown is an attorney and the author of 11 books, including Web of Debt, webofdebt.com

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