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Let's Take Back the Banks from Greedy Financiers

From North Dakota to Scotland, the public bank option is winning support.
 
 
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The Royal Bank of Scotland (RBS) and the Bank of Scotland have been pillars of Scotland’s economy and culture for over three centuries.  So when the RBS was nationalized by the London-based UK government following the 2008 banking crisis, and the Bank of Scotland was acquired by the London-based Lloyds Bank, it came as a shock to the Scots.  They no longer owned their oldest and most venerable banks.

Another surprise turn of events was the triumph of the Scottish National Party (SNP) in the 2011 Scottish parliamentary election.  Scotland is still part of the United Kingdom, but it has had its own parliament since 1999, similar to U.S. states.  The SNP has rallied around the call for independence from the UK since its founding in 1934, but it was a minority party until the 2011 victory, which gave it an overall majority in the Scottish Parliament.

Scottish independence is now on the table.  A bill has been introduced to the Scottish Parliament with the intention of holding a referendum on the issue in 2014.

Arguments in favor of independence include that it will allow the Scottish people to make decisions for Scotland themselves, on such contentious issues as having nuclear weapons in their seas and being part of NATO.  They can also directly access the profits from the North Sea oil off Scotland’s coast.

Arguments against independence include that Scotland’s levels of public spending (which are higher than in the rest of the UK) would be difficult to sustain without raising taxes.  North Sea oil revenues will eventually decline.

One way budgetary problems might be relieved would be for Scotland to have its own publicly-owned bank, one that served the interests of the Scottish people.  True economic sovereignty means having control over the national currency, credit and debt.

The Public Bank Option

It was in that context that I was asked to give a presentation on public banking at RSA Scotland (the Royal Society of Arts) in Edinburgh on November 22nd.  Among other attendees were a special adviser and a civil servant from the Scottish government.  The presentation was followed by one by public sector consultant Ralph Leishman, Director 4-consulting, who made the public bank option concrete with specific proposals fitting the Scottish context.  He suggested that the Scottish Investment Bank (SIB) be licensed as a depository bank, on the model of the state-owned Bank of North Dakota.  Lively debate followed.

The SIB is a division of Scottish Enterprise (SE), a government economic development body.  SE encourages economic development, enterprise, innovation and investment in business, which is achieved by the SIB through the Scottish Loan Fund.  As noted in a September 2011 government report titled “Government Economic Strategy”:

“[S]ecuring affordable finance remains a considerable challenge . . . . Evidence shows that while many large companies have significant cash holdings or can access capital markets directly, for most Small and Medium-sized companies bank lending remains the key source of finance. Unblocking this is key to helping the recovery gain traction.”

The limitation of a public loan fund is that the money can be lent only to one borrower at a time.  Invested as capital in a bank, on the other hand, public funds can be leveraged into nearly ten times that sum in loans.  Liquidity to cover the loans is provided by deposits, which remain in the bank available to the depositors.  Any shortage in liquidity can be covered by borrowing at low interest from other banks or the money market.  As observed by Kurt Von Mettenheim, et al., in a 2008 report titled Government Banking: New Perspectives on Sustainable Development and Social Inclusion from Europe and South America (at page 196):