The Growing Movement for Publicly Owned Banks
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An amendment to the initial bill would enable the Community Bank of Illinois to make loans directly to the state’s General Revenue Fund, helping the state cope with its current budget challenges.
A Massachusetts-owned Bank
On March 12, the Associated Press reported that a jobs bill sponsored by Massachusetts Senate President Therese Murray also includes a call to study a Massachusetts-owned bank. She told a business group that a state-owned bank has worked in North Dakota, helping to insulate that state from the worst of the recession while also keeping its foreclosure rate down; similarly, a state-owned bank could spur job creation and free up lending to Massachusetts businesses.
Grandfather of the Concept: The Bank of North Dakota
All of these proposals take their inspiration from the Bank of North Dakota, which was founded in 1919 to resolve a credit crisis like that facing other states today. Last year, North Dakota had the largest budget surplus it had ever had. It was the only state that was actually adding jobs when others were losing them. In March 2009, when 46 of 50 states were in fiscal crisis, the Council of State Governments noted that North Dakota was in the enviable position of discussing tax cuts and looking for ways to spend its surplus.
With the deepening crisis, according to National Public Radio, by January 2010 only two states could still meet their budgets—North Dakota and Montana. On February 8, however, the Montana paper the Missoulian reported that the Montana State Legislature’s chief revenue forecaster foresees a budget deficit by mid-2011, leaving North Dakota the only state still boasting a surplus.
North Dakota’s riches have been attributed to oil, but many states with oil are floundering. The sole truly distinguishing feature of North Dakota seems to be that it has managed to avoid the Wall Street credit freeze by owning and operating its own bank. According to the North Dakota Department of Commerce, the BND turned a profit in 2009 of $58.1 million; this money goes into the state’s General Fund. North Dakota’s economy is ten times smaller than Michigan’s, suggesting that Michigan could generate $500 million per year in this way; Washington State and Illinois present similarly inviting possibilities.
That defuses the objection raised in a March 15 editorial in The Detroit News, arguing that Michigan can ill afford the $150 million capital investment to start a bank. If operated like the BND, the Michigan Development Bank could soon be a net generator of state revenues. There are other possibilities, besides a bond issue, for providing the capital to start a bank, but that subject will be reserved for another article.
The BND’s 90-year track record of prudent and profitable lending defuses another objection to state-owned banks: that a public agency cannot be trusted to act responsibly in managing public funds. The Detroit News' editorial concluded that Michigan should “leave banking to the bankers,” but it is precisely because the bankers have destroyed the economy with their reckless lending practices that the public needs to step in. We need a “public option” in banking to set standards and keep private banks honest.
The True Potential of Publicly-owned Banks
North Dakota broke new ground nearly a century ago, but the true potential of publicly owned banks remains to be explored. Nearly all of our money today is created by banks when they extend loans. (See the Chicago Federal Reserve’s “ Modern Money Mechanics," which begins, “The actual process of money creation takes place primarily in banks.”) We the people have given away our sovereign money-creating power to private, for-profit lending institutions, which have used it to siphon wealth from the productive economy. If we were to take that power back, we could generate the credit we need to underwrite a whole cornucopia of projects that we don’t even consider because we think we lack the “money.” We have the labor and we have the materials; we just lack the “liquidity” necessary to put them together to create products and services.