Guest Editor’s Column: Public Banking as an Answer to Artificial Scarcity
We are often told, and we tend to internalize, the idea that scarcity is a natural condition of humankind, and the planet. While it is true that natural resources are finite, the specter of scarcity has recently been extended, in many nations’ grand narratives, to include finance. We are told there’s no money for public schools, public safety, and public transportation. We are told that everyone needs to tighten their belts, practice “shared sacrifice,” and give up our “entitlements.”
In fact, our present economy exists in a state of artificial scarcity. America is not broke, resources exist to fund public goods, and the implementation of a few brave but entirely feasible ideas could lead to a healthier, more dynamic economy, without forced choices between essential public services. Public banking is one such idea, and perhaps the most salient one, because public banks can be chartered and managed to lend locally, refrain from risky speculation, and return millions of dollars per year to states’ and municipalities’ general funds.
The existing private banking system imposes artificial scarcity on the public. Private banks do this by withholding loans to small businesses, moving money out of the communities that do business with the banks, and being beholden to shareholders rather than local customers. Monopolies of any resources create artificial scarcity. In the case of money, that scarcity results in inequality that hinders common folks’ purchasing and investment power. Simply put, money is limited by bankers as if it were a precious metal, when it’s more like a simple metric, like inches — something we can never run out of.
So we are left with a nation where there is plenty of work to do, but no jobs. There is plenty of demand for services, but no investment targeted where it will do the most good. When you combine this artificial scarcity with a federal government ideologically committed to austerity, the result is the slow death of local communities’ vitality, and an anemic national government with no effective plan to restore that vitality.
Public banking is one way to transcend this malaise. Since their primary mission is financing development in the communities where citizens democratically own the banks, there will be no diversion of public money, or private deposits, into speculative instruments and foreign industries that compete with domestic industries. There will be no unreasonably high interest rates holding the financing of public goods hostage to private lenders. All of these benefits, and more, will offer a way out of the artificially imposed scarcity of the private banking monopoly. As Marc Armstrong, Executive Director of the Public Banking Institute, recently put it:
This approach would serve our communities as we seek to reverse the artificial economic scarcity imposed on us by the existing private banking system. Affordable loans to fund the new economy, a simple idea with its roots being local, not centralized on Wall Street or in Congress. The Public Banking Institute envisions public banks as the organizing entity for the development of this market. Public banks can be the provider of debt capital to businesses and, by issuing corporate bonds, serve as the investment vehicle for people who wish to take a portion of their retirement funds to invest locally.
And, as David Brodwin of the American Sustainable Business Council expresses, public banks can create abundance in public coffers where, now, there is the construct of scarcity:
Public banks magnify the money the state can deploy for economic development and infrastructure investment. Because of the way our system of “fractional reserve banking” works, each dollar the state sends to a public bank can support at least two dollars of investment in loans for local business, and potentially more . . . The public bank charges interest to borrowers and generates earnings. Since it doesn’t have to pay dividends or show earnings to outside investors, it can give its earnings to the state (after retaining some earnings to support growth.) Or, it can offer the state below-market borrowing costs and forgo earnings.
This is why interest in public banks is growing across the nation. People from all sides of the political spectrum are fed up with private financial institutions’ imposition of scarcity when there is an abundance of human ingenuity and individual capital. It’s time to put the word “scarcity” back where it belongs–referring to resources which are actually scarce, rather than imagining that we lack the banking resources needed to enable public policy.
Featured Article: Remaking the Federal Reserve, Building Public Banks and Opting Out of Wall Street
by Margaret Flowers and Kevin Zeese Originally published inTruthout
Creating a Finance System That Serves the People, Part II.
In Part I of this series, we examined breaking up the too-big-to-fail-or- jail banks, regulating them – especially their massive and risky derivatives trading – and more aggressively enforcing laws and regulations against security fraud.
In Part II, we examine how to remake the Federal Reserve into a transparent, democratic institution that serves the necessities of the people and the economy, not just the bankers; how to develop public banks in every state and many cities throughout the nation; and how people can opt out of Wall Street right now.
In other articles and on our web site, we examine the broader economy and how to remake it by putting in place economic democracy so that people have greater control over their economic lives and more influence over the direction of the economy.
It is worth restating that we do not see the proposals here as final, but more as an opportunity to continue the discussion so Americans can develop a finance system that serves and protects them.
Transform the Federal Reserve
A fundamental question for the new finance system is the role of the Federal Reserve and whether it should remain in private hands. The Federal Reserve is a privately owned US central bank that acts behind closed doors to create money and set interest rates, and it presently puts the interests of the big banks first. The Federal Reserve was originally created by Congress in 1913 and can be altered, nationalized or even dismantled by Congress.
The Fed is a private entity that is controlled by the banks. The 12 Regional Reserve Banks issue shares of stock to its member banks. The Fed is not operated for profit, and the stock may not be sold, traded or pledged as security for a loan. It does pay dividends that are, by law, 6 percent per year. But more importantly, the stock provides banks with votes to elect six of the nine members of the board of governors of the regional banks.
As Leo Panitch told The Real News Network, it is “not just that the banks are too powerful outside the Treasury and Fed. The Treasury and Fed are part of the Wall Street nexus, and they are organized in such a way, and the people who work in them are trained in such a way, as to be reproducing the current system.”
There is widespread agreement among economists that there is a need for a central bank to regulate the money supply by setting interest rates and to be a lender of last resort in a financial crisis. However, Bill Black argues that the Fed can be made very small and mechanical in its setting of interest rates, rather than maintaining the current approach, which depends on what members of the Federal Reserve Board of Governors decide.
Further, the Fed needs to be made utterly transparent. “There is no reason for anything the Fed does to be opaque” says Black. In 2010, an “audit the Fed” bill passed in Congress despite aggressive opposition by the Fed. It was not the broad, open audit originally proposed by former Texas Republican Congressman Ron Paul and Rep. Alan Grayson (D-Florida), but it did provide a snapshot audit of a limited time of Fed activity.
As a result of the Government Accountability Office (GAO) audit of the Fed, Senate sponsor Bernie Sanders of Vermont said, “We now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world.” Among the investigation’s key findings was that the Fed unilaterally provided trillions of dollars in financial assistance to foreign banks and corporations from South Korea to Scotland. These decisions were all made without the public, media or elected officials’ knowledge, and they would have remained secret without an audit.
In addition, the audit found conflicts of interest. For example, the CEO of JPMorgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Sanders urged that “No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed.”
But the fundamental question is: who should control the money supply? The control of the money supply may be one of the most important functions of government, but currently it is controlled by the Federal Reserve. The Fed creates funds digitally and makes them available to private banks at a low interest rate, which the banks can then use as they like to invest, add to their personal reserves and/or make loans of up to ten times the amount of their holdings.
At present, the government can only issue bonds that are sold to the Fed, banks or investors with the funds raised by those bond issues used for federal spending. These bonds are loans that must be repaid with interest by the government. So in effect, the government places itself in a position of debt by borrowing money from the banks, and then taxpayer dollars are used to pay the debt with interest. If the government created its own (debt-free) money instead, taxpayers would get more value for their dollars and the system could be more democratic and transparent, and could function for the public good.
Henry Ford said, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Why? Because, as Thomas Edison pointed out, “If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good … It is absurd to say our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.”
As part of the economic track of the 2011 Democracy Convention, Greg Coleridge argued that the US Constitution gives the government the power to create money; Article I, Section 8 says: “The Congress shall have power … to coin money, regulate the value thereof, and of foreign coin.” The creation of money is a public function, perhaps more important than any other part of the commons. As Coleridge points out, public money means we create our own money debt-free rather than borrowing from banks and building up debt.
The American Monetary Institute has put forward a thorough model of remaking the finance system to take power from the banks and give it to the people through the government. The institute point to a bill introduced by former Congressman Dennis Kucinich (D-Ohio), HR 2990, which dismantles the Federal Reserve and puts the necessary functions in the Department of Treasury, where a monetary authority is created to prevent inflationary and deflationary impacts. It would prevent banks from creating money through fractional reserve lending. Instead, money would be created by the government, which spends it into circulation for necessary programs – for example, infrastructure, education, health care.
Economist Jack Rasmus also urges that we “democratize” the Fed and require it to function as a national, Bank of North Dakota-like “public banking institution that would provide cost-only loans to the consumer sector (mortgage, auto, student, installment, etcetera), finance public investment corps for alternative energy, lend to community infrastructure projects, and totally remove the private banks from its board of governors and open market committee decision-making process.”
Moving the money creation function into the federal government would place it within the US constitutional system of checks and balances to work for the whole society, not only for the bankers and the privileged. Rather than the banker’s corporation, the Federal Reserve, creating money, the Fed would be replaced by a US Central Bank operating within the Department of the Treasury (as one option) which would create money.
Further, Coleridge argues, that there is good reason for governments to control the money supply because there are times when more money is needed in the economy and times when the money supply needs be slowed. When money is created by government, it is an asset and not debt to banks. We should be funding necessary projects and paying our debts with debt-free money. Money should be made for the benefit of the entire economy, not for the benefit of bankers.
Under such a system, the creation of money would be used to serve the interests of society. The money would be created and spent into circulation by the federal government for infrastructure, including the human infrastructure of education and health care. For example, the American Society of Civil Engineers grades US infrastructure D+ and sees an urgent need for over $3.6 trillion in spending to bring existing infrastructure to safe levels by 2020. As the federal government spends money on infrastructure and other urgent needs and funds local and state governments, this money is paid out to contractors, who pay their suppliers and laborers, who pay for their living expenses, and, ultimately, that money gets deposited into banks, which are then in a position to make loans.
Some creative thinking is needed to develop a new central banking system. We should open our minds to a wide range of options. For example, in addition to the approach described here, the finance system could be a fourth branch of government, elected directly by the people; or with a combination of elected and appointed governors to represent different parts of society, for example: energy, housing, health care, workers, transportation. The current system is not working and needs rethinking so that it serves the needs of the people and the society, not only the desires of financiers.
Public Banking: A Public Bank in Every State
Ellen Brown, the president of the Public Banking Institute, argues that we need a public bank in every state and major city. The United States has one model for public banking: the bank of North Dakota. When North Dakota farmers were losing farms to Wall Street, they organized a populist movement, and in 1919, set up the bank of North Dakota. The publicly owned bank recycles state revenues into credit for the state. Thus, North Dakotans keep their money in their community.
The result has been an ongoing success. Even during the current economic collapse, North Dakota escaped the credit crisis and has maintained a budget surplus since 2008, low unemployment and no public debt.
Imagine how different California could be if it had public banks. Brown summarizes: “At the end of 2010, it had general obligation and revenue bond debt of $158 billion. Of this, $70 billion, or 44 percent, was owed for interest. If the state had incurred that debt to its own bank – which then returned the profits to the state – California could be $70 billion richer today. Instead of slashing services, selling off public assets, and laying off employees, it could be adding services and repairing its decaying infrastructure.”
How does public banking work? All of the revenues of the state go into the state’s public bank, which, like other banks, leverages those deposits into credit. The state bank partners with local banks to fund local projects. For example, when there is a flood or other disaster, the bank quickly helps provide funds to rebuild homes and infrastructure. It is a bank focused on serving the public interest and which returns the profits to the public.
According to Brown, there have been two recent studies that show public banks are less corrupt than private banks and that they are more efficient and more profitable. The North Dakota public bank has complete transparency and accountability – including routine audits by several agencies. It does not pay executives exorbitant salaries and bonuses. It does not reward people for churning out risky loans. And it does not engage in casino investing in risky derivatives. It has lower costs because no advertising is necessary; instead, the government guarantees the bank easy access to liquidity.
In fact, Ellen Brown reports that as part of the “living wills” banks are required to prepare under Dodd-Frank – which describe how they will survive an economic crisis – the banks include “bail-in” provisions. These plans require depositors (who are unsecured creditors, with fewer rights than derivative investors) to bail out the banks by turning their savings into bank stock, which could be worth only pennies on the dollar in a crash.
Marc Armstrong, executive director of the Public Banking Institute, asks of the states: “What is their plan to prevent city, county and state governments from becoming creditors for the too-big-to-fail banks, the next time these banks lose a multi-billion dollar bet? Because of their fiduciary responsibility to the public, we request that our public finance officials answer the question: what is the risk we have in doing business with too-big-to-fail banks that are apparently now able to seize deposits and convert them to capital?”
The living wills of the big banks make them too risky for city, county and state government money, as well as pension funds’ money.
Another concern is that at least 1,350 school districts and government agencies across the nation have turned to a controversial form of borrowing called capital appreciation bonds to finance major projects. These bonds allow the government to avoid paying anything now and pass the debt on to future generations, but at a much greater cost. For example, $22 million borrowed now with no payments due for 21 years would cost the taxpayers $154 million, seven times the amount borrowed, when it is repaid in 2049.
This practice raises questions. Armstrong summarizes: “Why are state and local governments, school districts and public hospitals paying Wall Street banks billions of dollars of interest on municipal bond and capital appreciation bond debt, when we could be paying that same interest to ourselves by issuing credit with a public bank?”
If the government would have taken over Citibank it would not have done the kind of things that Citibank did. The government would not have used depositors’ money and borrowed money to gamble. It wouldn’t have gone down the casino capitalism route. It wouldn’t have played the derivatives market. It wouldn’t have made corporate takeover loans. None of these are productive from the vantage point of economic growth and raising productive powers and living standards. They would not be the proper behavior of a public bank.
Hudson points to the differences between public and private banking. Private “[b]anks are supposed to make money. And unfortunately, they can make money most easily … by being parasitic, not by being productive.” On the other hand, a public bank “would make loans for long-term purposes to serve the economy and help the economy grow.”
Brown would like to see states remove the middleman, the private banks that profit from their deposits, by creating a public bank in every state so states could “bring their money back home and leverage it for their own purposes.” There is no good reason for states and cities not to develop public banks and many good reasons to do so.
Change Is Already Happening as People Opt Out of Wall Street
There are a variety of vehicles being developed to help people move their money out of Wall Street banks and the current finance system.
The Move Your Money Project encouraged people to move their money from the big banks to community banks and credit unions. The Occupy movement held a Bank Transfer Day on November 5, 2011, as part of this campaign. The campaign was assisted by banks whose corrupt practices became notorious and who had started adding fees, like ATM card fees. Three months after Bank Transfer Day, more than 5.6 million customers had moved their money. The campaign continues at Switch Your Banks, which has a consistently excellent blog on banking. Credit unions, a form of cooperative finance, now have assets of over $1 trillion and are becoming major financial players.
People have also been creating time dollars and time banks. This concept, originated by Edgar S. Cahn, allows people to give time to get time; that is, if someone takes an hour to teach someone to read, they can get an hour for a massage from someone else participating in the time bank, and the masseuse can get an hour from a local participating plumber. This work is conducted outside of the tax system and allows people who have skills, but perhaps are unemployed or underemployed, to use their skills in a dignified way to purchase the skills of other people. TimeBanks.org provides a directory of Time Banks in the United States. If you cannot find one in your community, you can create a time bank.
Another opt-out is local currency. Across the world, 1,900 local communities, including over a hundred in the United States, are now issuing their own currency. Some communities, such as Ithaca, New York, issue paper currency; others in Canada, Australia, the UK or France issue complementary electronic money.
The new Internet currency, Bitcoin, has become popular very quickly.Bitcoin is already bigger than many sovereign currencies and this month broke the $1 billion value mark. Bitcoin is not tied to any particular financial institution and is independent from world governments. Some view Bitcoin as a safe haven for people trying to protect their money from corrupt Wall Street banking, but large investors have begun buying up Bitcoin to avoid taxes. The outcome is uncertain at this time.
More and more questioning has arisen regarding the current debt-based finance system. Occupy Wall Street offshoot Strike Debt is building popular resistance to all forms of debt imposed on us by the banks. They produced the Debt Resistor’s Operations Manual, which provides specific information and tactics for understanding and fighting against the debt system. It provides information on how to deal with personal debt, as well as how to work collectively to challenge the way debt undermines communities. Strike Debt also organized a Rolling Jubilee where participants buy debt at pennies on the dollar, as debt collectors do, but rather than collecting the debt, they forgive it. So far, they have raised over $578,000 to abolish over $11.5 million in debt.
People are also examining ways to invest locally rather than on Wall Street. Michael Shuman, in Local Dollars, Local Sense points out that Americans have $30 trillion invested in stocks, bonds, mutual funds, pension funds and life insurance funds, but not even 1 percent of these savings touch local small business. He shows how people can profit by putting money into building their local businesses and creating resilient local and regional economies. Shuman describes many ways to opt out of Wall Street and opt in to local investment, among them investment clubs and networks, local investment funds, community ownership, direct public offerings, local stock exchanges and crowd funding.
Tying It All Together
In his current book, What Then Must We Do?, political economist Gar Alperovitz argues that banking is one of two major areas where game-changing, systemic change might develop (the other is health care). As the Wall Street finance system fails us and places us at great financial risk, people are looking for alternatives and thinking about ways to create a finance system that will serve the people. A lot has been done in this area, and a cohesive set of principles is beginning to be developed. These include:
·Investigation and enforcement of the finance system.
·Breaking up the big banks and limiting their size so they are not a systemic risk.
·Remaking the Fed into a small, transparent, mechanical controller of interest rates.
·Transferring the power to create money to the government in a new central bank.
·Creating public banks in cities and states throughout the country.
·Creating systems outside of the finance system that allow for barter, time banks and other alternatives.
·Encouraging community banks and credit unions.
·Encouraging local investment in communities instead of Wall Street investment.
This article does not attempt to cover all aspects of finance. For example, the international systems dominated by the World Bank and International Monetary Fund require major transformation, but that topic would require an article of equal length. We also do not deal with the economy beyond finance, where we see worker-self-directed enterprises or worker cooperatives as the foundation of a newdemocratic economy that spreads wealth and power more equitably among the people and where a progressive tax system would fund the government.
Finance is the center of the US economy. The current system does not function for most people – or for small- and medium-sized businesses. It is a system that is addicted to casino-like investment, is corrupted by unprosecuted security fraud and funnels money to the wealthiest.
The 2008 collapse had devastating consequences, and since the system remains quite opaque, we do not know whether another collapse is near. It is time to develop an alternative system of finance designed to support the needs of the people and the country, not the needs of bankers. We hope this article adds to an ongoing conversation, and we look forward to your comments so the conversation can be advanced further.
You can listen to Big Finance Fraud and Public Banks with Bill Black and Ellen Brown on Clearing the FOG Radio.
Kevin Zeese JD and Margaret Flowers MD co-host ClearingtheFOGRadio.org on We Act Radio 1480 AM Washington, DC and on Economic Democracy Media, co-direct It’s Our Economy and are organizers of the Occupation of Washington, DC. Their twitters are @KBZeese and @MFlowers8. They will be featured at the Public Banking 2013 conference June 2-4, 2013, in San Rafael, CA; details here. _________________________
Curious as to how the Cyprus “Bail-in” went down? Here’s a depositor’s Laikie Bank statement with funds that have been blocked. Sign a petition to hold public finance officials to their fiduciary responsibility.
In this Newsletter
Featured Article: Remaking the Federal Reserve
Upcoming Events (sidebar)
Public Banking in the News (sidebar)
Obama’s Pacific Trade Deal Is No Deal At All (sidebar)
List of speakers here. Become a partner or sponsor of Public Banking 2013.Find out how.
Do you wish to attend but are short on cash? Well then,volunteer before and during the conference — and help make this a success! We have a high quality hotel at excellent rates. Reserve now before rates go up on May 10th. Everything you need to know about the conference ishere. Evening tickets as low as $35.
Public Banking Coalition Update:
These are the Public Banking Coalition state chapters and affiliates registered to-date, to be announced at Public Banking 2013: Colorado, Washington, Vermont, Maine, Massachusetts, Pennsylvania, New Mexico and Washington D.C. Don’t see your state? Get organized — contact Marc Armstrong at[email protected]org. Counties will be announced, too, but be sure you notify Marc Armstrong!
May 8 — Navigating the New Economic Reality with Richard Heinberg (Marc Armstrong on panel), 7-9pm, Santa Rosa, Register Here.
May 8 — Interview, the Meria Heller Show (Ellen Brown), 11am PDT
May 10 — Live appearance on RTTV (Ellen Brown), 3pm PDT
May 23 — Escaping the Budget Trap (Ellen Brown, Mike Krauss, Tom Sgouros, Marc Armstrong), 7pm, Drexel University/Stein Auditorium/Nesbitt Hall, Philadelphia
May 24 — Expert panel “A Parachute for the Fiscal Cliff” (Ellen Brown), University Village, Thousand Oaks, CA 2-4pm PDT
Jun 2 — Public Banking 2013 Funding the New Economy Conversation (tickets available separately from Conference)
Obama’s Pacific Trade Deal Is No Deal At All by David Brodwin Originally published in US News.
Question: When is a Trade Pact not a Trade Pact?
Answer: When it protects legacy industries from competition and strips from governments the means to manage their own economies.
With little attention from the media, an agreement called the Trans-Pacific Partnership is being negotiated among the U.S. and other Pacific Rim nations. The TPP has been positioned as merely a trade deal, to harmonize tariffs and other trade rules and promote trade among the countries involved.
But it’s much more than that. Described as a “stealthy delivery mechanism for policies that could not survive public scrutiny” the pact aims to severely curtail government authority at all levels. Meanwhile, it would greatly encourage predatory trade that harms communities and the environment.
This deal is bad for the economy, far beyond its impact on specific industries and communities. Economic vitality depends on constant innovation and evolution. The industries of the past need to adapt to new technologies and approaches or get out of the way. But this proposal is basically being written by lobbyists in legacy industries, and they are using it to limit their exposure to competition in the marketplace.
Here are a few of the most problematic aspects of TPP:
A Broad Range of Special Interest Giveaways
Many provisions of TPP have little to do with trade per se. They simply promote the interests of powerful global industry groups and use legal and political mechanisms to limit true competition in the market place. For example:
·Provisions of SOPA, the so-called “Stop Online Piracy Act” which was rejected last year by Congress. SOPA would give a competitive advantage to the film industry and other content-creators while restricting innovation on the internet.
·Provisions that would extent patent protection on pharmaceuticals while restricting governments from negotiating lower prices.
·Provisions that would privilege major banks and financial institutions over credit unions and the emerging sector of public banks.
·Provisions that would disadvantage organic farmers and others who adopt safer and more environmentally-sound agricultural practices.
·Provisions that would extend the dominance of coal and oil and hinder alternative energy producers, by blocking regulations and limiting deployment of smart grid and other infrastructure.
Attack on Local Economic Development Programs
According to leaked drafts, the proposed pact would ban state and local governments from extending preferences to vendors of locally-produced goods and services. “Buy American” programs would be forbidden. Local employers could not be supported. Local farmers could not be favored.
Threat to the Triple Bottom Line
Many jurisdictions have policies to promote opportunity and ameliorate the severity of market forces. These include minimum wage laws, laws requiring employers to offer health insurance, regulations covering product safety, work-place safety, environmental protection, and more. All of these protections are at risk under the TPP. For example, the pact would prevent communities from deciding whether or not they want fracking in their area.
A New International Court where Corporations Sue Governments
Once the TPP is signed, government entities at all levels in the participating countries will have to change their policies to conform to the agreement. This means dismantling any regulations, safeguards or incentives they have enacted to support their economies and provide better lives for their citizens. A system of tribunals will be set up to hold governments to account. Corporations could sue governments to demand the relaxation of standards, and could claim damages from governments that failed to conform. Under NAFTA, a similar tribunal system has already levied fines of hundreds of millions; under TPP this would expand greatly.
Secret Negotiations without Public Participation
All TPP negotiations to date have been conducted behind closed doors. No information has been released to the press and the public; no public participation or comment is invited or allowed. Even U.S. Senators have been barred from seeing negotiation points or drafts – yet hundreds of corporate lobbyists are at the table on a regular basis. Most of the information that has surfaced in public accounts comes from drafts leaked by participants dissatisfied with one provision or another. (For example, the Australian negotiating team is reported to have been upset about a provision which would have banned the way the Australian government negotiates with pharmaceutical companies. If implemented, this provision would result in a sharp increase in what Australians pay for prescription medication.)
It’s time to Open Up the Negotiations to the Public
In a global economy, trade policy has sweeping ramifications for every sector of the economy. Decisions on trade policy are really decisions on the relative power of corporations and governments. Trade policy affects employment rates, wage levels, the availability of capital, environmental conditions, public health, and much more. We cannot allow negotiations over these vital things to be conducted by secret bodies, without public oversight, comment, and ultimately the right of the public to affirm or reject these agreements.
The nature of trade pacts has changed significantly. Once upon a time, trade negotiations were largely about countries seeking advantage over other countries, or seeking to dismantle tariffs that prevented fair and open competition. Now the negotiations are about dominant industries seeking to prevent competition rather than encourage it. The negotiations are about dominant global-scale industries seeking to undercut government efforts to regulate them in the public interest. There is no such thing as a simple “trade pact” anymore.
David Brodwin is a cofounder and board member of American Sustainable Business Council. He will lead and moderate the TPP Forum on Monday evening, June 3rd. Follow him on Twitter at @davidbrodwin.
For the latest public banking developments in Philadelphia, be sure to download the letter that went to all Philadelphia City Council Members.
How did deep-red North Dakota end up with the nation’s most populist financial institution?
When the financial crisis struck in 2008, nearly every state legislature was left contending with massive revenue shortfalls. Every state legislature, that is, except North Dakota’s. In 2009, while other states were slashing budgets, North Dakota enjoyed its largest surplus. All through the Great Recession, as credit dried up and middle-class Americans lost their homes, the conservative, rural state chugged along with a low foreclosure rate and abundant credit for entrepreneurs looking for loans.
Normally one of the overlooked states in flyover country, North Dakota now had the country’s attention. So did an unlikely institution partly responsible for its fiscal health: the Bank of North Dakota. Founded in 1919 by populist farmers who’d gotten tired of big banks and grain companies shortchanging them, the only state-owned bank in America has long supported community banks and helped keep credit flowing. The bank’s $5 billion deposit base comes mostly from state taxes and funds. The money is leveraged so the bank can offer loans for local small businesses and infrastructure projects; the interest, rather than going to Wall Street banks, stays in the state. The Bank of North Dakota rarely makes direct loans; instead, when a community bank wants to give a sizable loan but lacks the capital, the state bank will partner on the loan and provide a backstop. Such partnerships help ensure that small-business owners, farmers, and ranchers can access lines of credit—and they strengthen community banks, which is why North Dakota has more local banks per capita than any other state.
During times of economic crisis, from the Great Depression to the Great Recession, the state bank has been essential to cushioning the blow for North Dakotans. It offers countercyclical support, meaning that in bad times, when credit starts to dry up, it plays an even bigger role in offering credit and helping struggling small banks make loans to good candidates. But the state bank has been good for North Dakota in another way you wouldn’t expect: It’s helped bolster the state budget. Since it became profitable in the 1940s, the Bank of North Dakota has returned more than $555 million to the state’s general fund.
North Dakota’s rosy financial picture can’t all be chalked up to the bank. An oil boom in the western part of the state has created thousands of jobs, and North Dakota’s housing prices were always low, so they never inflated to the dangerous levels other states saw. But policy experts like Sam Munger, the managing director at the University of Wisconsin-Madison Center for State Innovation, say that by offering partnerships and avoiding the risky practices of commercial banks, like subprime lending, the state bank was instrumental in keeping community banks healthy. “It’s partly because you have civil servants in charge,” he says, “rather than folks whose paychecks depend on how much money the bank makes in a quarter.”
To many Americans, of course, the idea that state governments should be running banks—that they can run them better—is anti-capitalist blasphemy. But in conservative North Dakota, the bank is so well established and popular that former U.S. Senator Kent Conrad, who’s 64, says he can’t remember a time when anyone seriously challenged it. Now, across the country, some policymakers and community groups want to follow North Dakota’s lead. Since 2009, lawmakers in more than 20 states have filed legislation to either start a state-owned financial institution or at least study the prospects. Most of the efforts have fizzled, but this year lawmakers in several states are cautiously optimistic they can turn their proposals into policy—creating, if not a full–functioning state bank, then at least the groundwork for one.
It won’t be easy; the idea is so unfamiliar that it strikes many as downright kooky, if not scarily socialistic. Times were different, opponents insist, when North Dakota founded its bank in 1919. But the hurdles faced by state-bank proponents a century ago were not altogether different from what they face today.
By the turn of the last century, North Dakota farmers knew they were getting cheated. Wheat dominated the state, and its growers were at the mercy of Minneapolis-St. Paul’s big banks and grain companies. Most Midwestern states were “economic colonies,” says Bill Pratt, a historian of the era at the University of Nebraska. “The empire was administered from the Twin Cities.” North Dakota farmers faced double-digit interest rates, while their cousins closer to the empire’s capital only had to pay a fraction of that. The loans almost always came due during the harvest, which forced farmers to sell more wheat when prices were cheapest. Making matters worse, just about every grain elevator along the railroad was operated by the big grain companies, which offered the same price and the same grade rating—always lower than the growers needed and wanted. The final insult: When the grain was weighed, the companies used a fan to blow on the pile, supposedly to remove dust. As an article in the Wyoming Star Tribunenoted in 1921, “What actually happened was that the fan removed not only the dust but during the course of the year in some of the larger elevators, fifty thousand bushels of grain as well.”
Republican lawmakers who dominated North Dakota politics were in the pockets of the banks and grain companies, so the farmers got nowhere lobbying for reform. In 1915, they began to team up with former socialist organizers eager to create a viable political operation. Calling themselves the Non-Partisan League, they began to challenge Republicans in primaries. Enthusiasm for the NPL grew quickly; by the end of 1915, the group had 25,000 dues-paying members. After the 1916 elections, the group controlled the state house and governor’s office. “They kind of caught the old-style politicians by surprise,” Pratt says. By 1918, the NPL had taken the state senate as well and set about implementing a populist agenda, which included creating a number of state-owned institutions. At the top of the list, along with a state-owned mill, was a bank.
The idea was relatively simple: Sell $2 million in bonds to finance the institution, require municipalities to make deposits to the bank to keep it capitalized, and start helping farmers access credit at reasonable rates. A powerful Industrial Commission—made up of the governor, attorney general, and agriculture commissioner—would oversee the bank, as well as other state-owned projects the NPL was launching.
Trouble was, the NPL had lousy timing. By the time it came to power after the 1918 elections, World War I was over and a postwar recession was hitting American agriculture as demand dropped off. Meanwhile, the war had stoked right-wing nationalism and the communist revolution in Russia had successfully deposed the czar, heightening fears of “red” revolt in the U.S. It was not a propitious time for radical reform.
News of the Bank of North Dakota was greeted with suspicion and fear. “North Dakota Adopts Autocratic Socialism,” blared the front-page headline of one Montana newspaper. Media coverage was largely critical (except, of course, in the NPL’s paper, The Nonpartisan Leader). National papers were particularly free with comparisons to Bolshevism; The New York Times, which featured frequent stories on the bank, ran a piece in 1921 arguing that the NPL “dreamed of duplicating in at least a great section of this country what Lenin and Trotsky did in Russia.”
Assaults on the bank had serious consequences. To appease the state’s community banks, which worried about the competition, the Industrial Commission promised not to withdraw state funds that had already been deposited with local banks. Anti-NPL politicians forced an audit, filed an unsuccessful lawsuit, and by 1920 had repealed requirements that municipalities make deposits there. As a result, the bank had almost no liquidity. Its bonds weren’t selling, and it stopped honoring its checks.
The NPL’s political opposition, the Independent Voters Association, set out to kill the Bank of North Dakota for good in 1921. It floated a state referendum on the NPL’s state-owned programs, including the bank, and engineered a recall election for the Industrial Commission members. (The recall and referendum were innovations of the NPL, now being used against it.) The election resulted in the nation’s first recall of a governor, attorney general, or agriculture commissioner. But while voters dumped the bank’s commissioners, they surprised almost everyone and voted to keep the bank.
A decade later, North Dakotans would be grateful they’d stuck with their “socialist” bank. The 1932 election, as the Great Depression raged, brought a new wave of NPL leaders to power. With the agriculture community in crisis, the bank began actively helping farmers to repay loans. While many farms were foreclosed on, giving the Bank of North Dakota thousands of acres of land, bank leadership started innovative programs to help people buy back what was once theirs. It all offered North Dakotans a fresh view of their bank as a helpful state institution—working for the common good, bailing out folks in need.
Over the following decades, the bank became a noncontroversial part of the state’s financial landscape. It made the nation’s first federally insured student loan in 1967 and became a major source of college loans. When the next great economic crisis hit, the Bank of North Dakota once again was indispensible, responding to the credit and loan crisis of the 1980s by aggressively backstopping local bank loans and providing credit that farmers could not get elsewhere.
By the 1990s, the state bank had become a major collaborator with the community banks that once feared it. A new bank president, John Hoeven, sought to make the bank a driver of economic growth, starting many of the programs for which the bank is now known, including targeted partner loans for small businesses. “I think the state bank has been hugely helpful to those community banks,” says former Senator Conrad. “They’re able to take loans that they just couldn’t do on their own.” Meanwhile, Hoeven’s leadership helped catapult him to the governor’s office and ultimately into the U.S. Senate—a Republican who owes his popularity, and his election, to his efforts to expand the role of a state-owned bank.
Given the success of North Dakota’s model, it’s hardly surprising that lawmakers in other states have tried to emulate the idea. Few of the measures have gained traction, partly because the idea of a state bank still strikes many as downright weird. This year, however, advocates are hoping that Vermont—which has been known to embrace the weird—will take up the cause. Vermont, state senator Anthony Pollina tells everyone who will listen, currently puts its tax dollars in the megabank TD. “They charge us fees, they lend our money wherever they want to lend it,” but “they don’t do that much lending in Vermont anymore. We need a bank that’s going to invest in the priorities of Vermont, not the priorities of Wall Street.” Pollina’s idea is to create a small-scale bank with around $50 million in assets. A bill to study its feasibility and propose a model has already been assigned to the committee on which Pollina serves as vice chair, and all five committee members are co-sponsors—good reasons for his optimism. In Montana, a group of lawmakers has introduced a bill to create a bank; it’s the third attempt there, but advocates are hopeful, having successfully brought together a coalition of small businesses and progressive-minded organizers.
A new state bank—somewhere, anywhere—would help to legitimize the idea. Between 2010 and 2011, lawmakers in 16 states from both parties proposed a total of 27 bills to either create a state bank or study its feasibility. Most failed. But after Massachusetts passed a bill to investigate a state bank, the Federal Reserve Bank of Boston produced a report advising against it. While the report did credit North Dakota’s state bank with emphasizing “safe and sound lending practices” and partnering successfully with small banks, it also pointed out that the bank, on its own, could not stop financial crises that directly impact North Dakota, like the one in the 1980s (even if it did alleviate the problems). The report argued that policymakers “would be better off studying the federal programs that have been augmented since the crisis.” The Center for State Innovation and De¯mos, a progressive think tank, wrote a joint letter taking issue with the report’s findings and accusing the Boston Fed of playing politics. Big banks, they pointed out, increasingly do not lend to small businesses, and there’s not enough evidence to show that the federal programs are helpful or adequate.
Still, the report took its toll; as one of the only official studies on the topic of state banks, it added to the already-considerable political challenges advocates face. In Oregon, a strong grassroots coalition pushed hard for a state bank but wound up with an investment act instead. The state will make a larger investment in collaborative loans with small banks. In New Mexico, state Representative Brian Egolf introduced a measure in the last session to create a state-owned bank, only to be confronted with an angry lobby of community banks. This time around, he’s renamed the financial entity a “small business development fund” so the community banks won’t try to kill it.
Proponents like Marc Armstrong, the executive director at the nonprofit Public Banking Institute, argue that banks are better for states than economic-development funds. Rather than directly loaning out, say, $50 million, a state bank would leverage that money, allowing it to put as much as ten times the asset amount to work in the state through relatively low-risk loans. In Armstrong’s own state, California, counties pay millions in interest on bonds and loans for their infrastructure needs. “If California had had a state bank,” he says, “we could have used the state bank credit to fund virtually all of that debt at very low cost.”
Still, for many states, creating or beefing up an economic-development fund is the only option that’s viable. Local banks often worry that a publicly owned state bank would hurt business rather than offer support. For their part, politicians tend to have a knee-jerk reaction against the “crazy” idea of a public bank. North Dakotans are baffled by that. “All of those people in other states who are really concerned ought to talk to the banks in North Dakota,” says U.S. Senator Heidi Heitkamp, a Democrat who served on the Industrial Commission. Community banks, she says, “have found the Bank of North Dakota to be a complete and total partner, to be willing to share risk with them on things they wouldn’t do alone.”
Perhaps the best argument for state banks is found in North Dakota’s history of weathering economic crises better than most. Sam Munger of the Center for State Innovation says that while a state bank can’t save a state economy “single-handedly,” the countercyclical nature of the bank will “help cushion the effect of the next inevitable boom-and-bust cycle. Build it now, so it’s in place and can be effective and functioning the next time.”
For now, however, the only state bank still operates in one of the country’s most conservative states. Roger Johnson, North Dakota’s former agriculture commissioner, says the state got lucky. “I’m a huge supporter of the state bank, and most people in North Dakota are,” Johnson says. But if legislators tried to create a bank today, he says, “I can assure you it would not have a snowball’s chance in hell of getting passed.”
Abby Rapoport is a staff writer at The American Prospect. She was previously a political reporter for theTexas Observer.
More about the Public Banking Institute
The Public Banking Institute (PBI) was formed in January 2011 and is a national educational non-profit organization working to achieve the implementation of public banking at all levels of the American economy and government: local, regional, state, and national.
We are part of the New Economy movement and are steadily advancing innovative short and long-term solutions to the damage caused by the Wall Street cartel and a dysfunctional banking system; and are regularly called on to provide expertise in subjects as diverse as bank capitalization, applicable banking regulation, governance, loan portfolio makeup, risk management and the newly proposed U.S. Postal Savings Bank.
Our vision is a national network of public banks, administered as public utilities that serve the public interest, run by public servants, providing transparency and accountability to the public.
Affordable and sustainable credit, locally generated and locally directed is the key to rebuilding a lasting and broadly shared prosperity for the American people. _____________
For more information on how BND operates, and how it partners with community banks instead of competing with them: