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North Dakota's State-Owned Bank a Viable Alternative Model to For-profit Banking System

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Posted Oct. 19, 2011

Interview with Ellen Brown, president of the Public Banking Institute, conducted by Scott Harris

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Growing public support for the Occupy Wall Street protest movement speaks to the long-simmering anger and frustration with the failures of the current economic system and the lack of accountability for the bankers and financiers whose reckless behavior plunged the U.S. and world economy into the Great Recession. In the U.S., recent polls find majority support for the protesters’ central message condemning corporate greed and the corrupt political system rigged in favor of the interests of America’s wealthiest 1 percent.

While the U.S. corporate media is dismissive of the movement due to the Occupy Wall Street activists’ lack of specific demands for change, there are many ideas for restructuring the U.S. financial and banking system that have been circulating for years that could offer viable solutions to repairing a broken system.

Just as there was majority support to establish a public non-profit alternative to private for-profit health insurance in the recent national health care reform debate, there is growing support for a government bank that offers competition to the nation’s largest private banks that recklessly engaged in casino-like gambling and lost billions of dollars of their customers’ investments. The public banking idea comes from the successful example of the 92-year-old Bank of North Dakota, the nation’s only statewide publicly-owned bank. Some observers credit North Dakota’s public banking system for the state’s low unemployment rate and large budget surpluses during the (recent) great recession. Between The LInes' Scott Harris spoke with Ellen Brown, an attorney and president of the Institute for Public Banking. Here she explains how North Dakota’s public banking system works and how a similar system could be adopted by states nationwide.

ELLEN BROWN: North Dakota, our single, public bank was set up in 1919 under conditions quite like what we have today, where the farmers were losing their farms to the Wall Street bankers. And when they discovered that the Wall Street banks were hooked to the railroads, were hooked to graineries, so it was all one cartel – it was a Rockefeller cartel at that time – and they weren't actually taking their grain when it was good grain. So there was actually an effort to get these farms. When they realized that, they banded together and formed a party called the nonpartisan leg. It was not about politics. It was not about socialism.

In fact, North Dakota is a very Republican, conservative state. It was about state sovereignty, keeping their money in the state to serve their people. So the Bank of North Dakota was set up to basically do what – well, pretty much actually what the Federal Reserve does. It was sort of a central bank for the system. So, it provides the liquidity for the little banks. It helps them with their capital requirements. It does not compete with the local banks; it partners with them. So, they didn't get into this whole derivative, mortgage-backed security type scheme because they didn't need to, because they had the bank stop of the Bank of North Dakota, so they tend to keep their loans on their own books. These are local people, they follow them to make sure they can pay, and so it's a real partnership with the local economy and not one that's designed to exploit the local economy.

So, right now, we have bills pending in 14 different states, either to form a state-owned bank or to do a feasibility study to see what it could do for the state.

BETWEEN THE LINES: Ellen, how would instituting a North Dakota-style public banking system in states around the country, how would that address many of the complaints in the resulting shattered economy we've seen from the reckless behavior of the for-profit banks?

ELLEN BROWN: Well, the No. 1 thing it would do is to create jobs. The reason: Jobs largely come through the small and medium-size business. Those (are the same kinds of) businesses that are funded by the public banks in Germany – which is why they have such a strong manufacturing export sector – is because it's the small and medium-sized local businesses that are not able to hire because they no longer have customers, and they don't have customers because of the collapse of the mortgage situation and the whole credit collapse, and they can't get loans; they get cheap credit like they used to. In California, I've heard complaints. They used to be able to get 8 percent credit lines at their bank. And nothing has changed in their business, but suddenly, the banks are requiring them to use credit cards. So that's 16 percent. That doubles their interest rate.

And all small companies run on credit, or even large companies, but they don't have trouble getting credit. But the small companies, you have to pay your workers and materials before you have a product. So, if you can't get that credit line, then you don't dare expand your business and you don't dare hire more people. And a public banking set-up will allow that. As in North Dakota, the Bank of North Dakota partners with the local banks and therefore they have lots of liquidity so they can make these local loans.

BETWEEN THE LINES: How much subsidies go to the North Dakota Bank from taxpayers?

ELLEN BROWN: No, the subsidies goes from North Dakota Bank to the taxpayers. But their profits go back to the state. They actually had a 19 percent return last year, I think. Before that, they had a 26 percent return. They had a huge return on equity. And this is a major source of profits for the state. But the bank is not subsidized at all. I mean, how this bank works is that all of the state's revenues are deposited in the bank. But it is set up as a DBA ("doing business as") of the state. So, technically all of the capital belongs to the bank as well, so it has no capital requirements, it has no deposit requirements. So then, what it does with huge amount of liquidity that it has is to spread it around and share it with the other banks.

BETWEEN THE LINES: Ellen, if you were to, of course, recommend a course of action state by state or on the federal level to institute public banking to provide funding for small businesses as an engine for the economy to boost employment and the economy as a whole, how would you go about it?

ELLEN BROWN: Well, I don't know that you do it on the federal level. And in fact, the reason we like the state-owned banks is that the federal level is pretty well locked up. They're deadlocked; they can't seem to make progress in anything. But at the state level, you can still get in to see your legislators and they'll listen to you.

Here in California, we have a state bank bill that just passed both houses of the legislature. It wasn't signed by the governor, unfortunately, but there still is good momentum for our state bank movement. And that's just us – I mean, we're just volunteers on the ground to just generate interest and kept pushing until something happened here. And it really is a state thing. I mean, it's totally legal, anybody can set up a bank who can qualify with the banking commissioner. I mean, Wal-Mart could set up a bank if they wanted to. So there's no reason a state can't set up a bank. It's just a matter of understanding what the principle here is. Banks actually literally create money. That's where our money comes from. They create money by leveraging their capital and then they clear it through the deposits. So that power, the power to create bank credit is what we want to get back into our local communities, using our own local assets. We don't want to be giving our capital and our revenues to Wall Street to use that leveraging power to be speculating abroad, speculating against us, buying up foreign companies that might compete with our companies, etc. All the things that Wall Street does purporting to be doing with their own money, so they can do whatever they want. But they're not doing it with their own money, they're doing it with our money. So, we want to bring our money back and use it for local purposes.

Ellen Brown's latest book is titled, "Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free". Read more about the benefits of public banking at publicbankinginstitute.org/

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