Cash-starved States Need to Play the Banking Game: North Dakota Shows How

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By Ellen Brown (about the author) Page 1 of 3 page(s)

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For OpEdNews: Ellen Brown - Writer

"He that will not apply new remedies must expect new evils; for time is the greatest innovator."

�� -- Francis Bacon

On February 19, 2009, California narrowly escaped bankruptcy, when Governor Arnold Schwarzenneger put on his Terminator hat and held the state senate in lockdown mode until they signed a very controversial budget.1� If the vote had failed, the state was going to be reduced to paying its employees in I.O.U.s.� California avoided bankruptcy for the time being, but 46 of 50 states are insolvent and could be filing Chapter 9 bankruptcy proceedings in the next two years.2�

One of the four states that is not insolvent is an unlikely candidate for the distinction � North Dakota.� As Michigan management consultant Charles Fleetham observed last month in an article distributed to his local media:

"North Dakota is a sparsely populated state of less than 700,000, known for cold weather, isolated farmers and a hit movie � Fargo. Yet, for some reason it defies the real estate cliché of location, location, location. Since 2000, the state's GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion!"��

What does the State of North Dakota have that other states don't?� The answer seems to be: its own bank.� In fact, North Dakota has the only state-owned bank in the nation.� The state legislature established the Bank of North Dakota in 1919.� Fleetham writes that the bank was set up to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits.� Three elected officials oversee the bank: the governor, the attorney general, and the commissioner of agriculture.� The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. The bank operates as a bankers' bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It loans money to students (over 184,000 outstanding loans), and it purchases municipal bonds from public institutions.�

Still, you may ask, how does that solve the solvency problem?� Isn't the state still limited to spending only the money it has?� The answer is no.� Certified, card-carrying bankers are allowed to do something nobody else can do: they can create "credit" with accounting entries on their books.�

A License to Create Money

Under the "fractional reserve" lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base.� Congressman Jerry Voorhis, writing in 1973, explained it like this:

"[F]or every $1 or $1.50 which people � or the government � deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up."3�

That banks actually create money with accounting entries was confirmed in a revealing booklet published by the Chicago Federal Reserve titled Modern Money Mechanics.2� The booklet was periodically revised until 1992, when it had reached 50 pages long.� On page 49 of the 1992 edition, it states:

"With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts [loans created as deposits in borrowers' accounts]."4

The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such devices as "overnight sweeps". �What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland.� With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5).� And since the state would actually own the bank, it would not have to worry about shareholders or profits.� It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest.� If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.

Dangerously inflationary?� Not if the money were used to create new goods and services.� Price inflation results only when "demand" (money) exceeds "supply" (goods and services).� When they increase together, prices remain stable.�

Today we are in a dangerous deflationary spiral, as lending has dried up and asset values have plummeted.� The monopoly on the creation of money and credit by a private banking fraternity has resulted in a malfunctioning credit system and monetary collapse.� Credit markets have been frozen by the wildly speculative derivatives gambles of a few big Wall Street banks, bets that not only destroyed those banks' balance sheets but are infecting the whole private banking system with toxic debris.� To get out of this deflationary debt trap requires an injection of new, debt-free money into the economy, something that can best be done through a system of public banks dedicated to serving the public interest, administering credit as a public utility.�

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Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private (more...)

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