[T]he demand isn't simply to make a public bank but is to treat the banks generally as a public utility, just as you treat electric companies as a public utility. . . . Just as there was pressure for a public option in health care, there should be a public option in banking. There should be a government bank that offers credit card rates without punitive 30% interest rates, without penalties, without raising the rate if you don't pay your electric bill. This is how America got strong in the 19th and early 20th century, by essentially having public infrastructure, just like you'd have roads and bridges. . . . The idea of public infrastructure was to lower the cost of living and to lower the cost of doing business.
We don't hear much about a public banking option in the United States, but a number of countries already have a resilient public banking sector. A May 2010 article in The Economist noted that the strong and stable publicly-owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the world in the last few years.
In the U.S., North Dakota is the only state to own its own bank. It is also the only state that has sported a budget surplus every year since the 2008 credit crisis. It has the lowest unemployment rate in the country and the lowest default rate on loans. It also has oil, but so do other states that are not doing so well . Still, the media tend to attribute North Dakota's success to its oil fields.
However, there are other Western public banking models that are successful without oil booms. Europe has a strong public banking sector; and leading it is Germany, with eleven regional public banks and thousands of municipally-owned savings banks. Germany emerged from World War II with a collapsed economy that had degenerated into barter. Today it is the largest and most robust economy in the Eurozone. Manufacturing in Germany contributes 25% of GDP, more than twice that in the UK. Despite the recession, Germany's unemployment rate, at 6.8%, is the lowest in 20 years. Underlying the economy's strength is its Mittelstand-- small to medium sized enterprises--supported by a strong regional banking system that is willing to lend to fund research and development.
In 1999, public banks dominated German domestic lending, with pr ivate banks accounting for less than 20% of the market, compared to more than 40% in France, Spain, the Nordic countries, and Benelux. Since then, Germany's public banks have come under fire; but local observers say it is due to rivalry from private competitors rather than a sign of real weakness in the sector.
As precedent for a public option in banking, then, the German model deserves a closer look.
From the Ashes of Defeat to World Leader in Manufacturing
Germany emerged Phoenix-like from its disastrous defeat in two world wars to become Europe's economic powerhouse in the second half of the 20th century. In 1947, German industrial output was only one-third its 1938 level, and a large percentage of its working-age men were dead. Less than ten years after the war, people were already talking about the German economic miracle; and twenty years later, its economy was the envy of most of the world. By 2003, a country half the size of Texas had become the world's leading exporter, producing high quality automobiles, machinery, electrical equipment, and chemicals. Only in 2009 was Germany surpassed in exports by China, which has a population of over 1.3 billion to Germany's 82 million. In 2010, while much of the world was still reeling from the 2008 financial collapse, Germany reported 3.6% economic growth.
The country's economic miracle has been attributed to a variety of factors, including debt forgiveness by the Allies, currency reform, the elimination of price controls, and the reduction of tax rates. But while those factors freed the economy from its shackles, they don't explain its phenomenal rise from a war-torn battlefield to world leader in manufacturing and trade.
One overlooked k ey to the country's economic dynamism is its strong public banking system, which focuses on serving the public interest rather than on maximizing private profits. After the Second World War, it was the publicly-owned Landesbanks that helped family-run provincial companies get a foothold in world markets. As Peter Dorman describes the Landesbanks in a July 2011 blog:
They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country's export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. [Emphasis added.]
The Landesbanks function as "universal banks" operating in all sectors of the financial services market. All are controlled by state governments and operate as central administrators for the municipally-owned savings banks, or Sparkassen, in their area.
The Sparkassen were instituted in Germany in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. The first savings bank was set up by academics and philanthropically-minded merchants in Hamburg in 1778, and the first savings bank with a local government guarantor was founded in Goettingen in 1801. The municipal savings banks were so effective and popular that they spread rapidly, increasing from 630 in 1850 to 2,834 in 1903. Today the savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.
Targeted for Privatization
The reputation and standing of the German public banks were challenged, however, when they emerged as competitors in international markets. Peter Dorman writes:
[T]he EU doesn't like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you'd fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
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