North Dakota is receiving increasing national publicity, as the only state out of 50 currently running a surplus and expected to do so into the future as well as the only state adding jobs, rather than losing them. Thanks to the October 2008 economic collapse, most state governments are facing their worst economic crisis since the Great Depression. Forty eight of our 50 face major deficits with some on the verge of bankruptcy. State budgetary problems have led many states to lay off teachers, police and sheriffs and to close school, health centers and courtrooms. Montana, the other state currently in the black, is expected to experience shortfalls (without tax increases or major budget cuts) in 2011, 2012 and 2013.
North Dakota also happens to be the only state to have its own state run bank, which many financial analysts believe is the secret of its relative prosperity. Attorney and author Ellen Brown has written extensively about the Bank of North Dakota in her book Web of Debt and in articles for the Huffington Post, Yes! Magazine, Truth Out and other Internet blogs and zines. Thanks to her efforts, which include meeting with state legislators to educate them how a state owned bank can stop the hemorrhage of state funds to Wall Street, the idea is catching on. At present five states have legislation pending to explore the creation of state owned banks or lending institutions, and candidates for office in eight other states are running on a platform advocating the creation of a state owned bank.
A Product of the Populist Movement
North Dakota created the Bank of North Dakota in 1919, after thousands of North Dakota farmers, enraged by the way eastern banks and commodity wholesalers were treating them, joined the growing populist movement and formed the Nonpartisan League. After taking over the state legislature, the League created both the Bank of North Dakota and a state owned mill and elevator to purchase, process and market (at a fair price) the grain produced by North Dakota farmers.
The Fractional Reserve Lending System
In large part the success of the Bank of North Dakota stems from its ability to operate according to the same fractional lending system as private banks. Up until a few years ago (when I first saw the film Money as Debt), I had the mistaken idea that the role of banks was to hold the money depositors entrusted to them and lend it out to borrowers at a slightly higher rate of interest. I also had the mistaken belief that most of the US dollars in circulation were printed by the US Treasury or the Federal Reserve. Nothing could be further from the truth.
In reality private banks create the vast majority of US dollars by making loans. Under the fractional reserve lending system, private banks are only required to hold as reserves 10% of the money they lend out. In practice this means if the bank issues a $250,000 mortgage, they only hold $25,000 of this loan in deposits. They other $225,000 doesn't really exist until the borrower begins to make monthly payments.
What this means is that a sparsely populated state, such as North Dakota, doesn't have to be fantastically wealthy to stimulate the state economy by making mortgage, student, business and personal loans to North Dakota residents. For a relatively small investment, the Bank of North Dakota can multiply the funds they hold in reserve by 900% every time they make a loan.
Obviously private banks do this all the time and some analysts see the fractional reserve system itself as a major culprit in the 2008 crash.
How the Bank of North Dakota Operates
In addition to deposits from private individuals, the Bank of North Dakota also serves as the depository for all state tax collections and fees for which they pay a competitive rate of interest to the state treasurer. The bank then uses these deposits as the 10% fractional reserve required by the Federal Reserve to issue up to 900% of their value as loans. As well as providing a major boost to the state economy by continuing to offer credit (when credit from private lenders has virtually dried up), the bank also pays a hefty dividend back to the North Dakota general fund. In 2009 this amounted to approximately $60 million.
Owing to conservative management, North Dakota's state owned bank has avoided most of the pitfalls that have caused many private banks to fail (including the giant Wall Street banks that have only survived thanks to trillions of dollars in taxpayer bail-outs). They do no subprime lending and have stayed clear of the derivatives market and credit default swaps. They did purchase some mortgage backed securities prior to the 2008 crash but not enough of them to cause serious negative financial impact.
The Dangers of Fractional Reserve Lending
There are obviously substantial risks in placing such enormous power the ability to create wealth by issuing credit (debt) in private hands. Thomas Jefferson and other Founding Fathers specifically warned against giving private banks the ability to create money.
Unfortunately US leaders, in creating a private system of wealth creation (the Federal Reserve) in 1913, chose not to heed their advice. The result, as Jefferson predicted, is allowing for profit lending institutions to siphon more and more wealth in the form of interest and insurance premiums from the productive economy. We are left with a situation in which the circulating money supply is so limited that the business sector can only create sufficient jobs to employ 75% of our workforce a statistic that isn't expected to improve.