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Original Content at https://www.opednews.com/articles/The-Bank-of-North-Dakota--by-Dr-Stuart-Bramhall-100507-842.html (Note: You can view every article as one long page if you sign up as an Advocate Member, or higher). |
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May 8, 2010
The Bank of North Dakota: Our Only State Owned Bank
By Dr Stuart Jeanne Bramhall
More and more activists (and state candidates in the November elections) are getting on the bandwagon to join North Dakota in exploring the creation of state owned banks and/or lending institutions. With many states on the verge of bankruptcy, thanks to their indebtedness to Wall Street, it seems an incredibly simple and cost effective way to restore their financial self-sufficiency.
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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.
A Golden Opportunity for Grassroots Financial Reform
Ariana Huffington and others have been advising progressives to withdraw their support from the Wall Street banks responsible for the 2008 crash and bank with local community banks instead. Attorney Ellen Brown, who has written extensively on the subject of state owned banks, feels this may not be enough to bring about genuine financial reform. Her main concern is that private community banks are unlikely to accumulate sufficient capital to compete effectively with the Wall Street giants.
Brown recommends that activists get on the bandwagon by supporting other states' efforts to follow North Dakota's example as well as Congressman Dennis Kucinich (along with some Tea Party members) who propose to create a publicly owned federal bank by having the government assume control of the Federal Reserve. At present the Federal Reserve is a consortium of private banks which, thanks to their absolute control over credit and the money supply, have ultimate control over the US economy.
Currently there are five states (Massachusetts, Illinois, Michigan, Washington, Minnesota) with bills pending to explore the creation of state owned banks or lending institutions. In addition state candidates in eight other states (Florida, Oregon, Illinois, California, Vermont, Idaho, Hawaii, Virginia) are running on a platform that calls for the creation of a state owned bank as a way to stem the hemorrhage of state funds to private banking institutions (as interest on state debt).
The process of obtaining a charter to start a state owned bank is relatively simple. In California, for example, the startup capital required for a typical California bank is only $20 million. This is a comparatively small amount for the world's eighth largest economy. Especially since the money wouldn't actually be spent. It would form the reserve which would entitle a California state bank to generate $200 million worth of loans.
Creating a Federal Bank
Up until the creation of the private Federal Reserve system in 1913, the US had a central, federally owned bank for most of its history. Many prominent economists, including Milton Friedman, Ben Bernanke (the current chairman of the Federal Reserve) and John Kenneth Galbraith, blame the Federal Reserve Act for the Great Depression of the 1930s.
In 2008 progressive presidential candidates Dennis Kucinich and Cynthia McKinney ran on a platform advocating the US government create a federal central bank by taking over the Federal Reserve. Nobel laureate and former World Bank chief economist Joseph Sitglitz echoed these sentiments last year, observing that the US government would have been much better off funding a federally owned bank than authorizing trillions of dollars to the private investment banks who speculated their way into bankruptcy.
Here in New Zealand we have had a government-owned bank Kiwibank since 2002. It has been a fantastic resource in helping this country weather the global recession. I also find it fascinating that in the US, it is mainly Ron Paul and various Tea Party members and supporters who been championing the call for the government to assume control of (or abolish) the Federal Reserve.
In doing so, they are taking on some very powerful enemies. Perhaps this is why Bill Clinton and other members of the corporate establishment are working so hard to discredit them.