Public banking is a step toward a level playing field: let government get in on the game. Public banking can be a useful bridge, though it will not address the most serious issue in our current system: exponential growth.
We know whoever has the power to create new money, has the power to control society. There’s a lot to be said for local control over local resources. Every municipality, county and state could establish their own public bank. If the banking system remains the same – a no reserve, money creation and banking system – then why not establish public banks to create new money by issuing loans to their municipality? The private bankers have blazed this trail to enrich a few. Why not walk it for the general welfare?
Local, state & regional public banks
A public bank can:
Hold all the deposits of government entities. For example, in my hometown we could have a Portland Public Bank. It would hold the deposits of all Portland public enterprises. Like any small local bank, it would probably contract out a lot of its transfer services.
Just like small private banks today, a public bank could use these deposits as reserves and create money by making loans for municipal projects. When the citizens vote for a bond measure to improve school facilities, the bank would take the IOU from the public, and create the money just as a private bank does. The money-creation loan is guaranteed by Portland’s common wealth, and its ability to collect taxes into the future to repay the debt. Significantly, the Portland Public Bank could operate as a non-profit and charge only basic bank function costs. It need not charge the city interest, dramatically cutting the cost of most big infrastructure projects in half. This would make citizens’ taxes go much further!
Public banks could make loans to private parties for worthy projects…a new stadium, a revitalized commercial center. This is already done under our current system, but instead of the public creating the money for these projects, the public borrows the money from the private bankers, who create it, and then the public pays interest and/or takes the risk as part of a partnership with the private bankers. Allowing private banks to create money for municipal projects is a giveaway to bank shareholders.
Reduce costs and cut taxes
Worth repeating: a public bank could reduce the cost of public projects by eliminating interest on borrowing. Reducing costs could reduce the need for taxes – a big win. For example, in November 2016, California passed Proposition 51 which authorizes a $9 billion bond to pay for K-12 and community college facility maintenance and improvements. On top of the $9 billion, the state estimates it will pay another $8.9 billion in interest.13 A perfect example of how either a public bank or common wealth money could get double the results or use half the money.
Taxes could be cut or government could spend the interest savings on improving the common wealth, which creates jobs and increases the circulation of money.
Slow exponential growth
If the public bank eliminates interest on its loans, this would eliminate some of the pressure for ongoing exponential growth in the national economy. The bank could maintain an asset base (money created) in proportion to the city and its infrastructure demands.
Public banking is a step in the right direction, and well worth attention and consideration. It may be a bandage that cannot cure the disease, but it could certainly slow down the death of our economy and our democracy. It might make time for a more substantial change in our system that would allow us to survive into the long-term future. Creating these public banks now could be a useful bridge to systemic change later. And, local public banks established now could later do a designated share of money creation in a common wealth money system.
A public-private partnership
Taking the notion of public banks to the national level, we could leave the privilege of money creation with the private bankers, but pass a law requiring them to give the government a cut of the action. Basically, this proposal asks government to clearly acknowledge banks’ privilege of creating our money.
For example, in his book, The Money Problem; Rethinking Financial Regulation (2016),14 US based law professor and former treasury advisor Morgan Ricks uses many of the same words to describe the problem as other reformers, but like the Modern Money Theorist economists, he uses the word sovereign to mean national. He is not advocating a change in the current system, he advocates establishing a clearer legal framework for the existing system of private bank debt- credit money creation.
This legal framework would limit the ability of banks to expand their money creation into the shadow-banking world of off balance sheet shenanigans. And, in his proposal, in exchange for removing any limits on deposit insurance, the government would get a slice of the banks’ profit pie. In exchange for having taxpayers guarantee every single dollar the banks create, we’d get a cut.
Mr. Ricks solution does nothing to address the privilege of the private bankers to rule our government and our economy that accompanies there existing privilege to create our money.
A bridge, not solution
My concerns about the public bank options – whether for individual local public banks, or creating a legal framework allowing the private banks to continue to create our money under a silent partnership deal – are that the system itself does not change; it remains an exponentially growing money system privileging a few over promoting an increase in the common wealth.
A public bank or private-public bank partnership that continues to use our current money creation system, will require exponential growth. As noted, any exponential growth system is unsustainable and destructive of our home planet. Allowing public banks to exercise the same credit-based money creation privileges of the private bankers will not change the long-term consequences of our money system. It will slow down the exponential growth, but we will still be on that path to destruction.
However, the publicly owned Bank of North Dakota which was formed in 1919 by legislative action provides legal precedence. Because cities and states could become bankers in our existing system, this is a more easily accomplished change. It is easier to make change at the local and state level than for the entire nation. And, it is easier to change a part of the system than to change the whole system. A robust system of public banks could be an important bridge to transition to a full commonwealth money system. These public banks could then continue to play a role in commonwealth money creation at the local level.
CAUTION: People mean different things by public banking. Some are referring to a revolving loan bank, that does not create money, such as the North Dakota Bank. Others are referring to a public bank that functions just as the private banks do – creating money for their customers. Ask, what advocates mean.
For further advocacy on this option go to the Public Banking Institute, http://www.publicbanking.org. As I understand them, they are not advocating a bank that competes head-to-head with private banks.
Their concept is more like a revolving-credit fund. They have a rich trove of essays on banking and money creation in general. And there are local groups in many communities, including Portland, Oregon. Ellen Brown, Founder of the Public Banking Institute is the author of the Web of Debt (2008), and The Public Bank Solution; from Austerity to Prosperity (2013), and many insightful essays on her blog.15