U.S. States Consider Starting Their Own Banks

IPS News

By Matthew Cardinale

ATLANTA, Georgia, Apr 30, 2010 (IPS) - At least eight U.S. states are considering proposals to start state-run banks in the wake of an economic crisis where many private banks ceased or greatly decreased their lending, literally shrinking the money pool available in state economies.

Economist Ellen Brown, author of "Web of Debt", has been writing commentaries on various websites and runs a Google Group that has been pushing the idea of state-run banks for a couple of years, efforts which she says have made a lot of state legislators aware that a state-run bank was even a possibility.

North Dakota is the only one out of the 50 U.S. states that is still operating with a fiscal surplus, and some economists argue it is in part due to the state-owned Bank of North Dakota - the only bank of its kind in the U.S. - which has been able to pump money into its own economy by making loans to farmers, small businesses and families.

Numerous states are beginning to consider the idea of starting their own bank, since the issuance of credit is one of the main ways that money enters the economy.

The George W. Bush and Barack Obama administrations have pumped trillions of dollars into private banks through the federal bank bail-outs, with the hope that they will begin lending again. Yet any entity can start a bank, including a corporation, university, nonprofit, or even a governmental entity like a state, city, or county.

Hawaii, Illinois, Massachusetts, Michigan, Missouri, New Mexico, Vermont, Virginia, and Washington each have proposals on the table in their respective state legislatures considering the formation of a state-run bank in one way or another.

In addition, current candidates for political office in eight states - California, Florida, Idaho, Illinois, Missouri, Oregon, Vermont, and Washington State - are pushing a state-run bank as part of their platform.

"I researched this for several months," State Sen. Hanson Clark of Detroit, Michigan, told IPS. "I spoke to the president of the Bank of North Dakota in early February. It's a way to get our economy going in the region and the state, to create more jobs. Time and time again business people would tell me they were ready to expand, do projects, but they didn't have financing."

"This is really a market-based approach to create jobs," Clark said, adding that he has drafted legislation but that he is not optimistic about its passage. "Even though we're in a dire economy, this legislature is so paralysed on doing the status quo."

Washington State Rep. Bob Hasegawa is more optimistic about the bill that he's introduced. "We had a hearing last Session. It was very well-received by the Committee. The Speaker of the House is a supporter. In the interim we will speak to stakeholders. Next session we'll have something to pass," he said.

Even a Republican in the Conservative-leaning state of Missouri is pushing a state-run bank in his legislature, at least for the purpose of lending money to the state and possibly to local governments.

"It strikes me as somewhat unique and interesting," said State Rep. Allen Icet.

"Missouri has bonds... indebtedness we have to pay. Like all sister states, we face financial challenges. We, the state of Missouri, could benefit by following the path of North Dakota by creating a state bank, thereby avoiding interest payments on bonded indebtedness," Icet said.

There are numerous advantages to a state running its own bank, each premised upon the little-known practice called fractional reserve lending. Put simply, private banks in the U.S. and many countries lend money that they do not have, but that they literally create as an entry in their accounting books at the moment the loan is made. In the U.S., banks are allowed to lend up to 10 times the amount of money they have on deposit with the Federal Reserve.

Therefore, by starting a bank, states can multiply the power of the money they have from tax revenues by 10, by making loans to farmers, small businesses, and others.

"The state bank partners with other banks. It serves as back-up capital of those banks, taking loans off banks' books, making room for more," Brown said.

Brown also noted that state-run banks could lend the state money, whereas private banks lend money to the state at six percent interest.

Currently, the U.S .Congress is holding hearings regarding the investment firm Goldman Sachs, which, among other things, apparently made investments that wagered against the success of their own clients.

"None of that was happening in North Dakota. They're trying to make honest loans, they're not trying to cheat the system. Their mission is to serve the state. Their function is to serve the farmers that develop agriculture and [to serve] alternative energy sources," Brown said.

"They're there to take the long view of what's good for the community," Brown said.