“We can’t solve problems by using the same kind of thinking we used when we created them.”
               – Albert Einstein

Forty-six of fifty states are now reported to be so insolvent that they could be filing Chapter 9 bankruptcy proceedings within the next two years.1 Of the four that are not in that category, one is the isolated farming state of North Dakota. What does it have that other states don’t? The answer seems to be: its own bank. In fact, North Dakota has the only state-owned bank in the nation. It has avoided the credit freeze caused by the derivative schemes of the Wall Street bankers by creating its own credit, leading the nation in establishing state economic sovereignty.

North Dakota is an unlikely candidate for the distinction. As Michigan management consultant Charles Fleetham observed last month in an article distributed to his local media:

“North Dakota is a sparsely populated state of less than 700,000, known for cold weather, isolated farmers and a hit movie – Fargo. Yet, for some reason it defies the real estate cliché of location, location, location. Since 2000, the state’s GNP has grown 56%, personal income has grown 43%, and wages have grown 34%. This year the state has a budget surplus of $1.2 billion!” 

The secret of its success seems to be the state-owned Bank of North Dakota, which was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. By law, the state must deposit all its funds in the bank, and the state guarantees its deposits. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. The bank operates as a bankers’ bank, partnering with private banks to loan money to farmers, real estate developers, schools and small businesses. It loans money to students (over 184,000 outstanding loans), and it purchases municipal bonds from public institutions.

A License to Create Money

Still, you may ask, how does that solve the solvency problem? Isn’t the state limited to spending only the money it has? The answer is no. Certified, card-carrying bankers are allowed to do something nobody else can do: they can create “credit” with accounting entries on their books.

Under the “fractional reserve” lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base. Congressman Jerry Voorhis, writing in 1973, explained it like this:

“[F]or every $1 or $1.50 which people – or the government – deposit in a bank, the banking system can create out of thin air and by the stroke of a pen some $10 of checkbook money or demand deposits. It can lend all that $10 into circulation at interest just so long as it has the $1 or a little more in reserve to back it up.”2

The Federal Reserve’s 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such games as “overnight sweeps”. What chiefly limits bank lending today is the 8 percent capital requirement imposed by the Bank for International Settlements, the head of the private global central banking system in Basel, Switzerland. With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5). And since the state would actually own the bank, it would not have to worry about shareholders or profits. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest. If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.

But, you ask, wouldn’t that be dangerously inflationary? Not if the money were used to create new goods and services. Price inflation results only when “demand” (money) exceeds “supply” (goods and services). When they increase together, prices remain stable.

“Nationalization” Should Cover Bank Profits as Well as Losses

Today we are in a dangerous deflationary spiral, caused by sharply contracting credit and plummeting asset values. The monopoly on the creation of money and credit by a private banking fraternity has resulted in a malfunctioning credit system and monetary collapse. Credit markets have been frozen by the wildly speculative derivatives gambles of a few big Wall Street banks, bets that not only destroyed those banks’ balance sheets but are infecting the whole private banking system with toxic debris. As economist Paul Krugman recently wrote in The New York Times:

“Arguably, the only reason they haven’t failed already is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.”3

Krugman went on to speculate that nationalization and reorganization for the failed Wall Street mega-banks could be the only viable course. But the form of “nationalization” now being discussed involves propping up these profligate zombies with billions in taxpayer dollars, only to return them to their gambling-addicted private owners (or others like them) once the banks have been restored to viability. As economist Michael Hudson observes, this is a perversion of language. True nationalization would involve keeping the entities as public resources, returning the profits to the taxpayers who bore their costs.4

Our workers and our factories are sitting idle because the private credit system has failed. An injection of new money from a system of public banks could thaw the credit freeze and bring spring to the markets again. The mathematical flaw in the private credit system is the enormous tribute siphoned off to private coffers in the form of interest. A public banking system could overcome that flaw by returning the interest to the public purse. This is the sort of banking that was pioneered in Benjamin Franklin’s colony of Pennsylvania, where it worked brilliantly well. We need to return to our historical roots and implement that system again.

  1. John Mitchell, “46 of 50 States Could File Bankruptcy in 2009-2010,” Freedom Arizona (January 30, 2009).
  2. Jerry Voorhis, The Strange Case of Richard Milhous Nixon (1973), excerpted at http://www.sonic.net/~doretk/ArchiveARCHIVE/ECONOMICSPOLITICS/FEDERAL%20RESERVE/Jerry%20VoorhisFedReserve.html.
  3. Paul Krugman, “Banking on the Brink,” New York Times (February 22, 2009).
  4. Michael Hudson, “Orwellian Doublethink: ‘Nationalize the Banks.’ . . . The Language of Deception”, Global Research (February 23, 2009).