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The state bank solution

The state bank solution

Last updated on: November 17, 2010 at 5:30 am by Gene Veith

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The state bank solution 2010-11-17T05:30:09-05:00 Gene Veith

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My brother put me onto the example of the North Dakota State Bank as a solution to our country’s financial woes:

While the Fed continues playing parlor tricks to try and stimulate the economy, a much simpler method of igniting long-term economic growth and stability exists in North Dakota. Yes, North Dakota, a state operating with a surplus of cash and unemployment at 4%. In the early 1900’s the economy of North Dakota was agriculture-based, and the farmers there were experiencing serious financial problems that prevented them from buying and selling crops and financing farm operations. Grain dealers from out-of-state controlled prices and kept them artificially low, while farm suppliers continually increased their prices. To no one’s surprise, interest rates on loans climbed.

By 1919 the people of North Dakota had had enough and wanted state ownership and control of marketing and credit agencies, and so the legislature established the Bank of North Dakota. Its mission: to promote the development of agriculture, commerce and industry in ND. The Bank of North Dakota is a public bank that is robustly solvent, with a strong record of financing loans for agriculture, housing and higher education, as well as funding municipal bonds. All tax revenues and fees in the state go into the State Bank, allowing North Dakota to finance construction of roads, bridges and other infrastructure, maintain schools and libraries, and assist local businesses.

The Bank of North Dakota is truly a peoples’ bank that exists for the benefit of the state and its residents, only, with loans made at low interest rates and no bloated, outrageous CEO salaries and benefits that squander funds. And no shady derivatives allowed, either; a novel concept indeed. For 91 years the bank has flourished and North Dakota today is a rare example of economic strength in a sea of debt-ridden states that must slash services and raise taxes to stay afloat, giving a whole new meaning to the term “red states.” . . .

via Pearl Korn: North Dakota — A Template For Our Economic Recovery.

Here is more about how it works, from Ellen Brown:

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.

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.”

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. . . .

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.

Liberals like this, moving capital from the private to the public sector, while conservatives might like the federalist implications for empowering the states, as well as the decentralization of finance (which is not exactly laissez faire as it is). And North Dakota is a Red State with pretty conservative citizens, isn’t it? What do you think? I told my brother I would submit the idea to my readers and let him know.

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