Murphy, a former banker who won New Jersey’s race for governor, has
made a state-owned bank a centerpiece of his platform. Will the
nation’s second state-owned bank in a century follow?
by Ellen Brown
(NATIONAL) -- A UK study published
on October 27, 2017 reported that the
majority of politicians do not know where money comes from.
than three-quarters of the MPs surveyed incorrectly believed that
only the government has the ability to create new money. . . .
of England has previously intervened to point out
money in the UK begins as a bank loan. In a 2014 article the Bank
pointed out that “whenever a bank makes a loan, it simultaneously
creates a matching deposit in the borrower’s bank account, thereby
creating new money.”
Bank of England researchers said
97% of the UK money supply is created in this way. In the US, the
figure is about 95%. City
quoted Fran Boait, executive director of the advocacy group Positive
Money, who observed:
their confidence in telling the public that there is ‘no magic
money tree’ to pay for vital services, politicians themselves are
shockingly ignorant of where money actually comes from.
is in fact a ‘magic money tree’, but it’s in the hands of
commercial banks, such
as Barclays, HSBC and RBS,
who create money
whenever they make
those few politicians who are aware of the banks’ magic money tree,
the axiom that the people should own the banks – or at least some
of them – is a no-brainer.
of these rare politicians is Phil Murphy who this week won New
Jersey’s race for governor. Formerly a Wall Street banker himself,
Murphy knows how banking works. That helps explain why he boldly
made a state-owned bank a centerpiece of his platform.
maintains that New Jersey’s billions in tax dollars should be kept
in the state’s own bank, where it can leverage its capital to fund
local infrastructure, small businesses, affordable housing, student
loans, and other state needs. New Jersey voters went to the polls on
November 7 and placed Murphy in the governor's chair.
means New Jersey could soon have the second publicly-owned depository
bank in the country, following the very successful century-old Bank
of North Dakota (BND).
likely contenders among about twenty public banking initiatives now
underway include Washington State, which has approved a feasibility
study for a state bank; and the cities of Santa Fe in New Mexico and
Los Angeles and Oakland in California, which are exploring the
feasibility of their own city-owned banks.
Bank Is Not Simply an Intermediary
article in City Watch LA
critical of the idea of a city-owned bank observed that Los Angeles
formerly had a bank that failed, closing its doors in 2003 due to
insolvency. The argument illustrates the confusion over what a bank
is and what it can do for the local government and local communities.
Angeles Community Development Bank was not a bank.
It was a loan fund, and it was designed to fail. It was not chartered
to take deposits or to create deposits as loans, and it was only
allowed to lend to businesses that had been turned down by other
banks; in other words, they were bad credit risks.
a loan fund, a dollar invested is a dollar lent, which must return to
the bank before it can be lent again. By contrast, as
the Bank of England acknowledged
in its 2014 paper, “banks
do not act simply as intermediaries, lending out deposits that savers
place with them.”
chartered depository bank can turn one dollar of capital into ten
dollars in bank credit, something it does simply by creating a
deposit in the account of the borrower. If the bank’s books don’t
balance at the end of the day, it borrows very cheaply from other
banks, the Federal Home Loan Banks, or the repo market. It borrows at
bankers’ rates rather than retail rates, and that is one of the
many perks that a publicly-owned bank can recapture for local
governments. Borrowing from banks rather than the bond market
actually expands the circulating money supply, stimulating the local
sector banks, while rare in the US, are common in other countries;
studies have shown
that they are actually more profitable, safer, less corrupt, and more
accountable overall than private banks.
is particularly true of the Bank of North Dakota, currently the only
publicly-owned depository bank in the US. According
to the Wall Street Journal,
it is more profitable than Goldman Sachs or JPMorgan Chase. The BND
is risk-averse, lends conservatively, does not gamble in derivatives
or put deposits at risk. It is able to lend at lower than market
rates because its costs are very low.
BND holds all of its home state’s revenues as deposits by law,
acting as a sort of “mini-Fed” for North Dakota. It has seen
record profits for almost 15 years. It
continued to report record
profits after two years of oil bust in the state, showing that it is
highly profitable on its own merits because of its business model. It
does not pay bonuses, fees, or commissions; has no high paid
executives; does not have multiple branches; does not need to
advertise; and does not have private shareholders seeking short-term
profits. The profits return to the bank, which either distributes
them as dividends to the state or uses them to build up its capital
base in order to expand its loan portfolio.
BND does not compete but partners with local banks, which act as the
front office dealing with customers. It does make loans that
community banks are unable to service, but this is not because the
borrowers are bad credit risks. It is because either the loans are
too big for the smaller banks to handle by themselves or the
smaller banks cannot afford the regulatory burden
of lending in rural communities where they get only a few loans a
other cost savings, the BND is able to make 2% loans to North Dakota
communities for local infrastructure -- half or less the rate paid by
local governments in other states. The BND also lends to state
example, in 2016
it extended a $200,000 letter of credit to the State Water Commission
at 1.75% and a $56,000 loan to the Water Commission to pay off its
bond issues. Since 50%
of the cost of infrastructure is financing,
the state can cut infrastructure costs nearly in half by financing
through its own bank, which can return the interest to the state.
Phil Murphy succeeds in establishing a New Jersey state-owned bank,
expect a wave of public banks to follow, as more and more elected
officials come to understand how banking works and to see the obvious
benefits of establishing their own.
Brown is an attorney, founder of the Public
a Senior Fellow of the Democracy
and author of twelve books including Web
of Debt and The
Public Bank Solution.
A thirteenth book titled The
Coming Revolution in Banking is
due out this winter. She also co-hosts a radio program on PRN.FM
Her 300+ blog articles are posted at EllenBrown.com.