Only two states are currently solvent; North Dakota is one. What makes North Dakota different is that they have a state-owned bank. The advantage of a state-owned bank is to return profits to the public and/or minimize borrowing costs for the state and whatever portion of the public the state chooses as borrowers (North Dakota provides credit at the lowest costs for student loans and to farmers, for example).
Banks legally create credit out of nothing as a fraction of their assets (to simplify). Any state could record state assets (state receipts, buildings, land, etc.) on their accounting books and create credit from their value. Although different from most peoples’ misunderstanding, banks do not lend what depositors have put in the bank. Therefore, states are not “risking” assets through loans; they are legally entitled to create credit out of thin air. This is verified by the Federal Reserve’s Publication, “Modern Money Mechanics” and explained in its crucial details in my brief. Excerpts:
“The purpose of this booklet is to describe the basic process of money creation in a ‘fractional reserve’ banking system…The actual process of money creation takes place primarily in banks.”
“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrower’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the "loan"]."
What does this mean? It means that intelligent state legislators can immediately authorize their own bank, issue credit to themselves at 0% interest to purchase their outstanding debt, and immediately save themselves borrowing costs.
Whoa. That’s important.
For California, that means saving $5 billion every year. Reality check: ~20,000 teachers were laid-off this year in California (I am one, creatively trying to earn income as a writer). All could be re-hired at $70,000 per year and the state would still have $3.4 billion left over in savings!
Hey, how much is your state paying on interest for state debt? If you’re willing to contact a state legislator, I’ll help you with the information. Contact me at my bio info above.
Ellen Brown, Michael Sauvante, a constituent, and I met with a California legislator on the state banking committee. The legislator immediately recognized the national implications of this idea (“Why don’t we do this on a Federal level? Boy, Wall Street would hate that!”), was astounded California could save $5 billion so easily (“Why didn’t I know this?”), and appropriately infuriated that no bankster hawking to provide California credit at higher-profit levels after downgrading the state to BBB risk ever informed state legislators or Treasurer of the option that the state could legally create its own bank (“The state of California is far more appropriate to create credit than Goldman Sachs!!”). We will have a follow-up meeting with the legislator this month to create a plan of legislative action. Details to follow…
Now this is important: governments creating credit (debt) is only a temporary solution to our predicament. I think I humorously portrayed our situation by relating it to a Pingu cartoon here. The real answer is government creating money for the direct payment of public goods and services. This has to happen at the national level. The benefits are conservatively a trillion dollars every year: please see my paper here. I invite professional economists to work with me on this cost-benefit analysis; I fear I am not taking into consideration all of the measurable benefits.
As always, please share this article with all who say they want to be competent citizens. If you appreciate my work, please subscribe for free just below the article title.
Two one-minute visuals to imagine a trillion dollars, because almost all of us do not work with numbers of this magnitude:
Comments
A state owned bank, loaning money to itself, at zero interest. Sounds like a great idea, but I'd be worried about the California Legislature going crazy with 'free' money. Still sounds like it needs to be evaluated as an option.
Colleen: I agree. We should take the $5 billion now and then collectively enact national reform to shift the creation of money from its current status as debt (that's why the more our economy creates the deeper in debt we collectively get; yes, it's an insane model) to the direct creation of money for payment of public goods and services.
I encourage everyone to read my national article that's linked above to understand how THAT reform translates into a TRILLION DOLLARS of collective benefit. That's $10,000 per year average every year per US household!
Think about it: Every time the state finances some infrastructure project by a bond, we pay another 50% beyond the cost of the project in interest on the bonds. Every time the federal government issues new money, that money is issued as debt in the form of Treasury Bonds. We pay private banks for the privilege of issuing our own currency. Using the colonial money system and spending our money into existence, we could reduce the tax burden and government expenditures at the same time. That's how Hitler's Germany went from being the poorest country in Europe to the richest one in 5 years.
I think the key is that the human labor creates the value; the money is the token of that value, and it is appropriate that the state provide that token.
I think it is even appropriate that the local government provide the token of value for work performed or goods produced. How much token, of course, is the $64 question (no play on words intended).
One economist remarked that multiple communities doing that would create economic chaos. His interest was how it would affect international trade. However, in terms of what this monetary disjuncture is doing to global communities, we already have economic chaos.
What we probably need is currency on every level - the national dollar but also state and local currencies. In any case, I think Carl Herman and Ellen Brown are saying tremendously important things, and if we follow their advice, we can avoid the financial calamity coming if we continue to think that the dollar is what the economy turns on.
Jct: Sure, a State bank would work wonders but there’s also nothing wrong with small denomination IOUs if anyone can pay their taxes with them. When Argentina’s government workers were faced with cuts, their unions talked 6 state governments into paying them with small-denomination state bonds which could be used to pay for state services and taxes by everyone.
Too bad California IOUs weren't accepted in payment for state taxes and services like state bonds were in Argentina. Too bad California IOUs were not denominated too big to use as local currency. Too bad Argentina people were smart enough to avoid the tent-cities catastrophe and California people are too stupid to follow their example.
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But why let private profiteers benefit from running the banking system when letting government keep it saves us interest. Why represent our wealth with their chips for a fee when we can represent our wealth with our chips for free.
I don't believe North Dakota pays for FDIC insurance either, which would keep even more $'s circulating in CA.
Lower banking fees for customers would result as there would NOT be extraordinary CEO bonus's/pay skimmed from the banks earnings, or dividends skimmed and paid out to the wealthy shareholders/bondholders.
State banking ONLY makes sense as it's #1 priority is to benefit the states inhabitants and not International Corporatist's determined to off shore every job to China.
Nailbender, Christopher, Jean and King: great comments. Nailbender: The Bank of North Dakota does not pay for FDIC insurance; they back the bank with the "full faith and credit of the state of North Dakota" which does indeed eliminate added cost. The point, as I see it, is to take a relatively simple idea like credit and maximize public utility and efficiency as with other essential public goods and services.
Again, credit is debt. The real reform is transforming debt into government-created money, as I explain in a linked article supported by many of our brightest historical minds who wrote about this crucial issue.
Great article, Carl. I hope it gets wide exposure. State-owned banks are a brilliant idea.
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