Keeping the State’s Money in the State

An Alternative Solution To The Budget Crisis

Cut spending, raise taxes, sell off public assets – these are the unsatisfactory solutions being debated across the nation; but the budget crises now being suffered by nearly all the states did not arise from too much spending or too little taxation.  They arose from a credit freeze on Wall Street.  In the wake of the 2009 financial market collapse, banks curtailed their lending more sharply than in any year since 1942, driving massive unemployment and causing local tax revenues to plummet.

The logical solution, then, is to restore credit to the local economy.  But how?  The Federal Reserve could provide the capital and liquidity necessary to create bank credit, in the same way that it provided $12.3 trillion in liquidity and short-term loans to the large money center banks.  But Fed Chairman Ben Bernanke declared in January 2011 that the Fed had no intention of doing that — not because it would be too costly (the total deficit of all the states comes to less than 2% of the credit advanced for the bank bailout) but because it is not part of the Fed’s mandate.  If Congress wants the Fed to advance credit to local governments, he said, it will have to change the law.

The states are on their own.  Policy makers are therefore considering a variety of reforms designed to increase bank lending, particularly to small businesses, the hardest hit by tightening credit standards.  One measure that is drawing increasing interest is the creation of a bank modeled on the Bank of North Dakota (BND), currently the only state-owned bank in the country.  The BND has a 92-year history of safe, secure and highly profitable banking.  North Dakota has the lowest unemployment rate in the country; and in 2009, when other states were floundering, it had the largest budget surplus it had ever had.

Eight states now have bills pending either to form state-owned banks or to do feasibility studies to determine their potential.  This year, bills were introduced in the Oregon State legislature on January 11; in Washington State on January 13; in Massachusetts on January 20  (following a 2010 bill that lapsed); and in the Maryland legislature on February 4.  They join Illinois, Virginia, Hawaii, and Louisiana, which introduced similar bills in 2010.  The Center for State Innovation, based in Madison, Wisconsin, was commissioned to do detailed analyses for Washington and Oregon.  Their conclusion was that state-owned banks in those states would have a substantial positive impact on employment, new lending, and state and local government revenue.

State-owned banks could be a win-win for everyone interested in a thriving local economy.  Objections are usually based on misconceptions or a lack of information.  Proponents stress that:

1.  A state-owned bank on the BND model would not compete with community banks.  Rather, it would partner with them and support them in making loans.  The BND serves the role of a mini-Fed for the state.  It provides correspondent banking services to virtually every financial institution in North Dakota and offers a Federal Funds program with daily volume of $330 million.  It also provides check clearing, cash management services, and automated clearing house services.  It leverages state funds into credit for local purposes, funds that would otherwise leave the state and be leveraged for investing abroad, drawing away jobs that could go to locals.

2.  The BND not only does not compete for loans but does not compete for commercial deposits.  Less than 2% of its deposits come from consumers.  Municipal government deposits are also reserved for local community banks, which are able to use these funds for loans specifically because the BND provides letters of credit guaranteeing them.  Virtually all of the BND’s deposits come from the state itself.  All state revenues are deposited in the BND by law.

3.  Although the BND is a member of the Federal Reserve system, it is insured by the state rather than by the FDIC.  This does not, however, put deposits at risk.  Rather, it helps avoid risk and unnecessary expense, since the BND’s chief depositor is the state, and the state has far more to deposit than $250,000, the maximum covered by FDIC insurance.  FDIC insurance is not only very expensive but subjects members to FDIC regulation, making the state subservient to a semi-private national banking association.  (The FDIC calls itself an independent agency of the federal government, but it receives no Congressional appropriations.  Rather, it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.)  North Dakota prefers to maintain its financial independence.

4.  BND officials stress that the bank is run by bankers, not politicians bent on funding their favorite development projects or bestowing political favors.  The bank is run very conservatively, doing only creditworthy deals and avoiding speculation in derivatives and risky subprime loans.  By partnering with local banks, the BND actually shields itself from risk, since the local bank takes the initial loss if the borrower fails to pay.

5.  The BND does not imperil state funds or tax money but is self-funding and self-sustaining.  It manages VA, FHA and other forms of loans that are federally guaranteed and would otherwise go to large out-of-state banks.  Profits on these federally-guaranteed loans are then used to build a capital surplus from which riskier loans can be made to local businesses and development projects.  The BND has a return on equity of 25-26% and has contributed over $300 million to the state (its only shareholder) in the past decade — a notable achievement for a state with a population less than one-tenth the size of Los Angeles County.  Compare California’s public pension funds, which entrust their money to Wall Street and are down more than $100 billion, or close to half the funds’ holdings, following the banking debacle of 2008.

6.  Partnering with the BND allows community banks to fund local projects in which Wall Street is not interested, leveraging municipal government funds that would otherwise not be available for loans.  Further, infrastructure projects can be funded through the state bank at substantially less cost, since the state owns the bank and gets the interest back.  Studies have shown that interest composes 30-50% of public projects.

8.  The North Dakota Bankers’ Association does not oppose the BND but rather endorses it.  North Dakota has the most local banks per capita and the lowest default rate of any state.

Other states could realize similar benefits, if they were to form banks on the BND model.  Paying interest to coupon clippers on state and municipal bonds means sending money out of the state on a one-way trip to Wall Street.  Having a state-owned bank allows the state to keep its money local, flowing into the state treasury and the local economy.


• Originally posted by Yes! Magazine.

Ellen Brown is an attorney, co-chair of the Public Banking Institute, and author of thirteen books including Web of DebtThe Public Bank Solution, and Banking on the People: Democratizing Money in the Digital Age. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 400+ blog articles are posted at Read other articles by Ellen.

10 comments on this article so far ...

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  1. Deadbeat said on March 28th, 2011 at 10:19am #

    Ms.Brown writes …

    but the budget crises now being suffered by nearly all the states did not arise from too much spending or too little taxation. They arose from a credit freeze on Wall Street.

    I hardly got started reading this article when I saw what is a PATENTLY incorrect statement and thus faulty premise. The crisis of state budgets has been going on for DECADES. Recall 1975 when NYC almost defaulted. NYC got bailed out by NY State which put their budget into crisis. The end of revenue sharing and mandated also put stress on state budgets. Cutting taxes for the rich and corporations and “enterprises zones” underfunded state budgets. State also competed against each other for jobs by weakening labor laws, etc, etc, etc.

    This crisis is NOT a banking problem but a systemic Capitalist crisis.

  2. Keith said on March 28th, 2011 at 2:19pm #

    I would love to see all 50 states have state banks as this would significantly ameliorate our current financial dilemma, however, I wonder if this is currently possible? When North Dakota got into state banking in a limited way, Wall Street was probably not overly concerned. Right now, for a large number of states to move in that direction would be devastating to their bottom line and I suspect that they would bring awesome power to bear to insure that it didn’t happen, including violence. Whatever happens, it needs to happen fast. Things appear to be coming to a head very rapidly.

  3. PatrickSMcNally said on March 28th, 2011 at 6:00pm #

    If we were going to start examining economic indicators on a state-by-state basis then Minnesota would make a better example than North Dakota. Poverty percentages, median household income and per capita personal income have often been better in Minnesota over North Dakota. It also should be mentioned that western North Dakota has experienced an oil boom. You wouldn’t be able to tell that from all the talk about the Bank of North Dakota. North Dakota has also benefited from plant closings in other states, and the transfer of plant operations to North Dakota. This has been an important source of increase in manufacturing jobs in North Dakota, the same way it’s been for China and Mexico. None of that is really due to the Bank of North Dakota per se.

    Not that that really means much in itself. But the sudden fascination with the Bank of North Dakota is based upon using such selective data to turn the issue away from the real crisis of capitalism. Any actual socialist program would have to include the nationalization of both banks and all really large-scale companies to be the basis for a new society. But implying that the crisis of capitalism is merely an issue of needing to set up a state bank can only be diversionary.

  4. Deadbeat said on March 28th, 2011 at 10:28pm #

    I agree with Patrick and my argument regarding Ms. Brown’s articles on ND banking is that they are primarily based on faulty correlations. Ms. Brown ignores other factors that would explain the state budgets however recently ND gov’t dole out some favorable tax treatment to the rich and thus the form of ND banking has nothing to do with its budget. Patrick offers other factors that Ms. Brown ignores and the rich of ND is now using its strong balance sheet to reap tax breaks. If that trend continues ND budget will end up like most other states that Ms. Brown rails about.

  5. Ellen Hodgson Brown said on March 29th, 2011 at 12:24am #

    On oil and the BND, this is from our FAQs,

    Aren’t North Dakota’s oil revenues responsible for the state budget surplus?

    That is no doubt one factor, but many states with oil revenues are floundering. Something else must be contributing to North Dakota’s stunning success.
    The data shows that the Bank of North Dakota (BND) has contributed more to the state budget over the last 15 years than oil taxes have generated. Over the last decade, the BND has contributed over $300 million to the state.
    More to the point, did the oil companies direct any of their profits to supporting local banks, underwriting mortgages and loans to other businesses and start ups, students and farmers, reduce the cost of municipal bond issues or come to the aid of Grand Forks in its epic fire and flood? No, of course not.
    Meanwhile, the oil business itself has been and will be aided by the BND. Because export capacity has been reached, BND has been asked by the state legislature to fund a $100M loan to build the first petroleum refinery in the U.S. in nearly 40 years. If this legislation passes, oil industry refinement capacity will be expanded because of funds provided by BND.

  6. PatrickSMcNally said on March 29th, 2011 at 3:05am #

    Starting just with the listing of poverty rates in 2009 we find North Dakota in 13th place.

    That puts it in a better slot than a lot of other states, but still below 12 other states. If we lay side-by-side a few of the indicators for North Dakota and Minnesota we see that the latter performs consistently better:

    These are the types of indicators which must be gone through thoroughly before one starts proclaiming the BND as the model for how capitalism can solve its problems. Oil is certainly an important factor in enabling ND to attain that 13th spot on the poverty list. Discounting such data as poverty rates and the like merely makes a fetish out of banks

  7. Ellen Hodgson Brown said on March 29th, 2011 at 3:17am #

    The point is that the STATE GOVERNMENT has the largest budget surplus of any state. There can be wealthy or poor individuals in a state; this is about pulling STATE GOVERNMENTS out of budget crises.

  8. Deadbeat said on March 29th, 2011 at 7:56pm #

    Ms. Brown writes …

    The point is that the [North Dakota] GOVERNMENT has the largest budget surplus of any state. There can be wealthy or poor individuals in a state; this is about pulling STATE GOVERNMENTS out of budget crises.

    A budget is based on revenue vs. expense. You are correlating that the type of banking organization (state vs. private) is the reason for ND’s budgetary success. The point that Patrick and I are making is that premise is false. Budgetary priorities are the more likely indicators.

    No one is arguing that a state-owned bank is generally better for the public than a privately held bank since a public bank is more accountable. However a public bank is NOT IMMUNED to the contradictions of Capitalism and corruption. What you doing, as Patrick indicates is making a “fetish” of state-owned banking as an end-all solution the current Capitalist crisis.

    The form of a state’s bank won’t help a state’s budget or improve the standard of living for her citizens if that state budgetary priorities are flawed.

    If North Dakota continues its trend of “spending” the surplus on tax breaks to its richest citizens then the revenue coming from BND won’t be able to balance ND’s budget unless public service CUTS are made.

    A balanced budget or surplus doesn’t tell you anything. As Patrick suggests the surplus should be transferred to the poor further reducing North Dakota’s poverty rates. As I point out the ND’s surplus is being transferred to its richest via tax cuts. Which means that her state bank through her tax policies are now becoming a funnel of wealth transfer from average ND’s citizens to her wealthiest.

  9. Ellen Hodgson Brown said on March 29th, 2011 at 9:27pm #

    Fine. Any institution can be corrupted. States still would do better with state-owned banks. Why? Because banks actually CREATE money when they make loans. If states had their own banks, they too could create money with the deposits and assets that they now send out of state to Wall Street. Virtually ever state but ND is suffering from a credit crisis. To create credit you need 3 things: deposits, capital and creditworthy borrowers. The capital is leveraged into many times that sum in loans, which are covered by the deposits. The deposits are effectively double-counted (they’re still in the bank though they’ve theoretically been lent out), and that’s where the new credit-money comes from. If you don’t have that mechanism in place, and are instead sending send y9ur capital and deposits to Wall Street, you’re giving a huge resource away. You’re allowing Wall Street to leverage your money into credit, which they then use to buy stock in foreign corporations, taking away your local jobs; speculate in commodities, driving up prices; etc. That’s the point I’m trying to hammer home, not that ND is populated with saints. BANKS CREATE MONEY AS CREDIT. WE’RE IN A DEPRESSION BECAUSE WALL STREET PRECIPITATED A CREDIT CRISIS. THE WAY OUT IS TO FORM OUR OWN BANKS AND OUR OWN CREDIT.

  10. PatrickSMcNally said on March 30th, 2011 at 12:52pm #


    No. The recession has occurred because private businesses everywhere in the economy for the last 40 years have seen a drop in the level of profit which can be expected from simply providing consumers with more products and services. The 25 years after WWII saw a period where the demand seemed infinite for more products and services of a kind that were relatively easy to provide at a profit. When saturation set in in the early 1970s then investors began looking elsewhere. If Chrysler is in trouble because there are too many cars all over the world already, then one can’t expect to make a profit from owning stocks in Chrysler. In these circumstances, investors tend to shift their assets over to the financial sector in the hopes that some profits can be sustained outside of the normal process of delivering goods and services to the consumer.

    Where credit crises have occurred it has been the consequence of loans having been made that do not contribute to a rise in goods and services. The whole idea behind any kind of banking loans, whether done by a state bank or any other bank, was always premised on the idea that the borrower had the intent of using the money to cover expenses for something that would lead to a growth in consumer goods and services. Case example: someone takes out a loan so that they can open a new shoe store in a neighborhood where there is a demand for such. In this case the addition of more products to the economy demands the expansion of the money supply to cover a larger volume of goods in circulation. Eventually more dollar bills are actually printed to cover that demand, while bank credit is simply a temporary mechanism which allows the borrower to pay the costs of opening the shoe store before the economic effect of doing such has actually brought about the further printing of these additional dollars.

    But for the last 4 decades the USA has seen a wide variety of loans which are not made with the intent of opening more shoe stores (there isn’t much real need for that) or doing anything else to increase consumer items. Rather, these loans have generally been done with the intent of sustaining the consumer’s purchasing power even as attacks on wages threaten to undermine it. Reducing wages can be a great way of upholding profits since it lowers labor costs, except that if wages are everywhere reduced simultaneously then this lowers the consumer capacity and profits can still drop. The practice of easy lending to consumers who were increasingly in a shaky financial position was an attempt to cover over this contradiction. But it couldn’t work forever.

    That is not a state issue, but at least a national (some would say global) issue. As a credit crisis it would never have arisen if there had not been an attack on wages starting in the 1970s. That makes it very misleading to simply pronounce that Wall Street precipitated a credit crisis. Wall Street in the early 1970s was not specifically in a position to determine such a broad trend as the freezing of wages amidst rising costs of living which occurred throughout the whole economy.

    North Dakota recently proclaimed February 6 to be Ronald Reagan Day in honor of the Gipper’s 100th birthday:

    If Reagan’s admirers were to begin a campaign to privatize the NDB (the same way that they’ve campaigned to privatize social security) then I’d understand the idea of calling for demonstrations to stop such a privatization. But implying that the real source of the 2008 crunch is somehow to be found in merely the lack of enough state banks within capitalism is really leading people around by the nose.