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How to Boost the Economy for the Rest of Us

North Dakota's economic success shows what public banks can accomplish

Unfortunately, the continuing economic crisis brought few substantive changes to our out-of-whack financial system. But a number of states are looking into the possibilities of public banks— a commons-based financial institution that offers borrowers an alternative to Wall Street and megabanks. John David of the Public Banking Institute spells out the advantages of public banks, based on the success of the 90-year-old Bank of North Dakota in an article reprinted from “Shareable.net”:http://www.shareable.net/blog/reviving-main-street-a-call-for-public-banks

When Sergio Lub, a small business owner in Walnut Creek, California, submitted public testimony to the Banking and Finance Committee on May 2, 2011 supporting the creation of a state-owned bank in California, he wrote from personal experience:

“I long for the treatment I used to receive from the former Contra Costa Bank of Walnut Creek. Whenever I needed working capital, I just made a phone call and it was done. After our bank was bought by Wells Fargo, getting a credit line became increasingly more complicated to the point that now ― even after being a customer for 36 years ― we no longer qualify for loans. This is because our type of business (handcrafting and wholesaling of jewelry), does not conform with the standard type of businesses Wells Fargo seeks to bundle and easily re-sell to Wall Street investors.

“It is my hope that, as happens in North Dakota, our Bank of California will encourage and support local banks to finance local businesses so we will not be handicapped by the rigidity and restrictions of the big banks.”

Lub sees what the farmers and industrial workers of North Dakota saw when they noticed where their money went. They formed the Non-Partisan League, won an election, and created a state-owned bank in 1919.

If we had a widespread, well-operated, transparent network of publicly owned banks like North Dakota’s, the private banks would have to behave, or they would simply go out of business for failing to even come close to the standards set by their public counterparts.

Compounding our debt to private megabanks has carried us into dangerous waters. It’s time to compound our wealth by creating publicly owned banks. Public banks restore the issuing of credit as a public utility while supporting local and regional economies. The establishment of a public banking network will restore the credit commons so we can support local economies up to the state level. Instead of bailing out big banks, we could be revitalizing our neighborhoods.


A well-run public bank can aid state and local governments in getting through cash crunches without laying off large number of workers, privatizing public assets, or cutting back public services. Since creating local economic resilience is the motivator ― not just creating profit ― the focus of public banks is not short-term lending, but rather long-term loans to finance socially beneficial projects that are not profitable in the short-term.

Public banks also partner with community banks. The idea is to complement private banking with a public, non-profit alternative.
Any interest payments charged by a state bank are plowed back into the state as loans to fund economic development, rather than going to large, often out-of-state bankers. That allows taxes to be reduced at the same time that infrastructure spending is increased. The citizens would save money, and the state would make more money to provide better services and to grow local economies that are more resilient.

We can creatively use public banks alongside private banks to do the people’s business. Examples include low-interest loans to students, businesses, and home buyers; the purchase of municipal bonds for infrastructure and economic development; a secondary market for mortgages; and provision of short-term liquidity to private banks, as well as disaster relief and other public purposes. Loans for income-producing projects (transportation, energy, and housing) could be repaid with the profits generated by the funded projects. In all cases, the profits of a public banking institution are reinvested in its capital or returned as revenue to the governmental authority (state, county, or municipal) that established the public banking institution.

A public bank offers these advantages: no big-bonus-taking CEOs or shareholders demanding quarterly profits, etc.; a clean set of books that will be a matter of public record; and a mission statement requiring investment in developing local communities. To keep it public, the bank’s charter will prohibit the bank from ever being privatized.

But this is all just an idle dream, right?


In continuous operation since 1919, the Bank of North Dakota (BND) demonstrates that public banking is effective and is a valuable policy tool to keep economies stable and thriving. Currently, North Dakota ― in part due to the BND’s influence ― has the lowest unemployment rate in the nation (under 4 percent), has a $1.1 billion surplus, has experienced no bank failures in the state, and is the only state in the last two years to avoid a budget deficit. But they have big oil revenues, you say. So do other small states; the difference is the BND and its public banking policies.

The BND facilitates loans that commercial banks simply don’t make. This helps create a self-reinforcing economic loop that grows the state’s economy. For over 90 years, the BND has built strong working relationships with community banks to support family farmers, small businesses, and the state’s economic development. Now that’s a job generator every state could use.

Yes, they are holding some bad loans, especially now. But the core of what they do is to protect themselves by setting aside reserves to cover the inevitable loss. So the occasional default on such loans does not affect the overall profitability of the bank.

The BND returned over $350 million to North Dakota’s General Fund in the last decade, easing pressure on the state budget. For a state with a population of about 600,000 people, that’s considerable cash. Imagine the revenue the bank of a more populous state could generate (as well as save), thereby allowing taxes to shrink over time.

It also acts like a bankers’ bank or mini-Fed for the state’s financial system, supporting the operation of its other financial institutions. The BND helps community banks out in a pinch, clears their checks, and also buys loans from them when they’re either beyond their legal lending limit or they want to share risk. The BND is also a secondary market for residential loans. This is how healthy economies are nurtured and maintained. North Dakota has beaten the Wall Street credit freeze by generating its own credit.

As for job creation, areas with more small banks tend to have more small businesses. North Dakota has more local banks per capita than any other state. By serving as a secondary market for loans to aid local banks, BND has contributed to this economic fertility, which maintains the viability of credit-worthy local businesses. If North Dakota can do it, so can other states and municipalities, and they can do even more.


At minimum, a state bank can be a banker’s bank, and assist community banks and credit unions to lend more by guaranteeing portions of their loans. Beyond that, it’s up to each state’s wisdom and imagination.

Here are some possibilities:
1. Stimulate the economy by prioritizing the creation of essential jobs.
2. Cut investment costs in half or more with low-interest financing for homeowners and businesses.
3. Make health care affordable.
4. Issue import-replacement loans to develop in-state versions of products that are currently imported.
5. Issue credit cards at affordable interest, say 6%.
6. Tie a portion of the increase in state revenues from the bank to tax reduction.
7. Offer zero-interest loans as community equity loans for public infrastructure/benefit.
8. Loans to individuals for home improvements, etc.


A bank must start with capital. This takes the form of bonds issued for the purpose of capitalizing the public bank or an appropriation of funds to be repaid from the bank’s profits. There are several funding options: existing tax revenue, state and municipal CAFR accounts (government savings funds), and public assets.


From the Bank of North Dakota’s website, “To minimize the possibility of political meddling, the bank publishes annual and quarterly reports detailing its finances.” In addition, the people are established as the proper shareholders of the bank, with the bank board directly elected by the public. Only public money may be used for the campaigns. This elected board will provide policy direction and oversight to ensure that the bank performs according to its charter, which must spell out how the bank will support the public interest. Terms for board members should overlap to ensure institutional memory.

Twelve states are already considering creating a state-owned bank ― Oregon, Maine, Arizona, California, Washington, Illinois, Louisiana, Virginia, Vermont, Hawaii, Maryland, and Massachusetts. A network of public banks chartered by states, counties and cities could create a national community credit-generating system—a large source of investment dollars that has been sorely lacking. That would transform the ongoing race to the bottom into prosperity for all.