By Ellen Brown
8 Jul 2025 – A thriving economy requires that credit flow freely for productive use. But today, a handful of giant banks diverts that flow into an exponentially-growing self-feeding pool of digital profits for themselves. Rather than allowing the free exchange of labor and materials for production, our system of banking and credit has acted as a tourniquet on production and a drain on resources.
Yet we cannot do without the functions banks perform; and one of these is the creation of “money” as dollar-denominated bank credit when they make loans. This advance of credit has taken the form of “fractional reserve” lending, which has been heavily criticized. But historically, it is this sort of credit created on the books of banks that has allowed the wheels of industry to turn. Employers need credit at each stage of production before they have finished products that can be sold on the market, and banks need to be able to create credit as needed to respond to this demand. Without the advance of credit, there will be no products or services to sell; and without products to sell, workers and suppliers cannot get paid.
Bank-created deposits are not actually “unbacked fiat” simply issued by banks. They can be created only when there is a borrower. In effect, the bank has monetized the borrower’s promise to repay, turning his promise to pay tomorrow into money that can be spent today — spent on the workers and materials necessary to create the products and services that will be sold to repay the loans. As Benjamin Franklin wrote, “many that understand Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money; to trade with, when they have it at a moderate interest.”
If banks have an unfair edge in this game, it is because they have managed to get private control of the credit spigots. They have often used this control not to serve business, industry, and society’s needs but for their private advantage. They can turn credit on and off at will, direct it at very low interest to their cronies, or use it for their own speculative ventures; and they collect the interest as middlemen. This is not just a modest service fee covering costs. Interest has been calculated to compose a third of everything we buy.
Anyone with money has a right to lend it, and any group with money can pool it and lend it; but the ability to create money-as-credit ex nihilo (out of nothing), backed by the “full faith and credit” of the government and the people, is properly a public function, the proceeds of which should thus return to the public. The virtues of an expandable credit system can be retained while avoiding the exploitation to which private banks are prone, by establishing a network of public banks that serve the people because they are owned by the people.
The Stellar Example of the Bank of North Dakota
Publicly-owned banks can exist at many levels, from giant multinational infrastructure banks, to national infrastructure or postal banks, to local banks owned by states, counties, cities or tribes. In his 2021 book titled Public Banks, Professor Thomas Marois showed that 17% of banks are publicly owned, with collective assets just under $49 trillion. In the US today, many groups are working on establishing local public banks. But our only existing state-owned bank is the century-old Bank of North Dakota (BND), a stellar model that will be the focus of this paper.
The BND was founded in 1919, when North Dakota farmers rose up against the powerful out-of-state banking-railroad-granary cartel that was unfairly foreclosing on their farms. They formed the Non-Partisan League, won an election, and founded the state’s own bank and granary, both of which are still active today.
The BND operates within the private financial market, working alongside private banks rather than replacing them. It provides loans and other banking services, primarily to other banks, local governments, and state agencies, which then lend to or invest in private sector enterprises. It operates with a profit motive, with profits either retained as capital to increase the bank’s loan capacity or returned to the state’s general fund, supporting public projects, education, and infrastructure.
According to the BND website, more than $1 billion had been transferred to the state’s general fund and special programs through 2018, most of it in the previous decade. That is a substantial sum for a state with a population that is only about one-fifteenth the size of Los Angeles County.
The BND actually beats private banks at their own game, generating a larger return on equity (ROE, that is, net profit divided by shareholder equity) for its public citizen-owners than even the largest Wall Street banks return to their private investors (for figures, see below). These profits belong to the citizens and are generated without taxation, lowering tax rates. On October 3, 2024, Truth in Accounting’s annual Financial State of the States report rated North Dakota #1 in fiscal health, with a budget surplus per taxpayer of $55,600. Small businesses are now failing across the country at increasingly high rates; but that’s not true in North Dakota, which was rated by Forbes Magazine the best state in which to start a business in 2024.
Why So Profitable? The BND Model
For nearly a century, the BND maintained a low profile. But in 2014, it was featured in the Wall Street Journal, which reported that the Bank of North Dakota “is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. (JPM) and hasn’t seen profit growth drop since 2003.” The article credited this success to the shale oil boom; but North Dakota was already reporting record profits in the spring of 2009, when every other state was in the red and the oil boom had not yet hit.
The average ROE of the BND from 2000 through 2024 (its latest annual report) was 19.4%. Compare JPMorgan Chase (JPM), by far the largest bank in the country, with 2.4 trillion in deposits. Its average ROE from 2000-23 was 11.38% over the same period. For a detailed breakdown, see here.
How could the BND have outperformed JPM, the nation’s largest bank? Most important, it has substantially lower costs and risks than private commercial banks. It has no exorbitantly-paid executives; pays no bonuses, fees, or commissions; has no private shareholders; and has low borrowing costs. It partners with local banks in “participation loans,” avoiding loan origination costs. It engages in old-fashioned conservative banking and does not speculate in derivatives, so it has no losses or risk from derivative trades gone wrong.
The BND does not need to advertise or compete for depositors. It has a massive, captive deposit base in the state itself, which must deposit all of its revenues in the BND by law. Most state agencies also must deposit there. The BND takes some token individual deposits, but it does not compete with local banks for commercial deposits or loans. As for municipal (as distinct from state) government deposits, the BND generally not only reserves those deposits for local community banks but enhances their ability to secure municipal deposits. In many states, stringent collateral requirements are attached to municipal government deposits, such as a 110% collateral requirement with high quality securities. This essentially prevents local banks from using municipal deposits to fund local lending. In North Dakota, however, the BND provides letters of credit that guarantee the deposits of municipal governments and other public corporations, making collateral unnecessary and making municipal deposits available for local lending. In addition to its deposit base, the BND also has a substantial capital base, with a capital fund totaling $1.059 billion in 2023, along with deposits of $8.7 billion.
Among other costs avoided by the BND are those for fines, penalties and settlements arising from government and civil lawsuits. Since the year 2000, JPM has paid more than $40 billion in total fines and settlements to regulators, enforcement agencies and lawsuits related to anti-competitive practices, securities abuses and other violations; and it is still facing several hundred open legal cases.
The State’s Deposits Are Safer in Its Own Bank
The BND is not only more profitable but also safer than JPM. In fact federal data show that JPM is the most systemically risky bank in the country. The BND, by contrast, has been called the nation’s safest bank. Its stock cannot be short-sold, since it is not publicly traded; and it will not suffer a run, since the state would not “run” on itself.
Compare JP Morgan Chase, which has over $1 trillion in uninsured deposits, the type most likely to be withdrawn in a crisis. In March 2023, the FDIC insurance fund had a balance of only $116.1 billion – only 5% of JPM’s total deposits of $2.38 trillion. JPM also had major counterparty risk in the derivatives market, with close to $60 trillion in total (notional) derivatives. The risks of large notional derivative exposures were highlighted in the 2012 “London Whale” scandal, in which JPM incurred $6.2 billion in losses from exotic derivatives trades.
Not just the Bank of North Dakota but North Dakota’s local banks are very safe, aided by the BND with liquidity, capitalization, regulation, loan guarantees, and other banker’s bank services. No local North Dakota banks have been in trouble during this century, but if they were to suffer a bank run, the BND would be there to help. According to its former CEO Eric Hardmeyer, the BND has a pre-approved fed funds line set up with every bank in the state; and if that is insufficient for liquidity, the BND can simply buy loans from a troubled local bank as needed.
Today, state governments often deposit their revenues in giant Wall Street banks designated as SIFIs (Systemically Important Financial Institutions), including JPM; but those banks are riskier than they appear. They “insure” their capital with interconnected derivatives backed by collateral that has been “rehypothecated” (pledged or re-used several times over). The Financial Stability Board in Basel has declared that practice to be risky, “[a]s demonstrated by the 2007-09 global financial crisis.” The five largest Wall Street depository banks hold $223 trillion in derivatives — a risk highlighted by the Bank for International Settlements as “huge, missing and growing” in its December 2022 Quarterly Review — and they have a combined half trillion dollars in commercial real estate loans, also very risky in the current financial environment.
Under the Dodd Frank Act of 2010, a SIFI that goes bankrupt will not be bailed out by the government but will be recapitalized through “bail-ins,” meaning the banks are to “bail in” or extract capital from their creditors. That includes their “secured” and “collateralized” depositors, including state and local governments. Under the Bankruptcy Act of 2005 and Uniform Commercial Code Secs. 8 and 9, derivative and repo claims have seniority over all others and could easily wipe out all of the capital of a SIFI, including the “collateralized” deposits of state and local governments. The details are complicated, but the threat is real and imminent. See fuller discussions here and here, David Rodgers Webb’s The Great Taking, and Chris Martenson’s series drilling down into the obscure legalese of the enabling legislation, concluding here.
Even if the SIFIs remain solvent, they are not using state deposits and investments for the benefit of the state from which they come, and often they are betting against the public interest. The BND, on the other hand, is mandated to use its funds for the benefit of the North Dakota public. Other states would do well to follow North Dakota’s lead.
Advantages of a State-owned Bank for the Public, Local Government and Local Banks
Like private banks, a publicly-owned bank has the ability to create money in the form of bank credit on its books, and it has access to very low interest rates. But the business model of private banks requires them to take advantage of these low rates to extract as much debt service as the market will bear for the benefit of the bank’s private investors. A public bank can pass low rates on to local residents and businesses. It can also recapture the interest on local government projects, making them substantially cheaper than when funded through the bond market. As described above, the BND’s profits belong to the citizens and are generated without taxation, lowering tax rates.The BND also serves North Dakota’s local banks. It acts as a mini-Fed for the state, providing correspondent banking services to virtually every financial institution in North Dakota. It provides secured and unsecured , check-clearing, cash management and automated clearing house services for local banks. It participates in their loans and guarantees them, so the banks are willing to take on more risk, and they have been able to keep loans on their books rather than selling them to investors to meet capital requirements. As a result, North Dakota banks were able to avoid the 2008-09 subprime and securitization debacles and the 2023 wave of bank bankruptcies.
By partnering with the BND, local banks can also take on local projects that might be too large for their own resources or in which Wall Street has no interest, projects that might otherwise go to out-of-state banks or remain unfunded. Due to this amicable partnership, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks.
Serving the State as a Rainy Day Fund and for Disaster Relief
Unlike the Federal Reserve, which is not authorized to support state and local governments except in very limited circumstances, North Dakota’s “mini-Fed” can help directly with state government funding. Having a cheap and ready credit line with the state’s own bank reduces the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks.
The BND has also demonstrated the power of a state-owned bank to leverage state funds into new credit-dollars for disaster relief. Its emergency capabilities were demonstrated, for example, when record flooding and fires devastated Grand Forks, North Dakota, in 1997. Floodwaters covered virtually the entire city and took weeks to fully recede. Property losses topped $3.5 billion. The response of the state-owned bank was immediate and comprehensive. It quickly established nearly $70 million in credit lines – to the city, the state National Guard, the state Division of Emergency Management, the University of North Dakota in Grand Forks, and for individuals, businesses and farms. It also launched a Grand Forks disaster relief loan program and allocated $5 million to help other areas affected by the spring floods. Local financial institutions matched these funds, making a total of more than $70 million available.
The BND coordinated with the U.S. Department of Education to ensure forbearance on student loans; worked closely with the Federal Housing Administration and Veterans Administration to gain forbearance on federally backed home loans; established a center where people could apply for federal/state housing assistance; and worked with the North Dakota Community Foundation to coordinate a disaster relief fund, for which the bank served as the deposit base. The bank also reduced interest rates on existing Family Farm and Farm Operating programs. Remarkably, no lives were lost, and the city was quickly rebuilt and restored.
More recently during the COVID crisis, North Dakota distributed unemployment benefits through community banks coordinated by the BND 10 times faster than the slowest state, and North Dakota’s small businesses secured more Paycheck Protection Program funds per worker than any other state.
Progress and Challenges
In the past 15 years, groups across the country have worked diligently to establish publicly-owned banks in their states and communities. A big push came in 2011 with the Occupy Wall Street movement, demonstrating that even the dry subject of banking can incite large groups of people to take action in times of economic crisis. Many people moved their individual deposits out of big Wall Street banks into local community banks, but what about the large public deposits held by state and local governments? No community bank was large enough for their needs. The Bank of North Dakota demonstrated the feasibility of another alternative: the state or city could form its own bank.
Although more than 50 public bank bills and resolutions have been filed since 2010, the only new bank to emerge is the Territorial Bank of American Samoa, founded in 2016. Lobbying in opposition by big private banks has deterred politicians, who are reluctant to rock the boat when times are good and no immediate need is perceived. However, times are not so good today for the majority of the population, and they could soon get worse even for the wealthy.
To muster the political will to take action, politicians need a business plan in which the benefits of establishing their own banks clearly outweigh the costs; and public bank advocates today face hurdles that the BND avoided by being grandfathered in before the relevant agency rules were instigated.
One hurdle is that states today typically require uninsured public funds to be backed by pledged collateral (i.e. surety bonds or letters of credit) exceeding 100 percent of the value of the deposits. California, for example, has state tax revenues exceeding $80 billion. As a single deposit in a bank, only $250,000 of that sum would be covered by FDIC insurance, leaving the balance uninsured; so the state insures that balance with a collateral requirement that is 110% of uninsured deposits. The result is to tie up more liquidity than the deposits provide. Public banking advocates argue that the requirement is unnecessary and unfairly burdensome for state-owned banks. The deposits of the BND, which was chartered as “the State of North Dakota doing business as the Bank of North Dakota,” are backed by the state itself. Meanwhile, letters of credit, e.g. from a Federal Home Loan Bank, are a viable alternative.
Another hurdle is that most state constitutions prohibit the state from “lending its credit” to private parties. This has been construed as prohibiting the state from owning a bank, but legal memoranda have refuted that interpretation.
Besides a profitable business plan, politicians need a push from their constituents to take action, and most people haven’t heard of public banks and don’t understand the concept. Wider public exposure and education are necessary. Even many politicians are unaware of how banking actually works. Chartered depository banks have the power to create money as deposits when they make loans, expanding the local money supply and increasing the capacity for local productivity. Over 95% of our money supply today is created by banks in this way. This vast power to create money as credit is one that properly belongs in the public domain.
Times are changing, and public banking momentum continues to grow. By making banking a public utility, with expandable credit issued by banks that are owned by the people, the financial system can be made to serve the people and local enterprise without draining their resources away. Credit flow can be released so that industry and free markets can thrive, and the economy can move closer to reaching its full potential.
Ellen Brown is a member of the TRANSCEND Network for Peace Development Environment,
14 July 2025
Source: transcend.org
