How States Can Finance Their Own Recovery

By Ellen Brown

President Obama’s $787 billion stimulus plan has so far failed to halt the growth of unemployment: 2.7 million jobs have been lost since the stimulus plan began. California has lost 336,400 jobs. Arizona has lost 77,300. Michigan has lost 137,300. A total of 49 states and the District of Columbia have all reported net job losses.

In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.

The Advantages of Owning Your Own Bank

So, how does owning a bank solve the state’s funding problems? Isn’t the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of “fractional reserve” lending. As the Federal Reserve Bank of Dallas explains on its web site:

“Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank … holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

How many times? President Obama puts this “multiplier effect” at eight to ten. In a speech on April 14, he said:

“[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks. ‘Where’s our bailout?,’ they ask. The truth is, that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”

It can, but it hasn’t recently, because private banks are limited by bank capital requirements and by their for-profit business models. And that is where a state-owned bank has enormous advantages: States own huge amounts of capital, and they can think farther ahead that their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses; they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.

The Bank of North Dakota (BND) is set up as a dba: “the State of North Dakota doing business as the Bank of North Dakota.” Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to California, the State of California owns about $200 billion in real estate, $62 billion in investments and a projected $128 billion in 2009 revenues. Leveraged by a factor of eight, that capital base could support nearly $4 trillion in loans.

Besides capital, a bank needs “reserves,” which it gets from deposits. For the BND, this too is no problem, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the state in the form of loans.

Public Banking on the Central Bank Model

The BND’s populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a “bankers’ bank.” It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk and buy down the interest rate.

One of the BND’s functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks’ books for more loans. But these “shadow lenders” disappeared when they realized that the derivatives called “credit default swaps” supposedly protecting their CDOs were a highly unreliable form of insurance. In North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.

Other services the BND provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions and a well-funded disaster loan program. When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself – a prudent move today, when the FDIC is verging on bankruptcy.

The Commercial Banking Model: The Commonwealth Bank of Australia

For nearly a century, the publicly-owned Commonwealth Bank of Australia provided financing for housing, small business, and other enterprise, affording effective public competition that “kept the banks honest” and kept interest rates low. Commonwealth Bank put the needs of borrowers ahead of profits, ensuring that sound investment flows were maintained to farming and other essential areas; yet it was always profitable, from 1911 until it was sold in the 1990s.

A State Bank of Florida?

Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:

“For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6 percent for CDs, and make mortgage loans at 2 percent. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2 percent for mortgages.”

The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700, while the homeowner would save $88,000 in interest and pay for the home 15 years sooner. “Our bank will save people about seven years of their pay over the course of 30 years, just on interest costs,” says Dr. Khavari.

The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy develop-ment, and infrastructure construction not only sustainable, but profitable for the state, while at the same time creating much-needed jobs.

Ellen Brown developed her research skills as an attorney practicing civil litigation. In Web of Debt, her latest book, she shows how the private cartel of the Federal Reserve has usurped the power to create money from the people themselves, and how we can get that power back. Her websites are and


  1. MattyD

    November 13, 2009 at 1:52 pm

    I smell a rat here. I thought that real capital could only be created by saving the gains resulting from productive enterprise. Now I learn that there is no need for such tedious and time consuming toil. Through the magic of fractional reserve banking governments can free us of the need to save and accumulate. Nonsense! Money created out of thin air leads to corruption, malinvestment and moral hazard; no matter whether it is the Federal Reserve, the State of North Dakota or a guy in his basement with a printing press doing the counterfeiting. What we need are truly free markets, including a free banking system, and a sound money supply.

  2. Mikey

    November 13, 2009 at 4:57 pm

    So, the solution is for North Dakota to push itself into debt the same way the U.S. has gone into debt? How can one demand specie? What prevents devaluation as the state requires more money for “internal improvement” projects? Some portion of the reserves have to be tied up in Fed bank notes, or else the bank couldn’t be authorized, and there is no objective value for those notes, so how is it possible to keep the state’s economy afloat as Fed bank notes flood back into the United States in exchange for whatever specie remains?

    Quite possibly, the dumbest idea ever:
    “We’re going to pyramid onto the collapsing dollar system, brought about by loose credit by leveraging the assets of North Dakota in order to extend MORE loose credit! ” It’s like thinking that if the elevator cable snaps, all we have to do is jump right before impact and we’ll be saved!

    The “Liberty Voice” is publishing an article endorsing a measure that gives FURTHER power of lending to the government? Because obviously, TWO governments issuing credit are WAY more liberty friendly than ONE.

    Also, what libertarian believes that the state “owns” anything at all?

    Ellen’s bio says it all: “…(T)he private cartel of the Federal Reserve has usurped the power to create money from the people themselves, and (…) we can get that power back.”
    Translation: The Federal Reserve (which is under the direct control of the President of the United States) has the right to counterfeit, let’s work together so we can counterfeit, too!”

  3. sherry

    November 14, 2009 at 1:46 pm

    Frankly, I am proud of the readers’ comments above…they indicate that our readers are very good critical thinkers.

    However, there is one major error in Mikey’s comment that must be pointed out…The State of Ohio is the government of the people, so the bank itself would ultimately be owned by the people of the State of Ohio. To liken the State-owned bank to the Federal Reserve is to forget that the Federal Reserve is a private cartel of bankers and not owned by the people at all. Also, the President is not controlling the Fed…the Fed controls the President. Further, according to the US Constitution, it is the Congress that should regulate money, yet they haven’t audited the Federal Reserve or held them accountable for decades–perhaps nearly a century since its inception in 1913.

    On the other hand, the points of fiat currency verses that of real money are quite valid. However, considering we have no money in the state of Ohio (we are monetizing our debt currently because Strickland wants to be reelected) The Liberty Voice still believes that the state-owned (and therefor ultimately people-owned) bank is the best realistic solution that can address our immediate problems.

  4. Jesse

    November 14, 2009 at 2:15 pm

    I agree with virtually everything written in the other comments thus far. However, I don’t think the article stood for the idea of expanding credit or creating trillions from thin air.

    Currently, there is a problem in Ohio. Between the state and local governments, Ohio spends over 4 billion dollars, yes, billion with a b, each year in interest alone on financing its debts. Currently, there is an almost 800 million dollar budget gap. Over 600,000 jobs have been lost since 2000. The state is operating on stimulus money that won’t be there in a couple years. The state is going to have to borrow billions from the federal government to cover things like unemployment benefits because they are now virtually bankrupt. And things are not improving, they are getting worse. In 2 years, if something major is not done, Ohio is fiscally dead.

    This article is suggesting that, if nothing else, the state could simply take their assets and the general revenue fund and place them in a state bank owned and operated by the state. Then, do a consolidation loan to itself at a lower interest rate and save billions. No new money need be created. Basically, instead of paying billions of the public’s money to private bankers in interest, how about have the state keep that money in the public coffers.

    In addition to that, if the state wanted to go really wild, they could do what north dakota does and help people go to college, or help state businesses develop in order to provide jobs to the people of Ohio. How you ask? If a private bank will charge 6.8% for a stafford loan to an Ohio resident to pay for college, how about have the state bank charge 6%. The exact same amount of money is loaned that would have been loaned, except instead of financing the fed cabal, the interest stays with … you guessed it, the people of Ohio. And the college student gets to go to college for a little bit cheaper. Same thing applies for home loans, expanding businesses, etc. Who wins? The people. Who loses? The fed. And no the state bank would not have to be part of the fed reserve system to operate, nor would it have to shack up with the fdic for “insurance” (even though fdic is bankrupt). Overall is it perfect? Probably not. But it keeps the money at home, helps Ohioians, keeps us away from the fiscal nightmare that will be here in two years, wouldn’t increase the artificial money supply if done correctly, takes money away from the fed cabal, and most importantly, is in line with the Constitution. (See 10th amendment). So, it sounds like a good idea to me.

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  6. Mikey

    November 18, 2009 at 2:50 pm

    I understand completely that the Fed is a cartel of private banks, but those banks are fascist entities sponsored by the national government of the U.S. Private banks could issue fiat money all day long, but without the sponsorship of a state nobody would accept those dollars, it’s the words “legal tender” that make the shell game work.

    The Constitution authorizes Congress the power to determine weights and *coin* money. These ideas are two-halves of the same whole: First, declaring weights and measures provides agreed upon terms for measurement of goods. Second, coining money results in universally accepted units of measure for money.

    The government wasn’t authorized to “print” money because there is no such thing as paper money. Money is a market established good/commodity that has stood the test of time as easily transportable/transferable, divisible, and having an intrinsic value. Various goods and commodities have been used as currency in history, but the centrifuge of time led to a universal acceptance of precious metals, particularly gold, as best for the marketplace.

    Security was an initial problem for individuals who wanted to store their money safely, so wealthier individuals paid storehouses a fee to hold their commodities. These primitive “banks” would in turn provide a bill of attainder to the owner of the goods, which upon presentation of this bill, the storehouses would yield the goods, in part or whole, back to their rightful owners.

    Eventually, after trade became less local, merchants began to exchange the certificates themselves, signing over portions of their commodities to vendors in exchange for stock, and then accepting signed over portions from clients. The banks decided that it would be easier if the commodity swapping weren’t at the end of a lengthy ledger of who traded with whom, and began to issue certificates asserting the values in objective weight entitled to the bearer. Thus “bank notes” became issued.

    Now, the rub:

    Unscrupulous bankers, realizing that the money simply lay neglected in their vaults most of the time, began to issue notes in order to invest in business themselves. Without permission, they essentially “borrowed” the value of the commodities held in store, even though notes were ALREADY in circulation for those commodities, and began buying and selling in the marketplace, reaping profits without the investment of their own capital.

    Occasionally, there would be a “run” on a bank when word got out that the institution did not hold near enough reserve commodities to cover all notes in circulation. These banks would fail, and those last in line to collect their commodities would arrive to see bankers turning out empty pockets.

    Efforts were made to hold banks accountable by forcing them to only issue notes for exactly the amounts held in reserve. Governments, indirect beneficiaries of the banks who provided financing for “internal improvements” and wars, stated that there was no wrong in fractional reserve banking (meaning keeping only a fraction of the commodities in reserve against notes), upholding the ruling made on grain silo fraud committed by agricultural storehouses in earlier times.

    Eventually, the British government, an expert at devaluing currency for centuries, discovered that if it controlled the money by establishing a national bank (Bank of England) then they could borrow from the reserves of commodity held in the national treasury to pay for public works and their endless imperial expansion. They established a national currency based on the pound sterling (1 lb. of sterling silver) which quickly debased to a tiny portion of that. Ultimately, following World War I, the Bank of England collapsed in virtually all but name, and took on U.S. Treasury notes as a reserve currency in exchange for what remained of their specie.

    Every one of the scenarios above was based upon fractional reserve banking. The same was done in the United States under the “gold standard” era. It was never a requirement in the U.S. to hold a full reserve of commodities in store for notes issued, and banks fought insolvency in many ways, including but not limited to requirement that the specie (gold) could only be redeemed from the issuing branch of the bank, declaring that only certain certificate bearers had a right to redeem the specie, moving banks to farthest reaches of the frontier to make redemption of specie a near-impossibility (Google: Wildcat Banking), and finally, requesting that the U.S. government suspend payment of specie for years at a time.

    The aim and goal of the Federalist/Whig/Republican party of the U.S. during the 19th century was to establish a national bank of the United States (something they succeeded at a couple of times) in order to copy the British system, but the Jeffersonian wing of the Democrat party always smashed the entities. During Reconstruction, northern bankers worked to undermine smaller private banks in order to centralize their own power on the east coast, while Whigs infiltrated the Democrat party to set the stage for a final solution that would not be easily put asunder.

    After a series of well-timed panics, the populace was softened up enough to endorse the establishment of the private/public banking entity we now know today as the Federal Reserve. It is neither fully private, nor fully government. The Fed is made up of two bloodthirsty halves, each one bent on one day acquiring total control, but held back by the fact that one can’t survive without the other. Together they have expanded the chasm between rich and poor that had begun to fill-in at the close of the 19th century.

    The “middle class” of the last 75 years has been an illusion created by easy credit, enslaving the vast center of America to both the banks, due to enormous private debt and the boom-bust cycle of fractional and then fiat banking, and the government through expanding the role of the state to control and “moderate” the expansive phony economy generated by the banks, as well as the use of public debt and extreme taxation to pay on that debt.

    When F.Roosevelt confiscated all of the gold coins in 1932/1933 and issued Fed notes as “legal tender,” America took to its deathbed, but America had been afflicted with the cancer of fractional reserve banking for over 100 years, so it was just another phase in a long run to demise. Nixon, cutting the dollar loose from gold and allowing Fed chairs to dictate interest rates and the money supply via finger to the wind (marginally tied to the use of U.S. Treasury Notes as a base currency for the world, a practice in effect since the end of WWI), gave last rites. Greenspan and Bernanke are responsible for the remaining death rattles that we’re hearing as each boom and bust signals one gasp more before the grim specter claims its prize: the American system of government and banking.

    Why sustain this awful system? Why attempt to emulate it? Regardless of the short term gains (whose terms get shorter each time) it would be better to let the entire program finally die. Then, “Rex mortuus est, vivat libertas!” (The king is dead, long live freedom!)

    There is no long-term benefit to expanding credit. Healthy lending is based on savings, nothing more. You can’t lend what you don’t have, and it’s fraud to do so. Thus, I condemn the scheme as a way of simply enriching local bankers rather than national bankers, all at the expense of people responsible for working to save and earn their wealth.

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  8. Patti Patterson

    April 7, 2011 at 9:42 am

    Woh I love your content , saved to fav! .

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