What North Dakota Can Teach Us About Banking

| 1/8/2010 1:51:17 PM

Banksy cashIn his most recent column for the magazine, Utne Reader founder Eric Utne calls for nothing short of a restoration of the publicly issued money system of the American colonists. He points to the work of Ellen Hodgson Brown, author of Web of Debt:

Banking shenanigans have been with us since Babylonian times. According to Brown, we’ve also had egalitarian money systems that worked quite well. Before the Revolutionary War, each American colony printed and circulated its own currency. These currencies were not backed by commodities, like gold or silver. Instead, they were based on trust.

Ever since, Brown argues, private banking interests in the United States have usurped the public’s power to issue money and have captured the nation by debt. To escape the debt trap and reclaim control over our financial future, we need to quit bailing out Wall Street. We simply need to think local, and create our own municipal and state banks.

One significant complication is outlined by Hodgson Brown over at the Huffington Post. “Community banks lack capital—money that belongs to the bank—and the deposits of customers don't count as capital,” she writes. “Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand.”

What to do? North Dakota has the answer. The Bank of North Dakota (BND) is state owned and operates under a strict mandate to act in the public interest. “Although the BND is operated in the public interest,” Hodgson Brown writes, “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, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. 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 avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate.

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