New Hampshire has joined the growing list of states proposing to form their own publicly owned banks. HB 367 was introduced in early January, and on Tuesday, Feb. 12, the House Commerce Committee held a public hearing. Next steps for the bill are a Subcommittee work session at 10:30 am Feb 21, followed by an Executive session that afternoon. The Public Banking Institute submitted written testimony from Chair Ellen Brown for the hearing, which is reproduced here as a model that might help others wanting to submit testimonies for public banks in other states:
“Congratulations on a well-written bill for a state-owned bank that will allow New Hampshire to realize the benefits of public banking: a sustainable supply of locally generated, locally directed, affordable credit and liquidity, and a significant new source of non-tax revenue for the state.”
Full letter continues:
The public banking movement has gained significant traction in recent years, with legislation now pending in over 20 states, including Washington State, Michigan, Pennsylvania, New Mexico, New Jersey, California, Connecticut, Arizona, New York and Alaska. I’m attaching a very good article on the bill filed in Alaska, which covers the benefits and possibilities well. As the author notes, legislators tend to think that raising taxes or slashing services are the only way to balance their budgets, but there is a third way. By leveraging its own public funds through a state-owned bank, the state can not only generate new income for itself but can actually increase the money circulating in the local economy. As the Federal Reserve acknowledged many years ago, banks don’t merely recycle existing deposits. They actually create money when they lend. About 95 percent of the circulating money supply is created in this way.
When banks pump the economy with affordable credit for businesses and useful enterprise, the economy hums along productively. But in the 1990s, the loosening of banking regulations allowed the widespread use of bank credit for speculative purposes. “Financialization” of the economy followed, sucking up financial resources for “money making money” ventures that did not generate goods and services for the real economy. This predatory cycle of boom and bust is predictable and most recently occurred in 2008; and the economy is threatening to collapse again.
Meanwhile, businesses and consumers are still trying to pay down debts left over from the last recession, and they are not borrowing enough to generate new productivity or new demand. Just as bank loans expand the money supply, so repaying loans shrinks it, leaving insufficient money to finance new GDP. Governments, too, are hitting record debt levels, constraining them from borrowing to increase economic development and improve living standards. Agriculture, industry, infrastructure, education, small business, healthcare, science and technology all remain underfunded.
Increasing taxes is not the solution, since taxes suppress the volume of money circulating in the local economy. They do not address the root of the problem or prepare us for resisting the next crisis. If the federal government is not compensating for the lack of private borrowing, state and local governments need to step in. Rather than withdrawing money from the system, local governments need to put new money into it, and they can do that by establishing their own publicly-owned banks.
Loans for productive enterprises that generate their own income and fees (bus and train fees, energy fees and the like) are called “self-liquidating” loans. It was by funding this sort of loan through a national financial institution that President Franklin Roosevelt financed the New Deal in the 1930s, at a time when the nation’s private banks were bankrupt. The RFC Act of 1932 provided the Reconstruction Finance Corporation with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). With those initial resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion – and earned a net profit. It financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.
The Stellar Model of the Bank of North Dakota
Currently the nation has only one state-owned bank, but that bank has done remarkably well. In November 2014, The Wall Street Journal reported that the Bank of North Dakota (BND) was more profitable than even the largest Wall Street banks, with a return on equity that was 70 percent greater than that of either JPMorgan Chase or Goldman Sachs. This stellar performance was attributed by the author to the state’s oil boom; but in succeeding years the boom became an oil bust, yet the BND’s profits continued to soar. Oil plunged from over $100 a barrel in mid-2014 to $30 a barrel in January 2016. Yet in its annual report published in April 2016, the BND showed 2015 to be its most profitable year to date, with total assets of $7.4 billion and a return on equity of an impressive 18.1 percent. In April 2018 it reported record profits for its 14th straight year.
One of many advantages of having a cheap and ready credit line with its own bank has been to reduce the state’s need for wasteful rainy-day funds invested at minimal interest in out-of-state banks. When North Dakota went over-budget in 2001 and again in 2016, the BND acted as a rainy-day fund for the state. The bank also provides emergency credit lines when cities suffer floods and other disasters.
Ironically, the goal of the BND is not actually to make a profit. It was formed in 1919 to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in the state. For North Dakota, a very conservative Red state, the BND is not a “socialist” institution. Rather, it is about state sovereignty – keeping the state’s revenues in the state, to be leverage for local purposes.
The secret to its remarkable profitability is its very efficient business model. Its costs are very low: no exorbitantly paid executives; no bonuses, fees, or commissions; no private shareholders; very low borrowing costs; no need for multiple branch offices. BND profits are not siphoned off to Wall Street to be invested overseas or stored in offshore tax havens. They are recycled back into the bank, the state and the community.
New Hampshire can reap those benefits as well. We wish you the best of luck in establishing your own state-owned bank!
Chair, Public Banking Institute
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