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By Virginia Hammon, author of US Money: What is It? Why We Must Change. How We Can (2018) and with Mark Pash, How We Pay for a Better World (2019); and AFJM board member.

A response to Joe Bongiovanni and Howard Switzer’s blog about “Why Not?” Let it be known that we are a group that welcomes robust dialogue!

There are three key issues.

1. Can public banking serve as a bridge to money reform? Can we both be successful?

2. Does the public Bank of North Dakota (BND) create money as other commercial banks do, or is it simply a development revolving fund basic bank?

3. Is the scale of public benefit enough to make public bank advocacy worthwhile?

Money Reform AND Public Banking Success?

Let’s start with the fact that the public banking movement is doing awesome work! In less than 10 years, they’ve stimulated serious conversations across the country, and introduced bills in many states. The public banking movement has improved widespread understanding of the importance of who and how money is created. That is impressive work! And their chief inspirer, Ellen Brown is to be acknowledged for the depth of her understanding of history, finance, and monetary issues, and her ability to communicate to a broad community. The public banking movement is winning hearts and minds and energetic action. We can attach our car to their moving train. There is a win-win.

Where public banks are established in the near future, these banks may use fractional reserve money creation to provide low interest funds that support the public good in their communities. This is not a system change; it’s a bandage on the existing system. That new funding will matter to cities and states. However, depending on the number and size of public banks, that bandage may only staunch a relatively small flow of wealth from the many to the few while it provides some helpful funding.

Public banks can also be a bridge toward Just Money by inspiring further dialogue about the formative influence of money systems and the reasons we need to change the whole system.

The Alliance for Just Money aims to reform the whole national money system. A Just Money system limits the privilege and power to create the money supply to WE the People, creating the money as a public debt-free asset. As Howard and Joe explain, under legislation proposed (HR2990 of 2011), which would switch from bank-created money to debt-free government-created money, states will receive at least 25% of newly created money each year. This is likely to be much more than public banks operating in the current system can provide at any time in the foreseeable future. With a system change, a public bank could facilitate the distribute of this money and continue to play a role in each state’s financial system.

It is critically important to achieve full money reform as soon as possible, because allowing ANY entity to use fractional reserve debt-credit money creation leaves in place a system that transfers wealth from the many to the few, makes profits a higher value than life itself, and promotes the exploitation and degradation of labor and the environment.

Allowing state public banks to join this money-creation system will shift the system away from these systemic outcomes in a small way. However, trying to make the changes we need to survive and thrive in a better world, with only the limited impact of public banks, will be like trying to swim up a strong river, expending unnecessary wealth and energy to fight the unfortunate current-system consequences. And, we do not have time for that.

Just Money reform must follow as quickly as possible and we hope the public banking advocates will allow us to stand on their shoulders to reach the goal that we all share – a better, just, and sustainable world for ALL.

Are public banks money creators?

Joe and Howard state unequivocally, “there is no historical success for Public Banking doing fractional reserve banking,” and they claim that the BND and German Sparkassen Savings Bank do not create money.

A quick google search shows that there are public banks all over the world. Wikipedia lists 19 countries with about 45 different public banks. Some jump off the list as development banks, others would take research to determine whether they are money-creators or not, and what level of success they have achieved. I call Howard and Joe for the evidence for their bold claim about global history and global public banks.

We could sure use an easy test of whether a bank is a money creator or not. Given it’s only been about 7 years since the Bank of England admitted that, yes, they really do create money – contradicting more than a hundred years of denial, it’s not surprising that within our group, we’ve had quite a bit of dialogue about whether some public banks, credit unions, and shadow banks are creating money or not. We have an excellent exposition by Richard Werner in the International Review of Financial Analysis, of the banking trick used exclusively by money-creator banks. Can someone provide an equally good explanation how we can turn this explanation into a tool to discern whether a bank is creating money?

Jonathan McMillan, in The End of Banking (2014) suggests a simple accounting rule that would make money creation by private banks impossible:

The value of the real assets of a company has to be greater than or equal to the value of the companies liabilities.”

He defines real assets are “all assets that are not financial” (financial assets are assets such as IOUs from others, or other forms of securities that exist as a liability on someone else’s balance sheet). If this rule would stop money creation, would that mean that an institution breaking the rule IS creating money? Could this rule be used as a way to determine whether a bank is a money creator bank? A review of the financial reports of the BND, shows that if the financial assets are removed, the remaining assets total $373 million. The total liabilities are $5,848 million, 16 times the real assets.

Does that make the BND a money creator bank? Not necessarily, because if a Private Equity firm borrows against its equity, and then lends that on, its financial assets will certainly exceed its real assets. But if it receives its equity in the form of pre-existing money (which certainly must be the case) and it borrows money pre-existing money (perhaps from a bank which did create it), then it is lending out pre-existing money and not creating it. So, the fact that BND’s liabilities are greater than its real assets does not constitute evidence that it is creating money as it lends. What would?

The BND financial report also brags that it maintains a high standard of capital requirements. While federal bank regulation requires a capital ratio of at least 5% for Tier 1 (level of risk) capital, and a combined Tier 1 and Tier 2 capital ratio of at least 8%, and 10% for total risk-base, in 2019, the BND maintained ratios of 13.09%, 20.05%, and 21.31% for those categories. The BND proudly claims to be a conservatively run, prudent bank. Do those requirements apply to both money-creator banks AND revolving fund banks that do not create money? Or does this imply that the BND creates money?

Challenge to the readers: create a simple way, readily explainable at no more than 6th grade level, to discern whether a bank is creating money or not, by looking at a bank’s summary financial statements. We’ll test the best suggestions with a group of average readers with average understanding of how to read a balance sheet, and THE best will receive a one pound box of See’s Chocolates. 🙂 So give it your best shot in the comment section below!

Can public banks offer sufficient scale of benefit?

It’s better to have a slice of the pie than no slice at all, right? Joe and Howard do a great job with their example of why Just Money offers a greater scale of benefit than public banking. However, the establishment of some public banks may well have some public benefits for those municipalities or states which create them – now and in a future Just Money system. Now, it would at least allow municipalities and states to reduce interest payments and profit from fractional reserve banking. Public banking leader Ellen Brown has often made it clear that publicly created money is optimal, but that public banks are more readily achievable than monetary reform legislation. And, the success of her efforts demonstrates that she has been right about that.

The more we get together…

Changing the money system is a big endeavor. We need all the friends and partners we can get to achieve success. Focusing on the benefits of working together with others who share our values – equity, justice, prosperity, sustainability – and share our goal of a better world for all, will move us toward…

Just Money Now!

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Matthew sparks
Matthew sparks
2 years ago

I have a website Public Banking and Justice at which suggests forming a National Home Lending Bank (NHLB) that would fund home loans (with no interest involved) with government created money. This bank would make home loans available to all citizens that want to own a primary residence. Repayment would be 20% of household gross income. (more info at site) The relevant point about money creation is that by holding these universal mortgages, valued at over $30 trillion dollars, at the federal level these mortgages could be used as, what I am calling, Sovereign Home Equity Securities. (SHES) They… Read more »

Good Samaritan
Good Samaritan
2 years ago

It certainly has some good points. It has a larger set of goals which are beneficial to the members of the State. It does not financialize, but rather funds productive investments. It channels money back to the State. In China they have majority ownership of the banks and provide more guidance as to who gets the expanding money supply – that means more productive investment which public banks can do in the West.

Paul Lebow
Paul Lebow
2 years ago

The public banking movement could be so much more impactful if it educated people regarding our money system. The main messages I see are the desirability to stick it to the big banks and potentially lower fees (banking does take human resources, public or private) and the hope that public banks will lend for local business with a much higher risk of default. If BND is an example, can’t expect socially just or environmentally-friendly investments.

Promoting public banking really doesn’t involve changing the money system, the mission of AFJM.

Alliance For Just Money

If banks aren’t creating money, who is?

Mary Sanderson
Mary Sanderson
2 years ago

Virginia, your challenge: to learn whether a bank is ‘creating money,’ would it help to find out if the principal repaid gets extinguished, or transferred into some account? Is that info available publicly?

Mary Sanderson
Mary Sanderson
2 years ago

appreciate both these articles, the urgent reasons to work for national, NEED Act, JUST MONEY without delay, and the appreciation for Public Banking’s powerful raising awareness. I do lean more toward a ‘both-and’ approach to problems among friends, an ‘either-or’ approach.

Howard Switzer
Howard Switzer
2 years ago

Thank you Virginia. I think Ellen went for Public Banking because Monetary Reform is too difficult to get funding support for. It is easier to organize almost anything than it is MR. MR challenges the system, public banking does not. That alone hints at which change can actually address the power failures of our government to do its job. And that is also why we are not likely able to work with together. Will some of their people support us both? I think that may be the most we can expect but I am open to ideas for getting our… Read more »