All posts by Douglas Alde

Banking on Colorado Response to
Calabria: Colorado would be wise to reject state-owned banking

Earl Staelin, board member of Be The Change — USA, and a leader in its initiative to establish public banks in Colorado, Banking On Colorado, wrote an Op-Ed for the Denver Post, entitled Colorado needs a public bank, which appeared in the print edition of the Denver Post on Sunday, February 15, 2015. In response to that Op-Ed, Mark A. Calabria, of the conservative think tank, the CATO Institute, wrote the following Op-Ed, appearing in the Thursday, March 5, 2015 print edition of the Denver Post — rebutting Mr. Staelins Op-Ed.

You will see as you read this piece that Mr. Calabria is either inaccurate in his statement of facts or he so cherry-picks them to support his opinion that this is not a credible rebuttal. We discuss here the problems with this Op-Ed paragraph-by-paragraph.

From the Denver Post (with our comments, clarifications, and corrections):


OPINION

Colorado would be wise to reject state-owned banking
With Commentary from Banking on Colorado

By Mark Calabria

POSTED:   03/04/2015 02:59:02 PM MST   |   UPDATED:   03/04/2015 03:43:15 PM

Borrowers and savers have lots to choose from, with the emphasis on choice. There's no good reason to force these institutions to compete with a state-owned "political" bank. (Timothy A. Clary, AFP/Getty Images)
Borrowers and savers have lots to choose from, with the emphasis on choice. There’s no good reason to force these institutions to compete with a state-owned “political” bank. (Timothy A. Clary, AFP/Getty Images)

Here, Calabria implies that all state-owned banks are “political”. In fact, there is some truth to this, but only in the sense that a state-owned bank, with proper oversight, supports the citizens of the state rather than the shareholders of a commercial bank.

The financial crisis and its associated rescues have left many of us, including myself, angry at our nation’s largest banks. The bailouts were unfair, with one set of rules for Wall Street and another set for Main Street. This understandable frustration has led some to believe the solution can be found in a state-owned bank. While we must search for a sustainable solution to the current flaws in our financial system, creating a state-run bank is a cure worse than the disease.

Like any good ideologue, Mr. Calabria, states his belief upfront — that “creating a state-run bank is a cure worse than the disease,” and goes on to either misstate facts, or so cherry-picks them that he cannot fail to support his belief.

Public banks have a long history, with the first known public bank established in Genoa, Italy in 1408. Its mission statement could have been taken from Occupy Wall Street, with one of its purposes “…to eradicate certain bad practices of bankers, who are so devoted to their own interest that they barely blush as they ruin the public good.” Like many public banks that followed, Genoa’s Banco di San Giorgio later failed in part due to its loans to government.

The first public bank was actually founded in Barcelona in 1401, the Taula de la Ciutat, to act as the treasury of the government of Catalonia. Others were established in Italy not long thereafter, including Genoa’s Banco di San Giorgio, established in 1408. Calabria provides no documentation or analysis for his conclusion that the bank failed in part due to its loans to government. This is a nice piece of history, but perhaps it’s best to focus, as he does, on banks that were established less than 200 years ago.

More recently the first American public bank was established in Vermont in 1806. It failed six years later, costing the citizens of Vermont the equivalent of almost $3 billion in today’s dollars. Seven other states established public banks in the 1800s, with the last of these, the Bank of the State of Alabama, failing in 1845. These banks were characterized by rampant corruption. As South Carolina legislator John Felder reflected in 1846, “Whenever … such cohabitation exists, the bank runs into politics and politicians run into the bank and foul disease and corruption ensue … .”

Looking at state banks formed in the early 19th century does have some relevance. However, these failures have only slightly more significance today than the Italian example given in the previous paragraph. Both the economic and political times were quite different. And the monetary system was very different when precious metal was involved. Further, democracies were young and inexperienced. States were still learning how to run democratic governments effectively. And many of the failures were due to faulty legislation that established the bank initially.

The Vermont State Bank proved successful, showing significant and increasing profits every year between 1807 and 1811 despite the many impediments thrown at Vermont by neighboring states and their private banks. In the words of Governor Galusha in 1809 in his message to the Vermont State House, “It will be remembered by many that I was not amongst those that favoured the institution of country banks; but it is apparent that the establishment of a public bank in this state has saved many of our citizens from great losses, and probably some from total ruin -– for it is obvious that but for this establishment, in lieu of our own Vermont bank bills, our citizens would on the late bankruptcies have been possessed of large sums of depreciated paper of the failing private banks …”

The private banks viciously attacked the Vermont State Bank and the community banks it supported through counterfeiting — not difficult at the time. The worthless counterfeit bills were difficult to detect. They were exchanged for the gold, depleting the gold reserves of the Vermont banks.

While the Bank of the State of South Carolina (BSSC) was not without political corruption, the bank operated successfully for 58 years, from 1812–1870. In the end, the BSSC did survive the American Civil War intact and in 1867 it still held a large amount of assets belonging to the State — some of which admittedly had questionable value.

But it was not corruption that closed the bank as implied by Calabria. Although the BSSC did have its detractors, it had many supporters. Speaking at the closing of the bank in 1870, a representative from the State Board of Agriculture remarked, “Thus passed away a powerful institution, which for more than half a century had exercised exclusive control of the financial affairs of the State. Its friends claimed that it had saved, consolidated, and made profitable the funds of the State, that it had furnished relief to many citizens and added to the general revenues of the State, improving and developing the towns of the interior. Its profits were employed in paying the interest and in reducing the principal of the public debt. It preserved its capital entire and its funds safe, maintaining the character and the credit of the State in Europe and at home without blot or suspense. Its most violent opponents admitted the ability and integrity displayed in its management, and declared that the abiding confidence of the people in it was a high but dangerous complement to the parity of the public characters of the State.”

The State Bank of Alabama was doomed to failure from its very start. The legislation that created it was ineptly crafted and this was taken advantage of by the board that ran the bank for their own profit. This is one of only two credible examples Calabria gives of how not to design state banking legislation. Clearly, we can learn from this example as well as the good example of North Dakota to understand how to design legislation that avoids excessive political influence and yet be an effective tool for the state. And a minor point: Alabama’s was neither the last state bank to be formed nor the last to fail in the first half of the 19th century.

The recent history of Fannie Mae and Freddie Mac, quasi-public banks at the federal level, illustrates that mismanagement and corruption are not exclusively a thing of the past. We can also look abroad. Germany has an extensive system of public banks, the most prominent being the Landesbanken, which like the proposal before us in Colorado, are owned by the state governments. Despite being a minority of Germany’s financial system, the bulk of losses related to the subprime crisis arose from these public banks. Years before the crisis, the IMF warned of risks hidden in Germany’s public banking system. Unfortunately those warnings were ignored.

And the operations of Fannie Mae and Freddie Mac is Calabria’s other good example of how excessive political influence can doom a public bank to failure. Although both Fannie and Freddie were privately owned, since 1968 and 1970 respectively, in the 1990s and early 2000s they were given mandates from Congress regarding what sorts of loans they should be supporting. Certainly, in part, this led to the collapse of both organizations. They were then put in government-managed conservatorship to restore transparency and accountability and many of their officials were removed from office.

However, rather than take this as an example of how all public banks are doomed to failure, it can be taken as a “lesson learned” on how not to operate a public bank. North Dakota had the foresight to a design a way of operating their bank to avoid most of the pitfalls that can cause it to fail.

In Germany, the largest set of public banks are the Sparkassen Banks, which comprise over 1,500 municipally-owned saving banks that fund a large portion of small and medium sized businesses in Germany. These banks suffered no bank closings after 2008. In fact, despite numerous attempts by the private banks to put the public banks in Germany out of business, most recently by passing legislation taking away their public insurance, like our FDIC, they continue to thrive and they help their local communities thrive as well and are an important reason why Germany has the strongest economy in the Eurozone today.

Some might point to the Bank of North Dakota, currently the only state-run and state-owned American bank. Currently the Bank of North Dakota is generally a well-run institution. It is also a massive subsidy to the fossil fuel industry. One need only look at its annual reports to see that much of its below-market lending has been to the fossil fuel industry. It’s a case in point; government-owned banks will tend to subsidize the powerful and connected. Most of its risk is ultimately shifted to the federal government via various guarantees.

If Mr. Calabria had done as he has suggested his readers do, and actually looked at the Bank of North Dakota’s annual reports, he might have noticed that loans to the oil and gas industry are not their main target. In fact, as of 31 December 2014, only $305,927,000 of the commercial loan portfolio was committed to oil country-related loans. The commercial loan portfolio as of that date was slightly more than $1.5 billion and the total loan portfolio is $3.8 billion (these numbers are from private communications with the Bank of North Dakota and will be finalized in their 2014 annual report to be released on April 2015). So let’s do the math — oil country-related loans comprise less than 8% of the Bank of North Dakota’s total loan portfolio. This is certainly dwarfed by the free market investment in North Dakota oil and gas.

Furthermore, most of the risk of these loans is absorbed by the State of North Dakota, which currently has a Double-A+ credit rating. Further, the Bank of North Dakota currently has a Double-A- Standard & Poor rating — among U.S. financial institutions, second only to the Federal Home Loan Banks, rated Double-A+.

The vast majority of funding for the Bank of North Dakota comes from deposits resulting from tax and fee collections. The bank essentially offers below market rate loans by paying lower deposit rates back to the State, ultimately costing the taxpayer. It’s not magic. It is simply a hidden subsidy. Rarely is such a lack of transparency in the interests of the general public.

It is very clear that Calabria has little understanding of fractional-reserve banking. Otherwise, he would understand that even if the Bank of North Dakota did make its loans at “below market rate”, that it can loan out up to nine times its equity. The return on equity for the Bank of North Dakota has averaged around 20% over the last decade. And rather than ‘costing the taxpayer’, it has returned over $300M back to the state of North Dakota during that time period.

Note that the Bank of North Dakota does make loans that Calabria would consider “below market rate” in certain areas that the government deems beneficial to the citizenry — like student loans, some of which are made at as low as 1% per annum.

These are not simply theoretical curiosities. Academic research actually tells us what happens when the government owns banks. The most comprehensive study1, from economists at Harvard University, finds “that higher government ownership of banks is associated with slower subsequent development of the financial system, lower economic growth, and, in particular, lower growth of productivity.” Keep in mind that productivity is ultimately what drives wage growth. This research has been extended in a recent paper2 that attributes much of the worse outcomes to political interference in bank lending decisions.

We will address, in a future post, why we believe the models in the academic research Calabria mentions are not applicable to some of the public bank structures that are clearly working. We give here several counter-examples to what he believes the papers conclude — the BRICs (Brazil, Russia, India, and China) in the following paragraph and the Bank of North Dakota and the Reconstruction Finance Corporation following the text of Calabria’s next paragraph. We include the two papers that support his position, in addition to several we quote, at the end of this post for those who would like to look in detail at these studies.

In the international scene, the BRICs, heavily into public banks, have clearly outpaced the western world, with their private banking system. The BRICs growth rate was 6.5 percent per annum in the previous decade whereas the industrial world had a growth rate of 1.5 percent during the same period. While this certainly cannot be attributed completely to the fact that they have an extensive public banking system, it would be hard to argue that the banking system has hurt their economies.3

When the government owns the banks, lending decisions become increasingly driven by politics, rather than economics. Resources flow to those with influence. Government-owned banks also tend to under-price risk in order to buy votes. If there is one lesson we should take away from the recent crisis, it is that when you intentionally under-price risk, bad things happen.

North Dakota has come up with a successful model for a state-owned bank. Only general policy and oversight is done by the legislature. A three-member State Industrial Commission oversees Bank of North Dakota, composed of the Governor, the Attorney General, and the Commissioner of Agriculture. The Bank has a seven-member Advisory Board appointed by the governor. The members must be knowledgeable in banking and finance. The Advisory Board reviews the Bank’s operations and makes recommendations to the Industrial Commission relating to the Bank’s management, services, policies and procedures. This is a system that has worked for almost a century. It is certainly a model that can be adapted to Colorado.

Another public bank that deserves attention because of its great success is the Reconstruction Finance Corporation, which operated as an agency of the U.S.government transparently and without scandal or fraud from 1933 to 1957. It was the largest bank in the world and the largest corporation in America at the time, providing financial support to state and local governments and making loans to banks, railroads, mortgage associations, and other businesses. It played a major role in pulling the U.S. out of the Great Depression, helping banks return to normal operations, and in funding World War II. It loaned $35 billion into the economy in the years 1933 to 1945. Congress having deemed it was no longer needed, reduced its size after World War II and eventually closed it in 1957. The Reconstruction Finance Corporation operated with great success and benefit to the country.

In contrast, the behavior of the big Wall Street banks has been a model of mismanagement and fraud in service of their own interest — against the interests of their own customers and the public. Their power over the political system is so great that they have become too big to regulate, too big to prosecute, and too big to fail. The American citizens have borne all their losses — through loss of wealth, jobs, income, and pensions.

Anger at Wall Street is well founded. But you have plenty of options besides Wall Street. Colorado has 96 independent community banks and 91 credit unions. That’s not to mention growing alternative sources like peer-to-peer lending and crowdfunding. Borrowers and savers have lots to choose from, with the emphasis on choice. There’s no good reason to force these institutions to compete with a state-owned “political” bank.

In Colorado, the community banks and credit unions are currently unable to meet the needs of small and medium-sized businesses. And the Wall Street banks are unwilling to do so. Further, as in the North Dakota model, a state-owned bank would not compete, but partners with, community banks and credit unions to make loans to deserving businesses. In fact, as a result of the support of the Bank of North Dakota, there are more community banks in North Dakota than in any other state in the U.S — according to the FDIC, 81% of banks in North Dakota are community banks. During the last decade, banks in North Dakota, in partnership with the Bank of North Dakota, have averaged over four times more small business lending than the national average.


Mark A. Calabria, a former senior aide to the Senate Committee on Banking, Housing and Urban Development, is the director of financial regulation studies at the Cato Institute.


References

1 The most comprehensive study

2 A recent paper

3 Mutually assured existence | The Economist


Banking on Colorado: Bringing Our Money Home Conference Videos

Supported by a grant from the Denver FoundationBe the Change — USA, along with the Rocky Mountain Employee Ownership Center and the Public Banking Institute, hosted a conference in Denver on Saturday, January 31, 2015, Banking on Colorado: Bringing Our Money HomeWe present here videos from the entire event.

Introductory Address – Nomi Prins: Wall Street and the Concentration of Wealth in the Big Six Banks

Panel 1: Digging Deeper into Public Banking

Moderator: Michael O’Neill, Chief Compliance Officer, Colorado National Bank

Ellen Brown, Founder of Public Banking Institute, and Author

Gwendolyn Hallsmith, Executive Director, Public Banking Institute, and Author

Mike Krauss, Chairman, Pennsylvania Public Bank Project

 

Panel 2: The Challenge: The Need for Local Funding

Moderator: Dennis Gallagher, Auditor for the City of Denver

Student Loans: Roshan Bliss, Student and Youth Organizer

Renewable Energy: Amanda Bybee, Director, Strategic Planning & Initiatives, Namaste Solar

Family Farms: August Miller, Owner, Foodshed Products

Community Banking: Michael O’Neill, Chief Compliance Officer, Colorado National Bank

 

Panel 3: The Response: Public Banking

Moderator: Dennis Gallagher, Auditor for the City of Denver

Karl Beitel, Director of the Public Banking Project, San Francisco, and Author

Ellen Brown, Founder of Public Banking Institute, and Author

Gwendolyn Hallsmith, Executive Director, Public Banking Institute

Mike Krauss, Chairman, Pennsylvania Public Bank Project

Earl Staelin, Board Member, Be the Change

 

Keynote Address – Nomi Prins: Financial Autonomy: From Greece to North Dakota to Colorado

Call to Action Keynote Address – Ellen Brown: Banking on Colorado: Why the State Needs Its Own Bank

Call to Action – Mike Krauss


Thanks go to Jason Bosch, ArgusFest, for producing these videos, aided by Dave Gardner on the second camera. Jason’s videos can be seen on YouTube at https://www.youtube.com/user/argusfest/playlists


Calabria, CATO Institute: Colorado would be wise to reject state-owned banking — Denver Post Guest OpEd

Earl Staelin, board member of Be The Change — USA, and a leader in its initiative to establish public banks in Colorado, Banking On Colorado, wrote an Op-Ed for the Denver Post, entitled Colorado needs a public bank, which appeared in the print edition of the Denver Post on Sunday, February 15, 2015. In response to that Op-Ed, Mark A. Calabria, of the conservative think tank, the CATO Institute, wrote the following Op-Ed, appearing in the Thursday, March 5, 2015 print edition of the Denver Post — rebutting Mr. Staelins Op-Ed.

You will see as you read this piece that Mr. Calabria is either inaccurate in his statement of fact or he so cherry-picks evidence in support his opinion that this is not a credible rebuttal. We will discuss the problems with this Op-Ed paragraph-by-paragraph at Banking on Colorado Response.

From the Denver Post:


OPINION

Colorado would be wise to reject state-owned banking

By Mark Calabria

POSTED:   03/04/2015 02:59:02 PM MST   |   UPDATED:   03/04/2015 03:43:15 PM

Borrowers and savers have lots to choose from, with the emphasis on choice. There's no good reason to force these institutions to compete with a state-owned "political" bank. (Timothy A. Clary, AFP/Getty Images)
Borrowers and savers have lots to choose from, with the emphasis on choice. There’s no good reason to force these institutions to compete with a state-owned “political” bank. (Timothy A. Clary, AFP/Getty Images)

The financial crisis and its associated rescues have left many of us, including myself, angry at our nation’s largest banks. The bailouts were unfair, with one set of rules for Wall Street and another set for Main Street. This understandable frustration has led some to believe the solution can be found in a state-owned bank. While we must search for a sustainable solution to the current flaws in our financial system, creating a state-run bank is a cure worse than the disease.

Public banks have a long history, with the first known public bank established in Genoa, Italy in 1408. Its mission statement could have been taken from Occupy Wall Street, with one of its purposes “…to eradicate certain bad practices of bankers, who are so devoted to their own interest that they barely blush as they ruin the public good.” Like many public banks that followed, Genoa’s Banco di San Giorgio later failed in part due to its loans to government.

More recently the first American public bank was established in Vermont in 1806. It failed six years later, costing the citizens of Vermont the equivalent of almost $3 billion in today’s dollars. Seven other states established public banks in the 1800s, with the last of these, the Bank of the State of Alabama, failing in 1845. These banks were characterized by rampant corruption. As South Carolina legislator John Felder reflected in 1846, “Whenever … such cohabitation exists, the bank runs into politics and politicians run into the bank and foul disease and corruption ensue … .”

The vast majority of funding for the Bank of North Dakota comes from deposits resulting from tax and fee collections. The bank essentially offers below market rate loans by paying lower deposit rates back to the State, ultimately costing the taxpayer. It’s not magic. It is simply a hidden subsidy. Rarely is such a lack of transparency in the interests of the general public.

These are not simply theoretical curiosities. Academic research actually tells us what happens when the government owns banks. The most comprehensive study, from economists at Harvard University, finds “that higher government ownership of banks is associated with slower subsequent development of the financial system, lower economic growth, and, in particular, lower growth of productivity.” Keep in mind that productivity is ultimately what drives wage growth. This research has been extended in a recent paper that attributes much of the worse outcomes to political interference in bank lending decisions.

When the government owns the banks, lending decisions become increasingly driven by politics, rather than economics. Resources flow to those with influence. Government-owned banks also tend to under-price risk in order to buy votes. If there is one lesson we should take away from the recent crisis, it is that when you intentionally under-price risk, bad things happen.

Anger at Wall Street is well founded. But you have plenty of options besides Wall Street. Colorado has 96 independent community banks and 91 credit unions. That’s not to mention growing alternative sources like peer-to-peer lending and crowdfunding. Borrowers and savers have lots to choose from, with the emphasis on choice. There’s no good reason to force these institutions to compete with a state-owned “political” bank.


Mark A. Calabria, a former senior aide to the Senate Committee on Banking, Housing and Urban Development, is the director of financial regulation studies at the Cato Institute.


Fractional Reserve Banking 101 and 102 — Tutorials from the Khan Academy

To understand how a public bank can operate and make money for a state, county, or municipality that owns it, it is important to understand how banking is done in the United States, as well as most countries around the world. Most banks use a model of banking called fractional reserve banking. This model allows banks to lend out money that it tells depositors is available at any time, but in fact only a fraction of it is immediately available. It allows private banks to essentially create money ex nihilo (out of nothing).

The use of this model is very profitable for the banks but with the downside that it also creates the possibility of mass instability through bank runs. Since the Great Depression, these bank runs have been mitigated by government regulation and insurance through the Federal Deposit Insurance Corporation (FDIC). This tutorial looks at fractional reserve lending from the point-of-view of the bank — comparing it to what most Americans believe that banks do. Unless you are familiar with current banking techniques, you will be surprised by this information.



The following two videos go beyond the balance sheet of an individual bank to give a global overview of fractional reserve lending and how it works with multiple banks. The first of these videos shows again how money can be created that is many times the reserve amount. The second shows inherent instabilities of this model.

There are several things to note about how this affects the money supply. First, money is removed from the economy when a loan is paid back. Thus, to keep the money supply at the level required to keep the economy running smoothly, more loans need to be made. Also, when a loan is made, only the principal amount is created. The interest amount must be created in another loan to keep the money supply at the necessary level for an efficient economy. This is an additional source of instability not mentioned in the second video.



Public Banking In the News: How Public Banking is Winning the West

Public banking efforts are very active in the Western United States. Matt Stannard, who writes frequently about progressive economic issues, writes here about four of the more active public banking efforts in the western states: in Washington, New Mexico, Arizona, and Colorado.

From the Occupy.com:


Photo: liewcf / Flickr
Photo: liewcf / Flickr
How Public Banking is Winning the West
 

BY MATT STANNARD

FEBRUARY 17, 2015

You’ll read a lot about activism in this story, but most of it won’t sound terribly sexy or radical. There will be no black masks, no broken barricades or cops bashing skulls. Instead, what you’ll read about is hard work, lots of research about banks and economics and feasibility studies and cost-benefit analysis. There will be meetings, more meetings, and then more meetings. With people in suits even.

This is what the economic justice movement looks like on the inside. A new economy requires financing, and that financing needs to be managed democratically. Public banks are the way we do that.

Public banks are run by local or state governments, without shareholders, with a mandate to support local community banks and fund public goods like schools, city services and small businesses. Wall Street hates public banks because they demonstrate that local governments and communities can manage their money and finance their services without making massive interest payments to big banks.

Currently, there’s only one public bank in the United States, in North Dakota, but there are movements in over 20 states to create more. This story is about movements in four Western states where, because of persistent organizing, meetings, conversations, and a belief that democracy must be materialized, people like you and me have made impressive strides in the campaign to bring public banks to the United States.

Washington: “A Great Step Towards Democratic Control”

The state of Washington has been home to a public banking movement for a while now, with members of the Washington Public Bank Coalition finding a longtime ally in State Sen. Bob Hasegawa. The empowerment in Seattle of one of the country’s most progressive city councils may be decisive in tipping the scales for the public banking movement. The Seattle City Council’s adoption last year of a strong and uncompromising minimum wage ordinance – combined with a city budget that is revolutionary in its scope of social investment and commitment to economic empowerment and community revitalization – makes a publicly-owned financial institution especially appropriate for the city. A series of meetings on public banking took place in Seattle in December, featuring the state coalition, the Public Banking Institute, and several organizations from Seattle and throughout Washington.

I asked City Council member Kshama Sawant about the role of a public bank in financing the City’s vision of economic democracy. “Public banking is a great step towards the kind of democratic control over the economy that is urgently needed for investments in renewable energy, affordable housing and public transportation,” she told me. Fellow Council member Nick Lacata agrees; he recently told the Puget Sound Business Journal, “I think what really resonates with people is that these are public funds. Why are we putting them in private banks that don’t necessarily have the public interest in mind? Why don’t we capture them and put them in public banks that have the public interest in mind?”

Much work remains to be done in Washington where, as in many states, Lacata points out, questions exist concerning the constitutionality of public banks. (The Washington Coalition has concluded that public banks would not violate the state constitution). Sawant and other City officials find Washington citizens’ efforts inspiring in the face of the damage done to America by too-big-to-fail banks. “Wall Street and the big banks looted the economy and destroyed the dreams of millions of working people,” Sawant says. “And not only have these banks not been held accountable, they have successfully clawed back the few meager reforms meant to prevent another crisis like the Great Recession.”

New Mexico: “Dignity, Respect and Control Over their Own Lives”

Santa Fe was hit hard by the 2008 financial meltdown. Chiefly funded by tourism and money from the state, Santa Fe finds both of those sources depleted. Since 2011, the group We Are People Here has been fighting to bring economic democracy to the city. The group’s primary initiative has been the creation of a public bank. Last year, the City of Santa Fe answered the group’s call and agreed to listen to what they had to say. Following a symposium hosted by Mayor Javier Gonzales in September, the city began to seriously consider opening its own bank. Then, on Jan. 28, the Santa Fe City Council approved a feasibility study for such a bank.

It’s “the first official step” in the process, according to Nichoe Lichen of We Are People Here. “It will answer some important questions and compare several models for how a bank might serve Santa Fe.”

But Lichen hopes the city won’t limit itself “to evaluating Santa Fe’s current financial circumstances.” Rather, people should ask about “the risk of loss to public funds with Santa Fe’s current financial arrangements” with no public bank. That’s a fair question, since too-big-to-fail Wall Street banks can now “bail in” and gobble up depositors’ funds if they go under due to losses in shady, speculative deals.

Economic justice advocates in Santa Fe are excited. “Our mayor has taken the lead,” Lichen says. “We are so proud of him. The vast majority of individuals and organizations we have reached out to over the last two years have said this is a no-brainer.” Lichen says community bankers are somewhat uneasy about a public bank, believing it would compete unfairly with local banks, which are encumbered by operational costs and regulations. But a public bank would partner with, rather than compete with, community banks, allowing those banks to expand their portfolios without begging for support from Wall Street. Lichen also fears that officials in Santa Fe will settle for something less: a revolving loan fund that “would not keep our public funds safe from a bail-out or bail-in. It would not help end our debt cycle.”

“We are doing this to provide a more democratic, just, sustainable economy for Santa Fe,” Lichen says, “with dignity, respect and control by the people over their own lives.”

Arizona: “Liberation from Crushing Debt”

Over the past year, Arizonans for a New Economy co-directors Jim Hannley and Pamela Powers-Hannley have met with public officials, made presentations throughout Southern Arizona, and maintained one of the more impressive web sites in the new economy movement. “We are working at the State and local political levels to create a public bank for the City of Tuscon and/or the State of Arizona,” Jim Hannley told me in an email. The group recently met with State Sen. David C. Farnsworth, a Republican, and has been working closely with Sen. Steve Farley, a Democrat who has enthusiastically endorsed the idea. The group has also been engaging with Tuscon City Council members. Jim Hanley reports that Tuscon Mayor Jonathan Rothchild has promised to discuss public banking with Santa Fe Mayor Javier Gonzales.

The effort involves a stream of meetings and presentations with local sustainability and economic interest groups. But that patience and persistence is necessary, because public officials are risk-averse. Historically, when communities have been close to getting a public bank, the Wall Street bankers have parachuted in, filling public officials’ heads with misinformation about the supposed deleterious effects of such a bank (last year’s experience in Vermont is instructive in this regard). Elected leaders, fearing controversy, might conclude it’s not worth the effort.

“The challenge we face is primarily from elected officials who fear public backlash when an ill-informed constituency hears about the founding of a State or City bank,” Jim Hanley told me, and “addressing these challenges means developing partners in community organizations to provide a new distribution channel for our message.” This includes meeting with community bankers, who have more interests in common with their local businesses than they do with Wall Street bankers. The work is worth the effort for the Hanleys and Arizonans for a New Economy. “We are political activists who understand class conflict,” Jim said, “and the role that the banking monopoly plays in ensuring that the 1% continues to dominate all aspects of our country.” The democratization of finance, he said, “can liberate [people] from needless, rapacious, crushing debt.”

Colorado: “Fix this Badly Broken System”

Coloradans have been pushing for public banking since at least 2011, when a group calling itself the Main Street Partnership Bank coalition, made up of state legislators, public and non-profit lending agencies, and economic justice groups, began researching and debating the formation of state- or city-owned banks. On Jan. 31 of this year, a Denver conference entitled “Banking on Colorado” featured leading national figures such as Ellen Brown, Nomi Prins of Demos, and Mike Krauss and Gwen Hallsmith of the Public Banking Institute. Scores of local leaders were among the 120 or so people attending the event, which was sponsored by Be the Change-USA and moderated by Denver City Auditor Dennis Gallagher and Colorado National Bank’s Mike O’Neill.

Earl Staelin, a member of the board of directors for Be the Change-USA, has co-sponsored several citizen initiatives in Colorado to amend the state constitution to establish a public bank. He told me that the Bank of North Dakota was the model for Colorado – a bank that “makes loans in partnership with community banks such as in North Dakota,” and that would “lend for infrastructure, home ownership, student loans at low or no interest, clean energy,” and other public goods. The bank would be prohibited from “speculative investments such as mortgage-backed securities and derivatives.” Now, citizens in Denver, Boulder, Westminster, Englewood and other cities have joined the struggle.

The next steps are formidable. 86,000 signatures are needed to get public banking on a referendum ballot; Staelin’s group wants to collect 115,000 to provide a sufficient cushion for the inevitable challenges to signatures that will follow. Getting those signatures will take resources – petitioner circulators need to be paid, and Staelin guesses “it would likely take several million dollars” to sustain an informational campaign to beat back the propaganda from the big banks, particularly “the two large banking associations in Colorado, the Colorado Bankers’ Association and Independent Bankers of Colorado.”

But the multi-year effort is worth it to Staelin and his colleagues. “Public ownership and control of banks in the public interest,” he told me, “is the most realistic and effective way I know of to fix this badly broken system and to enable the vast majority of our population to thrive in a robust and stable economy, a clean and healthy environment where we have a meaningful opportunity to participate in our democracy.”

Matt Stannard is Policy Director for Commonomics USA and does research for the Public Banking Institute.

This article originally appeared at Occupy.com.


Earl Staelin: Colorado needs a public bank — Denver Post Op-Ed

Earl Staelin, a board member of Be The Change — USA, is one of the intellectual leaders of the Banking On Colorado and the public banking movement in Colorado. Here is his Denver Post Op-Ed supporting the formation of public banks in our state.

From the Denver Post:


OPINION

Colorado needs a public bank

By Earl Staelin

POSTED: 02/14/2015 05:00:00 PM MST   |   UPDATED:   02/14/2015 11:34:50 PM

After we bailed out the “too-big-to-fail” Wall Street banks in 2008 and 2009, things appeared to have improved. Today, Wall Street is rebounding and the job market is looking up. But the folks on Main Street working for low hourly wages or Coloradans paying tens of thousands of dollars in student debt with no end in sight, who lost their homes, or are working part time jobs with no benefits are not so sure.

Colorado entrepreneurs seeking green energy solutions and small business start-ups scramble for funding. Needed infrastructure projects like repairing our state bridges are not keeping up with civil engineers’ recommendations. Meanwhile, the marijuana industry has no place to bank its cash.

In 1729, Benjamin Franklin gave credit to the colonial government of Pennsylvania for restoring prosperity by lending money beginning in 1723. Franklin later blamed Britain’s decision in 1764 to prohibit further lending and printing of paper currency by colonial governments as the chief cause of the Revolution because it rapidly caused widespread unemployment and poverty.

Apparently, North Dakota paid attention to Franklin. This year, North Dakota celebrates its 96th year of having a state-owned bank, the Bank of North Dakota, and is the only state that has one. Arguably, as a result of its bank, North Dakota was the only state not to suffer budget deficits or declining employment as a result of the 2008 crash. Its unemployment rate was and remains the lowest in the nation at 2.8 percent. And it has had larger budget surpluses each year since 2008, no bank failures, and has remitted $900 million in taxes to the people of North Dakota. Critics attribute North Dakota’s success to its increased oil revenues, but its big increase in oil income did not occur until 2010, and Alaska and Montana have had more oil but still had budget deficits and high unemployment. Today, North Dakota has one of the lowest rates of home foreclosures, and consistently has the lowest rate of credit card default and student loan default in the United States.

The Bank of North Dakota makes most of its loans through local community banks, shares the risk, and often guarantees their loans. It invests in North Dakota and its citizens.

A public bank here in Colorado working together with our locally owned community banks is a promising option for expanding real prosperity and well-being here. It would be required to lend in Colorado. Its mission would not include paying commissions or bonuses, making risky investments in subprime loans or derivatives, or profiting at the expense of our community. A public bank’s mission would be to serve our communities by helping them thrive and our citizens prosper — through supporting small and medium sized businesses, green energy, lower student debt, reduced home foreclosures, sustainable farming, infrastructure, and more.

To this end, the first-ever conference on public banking in Colorado was held in Denver in late January. The conference, Banking on Colorado, featured national authors and local panelists representing Colorado farming, student debt, home foreclosures, green energy, a community bank, and small businesses.

For more information on the initiative, go to  bankingoncolorado.org. 

Earl Staelin is a Denver trial lawyer and co-sponsor of the Public Bank Initiative, which would amend the Colorado Constitution to establish a state-owned bank. 


The original article, with reader comments, can be found at Colorado needs a public bank.

 

Ellen Brown — Why Public Banks Outperform Private Banks: Unfair Competition or a Better Mousetrap?

From the The Web of Debt Blog:


Why Public Banks Outperform Private Banks: Unfair Competition or a Better Mousetrap?

Posted on   February 10, 2015   by   Ellen Brown   at   ellenbrown.com

Public banks in North Dakota, Germany and Switzerland have been shown to outperform their private counterparts. Under the TPP and TTIP, however, publicly-owned banks on both sides of the oceans might wind up getting sued for unfair competition because they have advantages not available to private banks.

In November 2014, the Wall Street Journal reported that the Bank of North Dakota (BND), the nation’s only state-owned bank, “is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.” The article credited the shale oil boom; but as discussed earlier here, 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 later increase in state deposits cannot explain the bank’s stellar record either.

Then what does explain it? The BND turns a tidy profit year after year because it has substantially lower costs and risks then 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 does not need to advertise for depositors (it has a captive deposit base in the state itself) or for borrowers (it is a wholesome wholesale bank that partners with local banks that have located borrowers). The BND also has no losses from derivative trades gone wrong. It engages in old-fashioned conservative banking and does not speculate in derivatives.

Lest there be any doubt about the greater profitability of the public banking model, however, this conclusion was confirmed in January 2015 in a report by the Savings Banks Foundation for International Cooperation (SBFIC) (the Sparkassenstiftung für internationale Kooperation), a non-profit organization founded by the the Sparkassen Finance Group (Sparkassen-Finanzgruppe) in Germany. The SBFIC was formed in 1992 to make the experience of the German Sparkassen – municipally-owned savings banks – accessible in other countries.

The Sparkassen were instituted in the late 18th century as nonprofit organizations to aid the poor. The intent was to help people with low incomes save small sums of money, and to support business start-ups. Today, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) Local public banks are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. The savings banks operate a network of over 15,600 branches and offices and employ over 250,000 people, and they have a strong record of investing wisely in local businesses.

In January 2015, the SPFIC published a report drawn from Bundesbank data, showing that the Sparkassen not only have a return on capital that is several times greater than for the German private banking sector, but that they pay substantially more to local and federal governments in taxes. That makes them triply profitable: as revenue-generating assets for their government owners, as lucrative sources of taxes, and as a stable funding mechanism for small and medium-sized businesses (a funding mechanism sorely lacking in the US today). Three charts from the SBFIC report are reproduced in English below. (Sparkassen results are in orange. Private commercial banks are in light blue.)

net-profit-sparkassen

sparkassen-return-on-capital

sparkassen-taxes-pd

Swiss Publicly-Owned Banks and the Swiss National Bank: Marching to a Different Drummer

The Swiss have a network of cantonal (provincially-owned) banks that are so similar to the Sparkassen banks that they were invited to join the SBFIC. The Swiss public banks, too, have been shown to be more profitable than their private counterparts. The Swiss public banking system helps explain the strength of the Swiss economy, the soundness of its banks, and their attractiveness as a safe haven for foreign investors.

The unique structure of the Swiss banking system also helps explain the surprise move by the SNB on January 15, 2015, when it lifted the cap on the Swiss franc as against the euro, anticipating the European Central Bank’s move to embark on a massive program of quantitative easing the following week. Switzerland is not a member of the EU or the Eurozone, and the Swiss National Bank (SNB) is not like other central banks. It is 55% owned by the country’s 26 cantons or provinces. The remaining investors are private. Each canton has its own publicly-owned cantonal bank, which provides credit to local small and medium-sized businesses.

In 2011, the SNB pegged the Swiss franc to the euro at 1 to 1.20; but the value of the euro steadily dropped after that, and the SNB could maintain the peg only by printing Swiss francs, diluting their value to keep up with the euro. The fear was that once the ECB started its new money printing program, the Swiss franc would have to be diluted into hyperinflation to keep up.

The SNB’s unanticipated action imposed heavy losses on speculators who were long the euro (betting it would rise), and the move evoked criticism from the European central banking community for not tipping them off beforehand. But the loyalty of the Swiss National Bank is to its cantons, cantonal banks, and individual investors, not to the big private international banks that drive central bank policies in other countries. The cantons had been complaining that they were no longer receiving the hefty 6% dividend they had been able to count on for the previous century. The SNB promised to restore the dividend in 2015, and lifting the cap was evidently felt necessary to do it.

Publicly-owned Banks and the Trans-Pacific Partnership

The SBFIC is working particularly hard these days to make information and technical help available to other countries interested in pursuing their beneficial public model, because that model has come under attack. Private international competitors are pushing for regulations that would limit the advantages of publicly-owned banks, through Basel III, the European Banking Union, and the Transatlantic Trade and Investment Partnership (TTIP).

In the US, the current threat is from the TransPacific Partnership (TPP) and its European counterpart the TTIP. President Obama, the Chamber of Commerce, and other corporate groups are pushing hard for fast track authority  to pass these secret trade agreements while effectively bypassing oversight from Congress.

The agreements are being sold as promoting trade and increasing jobs, but the effect of international trade agreements on jobs was evident with NAFTA, which hurt US employment more through the competition of cheap imports than helped it with increased exports. Moreover, only five of the TPP’s twenty-nine chapters are about trade. The remaining chapters are basically about getting government off the backs of the big international corporations and protecting their profits from competition. Corporations would be authorized to sue governments that passed laws protecting their people from corporate damage, on the ground that the laws impair corporate profits. The trade agreements put corporations before governments and the people they represent.

Particularly targeted are government-owned industries, which can undercut big corporate prices; and that includes publicly-owned banks. Public banks are true non-profits that recycle earnings back into the community rather than siphoning them into offshore tax havens. Not only are the costs of public banks quite low, but they are safer for depositors; they allow public infrastructure costs to be cut in half (since the government-owned bank can keep the interest that composes 50% of infrastructure costs); and they provide a non-criminal alternative to an international banking cartel caught in a laundry list of frauds.

Despite these notable benefits, under the TPP and TTIP, publicly-owned banks might wind up getting sued for unfair competition because they have advantages not available to private banks, including the backing of their local governments. They have the backing of the government because they are the government. The government would be getting sued for operating efficiently in the best interests of its constituents.

To truly eliminate unfair competition, the giant monopolistic multinational corporations should be broken up, since they have an obvious unfair trade advantage over small farmers and small businesses. But that outcome is liable to be long in coming. In the meantime, fast track for the secretive trade agreements needs to be vigorously opposed. To find out how you can help, go to www.StopFastTrack.com or www.FlushtheTPP.org.

____________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.


Public Banking in the News — The Boulder Weekly: Banking on the environment

A public bank can benefit local governments and economies in many ways. There can be a clear benefit to local infrastructure and businesses through community banks, and, as this article makes clear, there can be great improvements to our environment through investment in renewable energy.

From the Boulder Weekly


Thursday, February 5, 2015

Banking on the environment

A growing movement in Boulder sees public banking as the answer to a greener future

By Caitlin Rockett

Banking might not seem like the answer to a healthier environment, but there’s a growing movement in Boulder that believes public banking could fund environmental projects from solar development to local organic farms… even a municipalized electric grid.

Brad Thacker
Brad Thacker

Public banking is a simple concept: it’s a bank owned by the people for the benefit of the people. Unlike a credit union, a public bank’s profits go to all of the taxpayers of whatever entity forms the bank — whether that’s a city, state or even just a community within a city — not just the members of a single credit union. Also unlike traditional banks, public banks don’t allow for individual or business checking accounts. Deposits are accepted only from the municipality or state body that created the bank. Essentially, a public bank allows a municipality to invest its own money in its own bank and make interest on that money, then the bank can issue itself — or citizens — loans for infrastructure or other projects.

“The beauty of public banking is that the public sets the agenda of the banks,” says Gwen Hallsmith, executive director of the Public Banking Institute in Sonoma, Calif. “If the mission of the bank is to foster sustainable food and renewable energy and locally created businesses and jobs, then that’s where the bank will focus its resources instead of in the risky derivatives market and overseas investments involving slave labor and environmental destruction.”

Sounds like a good fit for the environment-loving population of the Centennial State. In fact, the concept of public banking has gained enough traction in Colorado to merit a conference on the topic that took place on Jan. 31 in Denver. In addition to the Denver conference, Clean Energy Action of Boulder held a special breakout session at Impact Hub on Jan. 29, where Hallsmith discussed the role that a public bank funded by the City of Boulder could play in financing not only Boulder’s stalled municipal electric utility, but could also create affordable housing, increase farm-to-table agri culture and renewable energy, enhance energy efficiency and improve public transportation.

“In Germany, where there is public bank in every community, they have been leaders in the field of solarizing their electric grid and creating all sorts of green economic development and new job opportunities,” Hallsmith says. “That’s the important point: public banks are owned by the public and they can therefore respond to our most pressing public priorities.”

For Alison Burchell, a geologist and founding member of Clean Energy Action, Boulder’s muncipialization effort is a pressing priority. Burchell says that she began to seriously look into how public banking could push municipalization forward about two and a half years ago.

Burchell took a look at the city’s financial statement for 2013 and found that all combined — from general reserves to waste water and downtown funds — the city has $269 million in reserve funds.

“So [on average] you need $25 million to set up a bank,” Burchell says. “Every $25 million gets you $250 million in loan credits. The thing that stopped me in my tracks is what is the other $250 million number we know floating around our community?”

The estimated funds needed to municipalize Boulder’s electric utility.

“The interesting thing about that money, [and] I don’t know where that money sits, but let’s say it sits in Wells Fargo. What’s the interest we’re getting on it now — 1 percent, something like that?” Burchell says. “When we go to borrow it back we have to pay loan fees and interest on what we borrow back.

“Whether with municipalization or not, there are going to be improvements to the way we produce and consume our electrons,” she says. “It’s very, very expensive if we go through a series of banks and a series of loan agencies … These are high risk projects, and it’s very expensive to loan or bond them. If we set up our own bank, we can begin to loan to ourselves and collect interest on our own money, and it doesn’t have to be these exorbitant interests, it could be more reasonable rates of interest, 3 or 4 percent, and still make a great profit.”

As a geologist, Burchell says she is drawn to concepts like public banking because of the environmental projects such institutions can fund. She makes no attempt to disguise that for her, municipalization is key where public banking in Boulder is concerned — and she’s not alone.

Amanda Bybee, vice president of Namesté Solar in Boulder, originally hails from Austin, Texas, where the utility is municipally owned. Bybee sat on a panel at the Jan. 31 public banking conference in Denver to discuss the need for local funding.

“I think there’s a lot to be said of public institutions that are accountable to the public. In Austin the utility is the primary fund that supports every other budget the city has, and that’s a great thing,” Bybee says. “And they’re able to say, ‘We care about where our energy comes from, we care about climate change, we care about economic development’ … but it’s hard to do. Look at what Boulder has had to put in place to even get as far as it is has [with municipalization].”

Beyond municpalization, Bybee says that public banking could simply provide a better option for individuals and businesses that want to get loans to install solar systems.

“So [the] solar [industry] is in a good position in the sense we have a good number of financing options, and there are a number of groups out there that provide solar loans and opportunities to make this accessible to people,” she says. “But the question for [Namesté Solar] is less about ‘Do we have access at all?’ and more about ‘Is there a better way to go about it that benefits the local economy?’”

On the Jan. 31 panel with Bybee was August Miller, co-founder of FoodShed Productions in Longmont, a group that works with local residents and farmers to teach them how to produce organic food. Unlike the solar industry, small farmers struggle more to secure financing to purchase land or equipment because of the extremely low average pay for a U.S. farm worker — according to Miller, between $2,500 and $5,000 annually.

“My wife and I earned a little over $6,000 in 10 months working for one farm,” Miller says. That was about $80 a week, with a minimum of 50 hours a week and a maximum of 60 to 70 hours a week. When they went to a bank seeking a loan in early 2014, they were told they were “too risky.”

“In terms of the surplus of farmers without land or access to land, public banking could go a long way to address the obvious dilemma for farmers not only in Colorado or Boulder, but throughout the nation.

“Having a low-interest loan that is long term, it’s very fitting for agriculture because you can’t move your farm because your investment is the soil and your knowledge is based on that investment in the soil,” Miller says. “The two fit nicely with each other. Having a 1 percent loan for 30 years would keep people here, it would make sure that they were invested in their community not just short term. It would change the whole mentality of how we do business and who our neighbors are.”

But is public banking feasible for Boulder or even Colorado?

“This is how change happens, right? A small group of committed individuals can change the world,” says Bybee. “Who’s to say that this group at the public banking forum can’t make it happen? I’m not going to bet against them.”

Respond: letters@boulderweekly.com


The original article with reader comments is on the Boulder Weekly website at Banking on the environment.

Bill Introduced in Maine Legislature to Establish a State Public Bank

A bill to establish The Maine Street Bank was introduced in the Maine legislature on 13 January 2015. Titled An Act to Create a Public Bank, the bill proposes to create a public bank by 1 July 2017 for the state of Maine that is largely modeled after the nearly century old Bank of North Dakota. It would also authorize the formation of public banks in municipalities and cities around the state.

To summarize the bill as it currently stands:

The purpose of the bank would be

  1. Economic development. To support job creation and economic development in Maine by increasing access to capital for businesses and farms within Maine in partnership with local financial institutions;
  2. Financial stability. To provide stability to Maine’s financial sector, but not to compete with state-chartered financial institutions, credit unions or other financial institutions within Maine;
  3. Basic banking services. To reduce costs paid by the State of Maine for basic banking services; and
  4. Return profits. To return profits, beyond the revenue needed to accomplish the purposes and for continued sound operation of the bank


The operation, management, and control of the bank would be by a Board of Directors consisting of five voting members appointed by the Governor and subject to approval and confirmation by the State Legislature. The Treasurer of Maine and the Commissioner of Administrative and Financial Services would serve as ex officio non-voting members of the Board. The voting members of the board would serve without compensation.

The Board would appoint and determine the compensation of the President of the Bank, who should have extensive banking experience, and other subordinates they deem necessary for the operation of the bank.

The Board would also appoint a seven-member Advisory Committee who must be representatives of the Maine’s financial, business, agricultural and labor sectors and at least two must by officers of financial institutions chartered in Maine and who do not maintain offices outside the state.

The proposed powers of the bank are given in detail in the legislation, found at the link — An Act to Create a Public Bank.

Hearings were held in the Joint Committee on Insurance and Financial Services on 3 February 2015. The written testimony of six individuals, representing themselves or a private or governmental organizations, can be found through the links below. It is no surprise that of these the only written testimony in support of the bill was from its sponsor and one private citizen. The individuals and organizations representing the establishment all submitted testimony in opposition to the bill.

In support of the bill were


In opposition to the bill were

  • Carlos Mello – Director of Business and Finance of the State of Maine
  • Terry Hayes – Treasurer of the State of Maine
  • John Witherspoon – President and CEO, Skowhegan Savings Bank – Representing the Maine Bankers Association
  • Doug Ray – Director of Legislative Affairs and Communications, Maine Department of Economic and Community Development


The Senate committee should be voting on the bill today, 5 February 2015. We will post further information as it becomes available.

We should be prepared in Colorado to see the same sort of opposition to the formation of either a state bank or municipal banks. We can learn from the testimony in other states and municipalities that have proposed legislation.

Please read and these testimonies and comment on how to rebut the opposition arguments and to improve the supporting arguments in the form below. If you don’t support the idea of establishing public banks, we would like to hear from you today. Your ideas are important to us.

We will update this post as the bill progresses through the Maine Legislature. You can find details of the bill’s progress at the link, HP23

A Short History of Postal Banking – from Slate.com

Postal Banking provides an alternative to the usury that pay-day lenders are now practicing on the Americans that can least afford to pay the exorbitant interest rates these lenders are charging. The following article, pulled from the pages of slate.com, looks at the history of Postal Banking and how it can provide relief to these Americans.

Postal Banking is one piece of a strategy to create a more sustainable banking system in America, which includes establishing Public Banks for state, tribal, county, and city governments across the nation. For more information about Public Banks, what they are and how they can benefit American, please see our Public Banking page on this site. An advocacy organization supporting the resumption of Postal Banking in the United States is BankAct.org.

The author of this piece, Mehrsa Baradaran, is an Associate Professor at University of Georgia School of Law and is an authority on the subject of Postal Banking. She gives a concise history of Postal Banking and a look at its potential for the future. Her book on the subject is forthcoming.

From Slate.com:


A Short History of Postal Banking

As the debate over reinstituting postal banking heats up, we should know we had it. And it worked.

Posted: Tuesday, August 18, 2014 1:51 pm


By Mehrsa Baradaran

Last week John Oliver offered up an exposé on payday loans, describing them as “the circle of debt” that “screws us all.” And at the conclusion of Oliver’s takedown on payday lending Sarah Silverman offered low-income borrowers better alternatives—including donating blood and jumping in front of rich folks’ cars. But there is a burgeoning alternative to usurious payday lending: postal banking, which allows low-income Americans to do their banking—from bill payment to small loans—at the same post office where they buy stamps. As states try to regulate away the payday-lending sector, their desperate customers may be pushed either into the black market or bankruptcy. Postal banking is a much better solution. It is time to consider a “public option” for small loans.

Every other developed country in the world has postal banking, and we actually did too. It is important to remember this forgotten history as we begin to talk seriously about reviving postal banking because the system worked and it worked well. Postal banking, which existed in the United States from 1911 to 1966, was in fact so central to our banking system that it was almost the alternative to federal deposit insurance, and served as such from 1911 until 1933. The system prevented many bank runs during a turbulent time in the nation’s banking history—essentially performing central banking functions before the Federal Reserve was up to the task. Postal banking helped fund two world wars and reduced a massive government deficit after the Great Depression.

Postal banks started in Great Britain in 1861 and, from the outset, the primary goal was financial inclusion. But in the U.S., postal banking had other uses as well: In 1871, President Ulysses S. Grant’s postmaster general, John Creswell, proposed post office savings banks to pay for a new telegraph system. President Grant himself endorsed the postal banks as a way to free up hoarded money in far-flung regions of the country. But the nation’s bankers opposed it. They objected to the notion that all the deposits would go directly to the Treasury. Everyone feared centralized bank power, and localism in banking was as sacred as the Constitution at the time. The American Bankers Association objected to the competition with the federal government. Ideological opponents called it communist, socialist, and paternalistic. While they claimed that the private markets and savings banks were sufficient, in fact 98 percent of all savings banks were in the five northeastern states, leaving the South and the West virtually unbanked.

Once the idea was first proposed, nine postmasters and almost every president, except Grover Cleveland pushed the issue for 40 years. Almost 100 bills died in Congress before anything happened.

After the panic of 1907 (A panic that started on Wall Street and led to bank runs across the country) momentum finally shifted. In the 1908 presidential election, banking reform became a major issue with William Taft actually campaigning on postal banking as a way to stabilize the banking sector and help credit-starved regions like the South and the West. Taft won and his administration initiated postal banking.

Taft’s clear support of postal banking and his electoral mandate still weren’t enough to overcome bank and Democratic opposition. The Postal Savings Bank Bill, as passed, finally acquiesced to both localism and private bankers by mandating that almost all of the postal deposits stay in the community of origin. The debate at the time over whether postal banks were needed is illuminating today. Opponents claimed that anyone with money to save was already saving it. The Boston Globe opined, “It is easy enough for anybody to find a savings bank; the trouble is to find the savings to put in it.” Others urged that the reason rural dwellers were not saving in banks was because of the “ignorance of the common people,” or because “the inhabitants of remote rural districts are not so well posted in the world’s wicked ways as those who have the opportunity of perusing the daily papers.” In other words, some people are just too dumb and too poor to bank. Today we hear similar claims that the problem with the poor and unbanked is that they “lack financial literacy” or that they just don’t have enough money to open a bank account. The truth is that they are plenty literate, but they either don’t trust banks or the banks left their neighborhood years ago, leaving only payday lenders.

The bill eventually passed in 1910 and created what was called the United States Postal Savings System.* The interest on accounts was set by statute to a low 2.5 percent to avoid luring customers away from banks. The postmasters and supporting congressmen also called the postal banks “the poor man’s banks” to set bankers at ease. Accounts were capped at $100 deposits allowed per month and a total savings cap of $500—the limit was raised to $2,500 dollars in 1918.

By 1913 (just two years later) the banks had received $32 million—most of which came from “stocking banks,” as reported by the New York Times in 1913. The Times reported with frustration that many larger deposits were turned away and that the current deposits likely represented a fraction of those available. Princeton University historian Sheldon Garon claims that it was these caps and concessions that ultimately doomed the postal banking system in the United States. And ultimately, it was not southerners and westerners that most needed the banks as had been expected (although they eventually came around). It was the raft of recent immigrants in urban areas who immediately took to these banks. The reason (from congressional testimony in 1913): “Hundreds of thousands of our newly made citizens distrust banks and will not patronize them. They have absolute confidence in the Government and know what postal savings banks are.” The post office offered information to customers in 24 languages and would pass out leaflets right outside the ports of entry into the U.S. Consequently, the busiest postal banks were those right near the ports. By 1915, immigrants owned more than 70 percent of the postal bank’s deposits even though they were less than 15 percent of the population. There were accounts of deposits coming in stockings and cans with the paper money rotting and the coins rusted.

By 1934, postal banks had $1.2 billion in assets—about 10 percent of the entire commercial banking system—as small savers fled failing banks to the safety of a government-backed institution. And this trend might have continued if President Franklin Delano Roosevelt didn’t have broader banking reform in mind. But Roosevelt chose the FDIC over postal banking as a way of stabilizing things. Paradoxically, the same Roosevelt who forged an unprecedented expansion of the federal government during the New Deal would choose a bank-funded insurance scheme as opposed to a public banking system.

But even this was not the end for postal banking. FDR used the postal banks to sell Treasury bonds in 1935 to pay off the budget deficit after the Great Depression. In 1941, the postal banks started selling “Defense Savings Stamps” to help fund the war. The campaign was a phenomenal success. By the end of World War II, the government had raised $8 billion in war funding from the post office alone.

Deposits also reached their peak in 1947 with almost $3.4 billion and 4 million users banking at their post offices. In part this was because in 1940, the post office introduced the world to banking by mail, which appealed to soldiers stationed abroad.

But it was the beginning of the end. In 1946, 68 percent of the nation’s towns and cities had both postal savings depositories and banks. And because banks could charge higher interest than the post office and were just as safe, the USPSS was no longer an attractive option for deposits. This is no longer true today as banks have been squeezed on all sides by money markets, capital markets, and foreign banks. Banks began to abandon poor areas and post offices remained, but without banking services. And once banks deserted low-income neighborhoods starting in the 1970s, the high-cost payday lenders and check-cashers flooded in.

In 1965 the postmaster generals started to endorse ending postal banking. In 1966 it was officially abolished as part of Lyndon Johnson’s streamlining of the federal government. The postal banking system died a quiet death without public discussion. The public and press failed to note the centrality of postal banking in one of the most turbulent periods of banking in our country. Postal banking was America’s most successful experiment in financial inclusion—a problem we face again today. As we contemplate whether it has a place in our future we must recall the vital role it played in our past.

Mehrsa Baradaran is an associate professor at the University of Georgia School of Law specializing in banking law and is author of a forthcoming book on the subject.


The original article is at A Short History of Postal Banking.