Born and raised in Urbana, Gary is a retired Dean and Professor of Education and Social Justice at the University of Illinois at Springfield (UIS)
A Champaign County Public Bank could receive deposits from county-based residents, businesses, hospitals, institutions of higher education and municipal governments, as well as County government itself, that would be used to help secure loans—including mortgages as well as corporate and public bonds—for beneficial public, private and nonprofit purposes and, in the process, “create new money” to circulate in the local economy and employ more people.
Today, money is created primarily by banks extending loans to borrowers and then managing the new accounts established. When loans are made, a borrower’s account is credited with the amount of the loan. This becomes an IOU (or debt) from the borrower to the bank and, conversely, an asset to the bank. Through this process, new money is created in the form of electronic entries that can be redeemed as cash when needed.
The deposits in borrowers’ accounts are spent on various productive activities designed to bring positive financial returns (or desired capital or consumer goods or services) to the borrowers, either of which typically expands economic activity in the local area. However, the deposits must be paid back to the bank over time with interest. Interest earned by the bank is what makes loans significant assets.
As new money circulates in the local area through the exchange of goods and services, its beneficial effects multiply. If the loans are mortgages, new homes or business structures are often built—or old ones purchased and improved. If the loans are bonds issued by the county itself or by municipal governments, infrastructure improvements may get made. If the loans are conventional business loans, new or expanded business activity may be stimulated. All of these activities create new jobs!
Before moving on, it should be noted that all banks, public and private, must secure the loans they make by maintaining reserves. Bank reserves are the currency (or bank capital) that is not lent out to a bank’s clients. A small fraction of the total deposits (typically 10 percent) is held internally by the bank in cash vaults or deposited with the central bank. The reserves exist to ensure that assets are available to cover expenses incurred by loans that fail or by unusually high rates of withdrawal of bank deposits (so-called “runs” on the bank).
For public banks, an approach for establishing sufficient reserves to cover the above contingencies is that used by the Bank of North Dakota (BND), the only public state bank in the U.S. The BND was set up as the Bank of North Dakota “doing business as” the state of North Dakota. This guarantees that all the assets of the state (its revenue deposits, real estate holdings, pension funds, investment securities, etc.) and, if necessary, its taxing powers are available to the BND to secure loans it makes. The BND also has an account with the Federal Reserve (central bank) that can be a source of very low interest loans to meet short term emergencies.
Most of the interest income taken in by the BND becomes available to make additional loans for publicly beneficial purposes. A portion could also be returned to the state, however, in the form of dividends. If the state has issued bonds for some purpose, such dividends could have the effect of “balancing out” the cost of interest on the bonds which, in turn, could reduce the state’s need to levy taxes extensively.
There is no reason why a county- or municipal-level public bank could not be established “doing business as” the county or municipality in the same fashion. Thus, a Champaign County Public Bank could be established (perhaps in conjunction with some or all of the municipalities located within it) to do business as Champaign County. This would allow extensive loans to be made which would spur economic growth throughout the County. The interest income generated could be used to bolster the bank’s reserves, extend more loans to the public, and/or pay dividends to the County (and perhaps to participating municipal governments).
Differences between Public and Private Banks
In the case of public banks, surplus income derived from fees, interest, investment securities, service charges, etc. after expenses have been paid can either be retained as reserves or, among other options, be “reissued” as additional loans to stimulate further local development; it would not, however, be treated as profit to be distributed for private gain.
By contrast, private banks, increasingly large national institutions, typically invest this surplus income to generate maximum profit to distribute to shareholders, directors and CEOs who may not even live—and spend money—in the local area.
Private banks usually feel pressure to maximize profits to attract or maintain shareholders and be competitive with other banks. This is often accomplished by investing their surplus income in different ways, including in financial instruments such as derivatives and credit default swaps which can place bank clients at risk unless the banks are deemed “too big to fail” and receive taxpayer bailouts for losses they incur as occurred in 2008. If profits are made from these investments, they are distributed to shareholders, directors and CEOs rather than being reinvested in beneficial local development. In short, they are used to benefit “Wall Street” rather than “Main Street.” The rich get richer; the rest, poorer.
It should be noted that because public banks use their surplus income to address the real economic needs of everyday individuals and of the institutions which serve them, wealth gets distributed much more broadly than it would if money were managed by private banks aiming to serve their shareholders, etc., a small subset of the total U.S. population.
It might be asked whether nonprofit credit unions with their members democratically controlling the organization could not be an attractive alternative to public banks? The short answer is that credit unions often struggle to generate reserves of sufficient size to offer loans supporting large commercial and governmental projects/activities. Their reserves would not include the extensive revenues and other assets of at least one government entity as occurs with public banks. Credit unions are better used for smaller financial transactions like home mortgages, auto loans, and small business loans.
Would a Champaign County Public Bank siphon money away from smaller, locally-owned private banks or credit unions and threaten their survival, or could it cooperate with these institutions in ways that benefit them and the local groups/organizations they serve?
For example, with its substantial reserves backed by one or more unit of government, could a county-level public bank subsidize or otherwise support the activities of locally-owned private banks and credit unions in ways that make them more competitive with large national banks? In exchange for these institutions agreeing to focus their efforts on supporting local economic development, could a public county bank act as a “mini-reserve bank” to these institutions by backing up their financial commitments directly, extending them low interest loans when necessary, or otherwise helping them to reduce the costs of their services (e.g., interest rates charged clients, especially low-income clients)?
Or could a county-level public bank cooperate with locally-owned private banks and credit unions by using the latter’s facilities, employees and/or technologies (e.g., computer hard- and software) to deliver at least some of its own financial services, thereby enhancing, through decentralization, their clients’ access to services? Further, could a few of these institution’s directors serve on the governing board of the public bank, ensuring coordinated communication, planning and problem solving? These forms of cooperation could improve the financial services available to county residents, businesses, and other organizations.
Residents of Champaign County should consider attending meetings being scheduled at the Independent Media Center (IMC) in downtown Urbana to discuss creating a public bank in the area, and/or implementing other economic reforms described elsewhere in this issue of the Public i (see notice).