WRITTEN EXPERT TESTIMONY FOR
CONSIDERING STATE BANK LEGISLATION
By Marilyn MacGruder Barnewall
President, The MacGruder Agency, Inc. (Retired)
WHAT IS A STATE BANK?
A state bank is owned
by the public and is not a private corporation.
It is, thus, a public bank. There is only one state bank in the United States, the Bank of North Dakota. A state bank is quite different from state-chartered banks which are present in most of the other 49 states.
The banks on the
street that do business with the public are owned by private investors, just as
they are now. They are not owned by the
state. A system of state-owned banks on Main Street would
be a socialist or communist system and state banks represent quite the
A state bank is an
administrator. It grants charters to
banks and acts as a correspondent bank for them.
At the current time,
money center banks act as correspondent banks for the independently owned banks
on Main Street. A correspondent bank receives loan requests
from smaller banks – banks too small to make a large loan when a client or
prospective client requests one. This
“loan sharing” concept is good… until the large banks become endangered by
marketplace forces and their own greed or stupidity.
Under the current correspondent banking
system, if one bank at the top fails, it has a spin-off effect on all of those
banks for which it has acted as a correspondent bank and participated in loans
with independent banks. In a failure
situation, the big bank must call its loans… including those loan
participations it has made jointly with smaller banks while acting in a
correspondent – or, a joint lending – capacity. Thus, it puts the smaller banks
at risk of failure too… it puts the entire system at risk of failure. That is why such banks are called “too big to
fail” – or, “too big to jail.”
In a state that has
its own state bank, nationally-chartered banks (banks chartered by the
Comptroller of the Currency) are still invited to do business. The primary difference for them in the new
environment is that the state bank now acts as the correspondent bank, not the
nationally-chartered bank... not Chase Manhattan or Wells Fargo or Bank of America, etc.
TO TURN A STATE ECONOMY
AROUND AND ACHIEVE POSITIVE FINANCIAL GROWTH:
Implement a state bank similar to the system in place
for 93 years in the State of North Dakota.
The State of North
A. Has enjoyed an unemployment rate as of July 2011 of 3.3%.
B. With a population of about 650,000, the Bank of North Dakota
has, during the past ten years, paid the State Treasurer more than $325 million
from bank profits.
C. In 2010, the worse economy in recent history, North Dakota had its
largest financial surplus in history.
D. North Dakota tops the list of state economies, year after
E. In 2011, North Dakotans
will see almost $500 million of their money returned to them in the form of
income and property tax cuts. Combined
2009 and 2011 tax reductions, the average North Dakotan will enjoy a 30 drop in
percent tax liability. The Legislature
also funded $342 million in property tax relief. The owner of a $150,000 home will enjoy a tax
reduction of $506.
$341.79 million in property tax relief;
$120 million reduction in income tax rates (17.9%)
$25 million reduction, corporation taxes (19.5%)
$2.125 million tax reduction, financial institutions (a
drop from 7 percent to 6.5
F. Enjoys population growth of 6% per year;
G. No bank failures during the past ten years; the lowest home
foreclosure rate in the nation; the lowest credit card default rate, too.
Specifically, what does a state bank do that causes such immediate and
positive results for a state’s economy?
In states other than North Dakota, the
billions of dollars received from taxes and fees are deposited in large
commercial banks – just like those that are borrowing trillions of dollars from
the Federal Reserve System… from taxpayers.
In North Dakota,
these deposits become “captive.” They
stay in the state. The corporate
headquarters of Chase Manhattan (New York City), Bank of America (Charlotte, NC), Citigroup (New York City),
Wells Fargo (San Francisco)
decide what they will do with those deposits.
They are famous for… what? Their
history says they invest in mortgage-backed derivatives, for one thing. Or, the too big to fail/jail banks lend your
tax dollars that your state deposits in them to businesses in their home
states, not in your state. Or the
Federal Reserve secretly lends the money to Wall Street or foreign banks and
businesses. Your tax dollars leave the
state, in other words. In North Dakota – or in any
state with a state bank – the tax dollars paid by the citizens of the state
remain in the state.
Every state takes in taxes and fees
every year. In North Dakota, these revenues are deposited
in the state bank which, in turn, makes sure a large percentage of the money
gets invested in the state’s economy.
And, the state bank gives a portion of its earnings back to the State
North Dakota is the only state that has had
a continuous budget surplus since before the financial crisis. They have had no bank failures in the past
ten years. Their mortgage foreclosure
rate and credit card default is the lowest in the country.
A July 18, 2011 Associated Press newspaper article reports
jobs in North Dakota
increased by 61,000 since 2000. That
doesn’t sound like a lot of jobs, but remember, this state has a population of
less than 700,000. Of those jobs,
17,000 were created between 2008 and 2010 – a time when most states were
REASONS FOR SEEKING
POTENTIAL ALTERNATIVE PATHS TO THE CURRENT BANKING SYSTEM:
The Federal Reserve System, a non-government private
corporation has since 1913 been determining monetary policy for the United States. A good case has been made by highly
recognized, eminent economists around the world who say America’s monetary
policy is destroying our economy. A
recent partial audit of the Federal Reserve shows this private corporation loaned
$16 trillion in near zero interest secret loans to American and foreign banks
The usual culprits – Citigroup received $2.5 trillion;
Morgan Stanley received $2.04 trillion, Merrill Lynch got $1.9 trillion and
Bank of America got $1.3 trillion (since Bank of America and Merrill Lynch are
the same corporation, B of A Inc. got the most money: $3.2 trillion).
But it wasn’t just American bankers that got nearly
interest-free loans. About $3.08
trillion went to foreign financial institutions all over Europe and Asia.
The point is, while the Fed was making the low interest rate
secret loans (for which U.S.
taxpayers are on the line), 6.5 million American homeowners were suffering
through delinquent and foreclosed mortgages.
Why are they in foreclosure? Because the monetary policies of the Federal
Reserve System caused a real estate bubble that resulted in the loss of
hundreds of billions – perhaps more than a trillion – dollars in primary
residential real estate values. They are
in foreclosure or behind in house payments because Federal Reserve monetary
policies have resulted in a rotten economy.
Citizens in all states question the wisdom of the Fed’s monetary
policies and the taxation of future generations of American children required
to pay for the monetization of United
Citizens of the states have expressed concern that the Federal Reserve
System is using their tax dollars to prevent the failure of banks in foreign
countries while their American financial services system is being compromised
by what Congress has chosen to call “too big to fail” banks. They complain that they are being “fed to the
wolves” or “thrown to the four winds of fate” by the policies of the Federal
Because the Federal Reserve System refuses to allow a
complete audit of the trillions of American taxpayer dollars it uses for debt
monetization purposes, it is impossible to evaluate precisely how that private
corporation is spending America into debt.
The Federal Reserve System is a private corporation, not a part of the
United States Government, and is referred to by many banking experts as a
“cartel,” (as OPEC is a cartel). The
Federal Reserve System generates private corporate profits by collecting
interest on the debt it is also responsible for generating… a clear “conflict
of interest” because when the nation is in debt, the Federal Reserve earns
profits on the interest paid on that debt.
The Federal Reserve System profits when America’s debt is high. When debt is low, it does not.
In response to citizen concerns
about what the people perceive as a federal financial system run amok, the
State of Texas
has approved that state’s right to print its own currency. The State of Utah has approved the use of gold and silver
coins in everyday commerce and business.
The State of Georgia
has approved the right of bank clients to open deposit accounts using gold and
silver coins. In South
Carolina, State Senator Lee Bright has introduced legislation that
backs the creation of a new state currency to “protect the financial stability
of the Palmetto State in the event of a breakdown of the
Federal Reserve System.”
As of March 2010, there were twelve
new declarations of State Sovereignty in progress in state legislatures around America. They include Alabama,
Nebraska, Rhode Island,
and Maryland. Obviously, state legislators see potential
Legislators responsible for the
reforms required to best protect the citizens they are sworn to serve must
choose carefully from a broad range of reforms.
Among those reforms must be a means by which bank lending to independent
businesses can be stimulated. A vast
majority of taxpayers are employed by independent businesses which have been the
hardest hit by the credit freeze caused by the reckless behavior of Wall Street
banks and Federal Reserve policies.
As of March 2011, there were
state-owned banking bills pending in eight states to either form or do
feasibility studies to assist in forming legislation. This year, bills have been introduced in Oregon, Washington, Massachusetts, and Maryland. Bills
from 2010 are pending in Illinois, Virginia, Hawaii, and Louisiana. The Center for State Innovation in Madison, Wisconsin, was
commissioned by Washington and Oregon to analyze the
impact of a state bank in those two states.
The conclusion: State-owned banks
in Washington and Oregon would, CSI said, have a positive
impact of substance on employment, new lending, and state and local government
revenues. In September 2011, the California State legislature passed state banking
legislation and it is awaiting Governor Brown’s signature.
I began writing in my columns two years ago about how a
simpler, more direct and less confrontational alternative than declaring
sovereignty or legislating the state’s right to create its own currency exists
for state legislators to take appropriate and immediate action to protect the
citizens of their state from the clearly potential failure of the federal monetary
I was the first banker and journalist to write about the
need for state banks. When I was a
consultant (1979-1993), my daily rate was $2,000. I was paid for my opinion. In 2011 dollars, that amount would probably
have increased to somewhere between $5,000 and $10,000 per day. This is a no cost opinion: I believe the establishment of a state bank
offers the most important alternative state legislators can find. It is a way to protect a state’s sovereignty
without declaring it, and a state bank makes it possible for a state to issue
its own currency (should it become necessary) without actually issuing it. A state currency without a state monetary
distribution system (state bank) is like an impotent bull:
Unable to perform. More
important, legislation declaring state sovereignty or the need for a state
currency may further debilitate what little confidence remains in the federal
system whereas the establishment of a state bank does not.
For example, currently the only way
to clear checks written on deposits in federally-chartered (or state-chartered)
banks is to utilize the check clearing system at the Federal Reserve
System. The Bank of North Dakota clears its
own checks. If a state declares
sovereignty (as several have said is their right), it must be done both de jure
("according to law") and de facto – or, "in reality." A state may say it is sovereign, but
sovereignty must also be accepted by other nations and states. For said declarations to hold legal weight
and to be taken seriously nationally and internationally, the declaring (de jure)
state must, according to international law, have a definable territory, it must
have a governing body, and it must be able to exercise and control its own monetary
power (de facto). Any state can comply
with the first two requirements (definable territory and and governing body). Logic dictates that no state can exercise
monetary power when tied to a failing federal system of finance and Federal
Reserve Notes that may – or may not – maintain value.
That is the basis of the people’s
concern for their economic well being.
One thing is absolutely certain. Without a state bank, states have no
alternatives should the federal system collapse. The state system will collapse with the
federal system. We all hope that doesn’t
happen, but the economy is not improving.
It gets consistently worse. With
a state bank, both state sovereignty and currency creation are possible. What legislators need to think about is
this: Without a currency distribution
system independent of the federal system currently in place, states have no
alternatives but financial chaos available to them – and that is what they will
get should the system fail.
In one of my editorials in News With Views (an Internet news
service with a million weekly readers), I said:
“As of June 30, 2009, the
Federal Reserve Bank of St. Louis said there were 6,898 commercial banks in the
– but as of June 30, 1984, there were 14,369 commercial banks? In 1994, that
number was pared down to 10,623. Now we have less than 6,898.”
Since local banks
are a key to the ongoing economic stability and are often the sole source of independent
business growth for communities, statistics indicate it is time for our legislators
to look at lawful alternatives available to the state that can stimulate
economic growth and taxpayer confidence.
Historic results over a period of 93 years at the Bank of North Dakota
proves the value of state banks.
Of all the alternatives available,
one fact stands out as identifiable truth:
States must be prepared to quickly come to the economic rescue of their
citizens should the need arise. The
financial services industry currently creates an unsafe economic environment in
which all alternatives must be kept open to states that want to serve the people
they represent. As it relates to the
economic well-being of any state’s citizens, a state bank offers the least
offensive alternative to the dangers of what may be a failing federal financial
system while concurrently supporting all potential alternatives required to
save citizens from extremely painful economic failure at the federal level.
As long as a State is tied to the
federal system of finance, it is impossible to declare sovereignty or create a state
currency because no monetary distribution system is available.
The United States is $15 trillion in
debt. We are spending $1.50 for every $1
in revenue we take in. That is
unsustainable. Before any new dollar or
Federal Reserve Note is printed, it is 46 cents in debt – and thus, it is not
“a dollar” nor what the Federal Reserve purports a Federal Reserve Note worth
$1.00. I’m not a lawyer and don’t know
the lawful implications of that, but I do know that if I turned a piece of
paper into something and represented it has having the value of $1.00 and it was only worth 46 cents, I’d be
arrested for counterfeiting.
Our problem in America today
is too much centralized power. The best
way to solve that problem in the economic sector is to implement state banks… a
system that decentralizes the power of the Federal Reserve System.
In short, without access to a state-owned
system of banking similar to the only such system in the country – North Dakota – it is
impossible to be properly prepared to protect any state’s citizens against the
devastation that can result from a failure of the federal financial
system. Equally, at this time there is
no legal reason barring any state from implementing a state bank similar to
that 93-year old system in the state of North
DEFINITION OF A “STATE BANK”
A state bank is owned
by the public and is not a private corporation.
The banks that do business with the public are privately owned, just as
they are now. The state bank acts as an
administrator, granting charters to banks and acting as a correspondent bank
Banks doing business
with loan, deposit and trust customers in any state would, under a properly-structured
state bank system, continue to be privately owned. The banks are privately owned but are chartered
by the state rather than the Comptroller of the Currency in Washington, D.C. That is the primary change that occurs when a
state owns its own banking system: The state,
rather than the federal government, charters the state banks doing business in
the state and the state establishes the qualifications private investor banks
must meet to provide banking and other financial services to citizens. The state establishes and/or approves acceptable
loan policies at banks it charters. The
state bank becomes the correspondent bank for independently owned banks it
Some states may try
to structure a state bank for political or other purposes. If a state bank is structured like a
political toy rather than as a state bank, it will fail. The mistakes made at the federal level that
caused systemic failure must be eliminated from the state system. They include:
banking has played a huge role in creating too much currency from thin air;
that, in turn, results in the inflation that has debased our currency. The only
logical outcome to fractional-reserve banking is inflation.
Inflation is not the
result of an increase in the cost of good as much as it reflects a decrease in
the value of the currency.
I recommend a return to the lending policies in place during the 1970s
and 1980s. In the good old days, bank
growth was dependent on bringing new deposits into the bank. A bank could lend a percentage of its deposit
base. That percentage was sometimes
determined by bank regulators… usually up to 70 percent of the deposit base,
depending upon overall bank loan quality.
Banks make money on loans (loan interest) and lose money on deposits
(they pay interest to depositors).
Forcing bank growth to occur on the basis of deposit growth is good… it
means there is business development and new jobs in the community. If those things aren’t there, bank growth
through new deposits is not possible because new deposit accounts don’t appear
when jobs aren’t being created.
Fractional-reserve banking makes bank growth dependent upon the
extension of credit. If a bank makes a
million dollar loan, the Federal Reserve System makes it possible for the bank
to lend $900,000; ten percent of the million dollar loan goes into the Federal
Reserve System. Thus, the name
“fractional-reserve” banking. In other words, because the bank made a
million dollar loan, $900,000 of new currency has been created by the Federal
Reserve fractional-reserve policies.
Creating money out of thin air results in reduced currency value and
that, in turn, causes prices to rise… purchasing products with a currency
that’s losing value requires more of the failing currency to purchase it.
The system of fractional-reserve banking must be kept out of the state bank
system. It is a major reason for the
failure of the federal system and should not be brought to the state level. It will, in the long run, cause them to fail,
A state bank
administers the granting of state bank charters on the basis of the
requirements established by the Advisory Boards created by the state legislature.
A state bank is not,
as many people think when they hear the words “state bank,” equivalent to “state-chartered
banks” (which have been in existence for many years in most states but which
are tied to the federal system of banking).
A state owned bank
operates its own system of banking. It
grants member charters to independent banks (much like the Comptroller of the
Currency grants national banking charters to national banks). Though a state bank must comply with federal
banking laws, the state bank, not the Federal Reserve System, establishes
monetary policy for the financial institutions it charters. A state bank may perform all functions
currently performed for member banks of the Federal Reserve (such as check
clearing) and the Federal Deposit Insurance Corporation (such as insuring
customer deposits). The Bank of North
Dakota does both things for the state bank but its member banks must currently
clear checks through the Federal Reserve Banks and deposits must be insured by
the Federal Deposit Insurance Corporation (FDIC). Should the federal system fail, both check
clearing and deposit insurance could be included in the state system.
A state bank can
(and does, in North Dakota)
function as a correspondent bank for its member banks. It can write mortgages… and, in the current
real estate market, a state bank can help establish a floor under the ongoing, downward
spiral of real estate values. There have
been no bank foreclosures in North
Dakota for the past ten years. I recommend that state banks be prevented
from selling real estate mortgages to Freddie Mac and Fannie Mae both of which
sell mortgages to Wall Street banks where they are still, even after all of the
trouble, included in mortgage-backed derivatives (which I term “worthless
pieces of paper”).
WHAT A STATE BANK IS NOT:
A state bank is NOT
the owner of state-chartered banks. If
it were, such a system of state-owned banks could be accurately called a
“socialist banking system.”
Properly structured state
banks are not operated by politicians.
Rather, with a well-written legislative Act, the state requires the bank
to be run by professional bankers under a well-controlled environment of
positive regulation. Since state bank
employees are public servants, and since they are not directly involved in
making loans to the public – that is done by the privately-owned independent
banks serving the public – no bonuses, commissions or fees for loan generation are
paid to state bank employees – or, to executive management of the bank.
properly structured, do not compete with community banks. Rather, they support them. A state bank uses state funds (now kept in
the state rather than being sent out-of-state to a “too big to fail” bank) to
provide credit for local growth-based projects.
Currently, funds from state taxpayers leave the state and are leveraged
for international investments. This
creates no jobs for state residents.
Neither does a
properly structured state bank compete for consumer or commercial
deposits. The independently-owned banks
chartered by the state handle those items – as they do now. In North
Dakota, less than 2 percent of BND deposits come from
consumers. Community banks have
available to them municipal government deposits and can use the funds to create
jobs locally because the BND provides letters of credit guaranteeing such
loans. As a properly-stated state bank
Act reads: “All state revenues must be
deposited in the state bank.”
The Bank of North
Dakota is a member of the Federal Reserve System. It is a member because it chooses to use the
convenience of Federal Reserve services available to it… not because it has no
other alternative (like the other 49 states).
A state bank Act insures state bank deposits – the tax and fee dollars
of the state’s taxpayers.
The Bank of North
Dakota is run in a very fiscally conservative manner… it is not subject to
outside interference by politicians with a special project they want to
fund. Credit policies chartered by state
banks must be approved by a state bank advisory board. Bank of North Dakota is not involved in
speculative loans or derivatives and other risky ventures… nor should any state
State funds and tax
monies are kept safe by a well-structured state bank. Such banks should be self-funded. Bank of North Dakota manages VA, FHA, and
other federally-guaranteed loans that would otherwise go to large, out-of-state
communities partner with a state bank, it allows independent banks to fund
local projects which sustain economic development within the community. The “too big to fail” banks have no interest
in local communities. Studies show that
from 30 to 50 percent of public project costs are composed of loan interest
paid. Thus, the reduced cost of
borrowing from a state bank can help fund infrastructure projects.
article from the Honolulu
newspaper appeared on June 27, 2011. It
was a story about how the Hawaiian Bankers Association (the state association)
opposes legislation being considered by that state’s legislature to implement a
state bank. The new banking system does
bring down certain power structures – like the ties that exist between state
banking associations and the American Bankers Association – and legislators
need to be prepared for such resistance.
In North Dakota,
their Bankers Association endorses the Bank of North Dakota.
It should be noted
that North Dakota
has the most local banks per capita and enjoys the lowest default rate on loans
of any state in the nation. Of the 93
banks doing business in North Dakota,
87 are state-chartered banks who have opted to become part of the new system – and
who have prospered while other banks around the nation suffer lost profits of
substance. The other six banks are
That is the ball on
which everyone needs to stay focused:
The win-win situation that results from implementing a state bank –
which is well worth the headaches of getting the job done (and done right).