The Royal Bank of Scotland (RBS) and the
Bank of Scotland were pillars of Scotland's
economy and culture for over three centuries. So
when the RBS was nationalized by the London-based
UK government following the 2008 banking crisis
and the Bank of Scotland was acquired by the
London-based Lloyds Bank it came as a shock to the
Scots. They no longer owned their oldest and most
venerable banks.
Another surprise turn of
events was the triumph of the Scottish National
Party (SNP) in the 2011 Scottish parliamentary
election. Scotland is still part of the United
Kingdom, but it has had its own
parliament since 1999,
similar to US states. The SNP has rallied around
the call for independence from the UK since its
founding in 1934, but it was a minority party
until the 2011 victory, which gave it an overall
majority in the Scottish Parliament.
Scottish independence is now on the table.
A bill has been introduced to the Scottish
Parliament with the intention of holding a
referendum on the issue in 2014.
Arguments
in favor of independence include that it will
allow the Scottish people to make decisions for
Scotland themselves, on such contentious issues as
having nuclear weapons in their seas (and
submarine ports) and being part of the North
Atlantic Treaty Organization. They can also
directly access the profits from the North Sea oil
off Scotland's coast.
Arguments against
independence include that Scotland's levels of
public spending (which are higher than in the rest
of the UK) would be difficult to sustain without
raising taxes. [1] North Sea oil revenues will
eventually decline.
One way budgetary
problems might be relieved would be for Scotland
to have its own publicly owned bank, one that
served the interests of the Scottish people. True
economic sovereignty means having control over the
national currency, credit and debt.
The
public bank option It was in that context
that I was asked to give a presentation on public
banking at RSA Scotland (the Royal Society of
Arts) in Edinburgh on November 22. Among other
attendees were a special adviser and a civil
servant from the Scottish government. The
presentation was followed by one by public sector
consultant Ralph Leishman, Director 4-consulting,
who made the public bank option concrete with
specific proposals fitting the Scottish context.
He suggested that the Scottish Investment Bank
(SIB) be licensed as a depository bank, on the
model of the state-owned Bank of North Dakota.
Lively debate followed.
The SIB is a
division of Scottish Enterprise (SE), a government
economic development body. SE encourages economic
development, enterprise, innovation and investment
in business, which is achieved by the SIB through
the Scottish Loan Fund. As noted in a September
2011 government report titled "Government Economic
Strategy":
[S]ecuring affordable finance
remains a considerable challenge... Evidence
shows that while many large companies have
significant cash holdings or can access capital
markets directly, for most small and
medium-sized companies bank lending remains the
key source of finance. Unblocking this is key to
helping the recovery gain traction.
The limitation of a public loan fund
is that the money can be lent only to one borrower
at a time. Invested as capital in a bank, on the
other hand, public funds can be leveraged into
nearly 10 times that sum in loans. Liquidity to
cover the loans is provided by deposits, which
remain in the bank available to the depositors.
Any shortage in liquidity can be covered by
borrowing at low interest from other banks or the
money market.
As observed by Kurt Von
Mettenheim, et al, in a 2008 report titled
"Government Banking: New Perspectives on
Sustainable Development and Social Inclusion from
Europe and South America" (at page 196):
[I]n terms of public policy,
government banks can do more for less: Almost
ten times more if one compares cash used as
capital reserves by banks to other policies that
require budgetary outflows. [2]
Leishman stated that the SIB now has
investment funds of 23.2 million pounds sterling
(US$37 million) from the Scottish government.
Rounding this to 25 million pounds, a public
depository bank could have sufficient capital to
back 250 million pounds in loans. For deposits to
cover the loans, the Scottish government has 125
million pounds on deposit with private banks,
currently earning little or no interest. Adding
just 14% of the General Fund cash and cash
equivalent reserves held by Scotland's local
governments would provide another 125 million
pounds, reaching the needed 250 million pounds
with six times that sum in local government
revenues to spare.
The model of the
Bank of North Dakota My assignment was to
show what the government could do with its own
bank, following the model of the Bank of North
Dakota (BND). On the Saturday following the RSA
event, the Scotsman published an article by Alf
Young that summarized the issues and possibilities
so well that I'm taking the liberty of abstracting
from it here. [3]
North Dakota is
currently the only US state to own its own
depository bank. The BND was founded in 1919 by
Norwegian and other immigrants, determined,
through their Non-Partisan League, to stop
rapacious Wall Street money men foreclosing on
their farms.
All state revenues must be
deposited with the BND by law. The bank pays no
bonuses, fees or commissions; does no advertising;
and maintains no branches beyond the main office
in Bismarck. The bank offers cheap credit lines to
state and local government agencies. There are
low-interest loans for designated project finance.
The BND underwrites municipal bonds, funds
disaster relief and supports student loans. It
partners with local commercial banks to increase
lending across the state and pays competitive
interest rates on state deposits. For the past ten
years, it has been paying a dividend to the state,
with a quite small population of about 680,000, of
some $30 million (18.7 million founds) a year.
Young writes:
Intriguingly, North Dakota has not
suffered the way much of the rest of the US -
indeed much of the western industrialised world
- has, from the banking crash and credit crunch
of 2008; the subsequent economic slump; and the
sovereign debt crisis that has afflicted so
many. With an economy based on farming and oil,
it has one of the lowest unemployment rates in
the US, a rising population and a state budget
surplus that is expected to hit $1.6bn by next
July. By then North Dakota's legacy fund is
forecast to have swollen to around $1.2bn.
With that kind of resilience, it's
little wonder that twenty American states, some
of them close to bankruptcy, are at various
stages of legislating to form their own
state-owned banks on the North Dakota model.
There's a long-standing tradition of such
institutions elsewhere too. Australia had a
publicly-owned bank offering credit for
infrastructure as early as 1912. New Zealand had
one operating in the housing field in the 1930s.
Up until 1974, the federal government in Canada
borrowed from the Bank of Canada, effectively
interest-free.
... From our western
perspective, we tend to forget that, globally,
around 40 per cent of banks are already publicly
owned, many of them concentrated in the BRIC
economies, Brazil, Russia, India and
China.
Banking is not just a market
good or service. It is a vital part of societal
infrastructure, which properly belongs in the
public sector. By taking banking back, local
governments could regain control of that very
large slice (up to 40%) of every public budget
that currently goes to interest charged to finance
investment programs through the private sector.
Recent academic studies by von Mettenheim
et al and Andrianova et al [4] show that countries
with high degrees of government ownership of
banking have grown much faster in the last decade
than countries where banking is historically
concentrated in the private sector. Government
banks are also LESS corrupt and, surprisingly,
have been MORE profitable in recent years than
private banks.
Young writes:
Given the massive price we have all
paid for our debt-fuelled crash, surely there is
scope for a more fundamental re-think about what
we really want from our banks and what
structures of ownership are best suited to
deliver on those aspirations?...
As we
left Thursday's seminar, I asked another member
of the audience, someone with more than thirty
years' experience as a corporate financier,
whether the concept of a publicly-owned bank has
any chance of getting off the ground here. "I've
no doubt it will happen," came the surprise
response. "When I look at the way our collective
addiction to debt has ballooned in my lifetime,
I'd even say it's inevitable".
The
Scots are full of surprises, and independence is
in their blood. Recall the heroic battles of
William Wallace and Robert the Bruce memorialized
by Hollywood in the Academy Award winning movie
Braveheart. Perhaps the Scots will blaze a
trail for economic sovereignty in the European
Union, just as North Dakotans did in the US.
A publicly owned bank could help Scotland
take control of its own economic destiny, by
avoiding unnecessary debt to a private banking
system that has become a burden to the economy
rather than a pillar in its support.
Ellen Brown is an attorney
and president of the Public Banking Institute, PublicBankingInstitute.org.
In Web of Debt, her latest of 11 books, she
shows how a private cartel has usurped the power
to create money from the people themselves, and
how we the people can get it back. Her websites
are WebofDebt.com and
EllenBrown.com.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
