Why Public Funds Should Be Deposited in Publicly-Owned Banks

A thriving economy requires that credit flow freely for productive use. But today, a handful of giant banks diverts that flow into an exponentially-growing self-feeding pool of digital profits for themselves. Rather than allowing the free exchange of labor and materials for production, our system of banking and credit has acted as a tourniquet on production and a drain on resources.

Yet we cannot do without the functions banks perform; and one of these is the creation of “money” as dollar-denominated bank credit when they make loans. This advance of credit has taken the form of “fractional reserve” lending, which has been heavily criticized. But historically, it is this sort of credit created on the books of banks that has allowed the wheels of industry to turn. Employers need credit at each stage of production before they have finished products that can be sold on the market, and banks need to be able to create credit as needed to respond to this demand. Without the advance of credit, there will be no products or services to sell; and without products to sell, workers and suppliers cannot get paid.

Bank-created deposits are not actually “unbacked fiat” simply issued by banks. They can be created only when there is a borrower. In effect, the bank has monetized the borrower’s promise to repay, turning his promise to pay tomorrow into money that can be spent today — spent on the workers and materials necessary to create the products and services that will be sold to repay the loans. As Benjamin Franklin wrote, “many that understand Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money; to trade with, when they have it at a moderate interest.”

If banks have an unfair edge in this game, it is because they have managed to get private control of the credit spigots. They have often used this control not to serve business, industry, and society’s needs but for their private advantage. They can turn credit on and off at will, direct it at very low interest to their cronies, or use it for their own speculative ventures; and they collect the interest as middlemen. This is not just a modest service fee covering costs. Interest has been calculated to compose a third of everything we buy.

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