Or Canada’s, at least, but Victoria Grant’s argument supposedly applies to the rest of the world. It turns out she’s mainly giving talking points for the Public Banking Institute, an organization that promotes state-owned banking where profits are recycled back into the community rather than taken out of state to enrich a few private owners, in her words.
According to the PBA website, North Dakota is the only state with a public bank, and the only state with a major budget surplus. Also, it claims that since 2010, many other states have introduced bills to implement public banking.
Miss Grant’s talk sounds like conspiracy theory at times (and she quotes the bible :(), but I’d like to find out more about a point she makes about the Bank of Canada and the change to the way it was used in the 1970’s that led to a never-ending cycle of interest payments on debt. Is there anything to it? There’s nothing on the BoC’s Wikipedia page about it.
Also, any ideas or comments about public banking in general? Something that sounds so easy, as it does in her speech, sounds too good to be true, but I don’t know nearly enough about it.
1:22 “The banks and the government have colluded to financially enslave the people of Canada.” Wrong.
And then at 2:50, she starts explaining the slavery; “First the government of Canada borrows money from private banks…” Whoa, wait a minute. That’s just not how it works; the government of Canada doesn’t pull up to Scotiabank and get a line of credit. They borrow money with bonds, which are insanely low interest instruments. It’s a ridiculous misrepresentation to say the government is just “borrowing from the banks.”
(3:20: She doesn’t understand fractional reserve banking, as is the case with everyone floating these ideas. This ongoing myth that money lent out is created out of thin air drives me crazy, but it seems amazingly popular.)
Anyway… ummm, why borrow money at all? That’s a CHOICE. Look, we are, what, five years removed from when the government of Canada was running a surplus every year, ten years in a row. The reason we’re running deficits is 99% a matter of fiscal policy and that fiscal policy is set by political factors, not “the banks.” In effect, we are voting ourselves into debt. There’s no reason the govenrment has to borrow money from anyone; they have chosen to borrow it to finance a political agenda.
The idea that we can somehow save ourselves from our own fiscal stupidity by somehow changing the way money works is a very tempting one. It’s easy; change the rules of the game and suddenly the Mastercard bill vanishes. I can see why it’s so easy to fall into the trap of thinking that there is some shortcut to avoiding the very cruel fact that we’ve run up debt, especially if you can blame it on Bad Guys <TM> and come up with a presto-changeo solution.
Furthermore, this is, frankly, an old idea that comes up every few years; Miss Grant is just parroting something she’s been told. It’s trivially easy to find the same argument coming up every now and then. Here it is from three years ago in my home town newspaper:
Some people disagree. The bank is also significantly out-performing privately owned banks.
The destruction of the (second) Bank of the United States was a dark spot on our history for a very long time. A lot of people think we would be well-served bringing it back.
Some people with agendas maybe. That article is pretty absurd. I don’t think anyone who is even vaguely familiar with the actual situation on the ground in North Dakota would agree with any of it.
The state-owned bank may or may not be great, but attributing North Dakota’s current extremely sunny economy prospects to it is a stretch of monumental proportions.
It also doesn’t really address such preposterous lies as “commercial banks just create money out of thin air when they give you a mortgage.” Stuff like this is dangerous because they’re getting millions of people to believe them and become ignorant.
Having a state-owned commercial bank just might be a good thing, who knows. Or maybe it won’t. Canada (that being the country of discussion in the OP’s link) also had a state-run airline, a state-run gas company, and other state-run “Crown” corporations that proved to be just as inept, avaricious, and corrupt as their privately run counterparts, to the surprise of no economist. We already have credit unions, which are effectively people-owned-and-run banks; membership is voluntary, unlike a state-run bank, so in a sense they’re actually better, and yet somehow they haven’t singlehandedly created Eden.
Maybe I’m one of those ignorant people, but I thought that the whole point of fractional reserve banking was to “create” money. And although it may be hyperbole to say that the money comes from “thin air” it is still a fictional increase in money based upon the predictable habits of lenders and borrowers. What am I missing?
The fact that the bank does not create money out of thin air. It’s not “hyperbole,” it’s false. What the young lady literally says, and what a lot of people believe, is that the bank does not lend you money they have acquired (through deposits, or whatever) but that they actually create the money into existence from nothing, by just “pressing a button.” That is wrong. The bank lends you money *they have actually come into possession of. * If Scotiabank gives me a $250,000 loan, they actually transfer $250,000 of honest-to-God money from their possession into my possession.
Fractional reserve banking does increase the money supply, by increasing the use of money - the velocity of money. They don’t just create money at will, though. It’s dependent upon people depositing and borrowing money. Otherwise, why would banks bother with customers? They could post profits by simply lending themselves money by pressing buttons.
The BANK OF CANADA (or the U.S. Federal Reserve Bank, or other equivalent institutions) absolutely can, and does, create money out of thin air. Commercial banks do not.
I think we are saying the same thing, but to use Cecil’s example: You deposit $100 in the bank. The bank gives me a loan for $90. You have $100 available to spend in the local economy and I have $90. Yes, the $90 came out of “honest to God” money in their possession, but there’s $190 in the local economy when you only deposited $100.
I understand that there are obligations all around, but I don’t think that it is completely false (it certainly is misleading) to say that the extra $90 came out of “thin air.”
The profits that a credit union makes are shared by its members and don’t directly help the state’s finances, like a publicly-owned bank’s would. One of the PBI’s main selling points is that the profits from a state-owned bank help keep taxes and its budget deficit down.
For me, one of the attractions of instituting public banking is to punish the big private banks, which governments seem powerless to do. As they are now, they apparently can’t be trusted with handling the nation’s and world’s finances, so it might be in everyone’s interest to take that responsibility away from them. If that’s possible.
Whoa, no, I don’t have that $100 to spend. I deposited that money.
I could spend it, but I’d have to withdraw it first. (Not necessarily physically; I could use my debit card.) The bank would no longer have it. A bank relies on the fact that people DON’T have their deposits to spend, that in fact they leave them in there. If they don’t, the bank fails.
Of course I understand the idea that the bank creates more money supply; we’re in agreement about that. But, again, that’s not what Miss Grant is saying, and her line is one a great many people really, truly believe.
I agree with everything you said but I felt I should add to this: it’s not necessarily a bad thing for governments to borrow money (euro crisis notwithstanding). In fact, few economists would recommend that the government issues no bonds at all.
I think most people have a household analogy in mind, where the goal should be to balance the books. But a better analogy is to a business, where businesses that borrow may outperform or outgrow businesses that don’t.
Or you could see it as the future paying back the past.
Say we have a massive road-building program, and we only spend money we have. Then one set of working population has entirely paid for that infrastructure, and potentially had to sacrifice other public services.
Meanwhile, the next generation of people entering the workforce get the benefit of that infrastructure while contributing no tax dollars to it.
Borrowing spreads the cost of such endeavours.
By this reasoning, cars and refrigerators also appear out of thin air. A person takes out a loan to buy a car; this car increases his earning capacity. He can then use this capacity to pay off the loan (and have a car in the meantime). The money didn’t appear from thin air, the guy drove to go get it. If anything, the guy created money from thin air, not the bank.