Part IV — What Comes Next · Lesson 64 · What Comes Next

Public banking & sovereign money

Bank of North Dakota, postal banking, the Chicago Plan, and the lawful reform package

Three monetary regimes are possible. Commercial-bank-credit creates ~97% of US money today by issuing loans. Public-bank-credit adds a state- or municipally-owned bank that captures the seigniorage for the public treasury rather than for private shareholders. Sovereign-money — the Chicago Plan revisited — gives the state alone the power to create money, ending fractional-reserve banking entirely. Each regime has a living case, each has a coherent reform proposal, and each makes a different trade-off between decentralization and public capture of monetary rents.

Three monetary regimes · who creates the money

The choice between commercial-bank-credit, public-bank-credit, and sovereign-money is the deepest monetary design choice a country can make. Click each to see who creates money, who captures the seigniorage, and what the living examples look like.

Public banking · BND model

A state- or municipally-owned bank operates alongside commercial banks. Holds state/local deposits; partners with (not against) community banks; returns profits to the public treasury.

Systemic risk
60/100
LMI credit access
70/100
Monetary precision
50/100
Public return on seigniorage
70/100

Who creates the money: Commercial banks still create most money. Public banks add a parallel wholesale-credit channel that recycles state deposits into state-priority lending instead of being held at out-of-state custodians.

Who captures the seigniorage: Public treasury captures the spread on state deposits and on public-bank lending. Bank of North Dakota has paid $1B+ to the state over the last decade — money that elsewhere accrues to private bank shareholders.

Living case: Bank of North Dakota (1919–present, $10B+ in assets, profitable every year of its 106-year existence). German Sparkassen and Landesbanken (~30% of German banking by assets). The Caisses des Dépôts in France. Japan Post Bank (¥230T in deposits).

Reform proposal: State-level: charter a public bank to hold state revenue and capitalize state-priority lending. California AB 857 (2019), New Mexico HB 236 (2023), Washington SB 5188 (2023), NY S1762 (2023), MA, OR active. Federal: postal banking reauthorization (which existed 1911–1967 and served ~4M depositors at peak).

Same shock · three responses

A demand shock arrives (think 2008, COVID, or a regional industrial collapse). Drag the magnitude. Watch credit availability, inflation pressure, and public-treasury capture diverge across the three regimes.

Recession · 50/100

Commercial bank credit

Credit availability after shock
70% of baseline
Inflation pressure added
+1.00 pp
Public capture of new money
5%

BND model

Credit availability after shock
85% of baseline
Inflation pressure added
+1.25 pp
Public capture of new money
40%

Chicago Plan / Vollgeld

Credit availability after shock
95% of baseline
Inflation pressure added
+2.00 pp
Public capture of new money
85%

Reading the chart

Status quo contracts credit hardest in a shock — commercial banks pull back lending precisely when borrowers need it most (procyclicality). This is the structural defect that 2008 exposed.

Public banking dampens the contraction because the state has different incentives (counter-cyclical mandate). BND was the only US state bank to expand lending during 2008–2010, while commercial credit contracted ~10%.

Sovereign money maintains credit availability best — but at the price of vastly expanded central-bank policy precision (a feature for technocrats, a hazard for those who distrust central authority). The honest trade-off is concentration of monetary authority for the price of eliminating private money-creation rents. Reasonable people land on different sides of this.

Where the seigniorage goes

Money creation is a rent. Right now, ~$700B per year of net interest margin accrues to private bank shareholders. Each regime change reallocates that rent.

Status quo · private capture
~$700B/yr
Bank NIM × $24T US bank assets, accruing to shareholders
Public-bank model · public capture
~$160M/yr
BND FY2023 dividend to ND general fund — scaled to 50 states ≈ $30B/yr
Sovereign-money one-time
~$2T+
IMF Benes-Kumhof 2012 estimate of one-time fiscal capacity from a US Chicago Plan transition

The honest framing

None of these regimes is free of trade-offs. Sovereign money concentrates monetary authority enormously — a real concern, especially in any country whose institutional independence is fragile. Public banking is incrementalist and depends on continuing state political will (BND has survived because both ND's political parties have historically defended it). Commercial-bank credit is what we have, with all its periodic crises and its persistent extraction of money-creation rents from the public to private shareholders. The choice is which set of trade-offs you prefer — and Lesson 65 shows what historically happened the last several times the question was actually put.

The Bank of North Dakota, in detail

The most underrated institution in American finance is a public bank in Bismarck, North Dakota. Chartered in 1919 by the Nonpartisan League to break the Twin Cities banking grip on North Dakota agriculture, BND has operated continuously for 106 years, profitably every year, returning more than $1 billion to the state general fund over the last decade. It does not compete with North Dakota’s ~70 community banks — it partners with them through participation loans, holding the wholesale side while community banks hold the retail relationship. The arrangement is why North Dakota has the most stable community-bank ecosystem of any US state, the lowest mortgage delinquency rates, and the only state public bank in the union.

BND is the answer to every objection that public banking is inherently incompetent, captured, or politically unstable. It has survived 106 years across populist, progressive, and conservative state administrations, all of which have defended it precisely because the dividend it returns to the state is visible, audited, and electorally legible. The replication template — state mandatory deposit base, wholesale-not-retail operating model, partnership with community banks, transparent annual public dividend — is exactly what California, New Mexico, New York, Washington, Oregon, Massachusetts, and Illinois are working through legislatively right now.

Sovereign money, in honest detail

The Chicago Plan was the 1933 proposal of Henry Simons, Frank Knight, Irving Fisher, Paul Douglas, and the University of Chicago economics department to require 100% reserves on demand deposits — ending the commercial-bank money-creation privilege and concentrating money issuance with the state. It was unanimously endorsed by the leading US economists of the time, including (eventually) Milton Friedman. It did not pass. It was revived by the IMF in 2012 (Benes & Kumhof, “The Chicago Plan Revisited”), tested by the Swiss Vollgeld Initiative in 2018 (failed 75–25 at the referendum but with the entire establishment opposed), and exists in current US legislative form in the NEED Act (Kucinich, HR 2990, 2011).

The honest sovereign-money trade-off is that it eliminates the private money-creation rent (~$700B/yr accruing to commercial-bank shareholders) and dramatically reduces banking-system instability, at the price of concentrating money-creation authority entirely with the state. People who trust the state more than commercial banks read this as a deep gain; people who trust commercial banks more than the state read it as a deep loss. Either reading is defensible; the empirical question is which set of failures (commercial-bank crises and Cantillon effects, vs. centralized monetary mismanagement) does more damage. Reasonable observers land on different sides. Both Chicago-Plan revival and public-banking expansion are inside the lawful reform menu — the menu Lesson 66 turns into a draftable bill.