2013, Public Investment Banks: Ellen Brown

Ellen Brown, president of the Public Banking Institute, (UC, Berkeley & UC, Los Angeles School of Law) explores successful public banking historical and global models in The Public Bank Solution, her latest book.

She traces the history and evolution of the current private banking system, showing how it usurped the power to create money from the people themselves, and how the people can take that power back through public banks operating in the public interest. Briefly, Ellen points out that public banks can:

  • make affordable loans to small businesses, farmers, government entities, and students,
  • save taxpayers up to 50% on infrastructure projects, like bridges and trains and schools,
  • eliminate billions in bank feesand money management fees for cities and states,
  • support a vibrant community banking sector and
  • enable sustainable prosperity.

Ellen Brown thinks that as the United States has no viable funding proposals it’s time to look more closely at China’s system.

Funding Infrastructure: the People’s Bank in China

The Chinese government owns the majority of its banks. About 40% of the funding for its giant railway project comes from bonds issued by the Ministry of Railway, 10-20% comes from provincial and local governments, and the remaining 40-50% is provided by loans from federally-owned banks and financial institutions. As a Bank of England Quarterly Bulletin points out, like private banks, state-owned banks simply create money as credit on their books.

They return their profits to the government, making the loans interest-free; and the loans can be rolled over indefinitely. In effect, the Chinese government decides what work it wants done, draws on its own national credit card, pays Chinese workers to do it, and repays the loans with the proceeds.

“One Belt, One Road,” China’s $1 trillion infrastructure initiative is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. The money largely comes from loans from China’s state-owned banks. The country’s five largest banks are majority-owned by the central government, and they lend principally to large, state-owned enterprises. Ellen continues:

“Where do the banks get the money? Basically, they print it. Not directly. Not obviously. But as the Bank of England has acknowledged, banks do not merely recycle existing deposits but actually create the money they lend by writing it into their borrowers’ deposit accounts. Incoming deposits are needed to balance the books, but at some point these deposits originated in the deposit accounts of other banks; and since the Chinese government owns most of the country’s banks, it can aim this funding fire hose at its most pressing national needs.

“China’s central bank, the People’s Bank of China, issues money for infrastructure in an even more direct way. It has turned to an innovative form of quantitative easing in which liquidity is directed not at propping up the biggest banks but at “surgical strikes” into the most productive sectors of the economy.

In a 2014 Wall Street Journal article, Citigroup chief economist Willem Buiter calls this “qualitative easing” to distinguish it from the quantitative easing engaged in by Western central banks. 

“In China’s context, such so-called qualitative easing happens when the People’s Bank of China adds riskier assets to its balance sheet — by relending to the agriculture sector and small businesses and offering cheap loans for low-return infrastructure projects — while maintaining a normal pace of balance-sheet expansion [loan creation] . . .

“Critics say China has a dangerously high debt-to-GDP ratio and a “bad debt” problem, meaning its banks have too many “non-performing” loans. But according to financial research strategist Chen Zhao in a Harvard review called China: A Bullish Case,” these factors are being misinterpreted and need not be cause for alarm . . .

“[M]ost Chinese businesses are funded through loans rather than through the stock market, as in the US; and China’s banks are able to engage in massive lending because the Chinese chiefly save their money in banks rather than investing it in the stock market, providing the deposit base to back this extensive lending. As for China’s public “debt,” most of it is money created on bank balance sheets for economic stimulus . . .

“The effect is very similar to what European central bankers are calling “helicopter money” for infrastructure  — central bank-generated money that does not need to be repaid. If the Chinese loans get repaid, great; but if they don’t, it’s not considered a problem. Like helicopter money, the non-performing loans merely leave extra money circulating in the marketplace, creating the extra “demand” needed to fill the gap between GDP and consumer purchasing power, something that is particularly necessary in an economy that is contracting due to shrinking global markets following the 2008-09 crisis . . .

“As noted by the Citigroup economists, Chinese-style ‘qualitative easing’ is actually less inflationary than the bank-focused ‘quantitative easing’ engaged in by Western central banks. And Western-style QE has barely succeeded in reaching the Fed’s 2 percent inflation target. For 2017, the Chinese inflation rate was a modest 1.8 percent”.

In America, cash-strapped state and local governments cannot issue money directly; but they can establish their own banks. Fifty percent of the cost of infrastructure is financing, so having their own banks would allow them to cut the cost of infrastructure nearly in half. The savings on infrastructure projects with an income stream could then be used to fund those critically necessary projects that lack an income stream.

Ellen cites the century-old Bank of North Dakota (BND), currently the nation’s only publicly-owned depository bank. The BND makes 2 percent loans to local communities for infrastructure, far below the 12 percent average sought by private equity firms. Yet as noted in a November 2014 Wall Street Journal article, the BND is more profitable than Goldman Sachs and JPMorgan Chase. Before submitting to exploitation by public-private partnerships, state and local governments would do well to give the BND model further study.


In England councils have access to cheap funding from the Public Works Loan Board, an arm of the Treasury. Its interest rates are linked to those in the gilt-edged market which have been at exceptionally low levels since the financial crisis of 2007-08. At the end of 2016, according to estate agents Colliers International, local councils were able to access a 45-year loan at a fixed rate of 2.45%. Instead of spending on public works however, according to the FT it is now generally used for buying commercial property or embarking on residential property development, either for sale or for the private rental market. Money borrowed at 2.5% or so is typically going into property yielding 6-8% or more.

Jeremy Corbyn proposes to have the Bank of England creating money and purchasing bonds for a state-owned “National Investment Bank” which would, under government direction, invest in housing, roads, green energy and public transport.

In February Scotland announced plans for a £2bn national investment bank to support smaller businesses and strategic projects. Nicola Sturgeon, first minister, welcomed this proposal for a government-owned bank to be in operation by 2020. This investment bank would fill a “gap in the market” for loans of £1m to £10m to small and medium-sized enterprises with high growth potential. It would also help to fund, possibly through direct investment, projects that aim to promote innovation to tackle “grand challenges” such as carbon emission reduction or artificial intelligence

As Ellen comments, the main roadblock to those solutions seems to be political. “They would kill the privatization cash cow of the vested interests calling the shots behind the scenes”.




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