Thursday, August 8, 2013

The Bank of Vermont

Proposal for a Publicly-owned State Bank in Vermont

Adrian Kuzminski


Today Vermonters have no control over access to capital. Loans are available to them almost exclusively through an unfair and exploitative banking system.

Money can be borrowed for the most part only from private banks which enjoy unearned profits through their effective monopoly over lending money to Vermonters at usurious rates of interest.

As a result, most Vermonters, like most people in other states, find themselves in perpetual debt peonage. If they are able to obtain capital for personal or private investment from the banking system -- getting an education, buying a home, starting a business, etc. -- they end up owing far more than they borrow.

If Vermonters are ever to take charge of their destiny, they must gain control over and transform the financial system which serves them.

This brief essay proposes the establishment of a public bank for Vermont which would make available credit to Vermonters at a very low rate of interest, ensuring that the capital necessary for productive and sustainable living be available to all in a fair and just manner, with the benefits going to borrowers, not to creditors.

What follows is a proposal for a state-chartered, non-profit public bank in Vermont -- to be called the Bank of Vermont (BVM). Its purpose is to provide low-cost banking services to Vermont citizens, businesses, and governments.


The BVM would be chartered by an act of the state of Vermont as an independent public bank. It would be the only public bank in the state, and, though charged with promoting public benefit, it would be entirely free of control by the state government.

The principal mission of the BVM would be to provide banking services, including non-usurious credit, to Vermont citizens, to corporations chartered in Vermont, and to state and local Vermont governments, as described below. The BVM would extend no services or credit to any other parties.

The BVM would be wholly owned and operated by an independent Board of Trustees chosen through statewide elections by Vermont voters. This Board would be responsible for all activities of the BVM. It would be, in effect, a fourth, separate, financial branch of state government. Its activities would be confined to the state of Vermont.

By law, the BVM would be the fiscal agent of the state. All state and local Vermont government revenues would be deposited in the bank, and all state and local government expenditures would be satisfied by payments drawn on those deposits.

In addition, citizens of Vermont and corporations chartered in Vermont would be free to choose the BVM as their fiscal agent; they would be allowed to deposit funds in the bank, to apply for loans, and to carry out other traditional banking activities through the bank.

The BVM would, upon its discretion, purchase state and local Vermont government bonds; it would also act, for a fee covering necessary expenses, as sole agent for the state of Vermont, or for any municipality or government entity in the state, offering their bonds to the public.

Any and all loans by the BVM to Vermont citizens, Vermont corporations, or Vermont government entities, would be made at the discretion of the bank upon proof of adequate collateral according to uniform standards of credit-worthiness. Any and all loans would be issued at a permanently fixed at a rate of no more than one percent interest per year.

All loans would be issued by local branches of the BVM, at least one to be established in every county. Some branches would naturally be more capitalized than others. A branch in Montpelier, for instance, if it were the depository of state funds, would be larger than most others, though some other branches in economic centers, such as Burlington, would also likely be larger than most.

At the discretion of the Trustees of the BVM, the various branches would coordinate their activities, including such short-term inter-bank lending as may be necessary to facilitate operations.

The BVM would create money, like other banks, through fractional reserve lending, keeping a certain percentage of deposits (to be determined by the Trustees) on hand at all times.

All deposits would be fully insured by the state of Vermont.


Public banking is a serious alternative to our current, increasingly dysfunctional and exploitative private banking system. In the system we have, money is created not by the government, as is widely believed, but by a private banking network which was granted the monopoly to do so in various stages between the Civil War and the creation of the Federal Reserve in 1913.

In this private system, credit is made available by private banks to governments, corporations, and individuals at exorbitant -- that is, usurious -- rates of interest. The Federal Reserve is a privately owned bankers' bank -- with a veneer of public accountability -- run by the large commercial banks for their interest, not the public interest. Banks lend to one another at very low rates, but they lend to everyone else at high rates.

The money lent out by the banking system has seldom been money on deposit with the banks. Mostly it has been created by the banks lending out more than they actually had on hand. Since most depositors do not demand their money at any given time, bankers were safely able to lend out far more than they had in deposits. This is called fractional reserve banking and it is how virtually all the money in circulation was created for centuries.

This system -- in which money is created "out of thin air" -- seems shocking at first blush, but it in fact reveals where money really comes from. Since money today is no longer based on gold or silver held on deposit, but is simply issued as debt for collateral, it is the collateral not the deposits which are in effect the reserves. In other words, the economy as a whole is what's backing the system.
Since the crisis of 2008 the banking system has been openly supported by so-called "quantitative easing" by the Federal Reserve, in which money is freely created to keep the system liquid. Fractional reserve banking no longer really exists, but the innovation it introduced -- the creation of money out of thin air -- has become universal. We call it fiat or token money.

The difficulty is not with the creation of money per se, which is essentially the creation of credit, but with the usurious interest rates which have been added on to it.

Since the creation of money as we know it is a function of a privatized banking system, which is allowed to charge virtually whatever interest rates the public will bear, creditors everywhere today are able to enjoy the benefit of an unearned surcharge on loans which they have done nothing -- beyond a bookkeeping entry -- to earn. As a result, a large portion of the wealth of the nation has been and continues to be steadily transferred from debtors to creditors, that is, from the ninety-nine percent to the one percent.

This is the principal vehicle by which wealth is extracted from the many (debtors) and concentrated in the hands of the few (creditors). Most people do not have adequate capital to satisfy their needs and ambitions, and must borrow at usurious rates for the things they desire. They must take out mortgages, car loans, education loans, credit card loans, and many other kinds of loans, mostly from the privatized financial system, in order to live reasonable lives.

The price of this today is debt peonage for most people. As long as economic growth could be taken for granted, borrowers could hope to translate their debts into increased productivity sufficient not only to pay back the principle on those loans, but the usurious interest as well. It was not a fair system, since debtors were obliged to pay high interest rates which left them poorer than they otherwise would have been, but that they could at least hope to come out ahead allowed them to tolerate the system.

Today the conditions of endless economic growth -- which go back to the beginnings of the industrial revolution -- no longer exist. Massive population growth over two centuries coupled with the depletion of non-renewable resources on a finite planet have brought us to the limits to growth, to a global eco-crisis.

To continue, under these circumstances, with our current financial system is to invite serious social conflict. Debtors will find it increasingly difficult to meet their obligations while creditors will find themselves imposing ever harsher condition on debtors as they try to ensure that their loans will be repaid. Look at the Eurozone today.

What is necessary above all is a new financial system which supplies needed credit to individuals, corporations, and governments without imposing on them usurious rates of interest. Without such rates, there would be little if any profit in the business of debt creation, and little incentive for private banking as we know it to continue.

Under these circumstances, it follows that banking, like any other natural monopoly, ought to be a public not a private institution. It is high time to end the privileged control given over to private interests to manage and unfairly profit from our money supply.

Nothing would be gained, however, if money creation by the state ended up as another version of concentrated power which perpetuated the same evils as our current privatized system, particularly the charging of usurious interest rates. Indeed, some advocates of public banking recommend appropriating the interest-setting function - as an offset to taxes -- in the name of the public good.

Yet it is naive to think that this power in the hands of the state would necessarily be used for public benefit. Allowing the power of the state to expropriate wealth from its citizens through imposing usurious interest rates is likely only to exchange one master for another.

This is particularly the case in a age of powerful, centralized, and largely corrupt and unaccountable governments, even on the state level. Even without usurious interest rates, the power of the state to issue credit through a public bank would likely be subject to an endless range of pressures, pleadings, lobbying, and favoritism from interest groups and government contractors.

The best course is to establish, as suggested here, a truly independent public bank, one not accountable to politicians but directly to the voters. The role of the state government would be to draft and pass the bank's charter, and then leave its functioning to independently elected trustees, with no further interference.

No political solution is perfect, but this one at least avoids some of the obvious pitfalls in reforming the money and banking system. The essential points to be included in any charter for a public bank are 1) that it be the fiscal agent of state and local governments, 2) that it charge no more than one percent interest on any loan, and 3) that it's trustees be wholly independent of state government, something possible only if they are elected directly by the people.

One might wonder why a rigid limit on interest rates should be set at one percent. This principal was developed by an early nineteenth century American populist, Edward Kellogg, on whom I have written elsewhere.

The fundamental idea is that one percent interest establishes a rate of repayment in which the interest equals the principle only after 72 years, roughly a human lifetime. This in effect puts a cap on interest payments such that no borrower will ever pay interest in excess of the principal originally borrowed.

This ensures that for any borrower -- and so for society as a whole -- the interest rate shall be commensurate with what is needed over time to replenish the resources consumed with the borrowed money, no more and no less.

Why should there be any interest at all? Without interest the money borrowed and spent is not replenished, and it is necessary that there be some rate of interest so that money is replenished to stabilize the system. At higher rates of interest, the borrower must not only replenish the money, but must actually put more money back into the system than the equivalent of what he or she borrowed to begin with.

This is easily demonstrated: At two percent interest the borrower must repay interest equal to the principle in 34 years, at three percent, in 24 years, at four percent, 18 years, and so on exponentially. At ten years it takes 7.2 years for the interest to equal the principle, at twenty percent, 3.6 years, etc.

This is an established accounting principle, called the Rule of 72. It is perhaps the best measure of the debt burden of interest rates. The operative point is that at any rate above one percent the debtor is subject to exponentially increasing degrees of unnecessary exploitation by whoever may be the creditor. Whether the creditor is a public or private entity is irrelevant.

Finally, this bank is proposed for Vermont because of Vermont's human-scale and strong democratic traditions. The US Constitution forbids the states from issuing their own currency, but it does not forbid them from setting up a pubic bank; nor does it prohibit a public bank from being structured as we have proposed.

As described here the BVM would be in a position to create credit for the citizens, corporations, and governments of Vermont using US currency. Because at present states are prohibited by the US Constitution from issuing their own currency, the BVM would have to rely on deposits of US currency to create a reserve upon which, through fractional reserve banking, it could issue a quantity of loans sufficient to meet demand. The availability of low-cost credit would be a powerful tool to establishing the economic self-sufficiency and independence of Vermont. It's a proposal worth taking seriously.

This essay was originally published 9 April 2013 in the Vermont Commons:

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