What are Banks &

How do Public Banks Compare with Private Banks?

An economist trained in university economic departments today will likely be told that “banks are deposit taking institutions that lend money”, that also charge a little interest for their troubles.

The reality however, is very different. On this page you can learn a great deal about banking, credit creation, deposits, loans, and more. You will also learn that “banks do not take deposits and banks do not lend money”, as an internationally renowned economist and professor, Richard A. Werner validated by conducting the first ever empirical study of what happens internally in a bank when they issue a loan.

For the Accountants among us, please click the Money Tree image below for a quick analysis of how banks create money illustrated with balance sheet Assets, Liabilities, and Equity. It’s a fascinating story! (It’s a little wonky, but completely comprehensible with a little patience, familiarity with Balance Sheet is recommended).

Or see this more animated illustration of how public banks work: https://youtu.be/lpho-eie-fw

How Banks Create Money —

A closer look at the Banks Balance Sheet (click image)

On the Importance Local Community Banks, Public Banks, and Public Oversight of Credit Markets

Illustrations of Private vs Public Banks

The PRIVATE Banking Model: At this very hour your governments — city, county, state — are depositing (legally loaning) your taxes to the “too big to fail” (TBTF) private banks. Here’s what happens:

Follow the money: 1. You earn an income; 2. You pay taxes to your governments; 3. Your governments ‘deposit’ your tax wealth into one or more privately owned monopoly banks on Wall Street; 4. As the new owner of our tax wealth the private bank can do with it as it pleases. and 5. the overwhelming evidence is that the big private banks prefer to lend to big private corporations, creating monopolies in every sector of the economy. The monopoly banks finance almost all the corporations responsible for the climate crisis, the debt crisis, and the growing poverty around the country and around the world.

A Revolutionary Change: the Reemergence of Local Public Banks.

The PUBLIC Banking Model: In sharp contrast to the private banking model, when your city, county, and state governments deposit (loan) your tax wealth to a local public bank owned by the taxpaying community, a dynamic economic engine is created that reinvests and multiplies your tax wealth exclusively for the city, county, or state that the bank is chartered to serve.

A local Public Bank owned by the City, County, or State will be chartered to invest exclusively in the local community it serves. It will not compete with Local Financial Institutions like community banks, credit unions, and CDFIs (Community Development Financial Institutions), but will instead collaborate with these local financial institutions (LFIs) in the issuance of loans to the regional community it serves, improving the performance of these Local Financial Institutions, and providing protection from the boom and bust cycles oft engendered by the TBTF bank (“toobigtofail”), the Wall Street / FED banks.

We still pay taxes to our city, county, and state, but now your government is required by law to deposit taxpayer wealth in the local Public Bank that serves the respective community. And since banks are the creators of the money supply, and public banks are constrained by the Regional Principle to only invest in the local community, the money you pay in taxes is kept in the community (not Wall St), and by the powers of credit creation new money is lent into the local economy, building small and medium sized businesses (SMEs), for infrastructure, for innovative technologies, for renewable energy, student loans, and much, much more. The wealth of the community increases, providing more jobs and better paying employment to the local community.

The Dramatic Decline in U.S. Banks

The US has lost 71% of its banks over the last four decades. by the USAFacts Team

Most commercial banks that have operated in the US over the past century are gone. Compared to an all-time high of 30,456 banks in 1921, total US banks fell to 4,135 in 2022, down 86%.

After the Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), the number of banks remained between 13,000 and 15,000 for 50 years. It wasn't until the 1980s when the number of banks started falling year-over-year.

Over the last four decades, the number of FDIC-insured commercial banks has fallen by more than 70%.

Here's some Richard Werner, Adair Turner, and others articles on Banking, Credit Creation, and the empirical evidence for a paradigm shift in economics.

Document links from ScienceDirect:

A lost century in economics: Three theories of banking and the conclusive evidence
https://www.sciencedirect.com/science/article/pii/S1057521915001477

 How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking
https://www.sciencedirect.com/science/article/pii/S1057521914001434

 [The following article is by Adair Turner, and investigates credit creation governed by "market forces" alone:]
Credit creation and social optimality [Market forces vs public policy guidance]
https://www.sciencedirect.com/science/article/abs/pii/S1057521912000877

Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan
https://www.sciencedirect.com/science/article/pii/S0921800916307510

A half-century diversion of monetary policy? An empirical horse-race to identify the UK variable most likely to deliver the desired nominal GDP growth rate
https://www.sciencedirect.com/science/article/pii/S1042443116300208

Towards a new research programme on ‘banking and the economy’ — Implications of the Quantity Theory of Credit for the prevention and resolution of banking and debt crises
https://www.sciencedirect.com/science/article/abs/pii/S1057521912000555

Enhanced Debt Management: Solving the eurozone crisis by linking debt management with fiscal and monetary policy
https://www.sciencedirect.com/science/article/pii/S0261560614001132

Can banks individually create money out of nothing? — The theories and the empirical evidence
https://www.sciencedirect.com/science/article/pii/S1057521914001070

[This next is a very important one, which I featured on our new RMPBI.ORG website:]

The relationship between bank size and the propensity to lend to small firms: New empirical evidence from a large sample
https://www.sciencedirect.com/science/article/pii/S0261560620302370

An analytical review of volatility metrics for bubbles and crashes
https://www.sciencedirect.com/science/article/abs/pii/S1057521914001471

Credit supply and corporate capital structure: Evidence from Japan
https://www.sciencedirect.com/science/article/abs/pii/S1057521911000494


Towards a new research programme on ‘banking and the economy’ — Implications of the Quantity Theory of Credit for the prevention and resolution of banking and debt crises
https://www.sciencedirect.com/science/article/abs/pii/S1057521912000555

An analytical review of volatility metrics for bubbles and crashes by Harold L. Vogel, Richard A. Werner