Let us assume a state needs to replace an aging bridge on one of its state highways. If the contractor’s bid for supplying the materials and completing the construction is two million dollars, the tax payers of that state will eventually pay close to four million dollars for the bridge. How can this possibly be? The answer in a word is – – “interest.”

The near doubling of the cost of most public projects, from bridges, to schools, to water and sewage systems, is the result of the legal process of fractional reserve banking through which the quasi-public US Federal Reserve Bank (the Fed) and the private banking industry loan most of the nation’s money into existence.

When a state needs $2,000,000 to pay a contractor to build a bridge (or a municipality needs $10,000,000 to put an addition on a school), it commonly borrows the money from one of the large, Wall Street affiliated banks. The bank doesn’t actually have the $2,000,000 to lend to the state, but through the process of fractional reserve banking, it can legally create the money out of nowhere and lend it at interest.

Since most public loans are repaid over a period of years, the state will eventually repay the bank not only the original $2,000,000, but an additional $2,000,000 in interest on money the bank never had to begin with. The end result – the taxpayers of the state will pay four million dollars for a two-million-dollar bridge.

The above example uses rounded figures to illustrate a point, but the research shows that, on average, 40 to 50 percent of the cost of public projects goes to pay interest to the private banking industry for the use of their “out of thin air” created money.


We could discuss at length the fairness of fractional reserve banking and how it extracts great sums from “we the people” to profit private banks. But like it or not, it is the legally established system we have long been using.  The question is, what can “we the people” do to avoid paying these huge fees to Wall Street banks? The answer – – we as states, regions, or municipalities can create our own public banks where we use the power of fractional reserve banking to create our own money to fund needed projects serving the common good. At the same time, we can return the interest earned on this money back to ourselves rather than sending it to Wall Street.

Established in 1919, the State-owned Bank of North Dakota (BND) is celebrating its 100th anniversary. The BND provides virtually all the services of the Wall Street Banks, but it keeps the people’s money in the state, working for the people. North Dakota has a population of only about 800,000 people, but in the last decade the BND has returned over 300 million dollars in interest and profits to the state that would otherwise have gone to Wall Street.

Additionally, North Dakota has the greatest per capita number of privately-run community banks of any state in the nation. Rather than competing, the BND partners with these banks, provides them with services, and even underwrites business and commercial loans by these banks that would otherwise be too large for a community bank to handle.

The BND is a model that can be repeated, and efforts to do so are happening across the nation.

Unit III will address: The Advantages of Public Banking