Tag: Banc Cymru

Public Banking for Wales: Escaping the Extractive Model

(reproduced with the kind permission of Dr Ian Jenkins of Welsh banking and monetary reform group Arian Cymru)

Public Banking for Wales: Escaping the Extractive Model

Dr Ian Jenkins

Introduction: An Apology

This paper is only intended to provide a brief overview of the potential of public banking in a Welsh context: an issue which has become particularly relevant in the wake of the report of the Silk Commission in November 2012, the findings of which have given added impetus to cross-party calls for borrowing powers for the Welsh Assembly Government. This piece is only intended to provide a stimulus for further investigation and, as such, and in the interests of readability, there are complex concepts which do not receive here the extensive discussion they require and I am aware that much is kept general which deserves the most specific of analysis; wherever necessary references to further reading, in which these concepts can be further explored, have been provided. However, I hope that this paper leaves the reader with a reasonable outline of the possibilities which public banking possesses in the Welsh context and with their interest sufficiently engaged to go on and look into the topic in more detail.


Deregulation and the Growth of the Financial Sector: From Intermediation to Parasitic Extraction

The economic history of the past 30 years has been, by and large, that of an uncontrolled expansion of the financial sector at the direct expense of the so called ‘real’ economy’ of manufacturing and production, brought about by the hegemony free-market doctrines, based principally on fundamentally ideological beliefs in deregulation and privatisation, which have become known as neo-Liberal or neo-Classical economics.

The extent to which growth in the the financial sector has outstripped growth elsewhere in the UK economy can be clearly seen in a speech given by Andrew Haldane the Executive Director for Financial Stability at the Bank of England:

In 2007, financial intermediation accounted for more than 8% of total GVA, compared with 5% in 1970. The gross operating surpluses of financial intermediaries show an even more dramatic trend. Between 1948 and 1978, intermediation accounted on average for around 1.5% of whole economy profits. By 2008, that ratio had risen tenfold to about 15%. (Haldane: 2010, p.4)

The truth is that ‘intermediation’ should be the absolute mot juste to describe the financial system: banks should be middlemen between investment capital, often in the form of deposits, and the productive economy. As former US bank regulator William K. Black put it ‘Middlemen serve a very useful purpose, but should not be very big and should not make a lot of money’, going on to point out that, ‘In the world we live in, finance has become the dog instead of the tail […] They have become a parasite’. The private banks have established themselves in this position through the control of the primary mechanism by which money is created within our system: the issuing of credit. In this paper I will aim to briefly outline how this credit function could be redirected from the speculation and bubble creation, which constitute the dominant directions of credit issuance under private banking, towards more stable and sustainable areas which serve the public interest instead of those of shareholders and bank CEOs. This is not a theoretical method, but rather one which throughout the post-WW II period saw the German Landesbanken facilitate the growth of the mittelstand sector of Small and Medium Sized Enterprises (SMEs), as well as in the present day constituting the means by which the state-owned Bank of North Dakota (BND) contributes significantly to North Dakota being the only US State to run a budget surplus throughout the post-2008 crisis.

In Offa’s Gap: Roots and Remedies of the Welsh Growth Collapse Dr Eurfyl ap Gwilym and Adam Price provide an extremely well-evidenced analysis of the effect of the economic policies of the past three decades on Wales, but, in common with the majority of mainstream economists, their analysis makes little attempt to analyse the role of banking and credit issuance in our current situation. In particular Offa’s Gap contains no discussion of the creation of money as debt by the private banking institutions, which constitutes one the core causes of our current economic malaise as well as providing a potential direction for future economic development through state control of the credit issuing function. The conclusion reached in Offa’s Gap is that:

Wales need a dedicated arms-length business-friendly agency working to attract export-oriented investment and support and encourage indigenous based exporters.

(Gwilym & Price: 2012, p.26)

This would doubtless be a very useful resource, but it would be no substitute for affordable and available credit. The paper also correctly focuses on the need for infrastructural investment, particularly in transport, in securing a successful economy, but fails to sufficiently criticise the role of privatisation in creating the current systemic problems of underinvestment caused by excessive profit-seeking on the part of rentier investors. The analysis in Offa’s Gap seems to base itself entirely on the attracting of exogenous investment, as did the WDA, and consequently ignores the real basic need of indigenous business, particularly SMEs, for affordable credit in order to develop and expand. In order for a productive economy to exist there must be adequate streams of affordable credit and it is the absence of such constructive investment which, I would submit, has been a vital contributing factor to the decline of the Welsh economy, and indeed that of the UK, in the past 30 years. Before continuing with this analysis it is worth briefly examining the current banking system and the effect of its operations on the real economy, in Wales as elsewhere.

Banking Now: The Extractive Model of Credit Creation

‘What is money and where does it come from?’ are, remarkably, questions rarely asked in mainstream economics and even less so by members of the public; yet the answers to these two questions hold one of the keys to understanding the (mal)functioning of our economic system and for devising a new, more democratic direction. As the great American economist G.K. Galbraith observed in his fascinating study of the history of banking Money: Whence It Came, Where It Went, ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it’ (Galbraith: 1975, p.1), stating later in the same text that, ‘The process by which banks create money is so simple that the mind is repelled’ (Galbraith: 1975, p.18). So what is money? The instinctive answer to this question for most people is that money is the physical notes and coins produced by the government; they may even go on to say that this money is produced at the Royal Mint at Llantrisant, ironically making this physical money one of an increasingly diminishing range of Welsh exports. Yet physical money of this sort, in the form of notes and coins, only accounts for approximately 3% of money in circulation. This version of money is indeed the product of government, as under the Bank Charter Act 1844 (7 & 8 Vict. c. 32) the power to create banknotes (and coins) became the exclusive preserve of the Bank of England, a power exercised in agreement with Westminster. Since the so-called ‘Nixon shock’ of 1971 ended the existing Bretton Woods system of international financial exchange by unilaterally cancelling the direct convertibility of the United States dollar to gold the banknotes of the Bank of England/UK government have been essentially what is known as a ‘fiat’ or ‘soft’ currency; that is, a monetary unit which is not backed by any ‘hard’ commodity such as gold and, consequently, is limited in quantity only by the inflationary consequences of overproduction.

So what accounts for the other 97% of money in circulation? To answer this question it is necessary to understand the nature of credit issuance through fractional reserve banking, which is neatly encapsulated by the Statement of Martin Wolf that, ‘The essence of the contemporary monetary system is the creation of money, out of nothing, by private banks’ often foolish lending’ (Wolf: 2010)[i]. This process is profoundly counter-intuitive to most members of the public who would assume that banks lend the deposits they receive, but this is not the case at all: the money issued through the process of creating a loan is created out of nothing, subject only to the rules for capital reserves contained in the Basel Accords. Two publications produced by the Bank of England make the current mechanism of money creation clear:


By far the largest role in creating broad money is played by the banking sector […] When banks make loans they create additional deposits for those that have borrowed the money.

(Bank of England: 2007, p.377)

The second publication, a transcript of speech in 2007 by Paul Tucker the Executive Director (Markets) for the Bank of England and a Member of the Monetary Policy Committee also states that:

Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account […] That is, banks extend credit by creating money.

The current system is a product of the fact that the Bank Charter Act 1844 prohibited banks from printing banknotes, but did not prohibit the issuing of money by ledger entry through the making of loans: with the advent of electronic systems in the past thirty years this facility to ‘print money’ by making entries into borrowers accounts with the stroke of a keypad has expanded significantly. Currently, then, there is a system in place whereby the power of money creation is largely in the hands of private corporations who are able to make sizeable profits through the levying of interest for their performance of this function. This system also leaves the private banks with the decision as to which sectors of the economy should be afforded lines of credit, and in the past thirty years this has moved increasingly away from the productive ‘real economy’ and towards speculation and bubble creation: with the results we now experience. Part of the deposit base of private banks is the income of local and national government and this leads to a situation wherein private corporations use public money as a deposit base for speculation and lending for speculation (See Fig.1).


bank diagram1

The Idea of a State Bank: Re-investment of Interest from Productive Credit Provision

 The best current example of a functioning state bank is that of the Bank of North Dakota (BND) in the United States. The way in which the bank functions is best described in its own words:

The deposit base of BND is unique. Its primary deposit base is the State of North Dakota. All state funds and funds of state institutions are deposited with Bank of North Dakota, as required by law. Other deposits are accepted from any source, private citizens to the U.S. government.

This framework provides the state of North Dakota with what is most needed for a local economy to thrive: affordable (and available) credit for SMEs and resources for the improvement of infrastructure. Under the state banking model the benefit derived from the interest accrued in the credit-issuing process is returned to the state and can be re-invested or spent in accordance with the public interest, instead of being paid to shareholders in dividends or in absurd bonuses to bankers who a merely carrying out a mechanical function, incompetently in many cases in the last thirty years (See Fig.2).


bank diag

Source: The Public Banking Institute (http://publicbankinginstitute.org/background.htm)

In the case of North Dakota this has resulted in the state being the only US state to run a budget surplus throughout the financial crisis post-2007 and this must make their model at least worth considering.

The Report of the Silk Commission 2012

In Part 1 of its remit The Silk Commission was asked to consider the National Assembly for Wales’s current financial powers in relation to taxation and borrowing and its report was produced in November 2012. The commission concluded that the Welsh Assembly government should be granted borrowing powers, basing this conclusion partly on ‘international evidence’ drawn from a single World Bank publication from 1999:  making this ‘evidence’ neither ideologically neutral, being the product of an organisation which is the éminence grise of global neo-liberalism, nor current, with many of its conclusions being weighed and found wanting by the latest financial crisis. The findings of the commission contains no consideration whatsoever of the role of banks in money creation through credit issuance, and the attendant problems of misallocation of investment, and no investigation of the success of public banking in the international context, for instance in the BRIC economies, or of the potential role of public banking in Wales. For this reason I feel that it is important that these issues be brought into the debate on the Welsh economy, as to ignore it would be to exclude a potentially democratising and sustainable banking system from the national conversation and would merely make any granting of borrowing powers to the Welsh Assembly Government nothing more than a new stream of income for the private banking system. If all that ‘responsibility’ means in the fiscal context is for Wales as a political unit to submit itself to the ‘discipline’ of the bond markets, then this is indeed a very sorry direction in which the politicians of the Welsh Assembly are taking both their current constituents, and those yet to be born.


There is a widely perceived need for change to the economic system today and especially for reform of the way in which banking operates, with the majority of the population feeling, rightly, that there is ‘something wrong’ with the way in which the economy, and particularly banking, currently functions. I believe that public banking can provide one of the possible directions of change which we so need in Wales and beyond and for this reason I would urge interested persons across all parties to look further into this topic.


Ahmad, J (1999) ‘Decentralising borrowing powers’ World Bank

Berry, S., Harrison, R., Thomas, R., de Weymarn, I. (2007) ‘Interpreting movements in Broad Money’, Bank of England Quarterly Bulletin 2007 Q3, p. 377. Available at http://www.bankofengland.co.uk/publications/ quarterlybulletin/qb070302.pdf

The Bank of North Dakota: http://banknd.nd.gov/about_BND/index.html

Brown, Ellen, Web of Debt (Baton Rouge: Third Millenium Press, 2008)

Commission on Devolution in Wales (Silk Commission) (2012) ‘Empowerment and Responsibility: Financial Powers to Strengthen Wales’ (full report at: http://commissionondevolutioninwales.independent.gov.uk/)

Tucker, P. (2008). ‘Money and Credit: Banking and the macro-economy’, speech given at the monetary policy and markets conference, 13 December 2007, Bank of England Quarterly Bulletin 2008, Q1, pp. 96–106. Available at: http://www.bankofengland.co.uk/publications/speeches/2007/speech331.pdf

Wolf, Martin, ‘The Fed is right to turn on the tap’, The Financial Times, 9/3/2010

Further Information can be found at:





Deiseb Banc Cenedlaethol i Gymru / Petition for a National bank of Wales and complementary Welsh currency.

arian cymru llun

Below is the link and full text of the a petition calling for a national Bank of Wales together with a complementary Welsh currency pegged at parity to sterling, similar to the C3 complementary currency in Uruguay and issued to interested SME’s, the self employed, industry, farmers and traders. The bank would need to be equally accountable to the people of Wales and the Welsh government so as to safeguard and protect the money of all Welsh citizens, and similar in purpose and function to The Bank of North Dakota in the United States.

The National bank would need to operate within a new transparent Welsh banking code, have no share holders, and have Glass-Steagall type  separated and capped banking sections, with deposit and pension accounts guaranteed to equivalent value, or commodities of equal worth stored to back them up. There would be opportunities for a future separated speculative banking section and a small capped mortgage and insurance section could be offered and expanded as and when the bank grows, with a ‘own what you pay for’ mortgage service being offered, and this share given back to the owners if and when the bank needs to sell the property (in the case of the house buyers insolvency for example) To sign petition please go to;


More details can also be found at:

https://sovereignwales.com/manifesto/#pwynt3 ,



Geiriad llawn/full text:

Banc Cenedlaethol ac arian cyflenwol i Gymru.

Rydym yn galw ar Gynulliad Cenedlaethol Cymru i annog Llywodraeth Cymru i helpu i sefydlu Banc Cenedlaethol Cymru a fyddai’n ceisio gweithredu yn ôl cod ymddygiad bancio newydd, modern, cyfrifol, cynaliadwy a thryloyw yng Nghymru.

Rydym hefyd yn galw am sefydlu arian cyflenwol ar gyfer Cymru gan y banc: sy’n debyg i arian cyflenwol C3 yn Wrwgwái, a’r WIR yn Swisdir, a’i roi i fusnesau bach a chanolig, pobl hunan-gyflogedig, diwydiant, ffermwyr a masnachwyr sydd â diddordeb.Rydym yn credu, yn arbennig yn wyneb y camreoli economaidd byd-eang a welwyd dros y blynyddoedd diwethaf, bod angen i Lywodraeth Cymru ddangos atebolrwydd ac arweinyddiaeth economaidd drwy annog a hyrwyddo arian sy’n rhydd o ddyled i’r cyhoedd, gyda’r wlad yn creu arian, a thrwy hyrwyddo arloesedd ariannol a bancio cynaliadwy, fel yr hyrwyddwyd gan sefydliadau fel Positive Money.

Rydym o’r farn y byddai Banc Cymru yn cynnig cyfle perffaith i Gymru ddangos arloesedd ac arweinyddiaeth economaidd o’r fath yn y byd. Gallai Pwyllgor Ariannol annibynnol a thryloyw yng Nghymru, a fyddai’n cynnwys cymysgedd o arbenigwyr nad oes ganddynt gysylltiad â gwleidyddiaeth, a phanel o arsylwyr, weithredu fel corff cynghori rhwng y banc a llywodraeth Cymru ynghylch pob mater perthnasol


A National Bank of Wales and complementary Welsh currency.

We call on the National Assembly for Wales to urge the Welsh Government to help establish a National Bank of Wales / Banc Cenedlaethol Cymru that would seek to operate within a new modern, responsible, sustainable and transparent Welsh banking code of conduct. We also call for a complementary Welsh currency to be established by the bank: similar to the C3 complementary currency in Uruguay and the Swiss WIR, and issued to interested SME’s, the self employed, industry, farmers and traders.

We believe that, in the face of the global economic mismanagement seen in recent years especially, the Welsh Government needs to show economic accountability and leadership by encouraging and promoting debt free money in the public and state creation of money and by promoting currency innovation and sustainable banking as promoted by movements such as Positive Money. We believe that a Bank of Wales would be a perfect opportunity for Wales to demonstrate economic innovation and leadership in the world.

An independent transparent Welsh Monetary Committee containing a mixture of non politically affiliated experts and a citizen observer panel could act as an advisory body between the bank and the Welsh government on all relevant matters.

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