Are Public Banks Unconstitutional? No. Are Private Banks? Maybe

Published on OpEdNews, by Ellen Brown, May 19, 2014.

The movement to break away from Wall Street and form publicly-owned banks continues to gain momentum. But enthusiasts are deterred by claims that a state-owned bank would violate constitutional prohibitions against “lending the credit of the state.”  

California’s constitution is typical. It states in Section 17: “The State shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association, or corporation ….”

The language sounds prohibitive, but what does it mean? Hundreds of state and local government entities extend the credit of the state. State agencies make student loans, small business loans, and farm loans. State infrastructure banks explicitly
leverage the credit of the state.

Legally, state and local governments are extending their credit to private banks every time they deposit their revenues in those banks. When money is deposited, it becomes the property of the bank by law. The depositor becomes a creditor with an IOU or promise to be repaid. The state or local government has thus lent its money to the bank.

How can these blatant extensions of the state’s credit be reconciled with the constitutional prohibitions against the practice? … //

… Public Banks Held Constitutional:

John Thom Holdsworth wrote in Money and Banking (1937) that in the mid-nineteenth century, “several of the states established banks owned entirely or in part by the state. There was some question as to the right of these state institutions to issue circulating notes, but the Supreme Court held that such notes were not ‘bills of credit’ within the meaning of the constitutional prohibition.”

In Briscoe v. Bank of Kentucky, 36 U.S. 257 (1837), the Court observed that the charter of the challenged Kentucky state bank contained “no pledge of the faith of the state for the notes issued by the institution. The capital only was liable; and the bank was suable, and could sue.” The Court “upheld the issuance of circulating notes by a state-chartered bank even when the Bank’s stock, funds, and profits belonged to the state, and where the officers and directors were appointed by the state legislature.”

The Court narrowly defined the sort of “bill of credit” prohibited by Article 1, Section 10, as a note issued by the state, on the faith of the state, designed to circulate as money. Since the notes in question were redeemable by the bank and not by the state itself, they were not “bills of credit” for constitutional purposes. The Court found that the notes were backed by the resources of the bank rather than the credit of the state. Moreover, the bank could sue and be sued separate from the state.

These cases are still good law. A state bank — or city bank or county bank — is not in violation of state constitutional prohibitions against lending the credit of the state.

Other Ways to Avoid Constitutional Challenge: …. //

… (full long text including hyper-links).


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