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We’ve never done anything big in this country without little banks. Yet the number of community banks in the U.S. has been steadily declining for decades, giving way to big banks that have little connection to the communities they claim to serve. The massive, unprecedented shift toward such a highly concentrated banking sector has weakened our ability to take action at a community level and leaves many people, especially those who have been historically marginalized, without access to capital.
In Next City’s senior economic justice correspondent Oscar Perry Abello’s debut book, “The Banks We Deserve: Reclaiming Community Banking for a Just Economy,’ he argues that community banking has a crucial role to play in addressing urgent social challenges, from creating a more racially just economy to preparing for a changing climate. The book was released today – order it here.
Hardly anyone these days talks about how banks have the power to create new money. Most bankers would say something along the lines of “We’re in the business of taking deposits and making loans.” That’s technically correct, but the precise relationship isn’t obvious.
In 2023, a working paper from the Federal Reserve Bank of Philadelphia stated: “Private money creation by banks enables lending to not be constrained by the supply of cash deposits. During the 2001–2020 period, 92 percent of bank deposits were due to funding liquidity creation, and during 2011–2020 funding liquidity creation averaged $10.7 trillion per year, or 57 percent of [gross domestic product].”
In other words, from 2011 to 2020, banks created $10.7 trillion in deposits every year out of thin air. Today that power is taken for granted and is increasingly concentrated in a few global megabanks.
In my introductory macro-economics class, our lesson about fractional reserve banking went something like this: Someone deposits $100 into a hypothetical bank, but the bank is only required to “keep” 10% in reserves while lending out the other $90 to the next person. That next person gets the $90 deposited in their account, and the bank now only needs to keep $9 in reserves while lending out the $81 to the next person. The pattern repeats until there’s basically nothing left to lend out.
At that time, about 70 people will end up with a cumulative total of nearly $1,000 deposited in their accounts. They’ll owe the bank the same amount plus interest, while the bank will have around $100 in reserves. If everyone runs to the bank to withdraw their deposits at once, they’ll demand the $1,000 in cash, and the bank fails because it only has $100 in cash reserves — hence “fractional reserve” banking.
The fractional reserve story isn’t the complete picture, but it gets across the basics of how banks create new money whenever they make a loan. After the first person deposits their $100 and the bank loans out $90 to the next person, the first person’s account balance doesn’t drop to $10. That $100 is still right where they left it in their account, available to spend. If these 70 people only do business with one another, and all the money stays in the bank at the end of each transaction, they’re just shifting around $1,000 to and from one another’s accounts. That’s $1,000 floating around this hypothetical economy that started out with just $100 deposited in one account. That turned into $1,000 in deposits through the bank making loans.
Economists call it “checkbook money.” Most money out in the world today has never existed as currency; rather, it has only ever existed as checkbook money, created initially by banks whenever they make a loan.
Read more: Why I’m Writing a Book About Taking Back the Banking System
The money-creation power of banks was much more obvious in America’s early days. Although some wealth was floating around the U.S. economy, there certainly wasn’t enough to invest in the building of a new country, and, unsurprisingly, most of that wealth ended up in the hands of those who were already well-off.
The first community banks emerged as a solution to the problem, with states chartering local institutions with the power to print new money and lend it out to people and businesses. When a bank made a loan, it printed its own banknotes that people and businesses began using and circulating locally. Banks and businesses in one town or city would generally recognize and accept notes printed by nearby banks, and the banks would settle with each other by exchanging currencies back to their originators.
From 1793 to 1861, about 1,600 private banks across the United States were licensed to print and circulate their own paper currency under state-granted bank charters. As chaotic as this nationwide patchwork of paper currencies was, it served the public purpose of building communities where people could live, work, gather and play. Granted, it was largely cultivated or built using stolen labor on stolen land.
Even though banks no longer issue their currencies, they still create new money in the same way every time they make a loan. Even as mutual banks, savings and loan associations, and minority-owned banks and credit unions emerged, these alternatives gradually gained the power to create new checkbook money when making loans, too.
Back in 1984, localized money-creation power was deployed across 15,767 community banks and more than 15,000 credit unions. By 2024, this power was reduced to just 4,128 community banks and fewer than 4,600 credit unions.
Money-creation power is still limited to just 124 community banks and approximately 500 credit unions led by and primarily serving communities of color. Due to how federal banking agencies currently regulate the bank-chartering process, even white communities today have more difficulty than ever chartering a new community bank and thereby gaining new local money-creation power to meet their needs.
Meanwhile, the big global megabanks that control more and more of the banking system use that money-creation power to fund war, prisons, the gun industry, fossil fuels, and private equity funds that are ravaging industries from real estate to journalism to healthcare and education. The four largest U.S. banks are also the four biggest financiers of the fossil fuel industry worldwide: Chase, Citi, Wells Fargo and Bank of America.
Reclaiming community banking isn’t just about opening up access to credit and banking to people and places that never had the same level of access or no longer have it. It’s not just about investing in environmentally-responsible technologies, building methods and materials. It’s not about redistributing wealth from those who have to those from whom it’s been stolen.
Reclaiming community banking is about redistributing — or in some cases restoring — the secret superpower of money creation to today’s communities, so that each community can leverage its relationships to respond to the challenges confronting us all.
