Public banking is banking operated in the public interest, through institutions owned by the people through their representative governments. Public banks can exist at all levels, from local to state to national or even international. Any governmental body which can meet local banking requirements may, theoretically, create such a financial institution.
Public banking is distinguished from private banking in that its mandate begins with the public's interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity. The costs of public projects undertaken by governmental bodies are also greatly reduced, because public banks do not need to charge interest to themselves. Eliminating interest has been shown to reduce the cost of such projects, on average, by 50%.
When the public interest demands, the mission of public banks is to respond immediately, to assure the long-term prosperity of the community. In the U.S., the Bank of North Dakota is a prime example of such a public bank.
Public Banking's Background
Resurrecting Main Street: An Introduction to Public Banking
Our taxes were taken to bail the banks.
But bailing Main Street? The Fed said no thanks.
And debt we compound it into the night.
So let us compound the wealth in full sight.
FROM DEBT TO WEALTH
Compounding the interest on our debt to private megabanks has carried us into dangerous waters. It’s time to compound our wealth by creating public banks. Public banks restore credit as a public utility, and support local and regional economies. States and municipalities are able to reclaim the fruits of their labor—their money supply—and exit the web of debt by creating a self-regenerating regional economic system. This alternative avenue for individuals, communities, counties, and states to create liquidity will put our tax dollars, and other public revenues to work for we the people.
While regulation of the megabanks seems like a good idea, they say that if we regulate them, they’ll move to other countries. The Too-Big-Too-Fail Few are also demanding that public policy priority should be on spending cuts to get budget deficits under control, not on the banks’ recklessness and mathematically unsustainable model that caused this crisis.
The establishment of a public banking network will restore the “credit commons,” so we can regenerate our local and state economies. Instead of bailing out big banks, we will be revitalizing our neighborhoods. Rather than the banking sector privatizing gains and socializing losses, how about sharing the gains with public banks?
HOW DO PUBLIC BANKS OPERATE?
Unlike private banking, which is driven by short-term thinking (quarterly earnings per share), public banks leverage the liquid assets of government to stimulate investment in the region’s economy, focusing on fiscal strength over the medium and long term.
A well-run public bank can aid state and local governments in getting through cash crunches without massive layoffs, privatized public assets, or cutbacks in public services. Since creating long-term local economic resilience, not short-term profits, is the objective, the focus of public banks is socially-beneficial projects.
The economy is suffering from a massive shortage of money. About 97% of our money comes from bank loans—a scarce resource these days. To create the jobs we need to thrive as a society, we can do as the American colonial governments did. States and municipalities can take on the lending functions of banks to boost their primary economic drivers, and to help their citizens prosper.
State legislatures are tricked or bribed into thinking they have to keep going to Wall Street, hat in hand, for another loan. But these loans include high interest payments, which put the state deeper in debt. Interest payments consume an ever-increasing percentage of our taxes at all levels of government. Those payments also stifle investment in much needed infrastructure, and eat the savings of citizens.
Public banks, on the other hand, invest in our needs, not Wall Street greed. Unlike our current situation, where the state works for the private banks, the public banking model is the state working for the benefit of the people. Complete transparency is essential to prevent corruption of this essential public utility.
At no cost to the taxpayer, public banks can finance the public directly. Any interest payments charged by a state bank are plowed back into the state, either to reduce pressure for taxes, or as loans to fund economic development, rather than being funneled to private megabankers. The citizens would save money, and the state would make more money to provide better services and to grow local economies that are more resilient. Over time, even federal subsidies to states would shrink, thus reducing the federal deficit.
More specifically, public banking is the use of the public funds of a constitutionally established government jurisdiction, such as a state, county, or municipal government, for the capital reserves of a banking institution; and the subsequent use of those public funds by the banking institution to generate affordable credit, investment, and profit for public purposes. Those public funds may include—but are not limited to—tax revenues, investments, pension funds, and such hard assets as land and buildings.
We can creatively use public banks alongside private banks to do the people's business. Examples include low-interest loans to students, businesses, and home buyers, the purchase of municipal bonds for infrastructure and economic development, a secondary market for mortgages, and provision of short term liquidity to private banks, as well as disaster relief and other public purposes. Loans for income-producing projects (transportation, energy, and housing) could be repaid with the profits generated by the funded projects. In all cases, the profits of a public banking institution are reinvested in its capital or returned as revenue to the governmental authority (state, county, or municipal) which established the public banking institution.
Creating a public bank would get the state's frozen credit moving again; it would have huge assets and a vast potential deposit base, no big-bonus-taking CEOs, or shareholders demanding quarterly profits, a clean set of books that will be a matter of public record, and a mission statement requiring investment in local communities.
A PUBLIC CREDIT PIONEER
In continuous operation since 1919, the Bank of North Dakota (BND) demonstrates that public banking is effective, and is a valuable policy tool to keep economies stable and thriving. Currently, North Dakota ― in part due to the BND’s beneficent influence ― has the lowest unemployment rate in the nation (just over 4%), and has no debt to service; instead, it has a $1.1 billion surplus, prevented any bank failures in the state, and is the only state in the last two years to avoid a budget deficit. Yes, North Dakota has big oil revenues, but so do other small states; however the critical performance differential is the BND and its public banking policies.
The BND facilitates loans that commercial banks simply don’t make, because of their long-term nature. It increases lending while avoiding risky loans. This helps create a self-reinforcing economic loop that grows the state’s economy. For over 90 years, the BND has built strong working relationships with community banks to support family farmers, small businesses, and the state’s economic development. That’s a job generator every state could use. Yes they are holding some bad loans, especially now. But the core of what they do is to protect themselves by setting aside reserves to cover them. So, the occasional loss on such loans does not affect the overall profitability of the bank.
The BND returned over $350 million to North Dakota’s General Fund in the last decade, easing pressure on the state budget. For a state with a population of about 600,000 people, that’s considerable cash. Imagine the revenue the bank of a more populous state could generate (as well as save), thereby allowing taxes to shrink over time.
The state bank also acts like a banker’s bank or mini-fed for the state’s financial system, supporting the operation of other financial institutions. The BND provides liquidity to community banks, clears their checks, and also buys loans from them when they’re either beyond their legal lending limit or they want to share risk. The BND is also a secondary market for residential loans. This is how healthy economies are nurtured and maintained. North Dakota has beaten the Wall Street credit freeze by generating its own credit.
As for job creation, areas with more small banks tend to have more small businesses. North Dakota has more local banks per capita than any other state. By serving as a secondary market for loans to aid local banks, BND has contributed to this economic fertility. BND helps provide stability and a stronger capital position for community banks by purchasing loans from their portfolios and investing in bank stock. This preserves local banking capacity, which, in turn, maintains the viability of credit-worthy local businesses.
The BND participates in loans originated by local banks and credit unions, either by increasing the total size of the loan, buying down the interest rate, or providing loan guarantees. They offer “below market rate of interest to start up, or to troubled borrowers within the state,” according to the BND website.Some of their business loans are “tied to new job creation as a requirement to get the loan.” And all its deposits are guaranteed by the state. If North Dakota can do it, so can other states and municipalities, and they can do even more.
MOVING BEYOND THE BND MODEL
At minimum, a state bank can be a banker’s bank, and assist community banks and credit unions to lend more by guaranteeing portions of their loans. Beyond that, it’s up to each state’s wisdom and imagination.
Here are some possibilities:
1. Stimulate the economy by prioritizing the creation of essential jobs;
2. Cut investment costs in half or more by providing low-interest financing to homeowners
3. Make health care affordable;
4. Issue import-replacement loans to develop in-state versions of products that are
5. Issue credit cards at affordable interest, say 6%;
6. Tie a portion of the increase in state revenues generated by the bank to tax reduction;
7. Offer zero-interest loans as community equity loans for public infrastructure/benefit;
8. As the Ithaca Hours Bank does, offer such loans to individuals for home improvements, etc.
A public bank could be, like the old Commonwealth Bank of Australia, a massive community currency system (operating on the people's credit), and a massive credit union and cooperative (owned by, run by and for the people).
WHAT ABOUT STARTUP CAPITAL?
A bank must start with capital. This will take the form of bonds issued for the purpose of capitalizing the public bank ,or an appropriation of funds to be repaid from the bank's profits. There are several funding options: existing tax revenues, state and municipal CAFR accounts (government savings funds), and public assets.
WHAT ABOUT CORRUPTION?
From the BND’s website, “To minimize the possibility of political meddling, the bank publishes annual and quarterly reports detailing its finances.” In addition, the people need to be established as the proper shareholders of the bank, with the bank board elected directly by the public, rather than by political appointment. The funding for these campaigns would be limited to public money. The elected board provides policy direction and oversight to ensure that the bank performs according to its charter, which spells out how the bank will support the public interest. Terms for board members overlap to ensure institutional memory.
Public banks would be required to use transparent accounting standards, to provide a trace on how proceeds of public banks flow into the local and national economy. All documents relating to every transaction should be posted online, available to the public for free.
A NETWORK OF PUBLIC BANKS
Sister public banks could align and strengthen their efforts, exchanging exposures among themselves so as to self-insure. Through networking, a national community currency system could be built to supplement the national currency. That would transform the race to the bottom into prosperity for all.