Is There a Case for Public Banking in America?

Last week I participated in the inaugural Public Banking Institute conference in Philadelphia – not a coincidence, freedom from the tyranny of the banks underscored the program. When I first learned of this idea of state-owned banks as a solution to our economic challenges, I was a real skeptic. Just what we need, our government running banks – visions of teller windows in the Motor Vehicle Department are not comforting. I met Ellen Brown about a year ago, author of Web of Debt and founder of the Public Banking Institute. She provided a well-researched history of banking in the United States that didn’t exactly match up with what they taught us in the Morgan training program. Most interesting, she told me about the Bank of North Dakota the nation’s only state bank. Established in 1919 during a period of economic depression in its farm economy, and under immense political attack from the private banks in the state, the bank now appears to be the pride and joy of the state, Republicans and Democrats alike. The bank’s deposits are comprised of state liquidity that would otherwise likely be sitting in branches of what are now money center banks, funding their activities largely outside the state. It has no branches and does not compete with local banks for customers, but instead acts as a “partnership bank” with private banks for the small business credit needs inside the state. The bank is professionally managed and is reported to have a thoughtful and independent governance structure which has steered it through the economic cycles quite well, including the recent financial crisis. It has been profitable at least back to 1971 based on available data, returning approximately $500mm of profits back to the state coffers since 1945, the majority of that in the past twenty years as the bank has grown. North Dakota, a population under one million, is different that other states. But the $4 billion Bank of North Dakota, like the state-owned grain elevator and flour mill, was born out of economic hardship not dissimilar to what most states in the nation are now experiencing. Public banking of course is a part of the economic fabric in many countries ranging from China and Russia to Japan and Brazil, but also in Germany where the Sparkassen system of local savings banks accounts for nearly half of the bank assets in Germany. I met a German gentleman now living in Canada at the conference and asked him what he thought of the Sparkassen system. His response was typically crisp: “Like everything in Germany, it just works.” I’m not ready to embrace a call for state-owned banks quite yet, and there was a connected and far more challenging question under discussion at the conference of whether government or the private banking system should control the credit creation function. This latter question is very complex with implications I can’t pretend to fully understand. But I know it has new relevance in a world of finite physical limits, which are in apparent conflict with a debt-based monetary system that by definition expands exponentially. But this is a discussion for another day. Apart from the predictable “free market” vs. “socialism” shout fest that the question of public banking will encounter, here’s what the case for public banking in America might look like:

  • Whatever we might say, banking is already a hybrid private/public sector function. And when push comes to shove, it’s only the lender of last resort (and now dealer of last resort) function of the world’s Central Banks that keeps the system afloat. So the question is not if the State should be involved in the banking function, but how it should be involved. Public banks are one obvious possibility to complement, not replace private banks.
  • It appears to work – at least it can work when properly executed. Outside the US, there are many successful and less successful case studies to examine. We should start by studying the German Sparkassen system of local savings banks.
  • If structured along the model of the Bank of North Dakota, a system of state banks would complement, not compete with, local place centered private banks, in a cohesive local ecosystem leveraging the “edge effect1” of value-creating boundaries between the private, public and philanthropic sectors within a given region. This appears to be happening in North Dakota.
  • A system of state-owned banks in the US adds to system diversity, and is by definition decentralized, adding much-needed resiliency to our present highly centralized and concentrated banking system. Furthermore, state-owned banks would never be rolled up into money center banks, so this resiliency is not temporal.
  • Public banks would provide a vehicle for taxpayer funds to be recycled productively in support of the local economies, leveraging these deposits by working collaboratively with the local private banks in support of local credit needs, and helping local banks compete with the unfair funding advantage of TBTF megabanks whose real interest is securing cheap deposits to fund whatever is most profitable – lending to hedge funds, lending for leveraged buyouts, or speculating in European bonds for the bank’s house account.

The profession of banking has been overwhelmed by the short-term-focused, transaction-driven business of banking. In our search for solutions, we should be open to exploring deeper direct engagement by the public sector, with all proper caveats regarding governance and political influence. Currently, we allow the TBTF banks to hijack the public sector involvement and subsidy, benefiting management, and their chosen transaction-driven brand of finance that is often not aligned with the interests of society. Banking is too important for this state of affairs. I’d like to thank the Public Banking Institute for putting on a thought-provoking first conference and boldly proposing solutions to some of the problems in our financial system that most need addressing. A careful state-by-state examination of public banking is an important part of the broad financial system transformation the Capital Institute seeks. ———— 1. In natural systems, an ecotone is an area between two biomes such as where a river flows out into the ocean through wetlands where life is abundant, creating what is known as the “edge effect”. Ecotone literally means the place where ecologies are in tension. Similarly, we see numerous examples of value-creating tension at the edges where the private and public sectors intersect.