Ecological and economic crises are calling private banks into question, and proving a catalyst to a new wave of public banks. Plans to make rapid transition happen – often in the shape of ‘green new deal’ packages – are gaining political popularity around the world. The United Nations has called for a Global Green New Deal, and Europe is moving ahead with its own version of the deal. Support for similar policy measures is seen as essential by most Democratic presidential hopefuls in the United States (US) and an ambitious plan is official policy for the United Kingdom (UK) Labour Party.

One of the first questions asked in response to such programmes is, how will the transition be paid for? In reply several argue that paying for the transition is quite straightforward and that simple innovations like channelling funds from bonds into low carbon infrastructure is possible. But the debate has placed a focus once again on why the private banking system has failed to support society’s social, economic and environmental priorities, especially investment needs at the local level where green new deals will be implemented, and is shining a new light on the potentially much larger, positive role that could be played by public banking at all levels.

Questions abound about whether conventional big banks meet our needs, or will meet the needs of future communities. But local government politicians in the US are trying to tackle this problem in a different way – by using the state’s tax receipts as the basis for lending to small local businesses or to fund other needs that private banking is less likely to support, such as renewable energy infrastructure or low cost home building. While initially slow it is an accelerating process. The main advocates began their campaigns, unsurprisingly perhaps, a decade ago after the global banking crash that brought down so many of the big banks, and reduced the public’s trust in banking generally. The conventional model had failed on its own terms and the search was on to find something that worked better.

They found it in the highly profitable Bank of North Dakota, where the tax receipts of the state are used to form the basis of loans – and, crucially, where the central purpose of the bank is not to make a profit for external shareholders but to generate benefits for North Dakota. The state is the only one of the 50 states not in the red and it is possible that its public bank helped somewhat toward this end – not just through its contributions to the state’s general funds, but through its partnerships with private community banks and its willingness to invest in community development projects. If the bank’s role is connected to the state’s financial success, it will be largely because of the profits which, at the rate of $30m a year, return steadily to state coffers.

More than ten years on from the banking crash in 2007, there are now over 20 local public banking bills under debate around the US. California passed a bill in October 2019 allowing cities and counties to open their own banks, and the city of Los Angeles lined up quickly to be first. New Jersey has recently created a board to look into setting up a public bank, identify capitalization needs, develop a governance and operational structure, and to file a report within a year. A recent Demos report suggests that what it calls “partnership banks” could act as “banker’s banks”, contributing to the health of local community banks, state budgets and small business job growth in an era of rapid banking concentration, budget deficits and disinvestment on main street. Partnership banks could raise revenue for states without raising local taxes, providing state governments with both banking services on fair terms and an annual multi-million dollar dividend. By offering lower debt costs to city and state governments, this kind of bank could fund public infrastructure projects and also encourage entrepreneurship.

Wider relevance

The conventional idea of banking is that private banks are safer when they are bigger – though that seemed to render them also particularly vulnerable during the banking crash of 2008 when they were clearly not too big to fail. And many that were only survived at great cost to the public who bailed them out. Conventional thinking also suggests that they are best privately and not publicly owned. But in the wake of a sector run by bankers with a narrow profit motive that experienced catastrophic failure, this notion was also to be found in the rubble of the collapse. Now, the American experience suggests there may be another way. The Bank of North Dakota has fostered a tradition of public sector banking since it was founded in 1919 – the same year incidentally that Neville Chamberlain launched the Birmingham Municipal Savings Bank, which – before it was subsumed into the TSB – and subsequent loss of mutual status, had more than sixty branches around the city.

In fact, lending by local authorities is nothing new; until the 1970s, local government in the UK regularly lent mortgages to staff – largely on the grounds that they needed somewhere to put their long-term deposits. New thinking has also been pushed by the recent experience of UK local government investing with private banks like the Bank of Credit and Commerce International (which collapsed in 1990) or the Icelandic banks which also failed. Cambridgeshire County Council linked up with Trinity Hall to form a new bank (Cambridge and Counties) because lending their reserves for energy or housing infrastructure is actually a very safe investment. But the US public banking movement has now built enough of a head of steam, that it may help turn conventional banking further on its head.

One of the notable features of public banks are that their loan rates can be kept at affordable levels. Activists with Public Bank L.A. argue that a city bank could loan the city money at below market rates, which would enable it to build more public housing and support the development of a greener energy infrastructure. These kinds of banks seem more likely to lend the funds that will be needed for future, rapid development of infrastructure if communities are to move towards a lower carbon future.

Context and background

Although the public banking revolution seems now to be inevitable, it has been tough – even in those centres which were most determined to move forward with it. In California, the story goes back to 2011, when Senator Ben Hueso filed a bill to investigate the creation of a new state bank. The bill was passed but was vetoed by the governor on the grounds, not that he disliked the idea, but because it should go through the state banking committee – which sank it first time round. He also asked the California Infrastructure and Development Bank (the IBank) to turn into a depository bank that could leverage its capital into multiple loans. If the $400 million the IBank currently held in loans could be counted as bank capital, the bank would be free to lend closer to $4 billion, backed by demand deposits from the local governments that are its clients. Now the Public Banking bill has passed, the rest of the US will be watching with interest to see what happens next.

A similar approach emerged  in Washington state, where the efforts of senator Bob Hasegawa finally paid off. The state agreed to fund banking consultants to write a business plan – which led to a proposal for a co-operatively-owned bank, involving as members any local government structures in the state. The Bank of North Dakota also underpins student loans and disaster relief. As banks create money when they lend, then a public bank is a way of bringing back the benefits of doing so, into public hands. So – not only can the benefits can be spread better – but they can earn the basic ‘seignorage’ that comes from money creation. This is the income and interest earned by issuers of credit and banknotes who sell them on to users and lenders, usually in return for a loan or assets, which can in turn make a profit.

In New Jersey, Governor Murphy, a Democrat, campaigned two years ago on the idea that taxpayer deposits sitting in large international financial institutions could instead go into a public bank, which could provide “below market rate capital” to “creditworthy and socially beneficial projects,” such as low-income housing, student loans and small-business lending. This stance proved popular and he is now setting up a board to follow through. The roll-out of more public banks at state or city level looks increasingly likely.

Enabling factors

This particular transition has only begun happening rapidly relatively recently. It is based on the lessons from the unusually successful $7.9 billion Bank of North Dakota, which was revealed in a report by the New York think tank Demos in 2011, and a broader growing awareness of how money is created and how the benefits of doing so had been, in effect, ‘captured’ by private banks. The Bank of North Dakota was founded in 1919 as a result of economic uncertainty: farmers, concerned that large grain traders and banks based outside the state threatened their economic sovereignty, saw a public bank as a means to protect themselves from exorbitantly high interest rates that put their farms at financial risk. The bank offered farmers more equitable access to capital, and despite initial fears that it represented a Bolshevik takeover of the state, the bank eventually gained bipartisan support. From the 1940s to the early 1960s, the bank served mostly as a public funds depository and municipal bond buyer. In recent years since 2000, its economic development activity has greatly expanded and the bank has contributed almost $300 million in profits to North Dakota’s treasury.

The success of this bank and the failure of the current conventional model of banking has convinced people that another approach may be needed. There is already a tradition of public sector banking in continental Europe, with varying degrees of success. In the UK, there are a few public sector development banks or boards, most notably now in Wales and in the form of the “British Business Bank”, the brainchild of former Secretary of State for Business, Innovation and Skills, Vince Cable. But there is also a long tradition of microbanking in the voluntary sector in the form of Community Finance Development Institutions and credit unions, especially in Northern Ireland. But so far, apart from Birmingham, with its municipal savings bank, there has been little city or regional banking.

It may be that the acceleration of the idea in the US will spread elsewhere too. For example, the uncertainties of the UK’s relationship with Europe, may increase pressure to set up a public sector bank along the lines of the German KfW. This bank was set up in 1948 to fund the re-development of post-war Germany under the Marshall Plan and remains state owned. It describes itself as a “promotional bank”, funding supporting change and encouraging forward-looking ideas projects in Germany, Europe and throughout the world. It has provided more than 1.7 trillion euros in loans over seven decades to achieve this aim. Many other countries around the world have state development banks, but these are more often in countries outside the global north, such as Brazil, South Africa, and India.

Scope and evidence

  • The Bank of North Dakota was founded in 1919 to protect farmers from exorbitantly high interest rates. From the 1940s to the early 1960s, the bank served mostly as a public funds depository and municipal bond buyer.
  • It is now worth $7.9 billion according to the New York think tank Demos.
  • In recent years since 2000, its economic development activity has greatly expanded and the bank has contributed almost $300 million in profits to North Dakota’s treasury.
  • The Bank of North Dakota also underpins student loans and disaster relief.
  • With 25 different proposals for public banks under debate in the legislatures of the USA, this debate is now speeding up.
  • California passed a bill in October 2019 allowing cities and counties to open their own banks, with the city of Los Angeles lined up to be first.
  • In 2011, Californian Senator Ben Hueso filed a bill to investigate a new state bank and the California Infrastructure and Development Bank (the IBank) to turn into a depository bank that could leverage its capital into multiple loans. If the $400 million IBank currently holds in loans could be counted as bank capital, the bank would be free to lend closer to $4 billion, backed by demand deposits from the local governments that are its clients.
  • A city bank could loan the city money at below market rates, which would enable it to build more public housing and support the development of a greener energy infrastructure.
  • Until the 1970s, local government in the UK regularly lent mortgages to staff – largely on the grounds that they needed somewhere to put their long-term deposits.
  • In 1919, Neville Chamberlain launched the Birmingham Municipal Savings Bank, which – before it was subsumed into the TSB – had more than sixty branches around the city.
  • The German bank KfR has provided more than 1.7 trillion euros in loans over seven decades to achieve this aim of encouraging forward-looking ideas.
  • New Jersey Gov. Phil Murphy, created a 14-member board aimed at launching a state-owned public bank. The board will file a report within a year.

Lessons for rapid transition

  • The long shadow of the 2007-2008 systemic financial failure, coupled with rising interest in how to finance rapid transition through Green New Deals, has reignited interest in new forms of public and mutual banking, which can think longer term and operate with a broader vision than the narrow focus on short-term profit of private banking.
  • Conventional, private banking is not the only game in town. Public banks are better positioned to think about the general needs and good of wider society, and are well placed to provide patient capital to lend to, and invest in, the long-term infrastructure changes and low carbon transition that the world needs right now.
  • Banking for local public good could offer good value for money and better trust in the banking system, whilst also ensuring banks become better at servicing the productive economy – as opposed to fueling speculation – and making sure that the benefits of economic activity are more efficiently and equally shared across society through investment in the public realm.

References

 When

1940s1950s1960s1970s1980s1990s2000s2010s2020s

 Where

North AmericaEurope & Central Asia

 Areas of change

Enough Money