Public Banks: History and Recent Proposals
September 20, 2022
Public Banks: History and Recent Proposals
Overview of Public Banks
However, by 1832, President Jackson’s distrust of a
Banks are generally private enterprises chartered by state or
national bank led to an executive order to withdraw federal
federal regulators for the purposes of accepting deposits and
funds from the second national bank, and political
making credit available to the communities they serve. As
infighting foreshadowed the institution’s demise. In 1836,
profit-seeking businesses, banks’ motivations do not
Congress did not renew the charter for the Second Bank of
necessarily align with certain public policy goals.
the United States, opening the door for states to start their
Policymakers use regulation and guidance to align some of
own banks. For example, Alabama, Kentucky, Illinois,
banks’ motivations with public interest.
Vermont, Georgia, Tennessee, and South Carolina all
created banks that were owned by the state government.
For example, banks use deposits as a funding source for
Missouri, Indiana, and Virginia also had banks with the
their lending. They may be indifferent to accepting deposits
state holding a majority interest, and a number of states
from various communities, but certain banks may prefer to
created banks with the state owning a minority interest.
lend only to affluent areas. The Community Reinvestment
Other states, such as Louisiana, were active in chartering
Act was enacted to ensure that banks lent to the
private institutions that focused on public policy goals such
communities from which they took deposits. Sometimes,
as building railroads and canals. However, the financial
the private sector may simply be unwilling to make credit
panic of 1837 and other issues led state-owned banks to
available to certain markets or to offer deposit accounts to
struggle and ultimately close. Further, the National Banking
certain customers. To take another example, agricultural
Acts of 1863 and 1864 created a new national banking
lending can be risky because of the unpredictable nature of
system, where privately owned banks could issue notes
weather patterns and crop yields, which impact borrowers’
backed by Treasury bonds. In 1865, Congress enacted
ability to make payments. Further, banks may be unwilling
further measures to tax state bank notes, ushering in an era
to open bank accounts for certain customers because the
of federally chartered private banks. By 1900, most of these
cost of due diligence is sufficiently high that it may not be
state public institutions had closed. One notable exception
profitable for them. In these examples, public policy goals
was the Delaware Farm Bank, of which the state of
of supporting domestic food markets and encouraging bank
Delaware owned a 49% share from 1800 to 1975. The state
account access could be at odds with private market
increased its ownership to 80% in 1976. However, the bank
motivations.
encountered significant financial stress, and by 1981 it was
acquired by a private bank in Pennsylvania.
One potential policy option to address certain issues would
be for policymakers to establish a public bank, which would
Bank of North Dakota, 1919-Present
be chartered to serve in the interest of public policy goals
During the early 1900s, agriculture drove North Dakota’s
not being met in the private sector. This In Focus discusses
economy. Growing seasons were constantly jeopardized by
the potential role of public banks, including institutions that
drought and harsh winters, and private banks began to raise
are wholly or partially owned by the government. It also
interest rates on farm loans, complicating access to
discusses certain financial institutions chartered by the
financing vital to the industry. In 1919, the state legislature
government with limited purposes tailored to achieving
established the Bank of North Dakota (BND) “for the
certain social policy goals.
purpose of encouraging and promoting agriculture,
commerce, and industry.” BND is one of two currently
History of Public Banks
operating public banks. It is operated, managed, and
controlled by an industrial commission composed of the
Pre-1900 Public Banks, Since Closed
state governor, agriculture commissioner, and attorney
Following the economic struggles after the Revolutionary
general. The governor appoints an advisory board of
War, Alexander Hamilton—then Treasury Secretary—
directors comprising seven bank officers from private
submitted a plan to Congress to charter a national bank to
banking institutions generally owned by North Dakota
issue paper money, provide depository services, and offer
residents. Today, the North Dakota legislature appropriates
banking facilities for commercial transactions, as well as to
funds from BND when needed through the budget process
act as the government’s fiscal agent. In 1791, Congress
or state law. All funds earned by the state (i.e., funds from
passed a bill that led to the First Bank of the United States.
penal institutions and educational institutions) must be
The charter lasted 20 years and was allowed to expire in
deposited in BND. Deposits do not have federal deposit
1811, rooted in fears, among other reasons, that a central
insurance but are guaranteed by the state and are exempt
banking system would crowd out a growing private banking
from state, county, and municipal taxes.
industry. In 1816, following another economic turndown,
Congress chartered a second national bank to provide relief
Generally, BND is empowered to make, purchase,
for the country’s economic woes and prevailing war debt.
guarantee, or hold loans to and for a range of borrowers and
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Public Banks: History and Recent Proposals
purposes, including state-chartered and federally chartered
provided safe harbor for private banking institutions doing
lending institutions as well as other financial institutions
business with cannabis companies that are legally licensed
and certain farmers who are residents of the state. BND can
in the state.
also make agricultural real estate loans in order to
participate in the secondary market, similar to how
In 2019, California enacted a law to study how city-run
government-sponsored enterprises such as the Farm Credit
banks would work and enacted another in 2020 to examine
System work. Further, BND can establish an electronic
state-run banks, particularly with an aim toward supporting
fund transfer system for its customers and serves as the
access to financial services among the unbanked. The
custodian for all securities required to be deposited with the
analyses are due to be completed in 2024, after which the
state except those the treasurer is explicitly responsible for.
legislature is supposed to vote on whether to launch the
Most of BND’s lending is done in partnership with local
banks. Cities in California, such as San Francisco and Los
banks and credit unions. About two-thirds of the
Angeles, have also considered establishing municipal
bank’s $4.7 billion loan portfolio consists of commercial
banks.
and agricultural loans, and a quarter of its loans are student
loans. The rest are residential loans.
Federal Reserve/Fed Accounts
With the rise of private digital currencies, such as Bitcoin,
Territorial Bank of American Samoa, 2016-Present
some have called for the Federal Reserve (Fed) to create a
In the early 2000s, the territory of American Samoa faced a
central bank digital currency (CBDC). This technology, if
considerable withdrawal of bank services, which was
implemented, could facilitate personal accounts held at the
further exacerbated when the Bank of Hawaii—the last
Fed, giving consumers an alternative to banking with
remaining domestic bank in the territory—announced its
private institutions. One potential benefit of this could be
intentions to close its operations there in 2012. (The bank
that consumers who struggle to maintain access to
agreed not to fully cease operations until suitable alternative
affordable financial services might be able to obtain them
financial services were established.) In 2016, the American
from accounts held directly at the Fed. Policymakers have
Samoa government established a public bank, the
debated whether individuals should be able to store CBDCs
Territorial Bank of American Samoa, which provided basic
in personal accounts at the Fed.
banking services to its citizens and remains one of the only
options for domestic banking services in the territory.
Postal Banks
While the public bank has been considered a success, it is
Somewhat similar to a Fed account is the concept of a bank
ineligible for federal deposit insurance, and this has sparked
account held at a local post office. Over the past several
debate over whether or not it should be privatized to give its
years, legislative (see, for example, S. 3891 in the 117th
citizens access to deposit insurance.
Congress) and policy proposals have been introduced on
how and whether postal banks could address financial
Other Public Bank Proposals
access issues. The Postal Service has physical locations in
From 2010 to 2012, several states—including Washington,
most neighborhoods, giving populations where access to
Oregon, Vermont, Maine, Massachusetts, and Hawaii—
financial services is geographically scarce—such as in rural
conducted separate studies on the potential benefits and
areas—a potential option for basic depository services.
feasibility of establishing public banks to help stabilize the
Some advocates suggest that the Postal Service could
economy in the wake of the 2007-2009 financial crisis,
extend credit at more affordable rates than private banks
serve small business lending goals, and support community
could. The costs and efficacy of these proposals continue to
banks. While some of these studies identified potential
be debated.
benefits to establishing a public bank, the costs of doing so
and the limited evidence for widespread profitability
Government-Sponsored Enterprises (GSEs)
contributed in part to each state resisting any formal policy
Congress has long used its ability to charter institutions to
development.
influence financial markets. For example, after the Civil
War, Congress chartered a bank to provide newly freed
In 2018, the California state treasurer noted that in light of
slaves with depository accounts. In 1916, Congress
the state recently legalizing the marijuana industry,
chartered the Farm Credit System to ensure access to credit
California would study the potential benefits and issues
for the agricultural industry. And perhaps most
with setting up a state-owned bank to service the cannabis
recognizable today is the set of housing GSEs that Congress
industry, which faced challenges accessing financial
established in the decades following the Great Depression.
services due to federal prohibition. In 2019, the California
Fannie Mae and Freddie Mac—still in conservatorship by
state senate approved a bill to create limited-purpose state-
the Federal Housing Finance Agency since the 2007-2009
chartered cannabis banks to help cannabis companies get
financial crisis—as well as the Federal Home Loan Bank
around restrictions on access to banking services. Under the
Board, were chartered to support lending in housing
state legislation, private banks or credit unions would have
markets.
been able to apply for a limited-purpose state charter so
they can provide depository services to licensed cannabis
Andrew P. Scott, Analyst in Financial Economics
businesses. The bill did not pass the California state
assembly. However, in 2020, California enacted a law that
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Public Banks: History and Recent Proposals
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