Public or Perish? The Future of Public Banking

By Karen Petrou and Drake Palmer

“Public” banks have been touted since before the U.S. Revolution as a remedy for a variety of common financial ailments, most recently as a cure for private banking’s presumed indifference to public purpose in order to protect personal profit.  The 21st-Century Equality Bank we previously outlined is one way to align a bank’s private interest with public purpose without public subsidy.  Is it enough or are public banks also required?  The public-bank scorecard documents several centuries of well-intentioned financial institutions brought down due to immunity from effective regulation and a lack of market discipline.  Given the renewed interest in public banks, will this time be different?  We doubt it. 

A Brief History of Public Banks

Public banking in the United States has its roots in the land banks of the colonial era, chartered by colonial governments to finance mortgages and other loans through the issuance of promissory notes.  The value of the notes rested on the value of the land, with the loans also backed by a government guarantee.  Over time, the notes began to depreciate due to over-printing and a loss of public confidence in the ability of the colonial governments to repay their guarantee in specie.  As a result, the colonial land banks were entirely wiped out by 1740. 

After the Revolution, finances in the new states were dominated by private banks that issued a jumble of currencies vulnerable to frequent speculation, fraud, and bank failures.  To protect borrowers, some states felt it necessary to establish state-sponsored public banks which, unlike the colonial banks, were subject to strict caps on printing of notes.  Vermont chartered one in 1806 with the hope that a currency carrying certain protections against depreciation and default would inspire greater confidence and provide a reliable source of credit, but it was forced to close in 1812 due to counterfeiting and the refusal of many private banks to accept its notes.  With a few exceptions, the movement remained dormant until the progressive era at the beginning of the 20th century. 

A Depression-era version of a public bank is the Government Development Bank of Puerto Rico.  Like much of the rest of the economic infrastructure on the island, it has fared poorly due to political mismanagement.  As part of the government’s financial restructuring, a Congressionally-appointed oversight board opted in 2017 to liquidate the bank, likely at considerable cost to bondholders. 

Does this mean that public banks are doomed?  Delaware’s was founded in 1807 and lasted in one form or another until 1981, likely due to the fact that this public bank was only partially owned by the state and thus had to answer to private shareholders.  This market discipline also mitigated losses when insider loans got the better of the bank, allowing sale to a large Philadelphia bank instead of costly liquidation.  In some ways, its structure is reminiscent of Fannie Mae and Freddie Mac before 2008: “hybrid” institutions with profit for private shareholders until taxpayers are forced to pick up the tab from an ill-governed, state-implicit guarantee.  

However, not all such stories are as dreary.  To this day the Bank of North Dakota, which was founded in 1919 as a repository for public funds, lends these out to support North Dakota’s economic growth almost entirely as a secondary lender in conjunction with community banks and credit unions.  In this way, the Bank of North Dakota is like the 21st-Century Equality Bank except that profits accrue to the state rather than to participating financial institutions. 

New-Age Public Banks

Despite this checkered history, the idea of public banks has had lasting impact.  American Samoa just chartered one last year.  Since 2011, states considering public banks have included Alaska, Arizona, Connecticut, Illinois, Minnesota, New Hampshire, New York, and West Virginia.  States such as Vermont and Massachusetts established commissions to assess the potential for public banking but ultimately opted against it.  New Jersey’s new Democratic governor is a strong advocate of public banking; his legislature, so far, not so much. 

In addition to statewide initiatives, there have been numerous city-led public-bank efforts, including recent ones in Los Angeles, San Francisco, and Seattle.  Interestingly, much of the momentum for municipal banks is in states that have legalized recreational marijuana, an industry for which private banks subject to federal law are essentially inaccessible.  These banks, then, are not about economic equality as much as they are about special-purpose interests, likely with risks to match.  Another type of municipal public bank – the “land bank” – acquires blighted and tax-delinquent properties and restores their economic viability through forgiveness of back-taxes and land development.  These new-age land banks are chartered by the municipality in which they operate and may receive funding from both public and private sources.  There are about 170 land banks across the country, with most chartered since 1980. 


The wreckage of financial institutions seemingly focused on the public good is scattered across the years.  Public charters have generally been exempt from meaningful standards, and private institutions – think the S&Ls of the 1980s and the GSEs more recently – have insulated themselves from regulatory scrutiny by appeals to a higher calling such as the “American Dream of Homeownership.”  Totally-public banks might avoid these temptations, but they will remain small absent large commitments of taxpayer funds or constructive partnerships with private-sector financial institutions.  Even so, public banks will always be subject to political, not public-purpose, direction. 

The best way to ensure that financial intermediation advances social welfare is to define a carefully-constrained charter, mandate transparent limits on self-dealing up front, and ensure that the bank is fit for purpose under reasonable rules that ensure long-term profit in concert with effective public service.  Public subsidies to support public service make sense, but only when sufficient regulation and private-sector discipline constrain the natural self-serving instincts of all-too-many politicians.

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