2018 could be a turning point in the way banking is done in America. The creation of publicly owned banks could save the public millions in fees and interest each year, lead to improved financial infrastructure, and drastically reduce the cost of public projects. In recent months, more than a dozen American cities and states have been exploring the idea of transferring their accounts from private banks into banks of their own.
Unlike private banks, public banks (also called publicly owned banks) are run by an individual municipality, county, or state and must serve the public interest rather than the interests of private shareholders. In practice, when a city or state channels its revenue through its own public bank and funds projects this way, it significantly reduces its financing costs to the tune of millions or in some cases billions of dollars each year, by lowering the cost of borrowing.
New Jersey Governor Phil Murphy, who began his term earlier this year, campaigned successfully on a public banking ticket. As a former Goldman Sachs executive, Murphy knew the cost savings such a state bank could bring, by reducing fees and interest payments on its billions in revenue and spending, including $1.5 billion in deposits held by foreign banks.
Funding public projects though a publicly owned bank reduces the costs by a whopping 50 percent on average by reducing or eliminating interest and debt service payments that would otherwise get paid to private banks.
According to the Public Banking Institute (PBI), funding public projects though a publicly owned bank reduces the costs by a whopping 50 percent on average by reducing or eliminating interest and debt service payments that would otherwise get paid to private banks.
Beyond New Jersey, cities and states around the country are exploring the possibility of public banks. In the past year, city council members in Washington, D.C., Santa Fe, Portland, and Seattle have conducted feasibility studies in their cities and many others cities are moving in that direction.
The Bank of North Dakota (BND) is often cited as the longest-running and only current public bank in the United States. It was started in 1919 to increase stability to the state’s economy, mostly agricultural at the time, which was buffeted by external forces.
BND was started before the Great Depression and therefore before the formation of the FDIC. It is not insured by the FDIC, and it doesn’t need to be—FDIC insurance only covers up to $250,000 and BND manages much larger State of North Dakota accounts. Instead, all deposits are insured by state of North Dakota itself. BND is often touted as a notable success because of its track record of providing economic stability during most national and international financial crises, including the Great Depression and the 2008 Crisis.
“Public banks are known all over the world and have a very-well established reputation or record, but they are still new here,” says Walt McRee of PBI. “And because they’re new here, we’re seeing that as we progress, the barriers and the opposition are starting to come up more and many are bringing out oppositional positions that are either based on a lack of information or an intentional sullying of the truth by the vested interests.”
As expected, many private banks and bank lobby groups have come out against this trend. Phil Murphy met with resistance when he spoke to the New Jersey Bankers Association last year, when former Lieutenant Governor Kim Guadagno, the Republican candidate who ran against Murphy derided the proposed state bank as “that wacky bank.”
Yet after Murphy’s victory, the establishment of a New Jersey state bank seems highly likely. “I think if we are able to pull the New Jersey thing through, we will see a real sea change,” said McRee.
Interest in public banks is growing particularly quickly in California, where the state treasurer recently laid out a plan to create a state bank to serve the state’s newly legalized cannabis industry.
Beyond the cannabis industry, cities in California are exploring the possibility of creating their own municipal banks, including San Francisco, Oakland, and Berkeley. Los Angeles recently divested from Wells Fargo and is moving toward creating a city-wide public bank following a highly successful campaign. This campaign, Divest LA, is a program of Revolution LA, a grassroots organization.
Revolution LA partnered with more than thirty progressive, indigenous, environmental, and social justice organizations, and rallied over a hundred neighborhoods to support their campaign. Ultimately, Los Angeles not only divested, but adopted a thirty-point Social Responsibility scoring system for all banks with which it enters into contracts, currently the most progressive in the country.
The push for a public bank naturally followed.
“Once we were tasked with finding out where to move the money next,” explains Phoenix Goodman, organizer with Revolution LA, “we realized, that all the other banks that would be applicable would be other Wall St. banks.” Los Angeles is now has been exploring the possibility of a municipal bank.
As an example of ethical public banking, Revolution LA and many other American public banking movements look to the German Sparkassen system as a model. The Sparkassen is a group of publicly owned savings banks which not only finance 70 percent of German small and medium-sized businesses, but have also been some of the largest financers of the transition toward green energy in Germany.
“We see public banking as the cornerstone for the green energy movement in Los Angeles,” says Trinity Tran, also of Revolution LA. “If the city was able to control its own money and everything was localized, we’d be able to direct those funds to finance green energy infrastructure and green energy investment.”
“We see public banking as the cornerstone for the green energy movement in Los Angeles,”
In 2018, Walt McRee believes, “the biggest advances are going to be in public awareness, involvement, and support.” Phoenix Goodman and Trinity Tran agree, and they have seen firsthand what an informed and motivated public can accomplish through strategy and organization.
For those inspired by their success, it should be noted that Revolution LA began as an informal meeting group in 2014. “The intent was just to get a younger generation of politically-aware people together to figure out the problems and the solutions,” says Tran, explaining that by 2015 “we'd outgrown coffee shops.” Once Trump won the presidential election, the organization seized on the energy and frustration to work toward local solutions and focused on divesting LA from Wells Fargo using simultaneous protest tactics and legislative action.
“Right from the beginning, we knew this was going to be a fight, going up against one of the most powerful banks in the world,” says Tran. “We played their game. We just did it better. We were told by a legislative director two days before the final vote was delivered that Wells Fargo was lobbying up to the very end. And then they waved their white flag.”
Aaron Fernando is a writer who covers local movements, new economy initiatives, and financial innovation. Follow him on Twitter at @00AaronFernando.