A Few Thoughts on Why We Need Public Banks

By Andrew Winnick

Acknowledgement: I want to thank the members of the Public Bank Pomona Valley Study Group many of whom offered detailed comments and suggestions on earlier drafts of this paper

A Bit of History
First let’s get one issue out of the way. The idea of developing a public bank, or a whole system of public banks, is not new and not radical or left wing. The U.S. had a major public bank, the Reconstruction Finance Corporation (RFC) which was created in 1932 under President Herbert Hoover, a Republican. [The depression started with the collapse of the stock market in October 1929. In 1933, Franklin Delano Roosevelt, FDR, became President.] The RFC was a public bank, created as an agency of the federal government, capitalized with federal money, and was used extensively by the Roosevelt Administration to fund a broad range of projects both private and public. It was designed to lend (not give away) money to both businesses and states in an effort to help them recover financially from the Great Depression. It continued to exist until 1957, providing a channel for public loans during World War II, and the post-World War II period from 1945 to 1957, when it was closed under President Eisenhower. However, even after it formally ceased to exist as a separate agency, some of its functions were transferred to other federal agencies including the Small Business Administration and the Import Export Bank.

There are many other successful examples of public banks. Under guidance from the U.S., in the aftermath of WW II, Germany developed a public bank focused on infrastructure projects which exists to this day. Germany also developed a series of regional and local public banks primarily focused on supporting housing construction, both by private individuals and by public entities. The World Bank, created in 1944, provides public money contributed by the governments of many countries to support major infrastructure projects in poorer nations around the world. The Asian Development Bank was started in the 1960s, and has 49 member governments in Asia and the Pacific, and 19 in other parts of the world. The European Union’s European Investment Bank (EIB) was created in 1958 as a “policy-driven bank” to further EU policy goals. This public bank is not to be confused with the European Central Bank (ECB), which is similar to the US’s Federal Reserve Bank.

Turning back to the United States, we should mention that there is a well-funded and very successful Public Bank of North Dakota that was established in 1919, which provides basic retail checking and savings accounts and other retail banking services to the otherwise unbanked residents of that state (but not in competition with private banks), in addition to making major infrastructure loans in the state (usually in a co-lending or underwriting role with private banks).

In California, the California Public Banking Alliance (CPBA), working with members of the State Assembly, in October 2019 succeeded in having passed and signed into law the Public Banking Act, allowing cities and counties to create public banks that can accept deposits from local government agencies and make low-interest loans for funding infrastructure projects and affordable housing. Under the terms of this law, initial efforts to create public depository banks are now underway in San Francisco, the East Bay (of S.F.), Los Angeles, and San Diego. Locally, there is now a study group focusing on the creation of a Public Bank of Pomona Valley. People from Claremont, La Verne and Pomona are active in this effort, including past and present members of City Councils.

In 1994, the California Infrastructure and Economic Development Bank (IBank) was created that can issue bonds, provide loan guarantees, and operate a modest Infrastructure State Revolving Fund (ISFR) Loan Program. With the support, again, of the California Public Banking Alliance (CPBA), efforts have been underway this year to convert the IBank into a true public depository bank for a portion of the funds held by the State, in order to make funds directly available for socially responsible investment. This bill, AB-310, probably with some revisions, will be re-introduced next year. Given the success in 2019 of the Public Banking Act, it seems that powerful Wall Street banks and equity firms are organizing to block this effort. But the CPBA and some members of the State Legislature are working to convince the State’s Treasurer and the State Controller (as well as the Governor) to support the effort to pass the new version of AB-310. It is anticipated that as local governments begin to develop their own public banks under the terms of the Public Banking Act of 2019, pressure will succeed in convincing members of the State Legislature to resist Wall Street, pass the new version of AB-310 and bring to California a state-level, fully functioning public depository bank that will support investments that will further racial equity, affordable housing, small business development, and an environmental emphasis that addresses both climate change and providing both blue and white collar jobs that pay a living wage.

The point is that public banks, on a regional/local level, at the national level, and internationally, are well established and function quite successfully. The idea of local city governments moving to create a Public Bank for the Pomona Valley area is quite feasible.

Why Do We Need a Public Bank and From Where Does It Get Its Funds?

In this section, we will focus on state and local public banks, and leave national and international public banks for a separate discussion.

Let’s begin with a fundamental point. The local government(s) establish a public bank by providing (investing) the initial capital, but does not “spend” its funds on the bank’s operations. Each governmental agency then uses the public bank as a depository. That is, member government agencies in that region can deposit funds they collect from tax receipts, fee income and state or federal programs, and earn dividends and interest, until the funds are needed for their intended use. In the meantime, those funds can be used by the bank to capitalize lending for projects consistent with the bank’s mission. Crucially, each governmental unit places funds in the public bank with the clear and explicit expectation that those funds will be employed to support broadly agreed upon social goals as specified in the mission statement, which the government unit(s) wrote. Depending on how the member governments write the bank’s charter, other institutions and the area’s residents may also be allowed to deposit funds in the bank. It should be noted that the public banks, just as the private banks, may use their deposits as capital reserves which can be used as a multiplier to generate loans up to ten times the amount deposited, and make those loans at competitive or even sub-market rates.

One might well ask: what do these government units do with these funds now, in the absence of a public bank in which to deposit them? The disturbing answer is: Wall Street. That is, these public government units place their funds in major private banks like Chase Manhattan or Goldman Sachs, or even in private “equity firms” like the Blackstone Group. Those private banks are then free to use these publicly owned funds as they wish in pursuit of their own, that is, the private banks’, profits , without any regard to the public’s well-being or social needs and goals. Unsurprisingly, the goal of the private banks is to use these publicly owned funds simply to make profits for the private banks (or equity funds).

However, once a system of depository public banks is created, these sponsoring governmental units can deposit some or all of their tax revenue, fee income and funds from other levels of government in those public banks, until such time as the government units need those funds. Once established, there are no additional costs to the sponsoring governments to use these public banks as a depository, except possibly modest fees to cover some operational costs.

How Do Public Banks Operate?

The governmental units that establish the public bank initially define the governing structure of the public bank, including (1) approving a vision and mission statement for the bank and (2) appointing a professional board of directors, who in turn hire and supervise the managers of the bank. The vision and mission statements make clear that the public bank is to be:
a. a professionally run, self-sustaining bank that must operate in such a manner as to meet adequate profitability targets so as to guarantee both (i) the bank’s long-term sustainability and (ii) a reasonable return on the deposits of the sponsoring governmental units while
b. engaging in investment and lending activities that support public goals of social justice, equity and environmental sustainability as enumerated by the sponsoring government unit(s) in the mission statement, and
c. operating with full transparency and accountability.

Merely as examples, the lending and investment activities supported by public banks might include the construction of major infrastructure projects including building affordable housing facilities, safe and efficient power grids, public transportation systems, improved water and sanitation systems, publicly available broadband networks, systems of public health and mental clinics, small business loans in targeted areas within the sponsoring government’s purview, perhaps for minority owners, etc. The public banks would lend money for these efforts, and require repayment of the loans at a reasonable rate of interest, so as to sustain the financial goals of the bank. In pursuing such public infrastructure goals, the public bank would seek to work with local commercial (private) community banks and credit unions that share an interest in supporting such public infrastructure projects.

The public bank can also provide critically needed regular retail banking services (checking and savings accounts, check cashing, bill pay and responsible short-term lending) to the “unbanked” or “underbanked” members of their community. Typically, this is pursued, not in competition with private banks, but to supplement the private banks’ efforts among community members whom, for various reasons, the private banks do not adequately serve.