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The Promise of Public Banks

The only one in the US is in North Dakota, but a growing movement believes the model can create a more stable economy and fund projects like the Green New Deal.

Second Bank of the United States, The River Newsroom
The Second Bank of the United States operated as a public bank from 1816 to 1836. Its headquarters is now the Portrait Gallery of Independence National Historic Park in Philadelphia.
Source: Wikimedia Commons
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The Bank of North Dakota was founded in 1919 at a time when the US economy looked much like it does today. Income inequality was extreme; deregulation was a hallmark of the financial, trade, and environmental sectors; and new technologies were imperilling the livelihoods of entire classes of workers.

Populist movements and progressive policy proposals attempted to address the era’s challenges. In rural North Dakota, federal, out-of-state banks were exploiting farmers, who comprised nine-tenths of the population, with high-interest loans. In response, small farmers and merchants, along with a former Socialist Party organizer, formed the Nonpartisan League, a political organization to advocate on their behalf. In 1918, NPL-affiliated candidates took control of the state’s legislature. The following year, they established the Bank of North Dakota (BND): a state-owned-and-operated bank, funded with taxpayer money and directly accountable to elected officials and civil servants.

The State of North Dakota does business as the BND, which means that the state government and its agencies are required to place their funds in the bank, allowing it to operate without federal backing. The bank’s profits are returned to the state in the form of legislative appropriations or mission-driven loans, partnering with local private banks to secure large loans for small businesses. Its mission statement is “to deliver quality, sound financial services that promote agriculture, commerce, and industry in North Dakota.” At the time of its founding, that meant offering low-interest loans to farmers. But now it acts as more of an incubator, according to David Flynn, the economics and finance department chair at the University of North Dakota, who told Vox that “when a US bank isn’t interested in going into that type of loan or startup, or thinks it’s too risky, BND would get engaged. They could point to this mission and say, ‘We’re helping growth, the growth helps the state.’”

The BND has more than $8 billion in assets; now offers business and student loans; and can offer larger loans with lower interest rates, which helps promote a healthy, self-sustaining local economy. According to BND’s 2018 Annual Report, it recorded its 15th consecutive year of record profit last year, with $159 million in income, $7 billion in assets, and an investment portfolio of $1.9 billion.

Now in its 100th year, the Bank of North Dakota is a socialist concept that enjoys broad support in a state Donald Trump won by 36 points in 2016. Its return on investment last year was 18 percent, well above the average return for all US banks. It has helped foster a sustainable, growing local economy, while insulating it from disaster: as the American Prospect points out, North Dakota was the only state not to face a budget shortfall in 2009 after the recession. So why is it still the only public bank in the United States?

Bank of North Dakota, The River NewsroomCredit: Source: Wikimedia Commons
The counting room of the Bank of North Dakota in 1920.

Public Banks, Disinvestment, and Marijuana

It might not be for long. Last month, California finalized a law allowing cities and counties to establish public banks, though it’s expected to take at least a year to establish a charter for one. And, more broadly, conditions are ripe for rethinking how financial institutions operate. The Bank of North Dakota was created to fill a void in local lending for farmers; as Cinnamon Janzer notes in U.S. News & World Report, there’s a similar void today in the rapidly growing cannabis industry. Janzer writes:

[The industry] is currently unbanked thanks to marijuana’s designation as a controlled substance on the federal level, meaning that any bank associated with the federal government—anything from using a federal routing number to being insured by the Federal Deposit Insurance Corp.—can’t accept marijuana money.


“California is looking at the possibility of a state-owned bank system similar to the Bank of North Dakota specifically to deal with the cannabis problem,” says Ellen Brown, cofounder of the Public Banking Institute, a nonprofit organization dedicated to advancing public banking across the US. She notes that a public banking system could solve the cash-based issues of the marijuana industry and keep millions of dollars in lending revenue in the state, the same way that profits gained by the Bank of North Dakota stay in its state.

There are also growing calls for disinvestment, which were amplified by the protests at Standing Rock against the Dakota Access Pipeline (which had funding from Wells Fargo, Bank of America, Goldman Sachs, and JPMorgan Chase, among others). Like all corporations, for-profit banks are legally obligated to maximize profit, and it’s easier to turn a profit by investing in Wall Street rather than local communities. But this means that public money ends up in the fossil fuel industry, private prisons, immigrant detention centers, and other places users might not choose to financially support.

Commercial banks continue to dominate the banking marketplace, but individuals are starting to make different choices about where they bank—especially here in the Hudson Valley. Nationwide, commercial bank deposits are 13 times higher than local bank deposits, but as Hudson Valley One reports:

Ulster County is marching to a different drummer. The most recent federal data shows the national banks growing more slowly in deposits in Ulster County than the local banks. If present trends continue, total Ulster County deposits in local banking institutions will exceed those in the county’s nonlocal banks in three or four years. And Ulster County continues to be one of the strongholds of credit unions, another important part of the banking world.

Local banks and credit unions are a perfectly good alternative for individual accounts, but they don’t have the capacity to handle large government accounts, and have less capital with which to issue loans. This makes public banking a good option for municipalities and states. As Ananya Garg writes for Yes! Magazine in a piece detailing the community implications of public banking, public banks are mandated to service their communities, not obligated to maximize profit, and are run like nonprofits, with community board members and public financials.

Public banking might also just be sound fiscal policy, a particularly compelling argument given the volatility of big banks. A 2011 report by liberal think tank Demos, writes Sarah Jones in The New Republic, explains how the public banking model can positively affect the local economy by stating that “banks can offer lower debt costs to city and state governments, fund public infrastructure projects, and encourage entrepreneurship by providing loans to small businesses at lower interest rates and with lower fees.” And a 2018 article in American Banker highlights more of the benefits, including “keeping state money in state” and “higher returns on public deposits.”

Time will tell how far the public banking movement spreads, and if it creates more institutions like the Bank of North Dakota. In addition to California, there has been support for public banks in Vermont, New Mexico, and Pennsylvania. New Jersey Governor Phil Murphy has been making the case in the Garden State. And Public Bank NYC is running a campaign in the nation’s largest city, calling for a public bank that would make equitable investments and “serve as a public trust invested in social justice.” There’s even been some movement statewide: Bills introduced in the New York Senate by Luis Sepúlveda (D-Bronx) and James Sanders (D-Queens) would, respectively, establish the Empire State Public Bank and amend finance law to allow the establishment of other public banks in the state, but neither bill made it out of committee during the 2019 legislative session.

And while public banking may have been born of socialism, public banks can help create a more stable and just economy under capitalism, one that centers the concerns of community members over profits, which will be needed to fund projects like the Green New Deal. As Ellen Brown, the cofounder of the Public Banking Institute, writes for the New York Times:

We actually need publicly owned banks for a capitalist market economy to run properly. Banking, money, and credit are not market goods but are economic infrastructure, just as roads and bridges are physical infrastructure. By providing inexpensive, accessible financing to the free enterprise sector of the economy, public banks make commerce more vital and stable.

Phillip Pantuso is the editor of The River, and has contributed to the Guardian, the New York Times, and Yes! Magazine. Follow him on Twitter @phillippantuso.