Access to Capital & Economic Renewal: The Public Banking Imperative

By Ed Quevedo

“May we proceed based upon an understanding that all economic activity is actually initiated by gift, just as each of our breathing lives is supported at the outset by the gift of nourishment.

That fluid gift is transformed through human development into capacities for new ideas and recognition of the needs of others.

This is a snapshot of how a healthy culture contributes to economic renewal.”

John Bloom, Senior Director, Organizational Culture, RSF Social Finance - The Genius of Money (2009)

Let us say, for discussion purposes, that you are a social entrepreneur, with a heart of gold and a brain motivated by service to society.  You have the technical skills, business savvy, capable team, and passion to launch a new venture that will meet an unquestioned and essential human need overlooked by the current market.  What is your fundamental need?  What is the oxygen that will fuel your idea and make it real, present, and powerfully transformative?  Access to capital.

Access to capital is such an essential concept, that we often forget its many forms, implications, and sources.  Access to capital is, at its core, not an economic concept.  When you draw your every breath, respond to your hunger for food and nourishment, and seek the affection, love, and companionship of others, you seek access to capital.

Oxygen and physical nourishment are, for humans, the most fundamental of many forms of natural capital. Social capital is also central to our existence as healthy, fully realized beings.

Financial capital is a notion derived from, not superior to, these other forms of capital. After all, without natural capital and social capital, we as a society would never have come to create financial capital. Thinking, breathing people, working in concert, and therefore served by natural and social capital, derived the notion of financial capital as a way of facilitating exchange in the post-bartering world of the industrial age.

In the “modern world,” however, financial capital has become dominant. It drives news headlines, has hijacked our politics and policy, and makes wage slaves of the best of us.  Most assuredly, financial capital has a more beneficial and human side – consider the work of organizations such as RSF Social Finance, The Triple Bottom Line Fund, and many other non-profit and even for-profit institutions and organizations working to make financial capital a force for good in the world.

Unfortunately, however, the ecosystem of financial capital is dominated by large, faceless, predatory, and sometimes dysfunctional organizations, rules, and practices.  And it is unavoidable.  Even for those of us who try to practice responsibility in our financial dealings, it is virtually impossible not to become entangled in one way or another in the web of traditional finance.  Mortgages, electronic funds transactions, purchasing various forms of energy, and event buying concert and music venue tickets:  these and dozens of other transactions of every-day life lead us into the grip of traditional financial institutions.

There is, of course, an even darker side to this reality.  For the millions of Americans and billions of other folks around the world who seek a better life without the luxury of practicing “sustainability,” the lack of access to financial capital means disease, hunger, a life embittered, and by extension, unmeasured suffering and ultimately millions of unnecessary deaths each year.

The notion of for access to financial capital is accordingly in need of a fundamental rethink.  One of the many options we have to mainstream the important work of institutions like Beneficial State Bank, Triodos Bank (about which I have written previously in these “pages”) is public banking.  Through public banking, access to (financial) capital becomes a reality not only for progressives seeking sustainable banking alternatives, but perhaps more importantly to all who would participate in the economy, including impoverished and marginalized communities and families.

Now more than ever, with an incoming federal administration that looks set to impose some of the most regressive financial and social revisions in decades, we would all be well served to better understand public banking and its promise for improved access to capital.  The Public Banking Institute (PBI), one of the few organizations working exclusively in this domain, defines public banking as:

“Banking operated in the public interest, through institutions owned by the people through their representative governments. Any governmental body which can meet local banking requirements may, theoretically, create such a financial institution.”

Public banking is distinguished from private banking in that its mandate begins with the public's interest. Privately-owned banks, by contrast, have shareholders who generally seek short-term profits as their highest priority. Public banks are able to reduce taxes within their jurisdictions, because their profits are returned to the general fund of the public entity.

When the public interest demands, the mission of public banks is to respond immediately, to assure the long-term prosperity of the community.”

In short, public banks are owned by public agencies such as states and communities, driven by community need and well-being, not profit.  With this very different incentive structure, public banks are in a much improved position to create affordable credit, and by their nature operate with greatly reduced risk.

They engage in no highly risky, complex, or artificial marketplace investments. Public banks are much better equipped to  stabilize potential credit crises, decreasing volatility rather than feeding it, as private banks tend to do.

Public banks are also much better positioned to invest in infrastructure and create jobs by partnering with local and hyper-local home-grown businesses to fund and grow them.  The risk profile, or so-called underwriting guidelines, of public banks, are keyed to public good, not return on investment.

When we consider the brutal impact of the wealth gap in the U.S., the increasing economic stratification of our society, and the urgent and unmet needs of our inner cities and impoverished fellow citizens, public banking on a broad or even intermediate scale can solve many ills.  Startlingly, in the vast, broad territory of the U.S., there is exactly one public bank: The Bank of North Dakota (BND).

BND was founded in 1919 to guarantee a ready and dependable supply affordable credit of the State’s farmers, ranchers, and businesses.  To give you a sense of the striking difference between the benefits and incentives that move a public bank vs. conventional private banks, consider these facts:

• From the spring of 2010, in the shadow of the global banking and financial collapse, North Dakota was the only U. S. state with a major budget surplus;
• The State maintained the lowest unemployment and default rates in the U.S; and
• It had the most community banks per capita, suggesting that the presence of a state-owned bank has not only not hurt but has helped the local banks.

BND further invigorates the State’s economy by making available low interest loans to students, existing small businesses and start-ups. It partners with private banks to provide a secondary market for mortgages and supports local governments by buying municipal bonds.

As a public bank, BND is capitalized by all of the State’s assets to capitalize the BND. By law, the State must also deposit all of its revenues in the Bank. BND issues dividends to its only shareholder - the people of the State. In the past decade, a very small population and a middling level of economic turnover, BND has returned over $300 million to the State’s general fund.  This supports the State’s healthy and regular annual surpluses and consequently eliminates pressure for drastic tax increases or spending cuts for vital public services.

It is a truism that, without access to affordable credit such as that which can be uniquely provided by a public bank, average Americans who do not have substantial wealth cannot make the critical investments in their families and local businesses required to provide a prosperous future.  Families with below-average incomes are even more damagingly disadvantaged.  They are driven to rely on pay-day loan companies, pawn shops, and other less than sterling sources of access to financial capital, and may even struggle to set up and maintain a simple checking account.

So – why aren’t there more public banks, especially in progressive states like California, Oregon, and New Jersey?  This is a complex question beyond the scope of the present article.  But one courageous and intrepid California municipality, the City of Oakland, voted in November to study the feasibility of setting up a public bank to be owned by the City.  The resolution also directed city staff to cooperate with other local jurisdictions to explore establishing a regional public bank.

Encouragingly, other cities such as Philadelphia, Pennsylvania, Santa Rosa, California, and Santa Fe, New Mexico, are also considering establishing public banks.  As we enter a new year, one filled with promising and potentially troubling transitions, you might consider adding to you New Year’s resolutions list to a commitment to become involved in advocating for public banking where you live.

On its face, public banking is not immediately the most inspiring or charismatic of pursuits.  But burnished by best practices in responsible marketing and the right kind of advocates, it might one day become a growing trend rather than a market oddity.  It is not a perfect model, but it strikes this writer as an essential and potentially transformative part of a wholesale strategy to, as I have put it elsewhere, build an economy worthy of our affection.

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Ed Quevedo is an educator and writer, and directs programs in Peace & Social Justice and Future Economies as a Research Affiliate at the Institute for the Future.