California is on the way to becoming a leader in the public banking movement. The Golden State could conceivably create 10 brand new public banks from Eureka to San Diego.
The idea of a public bank is not new, if you look internationally. It is a bank that is owned by the state (or city or regional agency) rather than by private investors and many still operate in other countries. In the United States, however, there is only one public bank, in North Dakota. But the movement has been building quietly in recent years.
In 2019, Governor Gavin Newsom signed AB857, allowing cities and regions to establish public banks and in October 2021, he signed AB1177 which calls for a study about the creation of a statewide public bank. Los Angeles also approved a study on the possibility of creating one for the city. There are nine other groups of public banking activists from San Francisco and the Bay area, Santa Barbara, Santa Rosa, Eureka, the central coast, Pomona Valley and San Diego.
There is only one public bank in the United States as of this date. That is the Public Bank of North Dakota. It has been successfully operating for more than a century. It has not harmed the financial industry in North Dakota AND does not compete with private banks (e.g. the Bank of America, Wells Fargo, East-West Bank, etc.) When it was started in l9l9, it grew out of the farm crisis that wreaked havoc on American farming. For example, grain storage (elevators) operators held down the price of grain, the cost of transportation was beyond their control and even the farm supplies they bought from out of state were out of their control. But worst was the fact that the banks they relied on for the credit needed to survive the farming and harvest cycles were not sympathetic to their needs. So after the boom and bust cycles of America’s 19th century economy, they decided to look to banking that served the farming community and not the distant (probably urban) shareholders.
Today, the PBND partners with private banks. If you want to borrow from the PBND, you must make the application at a local private bank that does the paperwork. The PBND partners with the bank in making the loan, providing some of the funds. It is a system that benefits the customers and the banks (who keep their customers.)
There are two powerful reasons why public banking would be good for Californians.
One lies in their ability to help the many Californians who are “unbanked” or “underbanked.” These are people who need low cost banking services but have too little income to get it through the large private banks.
People on the far side of the economic divide simply can’t afford the minimum balances or alternative charges to have a savings or checking account. A public bank that is not required to send dividends can offer low cost or free services. (By the way, the traditional way banks have made money is not through all these fees, but from making loans, using depositor funds as “reserves” almost like collateral. They are allowed to make loans ten times over the amount of “reserves” they hold. To oversimplify, when we deposit $100 into our savings accounts, the bank will keep $10 in its vault and loan out $90. And they earn money from the interest the borrower pays. It was never from nickel and dime charges.)
Sadly, some 25% of American households are “underbanked” or “unbanked.” When they want to cash their paychecks and pay their bills, they need to go to a check cashing service, where they can be charged up to 12% of the value of their check. (Most banks will cash the check for no cost for their customers.) For a paycheck of $1000, that is a fee of $120. So it’s expensive.
And to pay bills when cash is not accepted, the unbanked have to purchase money orders or cashier’s checks, again at a fee of $1.25 for a check under $100. But different agencies offer differing prices for this service, so you have to check places like the post office, Walmart and the various cash stores.
In short, it is inconvenient and not cheap to be unbanked or underbanked. And for families at the lower end of the income scale, it might not be fair.
But the second very powerful reason for having a public bank lies in its ability to help towns and cities and counties and regional governments to cut their financial costs. A public bank that is owned by a city can receive deposits of tax and other revenue. In return the public bank can provide credit to start projects such as roads, bridges, schools, playgrounds. (All such public works projects rely on credit to get started.) And profits from these loans can be returned to the general funds of the cities and governmental agencies. (Of course, the public bank will still have to keep a reserve fund on hand.)
Because a public bank is not obligated to distribute dividends to stockholders, the fees and interest rates they charge can be lower. It has been estimated that these costs for infrastructure projects can be reduced 50%!
There is a progressive element to the thinking of banking activists. No, they are not socialists who want the states and cities to own and control the banks. They hope that public ownership will give the public bank the freedom to extend credit for environmental projects to cope with climate change, to help in the construction of affordable housing, to be socially and environmentally responsible in their financial decisions.
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