As is the case with some definitions, government-owned banks are exactly what they sound like: banking institutions that are both owned and controlled by the government. The definition gets complicated because government control varies depending on the city, county, state or country, as a government-owned bank in China is wildly different from, say, the globally admired Bank of Canada. In the United States, state-run banks can also be public banks.
Government-owned banks come in all shapes and sizes, running quite differently around the world, but all strive to keep their regional economies afloat through various banking and currency mechanisms.
Parts of America today are increasingly intrigued by the idea of public banking, as states and cities wonder if they can repeat a model that has successfully thrived in North Dakota for over a century, but the idea of a government bank is certainly not new. Alexander Hamilton’s passion was the Bank of America, a concept for which he lobbied hard and eventually succeeded in creating after he had established the Bank of New York on a similar principle. The Bank of America was designed to hold the government’s deposits and to loan the government money, but it also created a centralized currency while promoting industry and business via loaning credit.
The Bank of the United States had to be chartered by the government, which is akin to being licensed through congressional approval. This charter carried the bank from its birth in 1791 through 1811, when Congress decided to let the bank’s charter lapse. The very next year, the War of 1812 broke out, and President Madison felt the sting of that loss of having available credit from the old Bank of America. Madison resurrected the bank in 1816 but not for long, as President Andrew Jackson came along a couple decades later and wasn’t a fan of state-run banking, so he allowed the charter to lapse again.
While government-run banks existed on a smaller scale, a national bank wouldn't exist again until 1914 and the creation of the Federal Reserve.
The U.S. Federal Reserve, also known as “the Fed,” is the central bank controlled by the government that strives to create monetary stability in the U.S. To that end, the Federal Reserve has four duties:
- Defining monetary policies: There’s a mechanism called the “federal funds target rate” that the Fed sets to try to create two things: a high rate of employment and a low inflation rate. The federal funds target rate doesn’t directly affect people’s day-to-day life, but it does influence overnight lending rates and the prime rate, which affect everything from deposits to loans for everyone from the kid with a first savings account to the tycoon trying to fund a new development.
- Regulating and overseeing all banks: The Fed was largely born to stop the boom/bust antics of unsecured banks and a lack of consumer faith. By creating a body to oversee all banks in the nation and by guaranteeing a portion of public deposits, the Fed gave the public confidence in the banking system, which in turn helped create a more secure national economy. State-chartered banks, however, fall under the purview of the Federal Deposit Insurance Corporation.
- Providing payment services: Everything from government payroll to processing electronic payments and bank transfers and even the printing and circulation of bills and coins is all just another day at the office for the Fed.
Maintaining monetary stability: By doing those three big jobs, the Fed has helped the American financial system be among the world’s most robust. There are those who feel the Fed didn’t do its job well enough during the years leading up to the 2008 economic crash, and there are those who still feel the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 has done little to resolve the inequities of private banking in America, and they’re the ones pushing for the ascent of public banking. However, America’s economy still holds strong, and much of that is due to the oversight and regulation of the Federal Reserve.
Just five years after the Federal Reserve was born, the state of North Dakota threw its hat into the banking ring with aspirations of wrestling control over the financial lives of North Dakota citizens from outside financiers who had little to no stake in the regional economy. The bankers in New York and Chicago didn’t care whether farmers in North Dakota could see their seasons through, and it often caused financial hardships and calamity for the largely agricultural state. It was 1915 when an excommunicated Social Party member named A.C. Townley dreamed up the Nonpartisan League, a political party that campaigned on a socialist platform, seeking things like state-owned grain mills, farm insurance and state-owned banks.
The party members won seats because they positioned themselves as pro-people and pro-farms rather than socialist, and one of the measures that they passed was that of a state-owned financial organization called the Bank of North Dakota (BND). It was funded with just $2 million back then, but here it is a century later and the BND is still going hard, taking in a profit of $159 million in 2018 and boasting assets totaling $8 billion, all while being a truly public bank that is on the side of its members, not that of profit and shareholder revenue.
Traditional banking means someone, like a farmer, might be rejected for a loan from a standard bank because he's too risky for a loan, or if he does get the loan, it may be with overly punitive terms. The Bank of North Dakota, however, defines risk a bit differently because it invests in the people — the thinking being that not giving the farmer a loan and hastening the farm’s likelihood of failing is bad for the community, the economy and the state. They may give that loan, or they may loan half to match a traditional bank’s loan, thus reducing the company’s risk and making terms easier for the borrower. Either way, it turns out that it definitely helps North Dakota's economy, and it's pretty good business for the BND too.
When talking about state-run banks meaning “bigger government”, it’s probably good to note that North Dakota is a very, very conservative state when it comes to the ballot box, but even in that "red" political climate, the BND enjoys great popularity. When the bank started a century ago, it began because of predatory lending practices and growing income inequality making it harder for average folk to get ahead. Those situations are rife in today's California, where income spreads are growing and big banks have a bad reputation.
Banks are only concerned with profit and not whether families and communities thrive, but BND looks at the big picture behind North Dakota's economy, and that’s what dictates its lending practices, and it turns out that California’s Governor Gavin Newsom is a big fan of that idea. The topic of public banking in California isn’t a new one, though — there’s been a grassroots drive to create a California-run public bank since 2011.
California’s economy would be the fifth largest in the world if it were a sovereign state, so some argue that California could depression-proof the state with a state-run bank to offset financial calamities that might strike the U.S. since the nation’s economy is so dependent on California. Many counties, cities and states are beginning to study how public banking could help them steady their communities by protecting them from predatory lending practices while boosting economies.