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1 1 (September 20, 2022)

handle is hein.crs/goveivx0001 and id is 1 raw text is: nforming ii dionaI Research Service led Ilive I Amte sin 01914 September 20, 2022 Public Banks: History and Recent Proposals Overvw of Public Bankts Banks are generally private enterprises chartered by state or federal regulators for the purposes of accepting deposits and making credit available to the communities they serve. As profit-seeking businesses, banks' motivations do not necessarily align with certain public policy goals. Policymakers use regulation and guidance to align some of banks' motivations with public interest. For example, banks use deposits as a funding source for their lending. They may be indifferent to accepting deposits from various communities, but certain banks may prefer to lend only to affluent areas. The Community Reinvestment Act was enacted to ensure that banks lent to the communities from which they took deposits. Sometimes, the private sector may simply be unwilling to make credit available to certain markets or to offer deposit accounts to certain customers. To take another example, agricultural lending can be risky because of the unpredictable nature of weather patterns and crop yields, which impact borrowers' ability to make payments. Further, banks may be unwilling to open bank accounts for certain customers because the cost of due diligence is sufficiently high that it may not be profitable for them. In these examples, public policy goals of supporting domestic food markets and encouraging bank account access could be at odds with private market motivations. One potential policy option to address certain issues would be for policymakers to establish a public bank, which would be chartered to serve in the interest of public policy goals not being met in the private sector. This In Focus discusses the potential role of public banks, including institutions that are wholly or partially owned by the government. It also discusses certain financial institutions chartered by the government with limited purposes tailored to achieving certain social policy goals. History of Public Banks Pre- 900 Public Banks, Since Closed Following the economic struggles after the Revolutionary War, Alexander Hamilton-then Treasury Secretary- submitted a plan to Congress to charter a national bank to issue paper money, provide depository services, and offer banking facilities for commercial transactions, as well as to act as the government's fiscal agent. In 1791, Congress passed a bill that led to the First Bank of the United States. The charter lasted 20 years and was allowed to expire in 1811, rooted in fears, among other reasons, that a central banking system would crowd out a growing private banking industry. In 1816, following another economic turndown, Congress chartered a second national bank to provide relief for the country's economic woes and prevailing war debt. However, by 1832, President Jackson's distrust of a national bank led to an executive order to withdraw federal funds from the second national bank, and political infighting foreshadowed the institution's demise. In 1836, Congress did not renew the charter for the Second Bank of the United States, opening the door for states to start their own banks. For example, Alabama, Kentucky, Illinois, Vermont, Georgia, Tennessee, and South Carolina all created banks that were owned by the state government. Missouri, Indiana, and Virginia also had banks with the state holding a majority interest, and a number of states created banks with the state owning a minority interest. Other states, such as Louisiana, were active in chartering private institutions that focused on public policy goals such as building railroads and canals. However, the financial panic of 1837 and other issues led state-owned banks to struggle and ultimately close. Further, the National Banking Acts of 1863 and 1864 created a new national banking system, where privately owned banks could issue notes backed by Treasury bonds. In 1865, Congress enacted further measures to tax state bank notes, ushering in an era of federally chartered private banks. By 1900, most of these state public institutions had closed. One notable exception was the Delaware Farm Bank, of which the state of Delaware owned a 49% share from 1800 to 1975. The state increased its ownership to 80% in 1976. However, the bank encountered significant financial stress, and by 1981 it was acquired by a private bank in Pennsylvania. Bank of North Dakota, 19 9Present During the early 1900s, agriculture drove North Dakota's economy. Growing seasons were constantly jeopardized by drought and harsh winters, and private banks began to raise interest rates on farm loans, complicating access to financing vital to the industry. In 1919, the state legislature established the Bank of North Dakota (BND) for the purpose of encouraging and promoting agriculture, commerce, and industry. BND is one of two currently operating public banks. It is operated, managed, and controlled by an industrial commission composed of the state governor, agriculture commissioner, and attorney general. The governor appoints an advisory board of directors comprising seven bank officers from private banking institutions generally owned by North Dakota residents. Today, the North Dakota legislature appropriates funds from BND when needed through the budget process or state law. All funds earned by the state (i.e., funds from penal institutions and educational institutions) must be deposited in BND. Deposits do not have federal deposit insurance but are guaranteed by the state and are exempt from state, county, and municipal taxes. Generally, BND is empowered to make, purchase, guarantee, or hold loans to and for a range of borrowers and

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