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THE PUBLIC BANK THAT WASN’T: NEW JERSEY’S EXCURSION INTO PUBLIC
BANKING  
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Ellen Brown
March 12, 2024
Counterpunch
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_ What would a Public Bank in New Jersey be? “The basic premise of
such an institution is to hold the millions of dollars in taxpayer
deposits that are normally kept in commercial banks and leverage them
instead to serve some sort of public purpose." _

, Collin – CC BY-SA 2.0

 

In 2017, Phil Murphy, a former Goldman Sachs executive, made the
establishment of a public, state-owned bank a centerpiece issue
[[link removed]] during
his run for New Jersey governor. He regularly championed public
banking in speeches, town halls and campaign commercials. He won the
race, and the nation’s second state-owned bank following the stellar
model of the Bank of North Dakota (BND) appeared to be in view.

Due to the priority of other economic-policy goals, the initiative was
largely kept on the back burner until November 2019. Then, in an
article titled “Murphy Takes First Key Step Toward Establishing a
Public Bank
[[link removed]],”
the New Jersey Spotlight announced:

“Gov. Phil Murphy is planning to sign an executive order Wednesday
[Nov. 13] that will create a 14-member “implementation board” to
advance his goal of establishing a public bank in New Jersey.

“The basic premise of such an institution is to hold the millions of
dollars in taxpayer deposits that are normally kept in commercial
banks and leverage them instead to serve some sort of public purpose.
…  [Emphasis added.]

“North Dakota currently is the only state that operates a public
bank wholly backed by the deposit of government funds. [Emphasis
added.] Founded a century ago to help insulate farmers from predatory
out-of-state lenders, the Bank of North Dakota offers residents,
businesses and students low-cost services like checking accounts and
loans. It has also been used to advance projects that boost
infrastructure and economic development, and has even produced revenue
for the state budget’s general fund, according to the bank’s
promotional materials, thanks to lending operations that regularly
turn a profit.”

Gov. Murphy signed Executive Order 91
[[link removed]] on Nov. 13,
2019, and the Implementation Board worked diligently for the next
3-1/2 years to advance its goals. In June of 2023, the
governor signed bill S3977/A5670 into law
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creating the New Jersey Social Impact Investment Fund (SIIF) along
with a $20 million appropriation for seed funding. The State
engaged Next Street [[link removed]], a mission-driven
advisory firm, to create a report with guidance and input from the
Public Bank Implementation Board, and on Feb. 2, 2024, Next Street
submitted its “Recommendations for Implementing a Public Bank in New
Jersey
[[link removed]]”
to the governor.

The report did a commendable job of identifying the extensive needs
for increased financing by a wide variety of interests in New Jersey,
including support for small business, affordable housing, home
ownership, student loans, education, better infrastructure, and many
others. Also commendable were its recommendation that the Community
Advisory Board be constituted of local stakeholders that could most
benefit from public bank funding, and its assurance of accountability
to the State and the public through transparency, detailed annual
public disclosure, and an independent annual audit.

WHEN IS A BANK NOT A BANK?

Public banking advocates have serious concerns, however, about other
aspects of the report. Most concerning is its apparent attempt to
redefine a “public bank.” The report recommends creation of a
public bank as a successor to the SIIF but asserts that the public
bank should not be a depository institution. This recommendation is
repeated throughout the report.

Many authorities confirm that a financial institution is not a
“bank” unless it takes deposits. See e.g. Investopedia
[[link removed]]: “A bank is a
financial institution licensed to receive deposits and make loans.”
See also SoFi’s “Guide to Depository Institutions
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stating “There is no difference between a bank and a depository. A
bank is a type of depository institution.” And see Wikipedia
[[link removed]]: “A bank is a financial
institution that accepts deposits
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a demand deposit
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making loans [[link removed]].”

The Wikipedia definition highlights the stellar advantage of a
“bank” over a “revolving fund” of the sort the Next Street
report recommends: banks actually create money
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deposits when they make loans. It is this authority that gives
bankers their enormous power
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the economy and in government, and it is a power backed by the credit
of the people. It should therefore belong to the people; and as
Governor Murphy recognized in 2017, it can be reclaimed by the people
through their own publicly-owned banks.

The nation’s sole state-owned public bank, the Bank of North Dakota,
takes deposits. Taking deposits is what makes it a “bank.” Being
owned by the state is what makes it a “public bank.” Because it is
a bank, BND can create new money in the amount of the loan when it
extends credit; and it is permitted to make a profit through its
loans. It can convert its profits or a portion of them quickly to new
capital, which can generate new loans up to 10 times the bank’s
capital base.

A New Jersey public bank on this model would be able to grow quickly,
eventually reaching the size needed to fully fund the state’s large
unmet needs. See for reference “Why a Sovereign State Bank Is Good
for Tennessee
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by Prof. Richard Werner, who proposes initial capitalization of $500
million for a Tennessee state-owned bank. A $20 million revolving fund
would be barely sufficient to cover New Jersey’s startup costs. The
Next Street proposal is to leverage this fund with private capital,
but that approach has repeatedly been shown to be inadequate to fund
infrastructure
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other major public projects. In many states it is unlawful for a
lending institution that does not take deposits to call itself a
“bank.” Public banking advocates contend that such misuse of the
term “bank” confuses public officials and the public and hinders
the public banking movement. The Public Banking Institute definition
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“banks with a depository bank charter (or equivalent direct license)
that the public owns through their representative government and
that work to benefit local communities.” The PBI website also
features an infographic distinguishing various types of financial
institutions, titled “U.S. Public Banks, Banks, and NonBanks
At-A-Glance: How Public Banks Excel
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A BANK IS NOT A CHARITABLE REVOLVING FUND

Among other concerns are the Next Street presumption that the New
Jersey public bank would be making risky, unprofitable loans (e.g.
loans to uncreditworthy businesses otherwise unable to get affordable
credit), and the recommendation that the bank could be majority
privately owned and operated. The BND is more profitable
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of the largest Wall Street banks
[[link removed].];
and to be a public bank, the institution must by definition be either
majority or 100% publicly owned and operated.

On the BND model, the New Jersey bank would be run by professional
bankers who prioritize safe lending. BND has been safely operated for
105 years, despite a majority of its board occasionally shifting
political parties. Experienced bankers make its loans free from board
or political influence and from conflicts of interest. BND’s
principal depositor, the state of North Dakota, by law must keep its
funds in the bank, thus protecting BND from a run on its deposits.
The Standard & Poor’s credit rating
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The S&P report states, “BND has one of the highest risk-adjusted
capital (RAC) ratios for rated U.S. banks.”

BND’s profitability has helped strengthen community banks and credit
unions in North Dakota by making loans in partnership rather than in
competition with them. In the Great Recession, it also bought loans
from stressed local banks to prevent bank failures and keep the
economy running smoothly. BND operates with very low overhead and
stresses productive and local lending rather than lending to buy
existing assets. The latter is the sort of speculative, nonproductive,
bubble-creating lending engaged in by the giant commercial banks from
which Gov. Murphy originally sought to divest. North Dakota’s
revenues are safer in its own bank than in the largest Wall Street
banks, which “insure” their capital with interconnected
derivatives backed by rehypothecated collateral, a practice that the
Office of the Comptroller of the Currency has declared to be “unsafe
and unsound.”

A LITANY OF CONTRARY STUDIES

In contrast to the conclusions of the Next Street report, other
detailed studies have recommended establishing true public depository
banks and have demonstrated that this can be done safely, profitably
and sustainably. Here are a few:

Exploring a Public Bank for New Jersey: Economic Impact and
Implementation Issues
[[link removed]] by
Prof. Deb Figart (2018). “Figart estimates
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every $10 million in new credit or lending by a state bank would yield
between $15 million and almost $21 million in gross state output and
between $3.5 million and $5.2 million in state earnings. Between 60
and 93 new jobs would be created.”

Public Bank East Bay Viability Study
[[link removed]] (2022).
“This Study and the accompanying financial projections show
that the PBEB [Public Bank East Bay, California] can achieve [its]
goals while operating in a conservative and secure way, minimizing
the financial risk to its sponsor governments.”

White Paper: Public Banking in the Northeast and Midwest States
[[link removed]].
This 2019 report by The Northeast-Midwest Institute “recommends that
all NEMW states adopt a public bank and do so with close attention to
their circumstances and needs, tailoring the bank’s specifics to the
nuances of the state.”

Why a Sovereign State Bank is Good for Tennessee
[[link removed]] (2023).
Prof. Werner states, “Banking is one of the most profitable
industries. The State Bank of Tennessee will be profitable and
constitutes a sound investment for the State of Tennessee. However,
the benefits abound and go beyond merely commercial attractiveness.
The establishment of the State Bank of Tennessee is a crucial step
that can be built upon in a variety of ways in order to be able to
counter future possible threats to financial and economic stability
and economic and political autonomy and freedoms.”

Whether the final stage of New Jersey’s efforts will be a true
public bank, as advocated by Gov. Murphy in 2017, remains to be seen.
Meanwhile other states and cities are making impressive progress
toward that goal. For updates, see the Public Banking Institute
newsletter [[link removed]].

_The Public Banking Institute team contributed to this article, which
was first posted on ScheerPost
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_ELLEN BROWN is an attorney, founder of the Public Banking Institute
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including the best-selling Web of Debt [[link removed]]. Her
latest book, The Public Bank Solution
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models historically and globally. Her 300+ blog articles are
at EllenBrown.com [[link removed]]._

* Public Banks; New Jersey Public Bank; North Dakota Public Bank;
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