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Does Public Banking Work?

While some on the right will decry California's recently enacted public-banking law as an invitation to government profligacy, the history of publicly-owned lending institutions shows that they can play a valuable role in addressing needs left unmet by the market. The key to success lies in governance and avoiding mission drift.

NEW YORK – Three decades after the fall of the Berlin Wall, the United States is finally embracing public banking. In the summer of 1989, political theorist Francis Fukuyama famously suggested that American-style free-market capitalism would become the default mode for organizing economies around the world. But now policymakers in that model’s very heartland are looking for alternatives.

Unlike many other countries around the world, the US has never had a sizable public-banking sector. But as of this month, public banks are legal in California, making it the second (after North Dakota) and largest state to have embraced the idea. California lawmakers recently enacted legislation that officially authorizes “public ownership of public banks for the purpose of achieving cost savings, strengthening local economies, supporting community economic development, and addressing infrastructure and housing needs for localities.”

Judging by the text of the law, California’s public banks will be more limited in scope than public-banking sectors elsewhere. They will be local, not-for-profit entities with a designated public purpose. Some may operate as commercial banks, accepting deposits and making loans; and others may serve as industrial banks with a focus on infrastructure investments.