Federal Legislation

Table of Contents:

Public Banking Act

Rep. Tlaib and Ocasio-Cortez recently introduced H.R.8721, the Public Banking Act, which would establish a (1) federal-level regulatory framework for public banks, (2) public bank grant programs, and (3) a supporting financial infrastructure for public banks. 

While the bill doesn’t directly create new public banks, it solves a number of problems faced by public banking advocates:

  • Legitimizing the idea of public banking to moderates/conservatives/skeptics as an institutional option
  • Providing substantial technical, legal, and financial assistance to start up public banks, currently undertaken largely by volunteer organizers
  • Carving out privileged access to federal finance tools for public banks
  • Leapfrogs the siloed efforts of changing individual state banking regulations with mixed success

On (1), the bill would provide formal federal recognition to banks chartered at either the federal or state level, resolving a number of problems currently facing public banking efforts. These include:

  • Clarifying that public banks must be wholly owned and controlled by the public via their state, local, or tribal government or a designated nonprofit instrumentality.
  • Lifting the $250,000 cap on public deposit insurance. Public deposits in private banks are currently FDIC insured but only protected up to $250,000, making the insurance functionally worthless relative to the size of public deposits. 
  • Creating a framework for public banks to act as fiscal agents for investing the funds of governments and public entities.
  • Building in a mandate for the federal framework to be “universal and comprehensively include historically excluded and marginalized groups.”
  • Developing regulations to ensure the banks’ practices are consistent with federal decarbonisation targets, and outright prohibiting any activity related to fossil fuels. 
  • Setting up a framework for public banks to act as intermediaries for a federally administered “central bank digital currency” (CDBC), digital cash, and/or postal banking system (as described in the sections below). 

On (2), the bill creates three grant programs (which would be accessible to public banks regardless of the financial health of their sponsoring governmental entity): 

  1. The Public Banks Grant Program, which would provide funds for start-up, capitalization, and ongoing operational costs.
  2. The Public Bank Incubator Program, which would provide technical and technological assistance to those seeking a public bank charter.
  3. The Community Development Grant Program, which would fund the facilitation of coordination of public banks with community development financial institutions (CDFIs), minority deposit institutions, and credit unions in order to support the public banks’ mandate to promote universal financial services.

On (3), the bill would establish four Federal Reserve facilities for public banks, which altogether would provide public banks a comprehensive set of lines of credit on both secured and unsecured bases (i.e., borrowing against the banks’ retail credit, public securities, and any other financial assets).


National Investment Authority

The National Investment Authority (or NIA, also known as a National Investment Bank, National Development Bank, National Climate Bank, National Infrastructure Bank) is a proposed federal financing body that would be responsible for coordinating the US’ industrial policy (i.e., the national strategy for economic development). 

In basic summary, the NIA would function similar to an investment bank, providing a prominent public option in the financial sector. After its establishment with a guiding industrial policy, the bank would identify public and private investments that achieve the national development goals. The NIA would function as a competitive buyer and seller of public and private-sector financial instruments in accord with the industrial policy. This public management of mixed public-and-private capital would guide private capital — which is already “downstream” of public money creation via publicly-chartered banking institutions — towards new productive ends. (It is important to note that in order for this envisioned “mixed economy” to be properly just and democratic, it ought to be established in tandem with other federal and local economic policies, such as a federal jobs guarantee, Medicare for All, universal basic income, as well as public banking proposals here.)

The NIA would be able to take ownership stakes in public and private enterprises by contributing equity capital to start ups, expansions, and conversions as part of the industrial policy. State and local governments would be able to appeal to the federal NIA to help finance the costs of local public ownership. Social enterprises and cooperatives would similarly gain a competitive edge, placing mission-driven business in a position to enter the mainstream as an alternative to extractive for-profit, hierarchical firms. 

The two major industrial policy projects today, which ought to be done in tandem, are the Green New Deal and a renewed effort of Black Reconstruction. Both require a “just transition” away from economic extraction and exploitation of people and the planet toward a democratic economy that guarantees human rights (e.g., housing, health care, food, water, clear environment, etc.) for every individual to prosper, especially the Black, Indigenous, and communities of color historically oppressed and displaced by public policy. A new industrial policy would usher in a new paradigm of economic development concerned with ecological sustainability, repairing the generational harms of racism, and materially benefiting every individual in the country. In order to design and execute industrial policy in line with the above projects, the NIA would need a federal-level decision-making body mandated towards these ends either via Congress or President Biden’s executive authority. 

The NIA has strong American historical roots. Alexander Hamilton’s industrial policy, achieved via the establishment of the First Bank of the United States and the Treasury Department, played a critical role in stabilizing the economy following the American Revolution. The short-lived War Finance Corporation (WFC) financed war industries and banks at the end of World War I and then the expansion of the country’s agriculture sector. The New Deal-era Reconstruction Finance Corporation (RFC), which at its height was the largest corporation in the world, purchased bank stocks and extended critically important loans to industry, mortgages for homeowners, and lines of credit for governments. For the war effort, the RFC established publicly-owned enterprises for developing raw materials and manufactured goods. While the RFC was disbanded in 1957, its legacy continued forward under the Treasury Department, Small Business Administration, Commodity Credit Corporation, the Export-Import Bank, among others.

The NIA would follow the model of “fiscal federalism” already in practice by federal-state economic programs, where the federal government is best able to raise money through Congressional appropriations while subnational governments are best able to design and implement projects with local knowledge and democratic input. Examples of this include block grants from the federal to state and local governments for various programs (e.g. Medicaid, natural disaster relief), federal loan guarantee programs, and the Federal Reserve System’s design of a federal-level Board of Directors and 12 regional-level Reserve Banks. 

Relevant to the broader mission of public banking as they are established in localities around the country, the NIA would provide public banks a unique opportunity to start, expand, and become better aligned with social and environmental goals. The NIA can incorporate this paradigm as follows:

  1. Offer mechanisms to capitalize local public banks via both equity capital and debt capital
  2. Include capitalization of local public banks as an Eligible Use for repayments from loans made by the NIA
  3. Allow repayments of loans made into local jurisdictions to remain at the sub-national level. This could be accomplished through several mechanisms:
    1. Establish Federal Reserve accounts for local governments to accept repayments
    2. Allow repayments to be made to a local Treasury or public bank
    3. Provide credit to local governments based on successful repayments
  4. To take advantage of the power of banks to leverage, allow a portion of the NIA budget to be provided in the form of federal guarantees for local financing.


Postal Banking

Postal banking is “simply the provision of financial services via the Postal Service… ranging from check cashing to bill payment to savings accounts to small-dollar loans.” 

Law professor Merhsa Baradaran outlines the three main benefits to a postal banking system:

  1. Below-market rates to consumers
  2. The USPS’ existing physical footprint in every geography of the US
  3. The widespread familiarity and legitimacy of the Postal Service, especially to the most vulnerable (in contrast with formal banking institutions)

If re-introduced today, postal banks would provide a universal public option for basic banking services. 

The US had a postal banking system from 1911 to 1967, offering basic banking services at post offices across the country. Since the system was the only fully insured option by the US government prior to the FDIC’s establishment in 1933, individuals tended to favor this safer public depository option in areas without deposit insurance and in periods of uncertainty. Postal deposits were re-deposited in local banks, which helped stabilize local banking sectors. To allow private banks to remain competitive, the postal banks accepted deposits between $1 and $500 and kept a low interest rate of 2%. 

Note: since the below Central Bank Digital Currency proposal intentionally maintains the physical cash option, postal banks could provide the interface for users to access their accounts via tellers and ATMs. This establishes the value of maximum inclusivity, ensuring this payments infrastructure is accessible to everyone, not just those able to utilize digital services via an app or website. 


Central Bank Digital Currency and Federal Reserve Accounts (“FedAccounts”)

The scope, scale, and ambition of Facebook’s Diem (formerly Libra) project demonstrates the urgency with which a public digital payments infrastructure needs to be developed and operationalized. If Diem or another private actor steps in to create a cryptocurrency and digital wallets system, the private capture of public money will be taken a magnitude further.

The “public option” discussions occurring with policymakers and central banks generally coalesce around the idea of establishing a central bank digital currency (CBDC) as the public digital payments infrastructure. There are three elements to consider incorporating into a CBDC: 1) a digital wallets platform (i.e., where the value is held); 2) the digital currency technology (i.e., how the value is held); and 3) a postal banking system, or the CBDC’s adjacent physical architecture (as discussed above).

With regards to digital wallets, the main proposal under consideration and debate in the US context is for the Federal Reserve to give individuals, businesses, and institutions access to a bank account directly with the central bank, known as “FedAccounts”. Currently, only member banks can have accounts with the Federal Reserve, so this would be a major transformation of the Fed’s role in the financial system. These FedAccounts would be accessible via a digital platform (similar to familiar mobile banking interfaces) and postal banks.

As a public option for basic banking services, Ricks, Crawford, and Menand suggest that this could offer a number of consumer advantages, including: 

  • No fees or minimum balances
  • Higher interest return on balances
  • Real-time payments
  • No interchange fees

Two notable macroeconomic consequences of this are:

  1. The central bank’s primary monetary policy tool – Interest On Reserves (IOR) – would be significantly more effective in managing inflation by having a direct immediate impact on bank accounts, rather than being mediated by financial institutions, which allows them to extract profit and divert the impact from the public towards investor profit. 
  2. The federal government would have a new direct mechanism for “UBI helicopter drops” as a monetary policy tool — simply marking up every FedAccount by a fixed amount as a means of both fighting poverty and managing inflation/deflation.

With regards to currency technology, in order to ensure the principles of privacy and anti-surveillance are properly integrated into the digital architecture, the underlying technology design should ensure the currency unit is as “cash-like” as possible by diverging the wallets system, described above, from the currency itself. Instead of being a ledger-based currency, the digital cash should function as “currency bearer instruments” (i.e., those who “bear” the unit hold the value directly, rather than indirectly via a ledger system). 

Analogous to the current use of multiple layers for verifying paper notes (e.g., barcodes, watermarks), “cash-like” instruments would contain cryptographically-secure components for verification without the need to go through a centralized or distributed ledger. This provides a base level privacy-preserving digital currency infrastructure that allows public and private fintech services to be built on top of it, including digital wallets platforms such as FedAccounts. The argument against “cash-like” digital currency rests on fearmongering of financing terrorism, gangs, and black markets, but avoiding confronting this proposed privacy trade-off in the CBDC’s design would build an expansive backdoor for state and corporate surveillance, even if not utilized initially.  

Representative Rashida Tlaib’s Covid-19 relief legislation, known as the ABC Act, is instructive for how this three-prong system would operate. It proposed providing every person in America with swipe cards that automatically added $1,000 to the balance monthly through a year after the crisis concluded.The cards’ accounts would function similar to the FedAccounts public digital wallets and the use of swipe cards builds in a privacy-preserving currency instrument.  The swipe cards would be distributed via mail request, in-person pick-up at FDIC-insured banks, post offices, and through targeted at-risk outreach to the elderly, homeless, disabled, and remote areas by a dedicated outreach corps. This ensures those most in need of inclusion of this relief and payments infrastructure are included, rather than allowing an underclass to remain in dire need due to a lack of administrative care. 


Further readings on the future of public finance

  • Modern Money Network researchers arguing for direct federal spending rather than “moderating” Green New Deal economic policy via public-private partnerships and lending solutions
  • New Consensus’ memo arguing for a national development strategy via existing executive authority
  • Saule Omarova’s blueprint for restructuring the central bank’s balance sheet