The task force's endorsement of this change represents a homecoming for Democrats, pushing the party to the left and turning toward the economic ideas that Sanders has advocated throughout his career. But the history of this kind of banking policy reveals that only a concerted push from the grass roots will make it reality.
Although government banking represents a major departure from recent policy, the idea has ample precedent in American history. It rose to prominence during the Populist movement of the 1890s. As a counterweight to the inequality of the Gilded Age, Populists advocated offering bank accounts at local post offices, making direct federal loans to farmers and placing the supply of money and credit under the control of government officials.
These ideas bore fruit in the early 20th century. Between 1910 and 1916, a postal savings bank opened for business, government launched a federal agricultural lending system and the first central bank since the days of Andrew Jackson was established — the Federal Reserve System, which, unlike its predecessor, was placed under government authority.
Although working people benefited from these new policies, grass-roots interest in broadening access to public banking persisted into the 1920s, before becoming a subject of intense concern after the Great Crash of 1929. Over the next few years, Americans watched in despair as a banking crisis took hold across the country.
In a period before the Federal Deposit Insurance Corp. (FDIC) was created to protect depositors, bank failures became so commonplace that the possibility of losing one’s life savings haunted the national imagination. In 1930, more than 1,000 banks closed their doors. More than 2,000 bank failures occurred in the following year. People whose savings were held in these institutions risked losing everything. By 1932, many smaller cities resorted to the drastic step of suspending all local business activity for days at a time — bank holidays — to stanch this ongoing disaster.
The continuing deterioration of the economy created difficult conditions for banks in the early 1930s, but the incompetence of bankers — and even frequent episodes of white-collar crime — exacerbated this debacle. “We have seen millions of dollars of savings lost through inexpert and fraudulent management of banks,” admitted the president of New York City’s famed Bowery Savings Bank. The Depression had inflicted widespread joblessness and hunger on the nation, and the severe banking crisis was deeply worsening this agonizing economic downturn.
The disintegration of the privately owned and operated banking system persuaded large numbers of Americans that bankers were blundering at best and criminal at worst. They saw public banking as the solution — with working people at the forefront.
An organization of farmers in Washington state declared that “the private ownership and control of the financial and banking system of the United States has failed.” Similarly, organized labor in the state denounced the “gross mismanagement and oftentimes criminal handling of the people’s savings.”
The possibility of expanding the Postal Savings System garnered a great deal of public attention. The government’s savings bank required patrons to withdraw money at their local post offices, since it did not offer checking accounts. Accordingly, legislation to add checking accounts was introduced in Congress with the backing of labor organizations across the country.
Simultaneously, there was a grass-roots push to establish government banks and frequent calls to nationalize the entire private banking system outright. Labor unions and farmer organizations also supported such plans. The idea became so common during the Depression that a chemical worker claimed “nationalizing banks is nothing radical in any way.”
Even as thousands of banks failed, however, President Herbert Hoover resisted financial change.
The inauguration of Franklin D. Roosevelt in March 1933 ushered in new leadership as the banking system spiraled into collapse. Acting swiftly, Roosevelt declared a national bank holiday until government intervention — loans and reorganization — permitted banks to operate safely again.
This action saved the banks, but it did not make the public any more forgiving about the suffering they had caused. Continuing grass-roots demands for public banking kept bankers on their heels as Congress debated further change.
And the bankers lost. Thanks to overwhelming public support, in the Banking Act of 1933, Congress separated commercial and investment banking and created the FDIC, over the objections of the banking industry. New Deal policies also made credit more available to farmers and homeowners, expanded the money supply and aided the formation of credit unions.
But Roosevelt accepted the private banking system. In the face of a national crisis, he opted to save existing banks, rather than venturing into the uncharted waters of public banking. As one prominent banker acknowledged, “We bankers got off pretty light in the Banking Act of 1933.”
Because these measures addressed a number of financial weak points and stabilized the economy, they dampened demands for further change. After more than a century of frequent bank failures, such traumatic events practically disappeared. In another departure from the past, the banks stopped magnifying, and sometimes causing, economic depressions.
Americans began taking this more stable economic order for granted, and public interest in banking policy waned. As a result, in the mid-1960s, bankers encountered little public opposition when they successfully lobbied to shutter the Postal Savings System.
As voters paid less attention to finance, industry promoted a deregulatory political agenda that made the economy less stable and banking services less accessible. Banking “deserts” developed in poor urban and rural areas where scarce branches are insufficient to meet community needs. Because of high and unpredictable fees, alongside steep minimum balance requirements, maintaining a bank account is difficult for low-income Americans. A $90 billion payday loan industry emerged as an alternative to banks for millions of “unbanked” consumers who spend hundreds — and even thousands — of dollars annually to obtain small, short-term loans.
The increasingly pressing question of the unbanked — and financial access more broadly — has become inescapable in light of the recent obstacles to delivering stimulus checks. Faced with the economic challenges of covid-19, the federal government attempted to provide struggling Americans with some income — and the broader economy with much-needed stimulus — by issuing $1,200 payments to many people.
But because the banking system effectively excludes 9 million American households, the straightforward matter of getting this money to its recipients posed a problem, in many cases for the very people who most needed this income. This disaster presents the Federal Reserve and the Postal Service with a critical opportunity to make financial services more accessible.
The Biden campaign’s endorsement of government banking aligns with a long American tradition of advocacy for public banks. This change would expand access to affordable financial services, thereby raising the bar for existing banks, as well. Taking this stand with working people instead of Wall Street will appeal to many Americans, including key Midwestern voters who felt abandoned by the Democrats in 2016.
Still, parties produce aspirational policy statements every election cycle. Once in office, presidential administrations must establish their legislative priorities. The New Deal experience reveals that political momentum toward government banking can be stymied when an administration lacks enthusiasm for the idea. After the votes have been counted, transforming party planks into laws requires sustained advocacy by organized citizens.