Prior to the Senate’s summer recess, lobbyists and advocates of the Digital Asset Market Clarity Act or Clarity Act made a frantic push for the legislation. They failed to get it to the floor for a vote, but the fate of the Clarity Act is far from over. Senate Republicans have vowed to revive the bill for September. They are hoping they can squeeze the bill through before the midterm elections, when Democrats will likely take back the House, if not all of Congress. If passed, the Clarity Act could be one of the most consequential financial legislations since Dodd-Frank during the Great Recession.  

Effectively, the Clarity Act would create a regulated framework for crypto by empowering the Commodity Futures Trading Commission (CFTC) to oversee the industry as opposed to the more stringent Security and Exchange Commission (SEC), which was the favored oversight agency under the Biden administration. Even more worrying is the fact that in its current form the legislation allows crypto companies the ability to offer “rewards” on transactions.

This aspect of the legislation has resulted in a fierce lobbying war between crypto companies and large banks. The crypto companies argue that the “rewards” are just a trivial and honest means to encourage everyday Americans to utilize crypto. Right now, crypto companies already offer “rewards,” but only a small minority of Americans take advantage of them. Currently, only 20% of Americans have ever used crypto. The banks fear that the legitimization of the “rewards” system will essentially result in a covert system of interest rates, which will encourage people to pull their deposits out of traditional banks and invest those funds into stablecoins.

No bank likes to lose its deposits, but if the Clarity Act, or some version of it does manage to make it out of Congress, the effect of stablecoin “rewards” will not fall on the banking sector equally. The large megabanks will be able to make the transition, as they did in the past with the creation of Money Market Funds. Small banks and credit unions, on the other hand, will likely faulter. 

It is undeniable that blockchain transactions have certain advantages. They are both quicker and cheaper than other conventional digital transfers. They are being rapidly integrated into financial networks because there are real world efficiencies, and it is only a matter of time before it becomes more ubiquitous. However, because the technology is interwoven with cryptocurrencies, which exclusively exist as a form of currency speculation, it has become nearly impossible to utilize the technology outside of crypto markets. Instead, and largely thanks to the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act which was passed last year, more establishments are issuing their own stablecoins. This includes the large megabanks.

If the Clarity Act does eventually get signed into law, and there is an exodus of deposits to stablecoins, the large banks can win back customers by issuing their own stablecoins. The small community banks and credit unions will not be so lucky. Since the 1980s, both small community banks, which the Federal Reserve defines as any bank with less than $10 billion in assets, and credit unions have seen a historic and devastating decline. According to data from the Federal Deposit Insurance Corporation (FDIC), in 1992 there were 14,423 insured commercial banks in the United States. Today, there are only 4,287. The picture is the same for credit unions. According to the Federal Reserve, there were 9,200 credit unions in 2004. Twenty years later, that number was more than cut in half to 4,579. With the passage of the Clarity Act, their decimation will likely accelerate. Credit markets will be even more dominated by large megabanks, or rather large megabanks sitting beside behemoth crypto companies. 

This scenario is a huge step backwards in the struggle for public money. For a nation to have a single stable paper currency is now considered a given. However, this was not always the case. Prior to the Civil War, the United States had a system of “free banking” where currency was essentially privatized. Competing banks would issue banknotes, which were a promissory note or receipt of a deposit. These banknotes then circulated as currency through the economy under the assumption that at any point the holder of the banknote could return them to the bank for metal coins or specie. The problem with this highly decentralized and privatized system—which crypto companies are recreating in a digital form—is that it created wildly fluctuating currencies that were prone to speculation.

Under the “free banking” system, there was no means to guarantee the value of banknotes either geographically or temporally. If a person traveled too far outside the bank’s headquarters or there was a rumor that a bank was facing hard times, the value of the banknote could plummet. With such unpredictability, the market was overflowing with con artists and hucksters. Speculators and insider traders could invest in banknotes with the knowledge that they were going to depreciate and then dump them on to suckers who were unaware that the banknotes were about to go under. Even still, because currencies were highly localized and privatized, if a bank had a monopoly over a particular region, it controlled not only the area’s lending options, but the entire money supply, which gave the owners of the bank tremendous political power.  

It was not until President Abraham Lincoln, under the direction of Treasurer Salmon P. Chase, that a federal banking system was created. With it, the federal government issued “greenbacks”—the precursor to the modern dollar—which were a form of public money. Because Congress mandated the recognition of “greenbacks” as legal tender and they were backed by the United States Treasury, people preferred them to the unreliable system of banknotes. In the face of public competition, the private banknote system began to collapse. Once the Federal Reserve was created in 1913, the end of private currency was inevitable. Finally, in 1933, Congress and President Franklin Roosevelt hammered the final nail in the private currency system when they ended the ability of people to use gold as legally accepted tender.

Part of the legacy of the New Deal was building over a set of policies that began under Lincoln to make money an entirely public affair. However, cryptocurrencies are threatening to return the country back to a system of privatized money. Not only would this system be economically devastating, essentially a forfeiting of one of our most important assets—our currency—to private speculators, but the project is downright un-American. 

Second to the abolition of slavery, the creation of a system of public money was President Lincoln’s greatest achievement. Even though it is properly overshadowed by the destruction of slavery, the creation of “greenbacks” should be recognized as the most consequential form of nationalization in American history. However, Lincoln and his allies were not starting from scratch. They believed that public money was part of the vision of the Founders for a healthy republic. Just as Roosevelt was building off Lincoln, Lincoln was building off Franklin and Hamilton. 

Prior to the American Revolution, Benjamin Franklin was an advocate of publicly owned “land banks.” These public land banks would make loans to farmers who were willing to use their land as collateral. The loans were made in the public bank’s banknotes, which would then be accepted by the colonial government for payment of taxes. Franklin was an enthusiastic supporter of the system. He penned the anonymous pamphlet A Modest Enquiry into the Nature and Necessity of a Paper-Currency describing how the public land bank system of paper banknotes increased trade and led to economic growth in the colonies. In the pamphlet, Franklin argued that a system of “plentiful currency” would mean that the wealthy could no longer exploit the poor through usury, and instead would be compelled to invest their wealth in productive purposes, which would grow the colonial cities and attract “Labouring and Handicrafts Men (which are the chief Strength and Support of a People).”

Unfortunately, the colonies’ British overlords were opposed to these public land banks. Franklin’s assessment was accurate. The easy availability of paper money meant that wealthy creditors, who were more loyal to the crown, could not charge high interest rates. In 1720, the British Parliament prohibited colonies from issuing public banknotes unless they agreed that they would only be a temporary measure. Then, in 1740, it banned the Massachusetts land bank. In 1751, it extended its ban to all the colonies. Finally, in 1764, parliament enacted the draconian measure of banning any form of unauthorized paper currency—public or private—in the colonies. Realizing that its harsh crackdown on the colonial economy was driving the colonists toward independence, the British Parliament rapidly change policy in an attempt to console dissenters. After a four year wait, parliament granted New York permission to create a land bank. Three years later, they would extend this policy to the rest of the colonies. However, it was too little too late. Frustrated by their continual interference and planned economic underdevelopment, the colonists were now on the path to independence.  

After the revolution, the colonial system of public land banks was not revived, but it was clear that if the young nation was going to survive it needed to assert some control over its financial markets. Acting as the nation’s first treasurer, Alexander Hamilton was acutely aware of this problem. As part of the Compromise of 1790, Hamilton convinced the newly created federal government to assume all the debts created by the states during the Revolutionary War, then issued a new bond to pay off those debts. While this did burden the new republic with debt, Hamilton recognized that the bonds would act as a form of public money, which overseas investors would then use to trade with the United States. 

Further encouraging the development of public money, Hamilton recommended that the United States charter its own bank, where the federal government would own the plurality (20%) of the shares. The capitalization of the First Bank of the United States was greater than the combined capital of all other banks in the colony. By its sheer size, it was establishing a system of universal banknotes that were implicitly backed by the federal government. Additionally, in an ingenious maneuver, Hamilton allowed investors to invest in the bank’s stock using 25% specie and 75% newly issued United States debt, thus redirecting US bonds back into an institution where the United States government was the single largest shareholder.

The First Bank of the United States was not only successful in helping to rebuild the country after the Revolutionary War but also provided a necessary counterweight against private speculators and financiers. During the Panic of 1792, bankers out of New York took out large loans from the First Bank of the United States to purchase United States debt in the hopes of cornering the market. The idea was to create a monopoly on America debt and sell it at a premium to investors who wanted to buy stock in the First Bank of the United States. When their plan failed, and they could not repay their loans, their scheme risked creating a generalized banking crisis. Fortunately, the law that created the First Bank of the United States also created the “Sinking Fund Commission,” which was responsible for overseeing the payment of the United States debt and handling financial crises. Under Hamilton’s leadership, the commission successfully contained the crisis, and the speculators were arrested and sent to prison for their actions. 

Unfortunately, the idea that money should be a public institution was not universally accepted by the Founders, with fierce opposition from Thomas Jefferson. It would take generations for it to be embraced by society. Under the New Deal—with the use of private banknotes and gold reserves decimated, the ability to receive basic banking services at a local post office, the existence of a federal infrastructure bank, and the expectation that private banks would be regulated like public utilities—it appeared that the idea of public money had finally triumphed. However, with the emergence of neoliberalism in the 1970s, and especially the bipartisan support for banking deregulation, the idea of public money faded. Now, with the emergence of crypto markets, America’s public money could be re-privatized under a new form.      

With the crypto industry completely capturing the Trump administration, the future of public money appears bleak. Still, there are promising signs that the public can retain control of its money. The 21st Century ROAD to Housing Act, which was passed earlier this year, prevents the Federal Reserve from issuing its own stablecoin, at least until 2030, thus eliminating any possibility that America’s central bank cryptocurrency could drown out private cryptocurrency rivals, but it is possible that state institutions could create their own public cryptocurrencies. One of the most exciting examples of this is the Roughrider Coin issued by the Bank of North Dakota (BND), the only state-owned-and-operated public bank in the country. Realizing that fintech poses a potential existential threat to the state’s community banks and credit unions, the BND’s Roughrider Coin is exclusively used to facilitate interbank transfers and not available to private investors for speculation. 

Additionally, public banking movements have emerged throughout the country to takeback public deposits that are currently held in America’s private megabanks. In Vermont, the White River Natural Resources Conservation District recently organized a two-day Vermont Public Banking conference. In Washington, state legislators recently agreed to fund a public banking work group that is responsible for creating an implementation plan for the state. In San Francisco, supervisors voted to put a referendum on the November ballot that would allow the city to create a nonprofit municipally owned financial corporation, which has the capacity to become a public bank for the city. Finally, from October 21-24, the Public Banking Institute has organized a national public banking conference. Titled “Public Banking for Public Prosperity: A Declaration of Financial Independence,” the conference intentionally harkens back to America’s founding and acknowledges that the struggle for public money is part of America’s democratic tradition.  

If these efforts continue and spread, then the ability of America’s oligarchs to use crypto markets to privatize our money can be stopped. That is the first step. To ensure a true flourishing of American democracy, then it is necessary that the entirety of the financial sector is brought under public ownership and control. As much of the history of the United States has shown, the fight for public money is part of the fight to defend the republic.

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