One of the arguments sometimes made by opponents of public banks is that they are not legal under state constitutions. A new legal memorandum written by attorney Earl Staelin examines this question and concludes state constitutions do not prohibit public banking. The legal arguments supporting this conclusion may help all states interested in establishing public banks, since the constitutional restrictions in the 45 states that have enacted them are all quite similar.
Some background: From the mid to late 1800s into the 20th Century, about 45 states enacted constitutional provisions to prohibit states and local government from investing in or making grants to private businesses. The main purpose of such provisions was to stop cities from investing in railroads, which often went bankrupt, leaving cities with debts they couldn’t afford. These provisions were not directed against the public banks that a number of states had established in the 1800s, some of which were quite successful.