Originally uploaded at SSRN.


This article asserts that there exists today and has always existed an interdependent relationship between banks and the state. I refer to this connection and its mutual benefits and responsibilities as a social contract. When Alexander Hamilton responded to President Washington’s inquiry about the advisability of a national bank, he wrote that “such a Bank is not a mere matter of private property, but a political machine of the greatest importance to the State.” This social contract has existed since the inception of banking in the United States and has been reinforced over time, but it has recently become weakened due to the growing size and political power of a few banks. This article for the first time tracks the evolution of the social contract in banking from Alexander Hamilton’s first push for banking to the recent bailout of the nation’s banks. The article explores why it is that banks and governments are bound together, why the relationship is inevitable, and how it has gone awry. The article then proposes that given the transformed banking landscape, the social contract needs to be reestablished. The social contract should focus on the three main needs of the public: bank safety, consumer protection, and access to credit. The article also provides an analysis of the major banking legislation since the New Deal that lend textual support for the proposition that banks are tasked with a public purpose. This analysis involves a first-hand search through hundreds of banking agency decisions that have articulated a “public benefit” test, and tracks how this test has changed through time and has been diluted in the last 30 years.