Conservatives should look to North Dakota’s state bank for an example of what a country of “banker’s banks” could look like.
Big banks are becoming increasingly politicized, and not in a direction that is favorable for conservatives. JP Morgan Chase led the fundraising charge for MindGeek, the firm that has given any child with the internet unfettered access to pornography. In a Congressional hearing, JP Morgan Chase and Bank of America willingly kowtowed to Rep. Alexandria Ocasio-Cortez, joining a boycott of a construction firm that builds detention centers for Immigration and Customs Enforcement. The writing is on the wall. In response, conservatives should bank with institutions that share the values of their community.
Local banks and credit unions foster a sense of community and place, are far removed from the culture wars in Washington, and enable local businesses to stay afloat against the tide of homogenization. However, they are struggling. If all is left to the invisible hand, it may be impossible to have local institutions that are responsive to local concerns and that truly are part of communities. According to the National Credit Union Administration’s yearly report, “Small credit unions face challenges to their long-term viability for a variety of reasons, including lower returns on assets, declining membership, high loan delinquencies, and elevated non-interest expenses. If current consolidation trends persist, there will be fewer credit unions in operation and those that remain will be considerably larger and more complex” Thus, conservatives should readily take up the mantle of public banking, which helps locally owned businesses, frees municipal budgets from Wall Street, and promotes the decentralization of banking power. Conservatives can look to North Dakota’s state bank as an example of how and why.
North Dakota’s agricultural economy in the 1910s was primarily wheat-based, and in a region prone to drought, farmers struggled. Additionally, obtaining and paying a farm loan was extremely difficult, as banks in faraway Chicago and Minneapolis would often charge farmers 12 percent interest rates on routine loans. In reaction to this, the prairie-populist Non-Partisan League came to dominate state politics for a decade, running on a platform of farmers’ interests and curtailing the power of large interstate corporations. At a time of peak Non-Partisan League control, to offer fairer loans the North Dakota State Legislature created the Bank of North Dakota (BND), which the government would own. The bank was an instant success, helping many families keep their farmland during the Great Depression, though the BND still had to foreclose some properties. When foreclosed upon, however, farmers often stayed and worked the land with the blessing of the BND, and many even repurchased their property after the Depression.
While the agricultural positions of farmers in North Dakota and Oklahoma during the Great Depression were undoubtedly different, we can contrast the North Dakota approach to financial policy and civic relationships with a point about Depression-era Oklahoma from George Will in a recent American Compass debate with Oren Cass. Will cited the men and women who fled the Oklahoman Dust Bowl as an example of the quintessentially American process of displacement and disruption. It’s true that displacement has been a fixture in American life, as Will said. But juxtaposing North Dakota and Oklahoma responses to the Great Depression raises a question for American conservatives: When the power to choose is available, should we be a nation on the move or a country of place and roots?
The power of state banking is not merely historical. The BND’s value to North Dakota today lies in its partnerships with local banks and credit unions. Locally owned financial institutions struggle throughout the country, making up only 29 percent of deposits. On the other hand, North Dakota is home to more banks per capita than any other state. Locally owned banks and credit unions account for a stunning 83 percent of all deposits at any North Dakota financial institution, according to the Institute for Local Self Reliance. The BND partners with local banks and credit unions to provide farm, business, mortgage, and student loans. The local financial institution puts up half the loan funds, and the BND delivers the other half. This practice allows local financial institutions to provide more credit, leading to more significant investment and regional prosperity in North Dakota. The reason is simple: Local institutions know local communities. Suppose a farmer needs a large loan to purchase new equipment. In that case, a credit union located on Main Street will have intimate knowledge of the land and the agricultural expectations for the area—more so than Wells Fargo. To increase the impact of its interventions, the Bank of North Dakota also reduces interest rates by up to 5 percent for explicitly job-creating loans.
When operating in conjunction with local banks and credit unions, public banking would play a major role in providing credit to small businesses. Local institutions know local businesses. Just like the example of the farmer, the local entrepreneur seeking a job-creating loan to expand his business will find a much more attentive audience with his community bank than with Bank of America. The community bank has more incentive to offer him the loan, because while it will go on their balance sheet, the state bank will provide half of the funds, significantly reducing the risk undertaken by the local bank. Furthermore, under a public banking model, the local institution will have more funds available to begin with, due to municipal revenue.
In the status quo, banks must have considerable collateral assets to qualify for accepting public deposits. Consequently, community-owned institutions are often excluded from receiving public deposits. And so, local taxes are used by large banks for loans that might not benefit these localities. State banks, however, can waive these collateral requirements with a letter of credit. This exception means that local governments can keep money in local banks, benefiting their communities’ economic well-being and ensuring that their funds are managed within their municipality, not New York City. Municipal governments under public banking would find themselves in a win-win situation, having both the safety of a large institution for their local revenue and the benefits of having local institutions use local revenue to promote prosperity. For these reasons, North Dakota averaged 434 percent more lending to small businesses than the national average.
Who would you rather have in the driver’s seat, Main Street or Wall Street? State banks put the people in charge and insulate local institutions from faraway economic collapses, such as the 2008 Great Recession. Many Americans feel as though they have no role or voice in a finance sector that prefers to gamble on “coin-flip capitalism” than to help local economies. The booming success of the stock market and large banks amidst the turmoil and job losses of the pandemic demonstrate that the profitability of the nation’s largest banks’ is increasingly unmoored from the prosperity of working people. In North Dakota, numerous community banks were able to stay afloat due to a BND intervention to counteract the many loans that were going unpaid.
Unfortunately, small businesses are imperiled now more than ever. According to President Biden, “Since the beginning of this pandemic, 400,000 small businesses have closed—400,000—and millions more are hanging by a thread.” It is urgent to maintain long term policies that help small businesses, which are critical to communities. Otherwise, the United States will be dominated by unaccountable megacorporations that operate without any sense of place or community.
Populist conservatives should seek to foster and protect local financial institutions just as they hope to promote local businesses, rather than leave the entire economy in the hands of faraway corporations. Local financial control facilitates that. For example, if Amazon continues along its path of banning books that fall foul of woke orthodoxy, social conservatives can find solace in their locally owned bookstore, which will be happy to order books for them upon request. But perhaps that bookstore needed a loan to stay afloat after the economic decline of 2020, or with a reduced-rate loan it could expand its building, creating jobs. When financing for would-be small manufacturers and businesses is readily available at a local level, products made in the United States will be much easier to come by and numerous jobs can be created and protected by this increased investment.
Now, state banking is far from a panacea. Critics point to risks of corruption and politicization, both of which have a historical basis. However, these issues arise in powerful, privately-owned national banks as well. If there is corruption, let it happen in a bank where taxpayers are legally entitled to inspect the bank’s records and vote out the representatives who appointed corrupt officials. Public banking works when it is apolitical, accountable, and in conjunction with local institutions.
Unfortunately, the main advocates of public banking are currently Democrats. At the federal level, legislation to promote public banking is a project of progressive Representatives Alexandria Ocasio-Cortez and Rashida Tlaib. Their plan is to enable states and municipalities across the country to create their own public banks, which either can be along the lines of BND-style “banker’s banks”—institutions that exist in the retail sphere, competing directly with private banks and credit unions—or even enabling the Post Office to serve as a bank. The latter forms of institution does not have the track record of the BND, however, which allows local banks and credit unions to thrive rather than serving as yet another powerful competitor. Moreover, Ocasio-Cortez and Tlaib dilute the importance of public banking by attempting to shoehorn into their bill a ban on fossil fuel investments by the newly created public banks.
But while the proposed legislation has flaws, it is admirably entrepreneurial in its policy goals. Congressional Republicans would do well to work to amend the bill so that it creates apolitical, highly efficient “banker’s banks,” that create an even playing field for local financial institutions and businesses. I implore Republicans to follow the lead of Massachusetts State Senator Patrick O’Connor, the sole GOP cosponsor of BND-style public banking legislation in my native Bay State. State banking bills will not always be perfect, but they can be a bipartisan antidote that empowers communities to free themselves from Wall Street’s worst excesses.
Ben Frogel writes from Westborough, Massachusetts, where he is helping to pass public banking legislation.
This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.
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