The People's Bank: Deep-Red North Dakota's Populist Bright Spot

When the financial crisis struck in 2008, nearly every state legislature was left contending with massive revenue shortfalls. Every state legislature, that is, except North Dakota's. In 2009, while other states were slashing budgets, North Dakota enjoyed its largest surplus. All through the Great Recession, as credit dried up and middle-class Americans lost their homes, the conservative, rural state chugged along with a low foreclosure rate and abundant credit for entrepreneurs looking for loans.

Normally one of the overlooked states in flyover country, North Dakota now had the country's attention. So did an unlikely institution partly responsible for its fiscal health: the Bank of North Dakota. Founded in 1919 by populist farmers who'd gotten tired of big banks and grain companies shortchanging them, the only state-owned bank in America has long supported community banks and helped keep credit flowing. The bank's $5 billion deposit base comes mostly from state taxes and funds. The money is leveraged so the bank can offer loans for local small businesses and infrastructure projects; the interest, rather than going to Wall Street banks, stays in the state. The Bank of North Dakota rarely makes direct loans; instead, when a community bank wants to give a sizable loan but lacks the capital, the state bank will partner on the loan and provide a backstop. Such partnerships help ensure that small-business owners, farmers, and ranchers can access lines of credit--and they strengthen community banks, which is why North Dakota has more local banks per capita than any other state.

During times of economic crisis, from the Great Depression to the Great Recession, the state bank has been essential to cushioning the blow for North Dakotans. It offers countercyclical support, meaning that in bad times, when credit starts to dry up, it plays an even bigger role in offering credit and helping struggling small banks make loans to good candidates. But the state bank has been good for North Dakota in another way you wouldn't expect: It's helped bolster the state budget. Since it became profitable in the 1940s, the Bank of North Dakota has returned more than $555 million to the state's general fund.

North Dakota's rosy financial picture can't all be chalked up to the bank. An oil boom in the western part of the state has created thousands of jobs, and North Dakota's housing prices were always low, so they never inflated to the dangerous levels other states saw. But policy experts like Sam Munger, the managing director at the University of Wisconsin-Madison Center for State Innovation, say that by offering partnerships and avoiding the risky practices of commercial banks, like subprime lending, the state bank was instrumental in keeping community banks healthy. "It's partly because you have civil servants in charge," he says, "rather than folks whose paychecks depend on how much money the bank makes in a quarter."

To many Americans, of course, the idea that state governments should be running banks--that they can run them better--is anti-capitalist blasphemy. But in conservative North Dakota, the bank is so well established and popular that former U.S. Senator Kent Conrad, who's 64, says he can't remember a time when anyone seriously challenged it. Now, across the country, some policymakers and community groups want to follow North Dakota's lead. Since 2009, lawmakers in more than 20 states have filed legislation to either start a state-owned financial institution or at least study the prospects. Most of the efforts have fizzled, but this year lawmakers in several states are cautiously optimistic they can turn their proposals into policy--creating, if not a full--functioning state bank, then at least the groundwork for one.

It won't be easy; the idea is so unfamiliar that it strikes many as downright kooky, if not scarily socialistic. Times were different, opponents insist, when North Dakota founded its bank in 1919. But the hurdles faced by state-bank proponents a century ago were not altogether different from what they face today.

By the turn of the last century, North Dakota farmers knew they were getting cheated. Wheat dominated the state, and its growers were at the mercy of Minneapolis-St. Paul's big banks and grain companies. Most Midwestern states were "economic colonies," says Bill Pratt, a historian of the era at the University of Nebraska. "The empire was administered from the Twin Cities." North Dakota farmers faced double-digit interest rates, while their cousins closer to the empire's capital only had to pay a fraction of that. The loans almost always came due during the harvest, which forced farmers to sell more wheat when prices were cheapest. Making matters worse, just about every grain elevator along the railroad was operated by the big grain companies, which offered the same price and the same grade rating--always lower than the growers needed and wanted. The final insult: When the grain was weighed, the companies used a fan to blow on the pile, supposedly to remove dust. As an article in the Wyoming Star Tribune noted in 1921, "What actually happened was that the fan removed not only the dust but during the course of the year in some of the larger elevators, fifty thousand bushels of grain as well."

Republican lawmakers who dominated North Dakota politics were in the pockets of the banks and grain companies, so the farmers got nowhere lobbying for reform. In 1915, they began to team up with former socialist organizers eager to create a viable political operation. Calling themselves the Non-Partisan League, they began to challenge Republicans in primaries. Enthusiasm for the NPL grew quickly; by the end of 1915, the group had 25,000 dues-paying members. After the 1916 elections, the group controlled the state house and governor's office. "They kind of caught the old-style politicians by surprise," Pratt says. By 1918, the NPL had taken the state senate as well and set about implementing a populist agenda, which included creating a number of state-owned institutions. At the top of the list, along with a state-owned mill, was a bank.

The idea was relatively simple: Sell $2 million in bonds to finance the institution, require municipalities to make deposits to the bank to keep it capitalized, and start helping farmers access credit at reasonable rates. A powerful Industrial Commission--made up of the governor, attorney general, and agriculture commissioner--would oversee the bank, as well as other state-owned projects the NPL was launching.

Trouble was, the NPL had lousy timing. By the time it came to power after the 1918 elections, World War I was over and a postwar recession was hitting American agriculture as demand dropped off. Meanwhile, the war had stoked right-wing nationalism and the communist revolution in Russia had successfully deposed the czar, heightening fears of "red" revolt in the U.S. It was not a propitious time for radical reform.

News of the Bank of North Dakota was greeted with suspicion and fear. "North Dakota Adopts Autocratic Socialism," blared the front-page headline of one Montana newspaper. Media coverage was largely critical (except, of course, in the NPL's paper, The Nonpartisan Leader). National papers were particularly free with comparisons to Bolshevism; The New York Times, which featured frequent stories on the bank, ran a piece in 1921 arguing that the NPL "dreamed of duplicating in at least a great section of this country what Lenin and Trotsky did in Russia."

Assaults on the bank had serious consequences. To appease the state's community banks, which worried about the competition, the Industrial Commission promised not to withdraw state funds that had already been deposited with local banks. Anti-NPL politicians forced an audit, filed an unsuccessful lawsuit, and by 1920 had repealed requirements that municipalities make deposits there. As a result, the bank had almost no liquidity. Its bonds weren't selling, and it stopped honoring its checks.

The NPL's political opposition, the Independent Voters Association, set out to kill the Bank of North Dakota for good in 1921. It floated a state referendum on the NPL's state-owned programs, including the bank, and engineered a recall election for the Industrial Commission members. (The recall and referendum were innovations of the NPL, now being used against it.) The election resulted in the nation's first recall of a governor, attorney general, or agriculture commissioner. But while voters dumped the bank's commissioners, they surprised almost everyone and voted to keep the bank.

A decade later, North Dakotans would be grateful they'd stuck with their "socialist" bank. The 1932 election, as the Great Depression raged, brought a new wave of NPL leaders to power. With the agriculture community in crisis, the bank began actively helping farmers to repay loans. While many farms were foreclosed on, giving the Bank of North Dakota thousands of acres of land, bank leadership started innovative programs to help people buy back what was once theirs. It all offered North Dakotans a fresh view of their bank as a helpful state institution--working for the common good, bailing out folks in need.

Over the following decades, the bank became a noncontroversial part of the state's financial landscape. It made the nation's first federally insured student loan in 1967 and became a major source of college loans. When the next great economic crisis hit, the Bank of North Dakota once again was indispensible, responding to the credit and loan crisis of the 1980s by aggressively backstopping local bank loans and providing credit that farmers could not get elsewhere.

By the 1990s, the state bank had become a major collaborator with the community banks that once feared it. A new bank president, John Hoeven, sought to make the bank a driver of economic growth, starting many of the programs for which the bank is now known, including targeted partner loans for small businesses. "I think the state bank has been hugely helpful to those community banks," says former Senator Conrad. "They're able to take loans that they just couldn't do on their own." Meanwhile, Hoeven's leadership helped catapult him to the governor's office and ultimately into the U.S. Senate--a Republican who owes his popularity, and his election, to his efforts to expand the role of a state-owned bank.

Given the success of North Dakota's model, it's hardly surprising that lawmakers in other states have tried to emulate the idea. Few of the measures have gained traction, partly because the idea of a state bank still strikes many as downright weird. This year, however, advocates are hoping that Vermont--which has been known to embrace the weird--will take up the cause. Vermont, state senator Anthony Pollina tells everyone who will listen, currently puts its tax dollars in the megabank TD. "They charge us fees, they lend our money wherever they want to lend it," but "they don't do that much lending in Vermont anymore. We need a bank that's going to invest in the priorities of Vermont, not the priorities of Wall Street." Pollina's idea is to create a small-scale bank with around $50 million in assets. A bill to study its feasibility and propose a model has already been assigned to the committee on which Pollina serves as vice chair, and all five committee members are co-sponsors--good reasons for his optimism. In Montana, a group of lawmakers has introduced a bill to create a bank; it's the third attempt there, but advocates are hopeful, having successfully brought together a coalition of small businesses and progressive-minded organizers.

A new state bank--somewhere, anywhere--would help to legitimize the idea. Between 2010 and 2011, lawmakers in 16 states from both parties proposed a total of 27 bills to either create a state bank or study its feasibility. Most failed. But after Massachusetts passed a bill to investigate a state bank, the Federal Reserve Bank of Boston produced a report advising against it. While the report did credit North Dakota's state bank with emphasizing "safe and sound lending practices" and partnering successfully with small banks, it also pointed out that the bank, on its own, could not stop financial crises that directly impact North Dakota, like the one in the 1980s (even if it did alleviate the problems). The report argued that policymakers "would be better off studying the federal programs that have been augmented since the crisis." The Center for State Innovation and De-mos, a progressive think tank, wrote a joint letter taking issue with the report's findings and accusing the Boston Fed of playing politics. Big banks, they pointed out, increasingly do not lend to small businesses, and there's not enough evidence to show that the federal programs are helpful or adequate.

Still, the report took its toll; as one of the only official studies on the topic of state banks, it added to the already-considerable political challenges advocates face. In Oregon, a strong grassroots coalition pushed hard for a state bank but wound up with an investment act instead. The state will make a larger investment in collaborative loans with small banks. In New Mexico, state Representative Brian Egolf introduced a measure in the last session to create a state-owned bank, only to be confronted with an angry lobby of community banks. This time around, he's renamed the financial entity a "small business development fund" so the community banks won't try to kill it.

Proponents like Marc Armstrong, the executive director at the nonprofit Public Banking Institute, argue that banks are better for states than economic-development funds. Rather than directly loaning out, say, $50 million, a state bank would leverage that money, allowing it to put as much as ten times the asset amount to work in the state through relatively low-risk loans. In Armstrong's own state, California, counties pay millions in interest on bonds and loans for their infrastructure needs. "If California had had a state bank," he says, "we could have used the state bank credit to fund virtually all of that debt at very low cost."

Still, for many states, creating or beefing up an economic-development fund is the only option that's viable. Local banks often worry that a publicly owned state bank would hurt business rather than offer support. For their part, politicians tend to have a knee-jerk reaction against the "crazy" idea of a public bank. North Dakotans are baffled by that. "All of those people in other states who are really concerned ought to talk to the banks in North Dakota," says U.S. Senator Heidi Heitkamp, a Democrat who served on the Industrial Commission. Community banks, she says, "have found the Bank of North Dakota to be a complete and total partner, to be willing to share risk with them on things they wouldn't do alone."

Perhaps the best argument for state banks is found in North Dakota's history of weathering economic crises better than most. Sam Munger of the Center for State Innovation says that while a state bank can't save a state economy "single-handedly," the countercyclical nature of the bank will "help cushion the effect of the next inevitable boom-and-bust cycle. Build it now, so it's in place and can be effective and functioning the next time."

For now, however, the only state bank still operates in one of the country's most conservative states. Roger Johnson, North Dakota's former agriculture commissioner, says the state got lucky. "I'm a huge supporter of the state bank, and most people in North Dakota are," Johnson says. But if legislators tried to create a bank today, he says, "I can assure you it would not have a snowball's chance in hell of getting passed."