By Ben Frogel, The American Conservative | April 7, 2021
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.