Creating More Capital for Underserved Communities Through State-owned Banks

Did you know that North Dakota is the only state to have maintained a state-owned bank for over a century? 

You probably didn’t and it’s understandable. For generations, it has been likely that only the citizens of North Dakota have ever even thought about the idea of a state-owned bank, as it’s the only state to successfully maintain one. 

But it might not be for much longer. 

Founded in 1919, the Bank of North Dakota was established because farmers were being price gouged by banks that were in the pockets of the railroad and grain warehousing industries. The farmers’ grievances led them to organize a political party, the Nonpartisan League, and then to successfully push for a state-owned bank, which has survived and thrived for over a century in a state where one would hardly expect much support for a socialist enterprise. 

The strength of a bank owned by the state or city is that its overriding interest must be the health of its local economy. Since the capitalization of the state bank is derived from tax collections and holdings, it creates a new kind of resident: the taxpayer shareholder. 

The history of government-owned banks goes back to the founding of the nation. Secretary of Treasury Alexander Hamilton proposed a national bank that could build critical national transportation and communications networks. The First and Second Bank of the United States existed for some 40 years until Andrew Jackson allowed the Second Bank’s charter to expire due to what he perceived to be the anti agrarian policies and anti “common man” attitude of the banks’ leaders. 

Some states experimented with government-owned banking institutions in the early to mid-19th century, but these failed for a variety of reasons, leading some states to create constitutional provisions that philosophically stood in the way of the introduction of state banks. 

Growing Interest in Government-run Banks

The interest in creating publicly owned state or local banks since the 20th century has been almost nonexistent until now. According to a recent report from the Government Finance Research Center at the University of Illinois Chicago, four states—New Mexico, New York, Oregon and Washington—introduced legislation in 2021 to create state banks.   

One of the underlying reasons for this surge in interest has been the notion that state banks would be better positioned to help provide resources, including loans and credit, to underprivileged communities that aren’t appropriately served by the commercial banking system. The widespread concern with increased societal equity has been a national focus for the last several years, and this is one potential vehicle for spreading the wealth to areas most in need of capital infusions.

A recent example of this idea catching on is when California approved a law in October 2019 that allowed cities and counties to create public banks. Opponents pointed to inefficient government agencies, the prospects for corruption, and the reality of competition with the private banking industry. Yet, those promoting public banks in California successfully highlighted the potential to invest in local economic development activities, housing, neighborhoods and communities, and the possibility of affordable lending rates.

The California case indicates that a city- or county-owned bank could be held accountable by the people and would ensure that discrimination and redlining and other contributors to disparities would not be allowed. In one sense, then, the impetus is economic privation that results in collective, political action.

Investing in Private Sector Activities

State banks, in and of themselves, would not be the first time that governments have reached their fiscal hands into the private sector. Railroads and canals were frequent beneficiaries of state investment in the early 19th century and in many cases owned by the state as well as some large mercantile cities. The Pennsylvania Railroad, Baltimore and Ohio and the Erie Canal come to mind. Of course, creation of the Federal Reserve System in 1913 to drive monetary policy certainly underscored the acceptance of government intervention in the economy. 

The Great Depression also ushered in a few more experiments in state ownership of productive facilities, such as the Tennessee Valley Authority. Many cities built, owned and operated electric and gas facilities.  

And yet after centuries of government investment in the economy, it’s not an understatement to say that the general attitude of government involvement in the U.S. economy tilts toward being less interventionist than many other industrial democracies. The conventional wisdom is that if a market exists for a product, the private sector should be permitted to operate and the public sector should stay out or, at most, regulate the activity.

The notion of state banks, however, may be yet another one in which conventional wisdom can evolve over time. There are countless instances in which yesterday’s widely held truths are set aside in the face of experimentation that proves them to be less than valid.

There’s no way to know whether state banks are going to become commonplace, and there are certainly obstacles—not the least of which is the political power of the commercial banking system in America. But as more states research and debate their benefits, it’s likely that people who live outside the borders of North Dakota are going to become increasingly familiar with this concept—and perhaps will find themselves holding checkbooks with their states’ names.