Laboratories of Democracy is a series that looks at the nation’s most intriguing experiments in local policy.

The policy: public banks

Where: North Dakota

In place since: 1919

The problem:

There’s a legislative fight brewing in California. Supporters are pushing a public banking law that could redefine the state’s financial landscape, while detractors call it a government intrusion. Both would benefit to look at an unusual source — North Dakota — where a similar policy has been in place for a century.

In the 1900s, North Dakota was, not unlike today, a place overlooked between the already established East Coast and rapidly developing West. The state was largely settled by farmers, who spread themselves sparsely. The low population density meant that local financial institutions had trouble taking root. In effect, North Dakota was a banking desert.

That decentralization, combined with the predatory nature of the gilded age — an era of economic deregulation and extreme income inequality — left North Dakota’s fledgling economy vulnerable to the whims of corporate banks. Financial capitals such as Chicago and Minneapolis could inflate farmers’ loan rates or undercut grain prices without fear of reprise.

“A lot of your economic livelihood would be, for lack of a better word, controlled by out-of-state interests who may not have the best interests of the local producers in mind,” said David Flynn, the economics and finance department chair at the University of North Dakota.

The perception of nefarious-minded outsiders meddling in the daily lives of North Dakotans elicited a grassroots response. In 1915, A.C. Townley, a failed farmer and excommunicated Socialist Party organizer, established the Nonpartisan League, a populist progressive political party. Townley recruited members through socialist newspapers and pooled enough money to buy a fleet of Ford cars. With them, the Nonpartisan League campaigned across the state, courting agriculture workers to their cause of expanding farmers’ protections through state ownership.

The group ran on a platform pushing for the establishment of state-owned banks, state ownership of various agricultural apparatuses like mills and elevators, and farm insurance. If those entities were under state control, they argued, their purpose would be to support North Dakota farmers rather than bring about profit. According to Elwyn B. Robinson’s History of North Dakota, Townley cherry-picked much of the Nonpartisan League’s plan from the Socialist Party. Canvassing taught him that the party’s policies were often more popular than the word “socialism.”

A year later, Townley and the league managed to recruit more than 20,000 members, winning local elections and taking control of the state Senate and governorship.

The group was able to pass two major reforms before losing power in the 1920s. One was the creation of a state mill; the other, with a $2 million allocation, was a state-owned bank, the Bank of North Dakota, which still runs today and has been instrumental in the growth of North Dakota’s economy.

How it worked:

The Bank of North Dakota, or BND, is the nation’s only public bank: a government-owned and -operated entity that prioritizes public access over profit, and offers fair banking services to North Dakotans when private banks can’t or won’t. “It is potentially insulating you from loans, lenders, from out-of-state interests who won’t or don’t listen to the concerns of the local economy,” Flynn said.

At the time of its creation, BND’s purpose was to protect the state’s farmer class by offering low-interest agriculture loans. A century later, the bank is still an active force in the state, although its function has shifted, Flynn said, “from an insulator to more of an incubator.”

With $8 billion in assets, BND now offers business and student loans along with commercial services. Its purpose, however, continues to distinguish it from modern private banks. “When a US bank isn’t interested in going into that type of loan or startup, or thinks it’s too risky, BND would get engaged,” Flynn said. “They could point to this mission and say, ‘We’re helping growth, the growth helps the state.’”

That mantra also applies to the local banking ecosystem. Student loans are facilitated directly with BND, but other loans, called participation loans, go through a local financial institution — often with BND support. For example, if someone wants to take out a business loan for $20,000 with a local bank, BND would lend half of the money, $10,000, and minimize the risk for that bank. The result: The individual and local bank or credit union are supported by BND through a single transaction.

According to a study on public banks, BND had some $2 billion in active participation loans in 2014. BND can grant larger loans at a lower risk, which fosters a healthy financial ecosystem populated by a cluster of small North Dakota banks. The benefits of these loans are kept local, and the banks are protected from risk with BND support.

BND’s roots are in socialism, but it’s codified into the constitution of a deep-red state where Donald Trump beat Hillary Clinton by 36 percentage points in 2016. Not that there has been any serious effort to remove it. “There seems to be pretty strong support for maintaining a state-owned bank and a state-owned mill,” Flynn said.

Last July, the bank celebrated its 100th birthday. To naysayers, the bank points to its solvency, with net earnings of $159 million in 2018. “The bank has largely been profitable in the time I’ve been in the state; that’s coming up on 20 years now,” Flynn said. “So, there’s a hesitation of, ‘Why get rid of it when it’s working so well?’”

That success has drawn the attention of California, where a movement to create a public bank has gained prominence — with both successes and failures — since 2018.

The differences in size, economy, and population of California and North Dakota are unmistakable. But many of the characteristics of the modern economic landscape are eerily similar to that of a century ago when BND first passed: increasing income inequality and predatory practices on the part of financial institutions.

While California’s needs in the face of those pressures are distinct from North Dakota’s, some members of the state legislature see a public bank as the solution. Enter Assembly Bill 857, which offers municipalities in the state the chance to set up and manage their own banks just like in North Dakota. “The largest Wall Street banks have failed to serve Californians in so many areas,” said Democratic state Rep. David Chiu, one of the co-authors of the legislation. “[They] caused the mortgage foreclosure crisis, then failed to lend during the most intense housing crisis in American history.”

There have been efforts to establish public banks in nearly two dozen other states. This year alone, four state legislatures beside California — New York, New Mexico, New Hampshire, and Massachusetts — have introduced bills to create or explore creating public banks. None, however, have passed.

AB-857 just passed through the state’s legislature and sits on Gov. Gavin Newsom’s desk to be signed into law. The bill is a step in the right direction, but Chiu expressed concern that the cost of success is that the law has been diluted to impotence. As the bill has passed through various committees, additional requirements — like federal liability insurance and a limit to 10 banks total — have been added to rebuff objectors, concerned about the stability of future public banks. “We’ve likely made it very difficult to establish a public bank,” he said.

The banking sector, unsurprisingly, remains unmoved. Beth Mills, a spokesperson for the Western Bankers Association, which represents Wells Fargo and Bank of America, cites startup costs, conflicts of interest, and a lack of government expertise in the field as reasons for opposition to the banks. “Our position hasn’t been secret,” Mills said. “We’re opposed to the concept in general.” Mills posited that the banking industry already meets the needs of the California population; and, according to a survey the WBA conducted, the majority of Californians oppose public banks.

Miguel Santiago, the bill’s other author, had a quick retort. “At one point in time, people argued against the Social Security system,” he said.

Will Peischel is a writer based in Washington, DC. His work has appeared in Washingtonian and Los Angeles Magazine.