Jim Houser, co-own­er of Hawthorne Auto Clin­ic in Port­land, Ore., saw an oppor­tu­ni­ty to increase his sales of ​“plug-in” elec­tri­cal charg­ing kits for the local­ly pop­u­lar Prius hybrid cars. But when he talked with his bank about a loan for enlarg­ing his shop, which employs 14 full- and part-time work­ers, he got the dis­tinct sense ​“that it would be a waste of time to for­mal­ly apply for a loan.”

The presence of more state banks in the United States could have hugely positive effects: increased lending, less concentrated banking and better responses to economic crises.

“Cred­it has dried up out there,” says Houser, co-chair of one of the state’s small busi­ness orga­ni­za­tions, The Main Street Alliance. ​“It is hurt­ing small busi­ness­es tremendously.”

Mahlon Vige­saa, pres­i­dent and CEO of Cen­ter­Pointe Com­mu­ni­ty Bank in the rur­al region of Hood Riv­er, Ore., has a dif­fer­ent cred­it prob­lem. There’s a promis­ing wind pow­er project in the bank’s ser­vice area that needs to bor­row $6 mil­lion. A large out-of-state bank turned down the developer’s request, which Vige­saa would love to finance. But it’s too big for Cen­ter­Pointe to do on its own.

“Big banks are not lend­ing in small-town Amer­i­ca,” says Bar­bara Dud­ley, co-chair of the Ore­gon Work­ing Fam­i­lies Par­ty. ​“They are either not lend­ing or lend­ing over­seas,” thus slow­ing eco­nom­ic recov­ery and job creation.

North Dakota’s pub­lic option

But Dud­ley and a sur­pris­ing­ly diverse coali­tion – includ­ing bankers and busi­ness­men like Houser and Vige­saa – see a solu­tion to these two dis­tinct but relat­ed cred­it fail­ures: the cre­ation of Oregon’s own state bank.

Pro­po­nents want the bank to be mod­eled on the 92-year-old Bank of North Dako­ta, the country’s only state bank. BND relies on state deposits of tax dol­lars; its chief aim is to help com­mu­ni­ty banks make loans. Such banks are com­mon in oth­er indus­tri­al­ized coun­tries, as they were in 19th-cen­tu­ry America.

BND was found­ed in 1919 by pop­ulists of the Non­par­ti­san League react­ing to exploita­tion of farm­ers by out-of-state banks, rail­roads and grain millers. Dur­ing its long his­to­ry, the bank encour­aged sus­tain­able growth in good times (for exam­ple, offer­ing the first fed­er­al­ly insured col­lege loans). And it has reduced hard­ships for the state’s gov­ern­ment, farms and busi­ness­es in tough times, from eco­nom­ic down­turns to the after­math of floods. Now the bank has attract­ed atten­tion for its role in help­ing to keep the state’s unem­ploy­ment rate the low­est in the nation. (High prices for the state’s ener­gy and agri­cul­tur­al prod­ucts had much to do with that as well.)

With a his­to­ry of con­ser­v­a­tive man­age­ment, BND gen­er­al­ly fol­lows con­ven­tion­al mar­ket cri­te­ria and makes a prof­it. Half that prof­it ($350 mil­lion since 1997) is usu­al­ly returned to the state’s gen­er­al fund, but it also serves to help the state weath­er fis­cal prob­lems. The bank is also focused on encour­ag­ing eco­nom­ic growth. That mis­sion leads it to avoid diver­sions (such as spec­u­la­tion in deriv­a­tives) and to defer to both com­mu­ni­ty bankers and pol­i­cy­mak­ers on eco­nom­ic strategy.

“We’re not an influ­encer of the char­ac­ter [of the state’s econ­o­my],” bank pres­i­dent Eric Hard­mey­er says. ​“We are an enabler. We fol­low very much the strate­gic direc­tion of the state and of local eco­nom­ic devel­op­ment entities.”

How to build a bank

Over the last two years, a coali­tion in Ore­gon of com­mu­ni­ty bankers, small busi­ness own­ers, labor unions, farm orga­ni­za­tions and var­i­ous pro­gres­sive groups (includ­ing the Work­ing Fam­i­lies Par­ty) has endorsed a state bank in Ore­gon. Dud­ley first pro­posed the bank ear­ly in 2009 at a Jobs With Jus­tice con­fer­ence on the eco­nom­ic crisis.

Ini­tial­ly, pro­gres­sive groups in the state respond­ed to the refusal of bailed-out big banks to loan with a cam­paign to ​“move your mon­ey” or ​“fire your bank.” But then, still angry about the con­cen­tra­tion and glob­al­iza­tion of finance, their focus turned to how to make sure people’s mon­ey was used to gen­er­ate local jobs and eco­nom­ic growth. Inter­est in a state bank grew.

Orga­niz­ers rec­og­nized ​“this would nev­er go any­where if we didn’t have the sup­port of com­mu­ni­ty bankers,” Dud­ley says. Even­tu­al­ly, even the Ore­gon Bankers Asso­ci­a­tion endorsed the watered-down pro­pos­al, although pri­vate­ly big banks still oppose a state bank, Vige­saa says, and some pro­gres­sives wor­ry that banks will have too much influ­ence on any final pro­pos­al. Oth­er­wise, the main oppo­nents are antigov­ern­ment con­ser­v­a­tives, even though BND has bipar­ti­san sup­port in gen­er­al­ly con­ser­v­a­tive North Dakota.

Rough­ly a dozen oth­er states are also con­sid­er­ing leg­is­la­tion either to study the fea­si­bil­i­ty of a state bank (a move already man­dat­ed by the Mass­a­chu­setts leg­is­la­ture), set up a bank (as in Maine) or cre­ate a scaled-back alter­na­tive state agency for financ­ing eco­nom­ic devel­op­ment (as in Cal­i­for­nia and Ore­gon). Ore­gon is ​“far ahead of the pack,” Dud­ley says, both in build­ing its coali­tion and in pro­mot­ing leg­is­la­tion that would set up a pre­cur­sor state agency that could be lat­er con­vert­ed into a full-fledged bank. But after approval by Oregon’s House and Sen­ate com­mit­tees this year and win­ning sup­port from a bipar­ti­san major­i­ty of the leg­is­la­ture, the Repub­li­can co-chair of the Ways and Means Com­mit­tee blocked the bill from com­ing to a vote.

Fol­low­ing the BND strat­e­gy, most state-bank advo­cates pro­pose that the state gov­ern­ment would first issue bonds (or use alter­na­tive strate­gies) to estab­lish the bank’s cap­i­tal reserves. Then it would deposit short-term hold­ings of tax and oth­er rev­enue in the state bank, rather than in large nation­al or multi­na­tion­al banks as states typ­i­cal­ly do now. It would not accept oth­er deposits, such as from indi­vid­u­als. To encour­age com­mu­ni­ty bank­ing, such a state bank – or ​“Main Street Part­ner­ship Bank,” as some pro­po­nents pre­fer – would pri­mar­i­ly par­tic­i­pate in local loans ini­ti­at­ed by com­mu­ni­ty banks or in spe­cial lend­ing pro­grams direct­ed by the state legislature.

The state bank’s par­tic­i­pa­tion would expand the amount of mon­ey com­mu­ni­ty banks could loan to finance small busi­ness needs. For exam­ple, the Cen­ter for State Inno­va­tion, affil­i­at­ed with the Uni­ver­si­ty of Wis­con­sin, cal­cu­lates that an Ore­gon state bank would raise annu­al lend­ing by about $1.3 bil­lion, gen­er­ate about 5,400 new jobs and cost the state noth­ing, while bring­ing in $69 mil­lion in earn­ings to the state gen­er­al fund over a decade.

A state bank would also like­ly boost con­fi­dence in lend­ing dur­ing uncer­tain times. For exam­ple, from 2007 to 2009, when the nation­al cred­it crunch was tight­est and bank lend­ing dropped far­ther than it had in 70 years, BND increased busi­ness lend­ing by 35 per­cent, help­ing to counter the downturn.

“Absolute­ly,” BND has the effect of increas­ing bank and busi­ness con­fi­dence in North Dako­ta, says Hard­mey­er. ​“That’s one of the big ben­e­fits, the risk shar­ing. We can’t sit on our hands. We need to be out there work­ing with the bank­ing com­mu­ni­ty, deliv­er­ing funds to cus­tomers. If we didn’t, what would be the point of this institution?”

The pres­ence of more state banks in the Unit­ed States could have huge­ly pos­i­tive effects: increased lend­ing to local and small busi­ness­es, less con­cen­trat­ed bank­ing, more resilient respons­es to eco­nom­ic crises, more jobs, more state rev­enue and more local con­trol of the econ­o­my. The fed­er­al gov­ern­ment could also cre­ate jobs and sta­bi­lize the econ­o­my with a com­ple­men­tary nation­al infra­struc­ture bank, which Pres­i­dent Oba­ma sup­ports, or even a broad­er nation­al invest­ment bank, as some econ­o­mists have proposed.

“We def­i­nite­ly would be able to make more loans” if there were a state bank, com­mu­ni­ty banker Vige­saa says. And that, Houser says, ​“will make it eas­i­er for small busi­ness­es.” Though a state bank is no panacea, it sure beats per­va­sive state aus­ter­i­ty plans as a way to cre­ate jobs and strength­en local economies.