100 years of Bank of North Dakota: A rare public sector bank in US

I had blogged about how there are two public sector  banks in US: Bank of North Dakota and Territorial Bank.

BND is celebrating its 100 years and has put up a useful website to track its history:

The credit system of the United States and the northern plains was not structured to meet the needs of North Dakota farmers in 1915. National banks could not lend money on farm mortgages. State banks could make farm loans, but they were under-capitalized, often dependent on money from out of state.

Farmers were heavily dependent on store credit—buy food and hardware on credit now, pay for it after harvest—and insurance companies. Farmers needed money to purchase equipment, buy seed and livestock, and pay for such necessities of life as they could not produce for themselves on their farms. Commercial interest rates in the state were high—significantly higher than national averages. Local bankers were sometimes hostile or indifferent. Even those who were sympathetic found it nearly impossible to provide farmers loans at a price they could afford.

The credit situation in North Dakota was not merely a strain on family farmers. In thousands of cases, it made it impossible for the farmer to get in or harvest a crop.

Something had to change.

The train depot in Bismarck, N.D., loaded grain for transport to eastern markets. The railway charged high prices while grain traders kept prices low and bankers charged high interest rates. This served as a catalyst for the Nonpartisan League platform. (State Historical Society of North Dakota 1952-00101)

There were only three options: Persuade commercial bankers to be more helpful and understanding; create some sort of rural credit banks that would lend money to farmers at cost or at below-market rates (a sort of credit union approach); or create a central state bank for North Dakota that would make loans directly to farmers or at least induce local commercial banks to assume a more helpful policy in dealing with the cash-starved farms of North Dakota.

In addition to the banking challenges, the railroads were charging higher rates to transport grain within the state than to transport more miles to elevators in Minneapolis and Chicago. Elevators charged unfairly high prices to store the grain of North Dakota farmers, creating a perfect storm for dissatisfaction and frustration among farmers.

This led to the bank which was seen as a socialist experiment:

Nobody is quite sure where the idea of a state-owned Bank of North Dakota came from. League officials, including Governor Lynn J. Frazier, had spoken frequently of “a system of rural credit banks operating at cost,” (a kind of rural credit union system), but the idea of a central state bank did not enter the discourse until 1918 and 1919. A booklet published by the League on August 31, 1918, called for a “State Bank which will act in a similar capacity for our state as does the Federal Reserve and Farm Land Banks. . ..”

Conservative representative Paul Johnson of Mountain, North Dakota, wrote, “The bill looks to me to be socialist in the main points. I do not believe in state-owned and operated utilities: at least I do not believe in experimentation on a large scale like this.”

The 1919 North Dakota legislative session, taking its cues from the Nonpartisan League’s Industrial Program for North Dakota, created the Bank of North Dakota. The legislation declared that the Bank was “created for the primary purposes of providing low-cost rural credits, financing state departments and enterprises, and serving as a clearinghouse and rediscount agency for banks throughout the state.”

House Bill 18 from the 1919 North Dakota Legislature forever changed the course of history in North Dakota.

The NPL prepared a memorandum of recommendations during the 1919 session and presented it to the House and Senate of North Dakota.  Article 7 said: “That the state should establish and operate its own bank, for the financing of all state departments, industries and enterprises, for the handling of all public funds and for the making of farm loans and the stabilizing of credit in all industries carried on in the state.” This was the founding document of what became the Bank of North Dakota.

In the end, the League program was reduced to one large state mill and elevator (in Grand Forks), and one state bank (Bismarck). This centralization of what was originally a vision of a myriad of decentralized banks, elevators, and mills undoubtedly reduced the effectiveness of the monumental entities, but-–ironically—they probably insured their survival. It seems certain that the decentralized array of smaller institutions would have been swallowed up by the dynamics of North Dakota history. The two central institutions—the State Bank and the ND Mill and Elevator—were, in a sense, too big to fail, or at least too big to for League enemies to kill off with impunity.

After the landmark ND legislative session of 1919, even the hostile Grand Forks Herald wrote:

“The session was the most important in the history of the state, and it accomplished the most far reaching legislation yet enacted. The state is now the socialistic laboratory of the country, and unless the people veto the administration measures the experiment soon will begin… The most interesting experiment in the history of the country will be carried out in this state during the next two years.” The Herald concluded, “There is nothing Bolshevist, so far….”


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