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Cover Story

Reluctant Role Model

Consider this tale of two cities: Grand Forks, North Dakota, suffered massive flooding that left it economically crippled in April 1997. So did East Grand Forks, just across the river in Minnesota. Three years later, Grand Forks had lost 3 percent of its population, and East Grand Forks had lost 17 percent.

Those who are pushing for states like Illinois and Washington to create a publicly owned bank insist this difference in economic recovery is no coincidence. They give much of the credit for Grand Forks' resiliency-only one minute by car from its Minnesota counterpart-to the 92-year-old Bank of North Dakota, the country's only state-owned bank. Its help came in many forms, including a quickly established $25 million line of credit for the city itself.

Lawmakers in state capitals across the country are increasingly intrigued by such arguments. With the financial crisis fueling disdain for the banking industry in general, some view a public bank as an appealing alternative to a system they consider to be broken.

But Eric Hardmeyer, president and chief executive of the Bank of North Dakota, is not so sure.

"I am not an advocate for a state-owned bank model," Hardmeyer says. "I won't advocate that this is the model you should build in your state. It is up to the state and the constituency base to make that decision."

North Dakota and all state agencies are required by law to deposit their funds in the Bank of North Dakota-funds the bank uses, among other things, to support economic development, capitalize community banks, and make student loans.

In addition, the bank-where deposits are backed not by the full faith and credit of the United States, but by the full faith and credit of North Dakota-acts as a sort of miniature Federal Reserve for the 95 state-chartered banks.

Hardmeyer says he has been inundated with phone calls from policymakers across the country seeking his advice. They face huge budget shortfalls and want to know more about how the bank managed to return $340 million in profits to the state over the past 14 years. They complain about depositing state funds in large money center banks so far away, as local business owners complain about not being able to get loans. They all wonder whether it would make sense to try to replicate the Bank of North Dakota in their states.

Hardmeyer has a simple message for them: Good luck with that.

The Bank of North Dakota was formed in response to a set of very distinct challenges. In 1918, the country was reeling from a recession; poor weather had caused food shortages in parts of the country; and in North Dakota, farmers were finding it difficult to secure credit from lenders who were generally located in other states.

The bank was created specifically to give farmers in North Dakota a fighting chance in an adverse economic climate.

"North Dakota was an agrarian state, so this was about the ability to control our own destiny at a time when most of the big decision makers were out of state," Hardmeyer says.

He adds, wryly, "And you had just had the Bolshevik revolution in 1917, and socialism was somewhat in vogue, so the political atmosphere was completely different."

But where Hardmeyer sees unusually rare circumstances, others see similarities-including a deeply scarring recession, a widespread credit crunch, and frustration with big out-of-state lenders.

In Illinois, state Rep. Mary E. Flowers of Chicago has introduced a bill to create a bank with a structure similar to that of the Bank of North Dakota, including a requirement that the state's operating funds be deposited with the bank.

She says "a sense of helplessness" prompted her to draft the bill. "Last summer, when all the banks started going under, there were foreclosures, and the banks couldn't lend money," Flowers says.

She blames the banking crisis for stifling the kind of economic activity that Illinois needed to get its economy moving again. "Here, a person has an idea to create their own business but they cannot get the capital to start up," she says. "And we bailed out a lot of these banks with our tax dollars."

Considering the plight of local small businesses, Flowers began to see the North Dakota option as very appealing. She also envisions many other ways such a bank could make a difference. "We can help eliminate some of the deficit; we can help people stay in their homes," she says.

Mostly she just wants change. "If we keep on doing the same things we've been doing, we're going to get the same result," she says.

Flowers is far from alone. Her bill is one of more than half a dozen in states across the country, all aimed at either creating a state-owned bank or studying the feasibility of creating one. Others with pending legislation are Hawaii, Massachusetts, Maryland, Oregon, Virginia and Washington.