This is the speech that I delivered Tuesday, March 12,
2013 at 05:30 PM at the MUSEUM OF
AMERICAN FINANCE at 48 Wall Street in New York, NY to a crowd of about 40-45.
Thanks to my dear friend, Museum
president David Cowen, and the Augustana College Thought Leader Forum committee
for inviting me to speak to you tonight. I have a foot in both Manhattan and
the Great Plains and hence had a lot of fun completing the background research
for this speech and writing it up in a way that avoids, or pokes fun at,
technical terms like regulatory arbitrage and disintermediation. A more formal
analysis of the Citibank episode and South Dakota’s other economic development
efforts will appear in my forthcoming book, Little
Business on the Prairie: Entrepreneurship and Prosperity in South Dakota,
to be published by Augustana College’s Center for Western Studies soon after I
complete the manuscript later this year. Or next. Or the year after that.
Having achieved tenure and middle age at the same moment, time, like my middle
section, has taken on an added dimension. Having thus sated the bragging East
Coast and self-deprecating Midwest parts of my psyche, let me begin.
Sioux Falls is a vibrant, growing city of about 150,000 located in southeastern South Dakota near the borders of Iowa and Minnesota. It is the commercial center of a 4 county MSA with a population approaching a quarter million people and its stores, restaurants, hospitals, and colleges serve about 1 million farmers, ranchers, and small town dwellers in the tri-state region. It is also a national center for credit card operations and has been since the early 1980s, when the New York Times complained that quote homes across the land are flooded with mailings from South Dakota offering … Mastercards – at a $20 annual fee and finance charges of 19.8 percent. unquote Today, a half dozen major credit card issuers each employ at least 100 people in Sioux Falls, and several other issuers employ staffs that number in the dozens.
Unassuming Sioux Falls became a national credit card processing and call center because in 1980 Citibank decided to relocate its massive credit card operations, which included some 6 million Mastercard and Visa holders spread across all 50 states, to the little city on the Big Sioux river. Citibank’s decision attracted considerable attention nationally and soon several other banks, including First City Bank of Houston, First National Bank of Omaha, and Michigan National Bank, also moved card operations into the Sunshine State, some into Sioux Falls but others into Rapid City in the Black Hills or Yankton along the Missouri River. An abundance of physical and human capital adapted to the credit card business now keeps card issuers in the state in the same way that magnetism keeps calendars stuck to refrigerators. In 1980, however, the state enjoyed no such specific set of human capital, so it relied instead on the personal magnetism of South Dakota governor Bill Janklow.
I never met Janklow, who passed away in early 2012, but henceforth I’ll call him Bill because that is what we do in South Dakota, call our leaders by their first names, and usually in their most familiar form too. Bill was nominally a Republican but like New Jersey governor Chris Christie he was not a party stalwart and also on the heavyset side as we say in the Coyote State. Bill had his warts, the most infamous of which you can read about on his Wikipedia page if you want, but he also had his charms, one of which was to set aside partisan bullshit – which by the way in South Dakota is an actual thing and not just a figure of speech – and actually get things done for his constituents. And I don’t mean pork – also an actual thing in South Dakota – or in other words projects that took from one and gave to another. What Bill excelled at was implementing policies that bettered the lives of some, nay sometimes all or most, South Dakotans, without injuring the interests or pockets of others, others within the state anyway. Bill’s efforts to entice good paying, environmentally clean jobs to the state was the foremost of those policies, and they took on a fever pitch in 1979, the first year of his first term, because a nasty recession was crimping state revenues. Most of the state’s needful came from real estate and sales taxes and also a state-owned cement plant. But few wanted to buy cement during the downturn, which was characterized by unusually high rates of inflation and nominal interest rates as well as by reduced output. Tax receipts of course also declined, partly due to a decrease in tourism, another big component of the state economy.
Citibank was also hurt by the recession, which was initiated by the Iranian Revolution and the abdication of Mohammad Reza Pahlavi, the Shah of Iran, in early 1979. Due to civil unrest in Iran, short to intermediate term oil supply inelasticity, and panicky remembrances of the 1973 oil crisis, the price of crude oil jumped from about $16 to $40 per barrel. That, combined with the public’s inflation expectations and the Federal Reserve’s relatively easy, pro-cyclical monetary policy under chairmen Arthur F. Burns and G. William Miller, induced yet another bout of stagflation, or a period of high inflation rates and weak economic growth.
Enter Paul Volcker, who is a friend of the Museum and, in case you have yet to meet him, as tall as a short Sasquatch. After becoming chairman of the Federal Reserve in August 1979, Volcker raised the Fed’s overnight lending rates in order to wring inflation expectations out of the economy. He also allowed commercial banks, who were losing depositors in droves, to raise the rates they paid on checking and savings deposits. Since the New Deal, the Federal Reserve had tightly regulated the rates that commercial banks could pay on deposits, effectively cartelizing them to avoid the mass panics and waves of bank failures that had rendered the Great Depression so very depressing. Members of President Roosevelt’s Brain Trust who distrusted financiers and their institutions, men like Louis Brandeis, an associate justice of the U.S. Supreme Court who in 1914 had published a scathing indictment of Wall Street called Other People’s Money and How the Bankers Use It, were thrilled with the arrangement because it made commercial banking so tranquil as to give rise to the infamous 3-6-3 Rule by which bankers borrowed at 3 percent, lent at 6 percent, and left the office to play golf at 3 p.m. The interest rate regulations, called Fed Reg Q, rendered the banking system stable for decades but when market interest rates, driven ever higher by inflation, rose above the legal caps it caused all sorts of problems, including what economists called disintermediation and what television viewers called why are so many banks making commercials about giving away toasters?
Toasters or not, under Reg Q and stagflation it made sense for depositors to pull their money out of banks and to invest it elsewhere, like money market mutual funds, where larger returns awaited. It also made sense to borrow as much as possible in the expectation of paying back cheaper dollars later. Citibank’s credit card division soon felt the pinch because it was paying 19 percent for money, lending it for less than that due to state interest caps known as usury laws, incurring operating expenses of 5 to 6 percent, and eating numerous defaults caused by the unsettled economic situation and the bank’s own inability to discern good from bad credit risks. At one point, Citibank’s credit card operations were costing it more than $300 large every day, some $2 million dollars down the tubes every week, chump change today but a lot of cheddar back then. Rather than shutter the business, Citibank’s Charlie Long, on orders from aggressive CEO Walter Wriston, began looking for a state with a more favorable business climate than New York had to offer. Pinning their hopes on the Supreme Court’s 1978 Marquette decision, which allowed a bank to charge any rate of interest lawful in either its location or that of its borrowers, Long identified 6 prospects, California, Hawaii, Rhode Island, Nevada, Missouri, and South Dakota, but eventually dropped all but South Dakota due to their distance from New York, their high costs of doing business, or the hostility of their state politicians. That last mentioned variable was essential because, due to the Douglas Amendment of the Bank Holding Company Act of 1956, out-of-state banks had to be invited into a state before they could do business in it.
Missouri held in the longest but South Dakota turned out to be the best choice overall for reasons I’ll describe a little later. The Comptroller of the Currency approved Citibank’s move in November 1980. The Federal Reserve did likewise in January 1981. Citibank South Dakota began operations in rented space in February 1981 and moved into the first of the three new buildings it would construct in the city that June. The rest, as they say, is history.
Soon after the move, a myth sprouted that Citibank had paid South Dakota to drop its usury law, its cap on the rate that lenders could lawfully charge to borrowers. The myth proliferated widely because it offered an easy explanation for Citibank’s decision to invest in a state known more for harsh winters and a surfeit of ringed neck pheasants and red-necked denizens than for financial expertise. Easterners regularly conflated North and South Dakota, evidenced by the fact that quote unquote Bismarck, South Dakota was mentioned on the national news more than once. Even less excusable, some people conflated South Dakota with South Carolina. One Wall Street venture capitalist, for example, congratulated a South Dakotan entrepreneur seeking funding by noting that he hardly had a southern drawl at all.
To the extent that South Dakota was known nationally in 1980, its reputation was far from savory. Just a few years earlier, the state had made national news due to a standoff on its infamous Pine Ridge Indian Reservation called Wounded Knee II and the murder of two FBI agents there. That was a typical Saturday night in Washington Square Park but Russell Means, who I also failed to meet before he passed last October, was then far scarier to most Americans than any New York pimp or drug dealer. And high levels of racial tension persisted in the state, even if the American Indian Movement moved out of the national spotlight. In 1975, for example, some Yankton Sioux forcibly occupied a tribally-owned but white-managed pork processing plant in Wagner. A building at Augustana College was also occupied by disgruntled Native Americans for a time.
The myth of South Dakota’s capitulation to the emerging megabank also made for great political satire, including an infamous fake news story that claimed, Onion or Colbert Report-style, that the South Dakota state legislature had voted to become a wholly owned subsidiary of Citicorp. According to the faux article, the state was thenceforth to be called Dakotacorp and Bill was to be its highly paid president. South Dakota’s capital, Pierre -- yes, it is pronounced the same as the pressure that teens put on each other to do drugs – was to be renamed Wristonville. It’s funny now but at the time it mortified South Dakotans, who traditionally abhorred just two things: big government and big business.
In fact, South Dakota took steps to eliminate its usury cap before Citibank expressed any official interest in moving to Sioux Falls. The impetus for the change came from state bankers because in 1979 South Dakota banks were in the same sinking boat as Citibank, paying big bucks to borrow but facing the state’s usury cap when they went to lend. Since its inception, South Dakota had looked for ways to keep borrowing costs for farmers and ranchers from going too high. In the 1910s it even established a state loan office that lent to farmers at 5.5 percent but shut it down after it suffered $57 million in defaults and other losses. Instead of solving the problem of high interest rates for riskier borrowers, the state’s legislature, like many before and since, pretended to solve it by capping interest rates, first at 12, then 10, then 8 percent, where it stayed from 1933 until 1970, when rising inflation and nominal interest rates made it apparent to all that the 8 percent cap prevented many prospective borrowers from finding willing lenders. The legislature responded to those pressures by twice increasing the cap 2 percent for most loans and by more for some other, inherently riskier loan types.
Nevertheless,
banks were still squeezed enough on the spread between the sources and uses of
their funds and hurt by an economy wracked with stagflation -- high inflation,
low growth, and numerous defaults – that the very existence of the state’s
banks was soon threatened, as was that of their business customers. As Paul H.
Nordstrom, president of the Security State Bank in Geddes, informed Bill in
late October, 1979, his bank could no longer lend to anyone except a handful of
its very largest and best customers. The state’s usury law was therefore
hurting quote the very class of people that it was originally intended to
protect. What a paradox. unquote Bill responded in early November:
Quote I agree that the interest
ceiling in its present form is causing problems for citizens and our
State-chartered financial institutions. This is the end product of years of
federal, congressional and executive mismanagement and inflation. I can assure
you that this problem will receive careful consideration during the forthcoming
legislative session. Unquote
The legislature might have simply increased its usury ceiling a few percent to buy time as it and other states had done previously but Thomas M. Reardon, the founder and chairman of Western Bank in Sioux Falls, and his son T.J. Reardon, the bank’s president, had a better idea, do away with the cap entirely for regulated institutions like their bank. South Dakota bankers quickly signed off on the radical idea and the lower house, which was dominated by libertarian-tinged Republicans, did too. Citibank then expressed interest in moving to the state if the law stuck and that sealed the deal in the upper house.
What South Dakota did do explicitly for Citibank was to change a state law that prohibited out of state bank holding companies from owning South Dakota banks. To get the state bankers who felt protected by that law on board, somebody concocted a measure that allowed out of state bank holding companies like Citibank to form, own, and operate in South Dakota small, new banks that did not compete against existing South Dakota banks. Meanwhile, back at the ranch, Bill stressed the obvious need to diversify the state’s economy away from agriculture. In 1980, South Dakota’s per capita income was $7,800, 18 percent below the national average of $9,500 and everyone knew its heavy reliance on agriculture was the main culprit. The state’s bankers acquiesced and the law passed with a large bipartisan majority in what some say was record time.
It has to be noted that those two laws – the elimination of usury caps for regulated institutions and the bank holding company enabling legislation -- were necessary but not sufficient conditions for Citibank’s move to coyote country. Citibank needed its card business to be pushed out of New York while simultaneously being pulled to Sioux Falls, which contrary to popular belief is not in the middle of nowhere, but rather on its edge. California did not have a usury law and Delaware, the king of chartermongering and corporate whoring, as stooping to corporate interests was known in some circles, soon copied South Dakota’s usury and BHC laws. So South Dakota had to have had something else going for it, something that pulled Citibank to its bosom instead of to Delaware. Bill’s magnetism was certainly part of the pull but so too were the people of South Dakota and some peculiar attributes of the state itself. And that’s where Benjamin Franklin and Werner von Braun come in.
Franklin is known for many things, from philandering to flying kites during thunderstorms. He was also a first rate monetary theorist, the founder of America’s first mutual fire insurer, and a diplomat, politician, and, more to the point here, the new nation’s first postmaster general. The post office evolved in numerous ways after Franklin’s short stint but it remained an institution that provided uneven service over the large nation that it served. Circa 1980, Sioux Falls enjoyed a very efficient post office while that of New York was, like the city it served, kind of funky smelling. Bill and others claimed that a letter sent from one borough of the city to another arrived more quickly if sent via Sioux Falls, some 1,350 miles to the west, than if sent directly across the East River. That sounds incredible and is almost certainly apocryphal marketing hype but what mattered is that Citibank officials believed that payments and other correspondence sent from most places in the country would reach Sioux Falls before they would hit New York’s financial district. It has been demonstrated, Richard C. Kane of Citicorp Credit Services wrote, quote that the efficiency of the U.S. Postal Service improves considerably when you are not dealing with major cities on either coast. unquote By 1982, 32 percent of all the mail sent to Sioux Falls went to Citibank but the local post office’s performance did not waiver.
Thanks to Nazi rocket scientist Werner von Braun, South Dakota was well connected to the national telephone network and to newer satellite communications technologies. Von Braun helped to develop America’s moon rockets and also its intercontinental ballistic missiles, many of which the military stuck in the middle of South Dakota cattle pastures and cornfields to put them out of reach of Soviet bombers and to make the Ruskies, should they ever attack, waste their nukes on sparsely settled districts. The powers that be also put a nice bomber base in western South Dakota, partly to keep it safer from attack but partly to allow the pilots to quote unquote practice for Siberia by flying low over the region’s prairies. Of course the Reds eventually made faster bombers and enough nukes to destroy the entire earth many times over but the airports and missile silos were already in South Dakota and needed to be connected to Washington and NORAD in the awful event that the launch codes had to be sent. So South Dakota had excellent, redundant communication systems, quote one of the most progressive telephone switching systems in the country unquote according to one banker. So it was almost as fast and cheap for Citibank HQ to call Sioux Falls as it was to call an uptown branch. Plus Sioux Falls was in the central time zone, an hour behind Manhattan but the same time as Minneapolis, Chicago, Kansas City, St. Louis, and the rest of the densely populated Mississippi basin, the American bottomland as archeologists call it. Sioux Falls was also just two hours ahead of California. Perhaps most importantly, it was more expensive for customers to call New York than Sioux Falls, which is near the east-west geographical center of the country, from most points in the country.
Of course there had to be somebody in Sioux Falls to pick up the phone and monitor the mail, somebody who both needed a job and could adequately fulfill its duties. Thank John Froelich and tri-state school marms for supplying Citibank with the human capital it craved. Froelich was born in Iowa in 1849, undoubtedly surrounded by corn that had to be husked by hand and that grew out of fields prepared by horse drawn plows. By 1892, he had developed and successfully demonstrated in Langford, South Dakota a dual direction, gasoline powered tractor that saved numerous man hours, and many acres of fodder, by drawing threshers, plows, and other farm implements. By the end of World War I, agricultural equipment manufacturer John Deere had taken over the design. Soon the American heartland swarmed with the simple, efficient machines, driving first horses and then men out of work. As tractors and their sundry attachments and cognates grew more complex they also grew more expensive, creating economies of scale that spurred farm consolidation. Then Jimmy Carter’s grain embargo added to the general pressure by decreasing agricultural prices.
In the early 1980s, therefore, South Dakota was awash in un- and under-employed men and women who had once been farmhands or even owned their own farms, or who had been teachers, shopkeepers, or other types of service providers in the many little farm hamlets throughout the state that withered away as the rural population declined and the agricultural districts hollowed out. Many of those folks ended up in Sioux Falls and Rapid City where they proved themselves a hard-working, dependable, and intelligent labor force.
Yes, I said intelligent. When I left NYU for Augustana a friend of mine, who shall remain nameless, joked that the median IQ in both places would increase as a result. I laughed because I was still a typical eastern elite but now I know better! The median South Dakotan is very intelligent. People from rural backgrounds often display a good deal of what some still call horse sense, a common sense, git r done kind of pragmatic knowledge. For example, when people in Winner, which is in south central South Dakota near the Rosebud Indian Reservation, wanted a semi-pro baseball team, they financed one, called the Pheasants of course, with the house rakeoff from quote unquote smokers or community poker games.
That is not to say that South Dakota hasn’t made some boneheaded moves in the past. As I mentioned previously, in the 1920s it lost almost $60 million dollars, a huge sum for the time, on farm mortgages. Governor Peter Norbeck thought that the state could borrow on better terms than individual farmers could, then relend the money to those farmers, or voters in other words, on very favorable terms. He was right, the state government was capable of selling bonds and making loans. It turns out, however, that it wasn’t so good at inducing voter-borrowers to repay, especially after they were hard hit by the agricultural depression of the 1920s and the drought and dust storms of the 1930s. The state thought it had sufficient equity cushion but it turns out that having neighbors appraise each others’ farms does not lead to conservative valuations. Such missteps were rare, however, and state-owned businesses, including the cement plant and some rail lines, proved successful at times because the state outsourced their management.
More surprisingly, perhaps, than their abundance of good horse sense, many South Dakotans are also well educated in the formal, city slicker sense of the term. South Dakota spends relatively little on K through 12 education – it is right down there with Puerto Rico and Mississippi in per capita terms – but somehow its students score in the top quartile on national exams. Its eastern half anyway is part of the Midwest, which traditionally values education very highly. And outside the mighty metropoles at either end of the state, class sizes are often small, 50 or fewer. I’m talking graduating class sizes here, not the number of students in classrooms. Stories abound like that of Grace Fairchild, a Wisconsin-born tomboy who moved to Parker, South Dakota circa 1900 and soon after took up a homestead near Philip, about 90 miles southwest of Pierre. Despite facing all of the many hardships of frontier life and a few more besides, she managed to get her many children through not just high school but state college, all except for one n’er do well son and the daughter who was accidentally shot and killed by her sister when playing a game of coyote.
However they did it with the meager resources at their disposal, South Dakota’s school teachers done good, done real good. In the early 1980s, the state boasted the highest literacy rate in the country and had one of the nation’s most productive workforces. A surprisingly large percentage had college degrees and due to the state’s high level of religiosity, which for the most part is a genuine sort of spirituality based on service to others and not just ritualistic or perfunctory church attendance, call center workers were if anything too eager to help customers, a problem less frequently encountered in, say, employees from Brooklyn or Newark – no disrespect, I’m not saying, I’m just saying.
Citibank
was thrilled with the quality of the available workforce, which it considered
the most productive of any in the 40 states in which it did business. South Dakotans
worked diligently and well but also came cheap. The state’s tax burden was very
light, the 48th lowest in the nation at the time. The bank franchise
tax paid by Citibank in South Dakota, for example, was 6.5 percent of profits,
compared to the 15 percent that prevailed in New York at the time. In South
Dakota, Bill used to say, quote the only hand in your pocket is your own.
unquote And South Dakota’s overall business climate ranked 11th best
in the country and employers enjoyed among the lowest rates for worker’s compensation
and unemployment insurance in the nation.
The state’s wage structure was also low. In 1985, for instance, Citibank reported that it paid a temp agency $5.20 an hour per worker, who received only $3.80 of that sum. The federal minimum wage was then $3.35. Some, like Ben Radcliffe of the South Dakota Farmers Union, complained that Citibank viewed South Dakota as quote something akin to a third world country unquote but in fact the state’s low wages were a function of its low cost of living. Healthcare costs were a third cheaper than in New York. Housing was dirt cheap even though sod had long since been abandoned as a home construction material, and rents were a mere fraction of those in and around New York. Wages were also low due to South Dakota’s long tradition as a so-called right to work state, a euphemism for anti-union in case you were wondering. Meatpacking giant John Morrell, which had a big facility in Sioux Falls, and mammoth Black Hills gold mine Homestake were, unsurprisingly, the leading lights of the right to work movement. The state’s long right-to-work tradition was yet another inducement to employers like Citibank, which foresaw few labor relations headaches in the state. Bill loved to tell prospective entrants that South Dakota was the 50th best state in the nation: for crime, energy costs, and time lost due to union work stoppages.
Citibank officials also lauded South Dakotans for having little discernible accent, for being quote pure vanilla … with but a few idiosyncracies. unquote South Dakotans pronounce a few words differently than elsewhere in the country, where ruff is the sound a dog makes, not the top of a house, and they use a few words in usual ways. I was taken aback, for example, when I was asked if I wanted a ticket at the end of my first restaurant meal in Sioux Falls … why, what did I do wrong, I asked? But for the most part South Dakotans all sound like television news anchorman Tom Brokaw, who hails from Webster, South Dakota in case you didn’t know. Sportscaster Pat O’Brien, Entertainment Tonight host Mary Hart, The Price is Right’s Bob Barker, January Jones, a.k.a. Betty Draper on Mad Men, Cheryl Ladd of Charlie’s Angels fame, David Soul from Starsky and Hutch, Catherine Bach, Daisy Duke from the old Dukes of Hazard TV show, and Ranae Holland, who tromps around the woods looking for Bigfoot every Sunday night on the Animal Plant network, are also all South Dakotans too, though perhaps slightly more attractive than the median denizen of the Blizzard State.
So South Dakota had a lot of things pulling for it: a sufficiently large, sufficiently educated workforce that worked hard and cheap. Despite living on the edge of nowhere, South Dakotans could handle calls from both coasts without working absurd hours and they were easily understood by callers from throughout the nation. Checks and correspondence arrived quickly and were not allowed to fester on the mailing room floor. And the state government was stable and pro-business. As Helen Wegner, a Pierre bureaucrat, explained to a senior vice president at the Bank of New York, which in 1983 considered moving some of its operations to Sioux Falls: quote South Dakota is a state where profit is not a bad word and where government views itself as a partner of business not its regulatory master. unquote In South Dakota, Bill once bragged to a Texas banker, quote Republicans and Democrats have come and gone, but our business climate has never been affected by the political weather. unquote
Sensing a big opportunity after Citibank’s move, Bill kicked the apparatus of the state government, such as it was, into high gear. State officials kept contact notes on prospective entrants similar to those maintained by corporate sales reps. Bill sent bankers engraved faux wedding invitations, complete with reply cards, to quote a Renaissance of Free Enterprise. unquote Not everyone, however, liked what they saw. The Bank of New York opted for Delaware instead and Sears, GMAC, and others jilted Bill after courtships of varying lengths and intensities. New York commercial banks Manufacturers Hanover and Chemical Bank also investigated the Mount Rushmore State but didn’t come. Seattle First National and Ranier, both based in Washington state, also looked hard at South Dakota, one going so far as to buy office space in Rapid City, but ultimately stayed away. Perhaps they did not believe that South Dakota’s quality of life was as high as the erstwhile New Yorkers who came with Citibank claimed it was. The biggest obstacle for many outsiders is the weather, which is much understood. It gets very, very cold and windy in the winter. When the jet stream dips deep into Dixie and it is fifteen degrees Fahrenheit in Manhattan with a zero wind chill, it is likely 10 below in Sioux Falls, with wind chills around fiddy below – yep, that’s five zero under zero. But Dakota’s freeze is usually a dry, sunny cold that lasts only a few months at most. The dry air and the fresh breezes of the spring and fall are invigorating, beckoning people outdoors to work, play, or enjoy the often spectacular sunsets and nightly gallery of stars. The air has such a delightful tang, one early twentieth century homemaker noted, quote It makes you want to work. unquote And while parts of the prairie are monotonously flat, the state has been nicknamed the land of infinite variety because of its beautiful Black Hills, its stark badlands, its plentiful riverine arroyos, its bountiful glacial lakes, and the series of huge manmade lakes that bisect it. Perhaps the bankers who didn’t come were never really interested in moving to South Dakota at all but rather sought to extract more favorable legislation at home, which most eventually received.
Indirectly, then, South Dakota pushed national and state regulators and lawmakers towards banking deregulation and helped to spread credit cards to a wider swathe of American consumers. Neither was necessarily a good thing as both were causes, though indirect ones, of the Panic of 2008. But if Bill and Citibank had not aligned in the early 1980s, surely other pressures would have led to the same outcome. I think that historians will soon begin to refer to the 1990s and the first decade of the 21st century as the Pyrite Age, a sort of less violent repeat of the Gilded Age where powerful political and corporate interests dazzled Americans with fool’s gold instead of gold trim. I have a short essay about it that will appear shortly in ABC Clio’s Idea Exchange website that I urge you to check out but the gist is that Americans today are not as upset about inequalities in wealth and corporate welfare as they were a century ago, when powerful third political parties were almost as ubiquitous as bombs and assassination plots, because they conflate credit, the ability to borrow on easy terms, with actual wealth, or assets minus liabilities.
Further evidence that American history would have marched down the same path to financial Armageddon with or without South Dakota comes from a little known postscript to the Citibank in Sioux Falls slash Wall Street on the Prairie story. In March 1983, South Dakota, still led by Bill and fresh from rendering state usury laws a dead letter, again teamed up with Citibank to try to circumvent financial regulations, this time the regulatory wall that separated commercial banking and insurance. Citibank was interested in entering the insurance market because it believed it could prosper there. In fact, a decade previously it had tried to buy into the Chubb Insurance Group but was prevented from doing so by the Federal Reserve, the main regulator of bank holding companies. For his part, Bill was interested quote to gain more jobs for South Dakota unquote and to quote bring down the artificial economic barriers that really don’t do my state or America any good. unquote The entering wedge was again a new law, this one allowing South Dakota banks to engage in insurance activities. To gain the acquiescence of the state insurance industry, which at that time numbered over 60 insurance companies and some 750 active agents and brokers, the law stipulated that state banks active in insurance could not attempt to lure customers away from other South Dakota insurers or banks. Let’s not kid ourselves, Bill noted in a letter to concerned insurance men, quote no large national financial services company is going to risk jeopardizing its unique opportunity to do business in 49 other states by trying to attract even a small amount of extra business in this state. unquote In that same letter, Bill also adroitly pointed out that if South Dakota didn’t pass the legislation another state would and that it wouldn’t protect South Dakota insurers from competition.
Interest
in the new law was intense. Within a few weeks of its passage, 15 bank holding
companies had begun investigating the possibility of entering insurance markets
via South Dakota. By the end of June 1983 Citicorp had purchased American State
Bank of Rapid City, First Interstate Bancorp had scooped up Big Stone State Bank,
and Security Pacific Bancorp had announced its intention to make an
acquisition, all with the intent of beginning insurance operations. Those banks
were optimistic because the Federal Reserve had for some years allowed the
state-chartered bank affiliates of bank holding companies to engage in any
activity which they were permitted to engage in under their state charters.
This time, however, Bill and Citicorp were up against Volcker, the insurance lobby, and common sense, not antiquated state usury statutes. An article in American Banker by Thomas E. Wilson called the theory behind the law quote utterly bankrupt, belied by the plain language of the BHC Act and the well-established principle of the law that federal law predominates over state laws when the two come into conflict. unquote Wilson also astutely noted that quote it would be extraordinarily unwise unquote to permit bank holding companies to engage in insurance because quote it is hard to imagine two industries more incompatible than banking and insurance. unquote
Despite renewed sarcastic references to South Dakota Inc., Bill and Citibank fought hard and in November 1984 actually received the blessing of the Department of Justice, which reasoned that quote there are substantial competitive benefits to be gained from permitting banking organizations to expand into new financial activities. unquote But in the summer of 1985 the Federal Reserve rejected Citicorp’s request to enter the insurance game because, as Wilson had noted, the law clearly differentiated between banking and related activities, which were lawful for bank holding companies or their subsidiaries to engage in, and insurance activities, which were not.
Volcker was adamantly opposed to allowing Citicorp or other BHCs from buying South Dakota banks as a mechanism for entering the national insurance market. In a May 1983 speech, he argued that a conservative approach to the matter was in order because it involved quote an area vital to the stability and prospects of the economy as a whole. unquote Federal Reserve governor Martha Seger was also opposed and pointed out that because South Dakota’s law prevented competition within the state it was clearly designed solely to circumvent federal law.
Volcker left office in 1987 and his successor, Alan Greenspan, harbored rather different views. Federal regulators later allowed commercial banks and insurers to merge and what the heck why not investment banks too? The result was rather disastrous as the resulting behemoths proved themselves too big to manage or govern and then too big to fail, but not too big to bail out with taxpayer money. Bill probably had some things on his conscience when he passed just over a year ago now, but the financial crisis of 2008 was not one of them. In the early 1980s analysts like John R. Dunne warned of a regulatory race to the bottom, led by states like South Dakota and Delaware eager to attract mobile, high-paying, low impact industries like finance to their states. Quote Such policies, like those already legislated in South Dakota, he warned, represent the bad side of deregulation and could lead to a deregulatory free-for-all. unquote A free-for-all did ensue but it focused on mortgage debt, not credit cards. And the deregulation wave of the 1990s and early aughts went on with no more significant input from South Dakota, which sailed through the housing bubble, financial crisis, and Great Recession with astonishingly little difficulty. In December 2011, three full years after the Panic of 2008 ended, South Dakota’s unemployment rate was, at 4.2 percent, the third lowest in the nation behind its neighbors Nebraska and North Dakota, which continued to experience an energy boom of Albertan proportions.
Mention of the recent bailouts brings me to the final person I promised to connect to this story, Alexander Hamilton. Hamilton has hung over the entire proceeding both literally and figuratively. The space we now occupy was once the private banking room of the Bank of New York, one of three banks that Hamilton helped to form before his life was snatched from him. A room bearing his name, likeness, and story lay just a few yards away. I interpret Hamilton as a civil libertarian, so I think he would have applauded South Dakota’s decision to abolish its usury cap, especially under an inflationary fiat currency regime. I also believe he would not have seen a problem with bank holding companies or interstate banking. He was the main mover behind the Bank of the United States after all, and soon accepted its directors’ decision to create branches in multiple states. He was far from a knee jerk advocate of deregulation, however, so I doubt he would have seen much merit in endangering deposits, especially after the advent of deposit insurance, by allowing banks to engage in insurance. And he surely would have opposed the Too Big to Fail doctrine that arose out of the Savings and Loan Crisis of the 1980s. In fact, David, Museum board chairman and financial historian Richard Sylla, and I recently published an article where we show that Hamilton espoused a lender of last resort rule that would later be named after Economist magazine editor Walter Bagehot. The rule, which saves solvent institutions, allows insolvent ones to fail, and doesn’t reward bad behavior, is one that South Dakotans steeped in horse sense would adopt for the entire country if they could. There are also a heap of Hamiltonian corporate governance reforms, described in my forthcoming book Corporation Nation, that would also be readily taken up if South Dakotans ran the show in Washington, as South Dakota natives Hubert Humphrey and George McGovern tried to do in 1968 and 1972, respectively, another dark time in the nation’s history. They both lost to Richard Nixon -- McGovern handily so -- which goes to show that while the majority rules it often isn’t very smart. Maybe, someday, the majority will be smart enough to follow the teachings of Hamilton and the horse sense of South Dakotans. Maybe, someday, we will have some of the prairie on Wall Street. Citibank N.A.’s recent decision to move its nominal headquarters from Nevada to Sioux Falls is a good start, though everyone knows that the real power is still at Citigroup holding company headquarters up on Park Ave. Maybe someday it too will move to Minnesota Avenue, or somebody from South Dakota will be running the show here in the Big Apple. Until then, keep your ass …ets safe. Thanks!
