Wall Street on the Prairie: How Financial Innovation and Regulation Cajoled Citibank into South Dakota

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 48^th 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 11^th 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 50^th 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 21^st
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!