How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran (review)

The history of banks has long been told by those who, basically, believe in them. From the canonical works of Rondo Cameron and Richard Timberlake to more contentious contributions like those of Naomi Lamoreaux, Stephen Haber, and Charles Calomiris, banks figure as enormously valuable instruments of economic development, even if their origins are parochial and their operations are notoriously unstable. Against this background, Mehrsa Baradaran's recent book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, makes a refreshing break. It's not that Baradaran doesn't believe in banks. Rather, she believes they are profoundly limited by their own profit-driven logic. That logic makes them congenitally ill equipped to serve as much as half the American population (139). Given that failure, we are obligated to think beyond our current complacency about the way we organize credit and its allocation in modern America. Baradaran herself argues that Americans should have a public option, postal banking, to spread and support credit.

The historiography of banks and Baradaran's punch line that we need a public option are of course related. Private institutions—commercial banks—have long monopolized an elemental role in our financial system. Supported in distinctive and essential ways by the government, commercial banks amplify the base money supply by lending into circulation their own representations of credit—the deposits we hold when we receive a bank loan. (In the old days, these representations of credit took the form of private bank notes.) In effect, commercial banks hold the privilege of issuing dollars, a privilege that advantages them incomparably against other credit providers. Bank credit in the form of deposits therefore composes the great majority of our effective money stock. (Josh Ryan-Collins et al, Where Does Money Come From? [London: New Economics Foundation, 2011] 23.)

Scholars interested in commercial banks have largely assumed the vital role they play, rather than interrogating their claim to that position. Thus the scholarship considers how fractional reserve banking works (Richard Timberlake), interrogates the intimacies of early lending (Lamoreaux), or examines what makes banks resilient or more vulnerable to runs or other breakdowns (Gary Gorton; Calomiris and Haber). These studies, while illuminating, leave in place the blanket assumption that banks properly monopolize the delivery of credit and the moneymaking function. We could even add critics of banking, those who focus on the bad apples of the industry (e.g., Stephen Mihm). They, too, generally neglect to query whether banks should be our money creators in the first place.

Baradaran takes a different tack. Her book amounts to the sustained proposal that credit allocation by banks proceeds according to a social contract. Private investors benefit the public as lenders, effectively increasing the money supply and allocating funds, in return for support from the government, which provides deposit insurance, acts as lender of last resort, coordinates the system that banks need to clear their accounts against each other, and more. Given that commitment of revenue and attention, commercial banks should service all the American people. Yet increasingly, banks cater only to wealthier Americans, leaving low-income individuals to the ravages of payday lenders and check-cashing services. While big banks borrow from the government at rock-bottom prices, the poor pay exorbitant prices for credit.

Baradaran's story is the slow-motion collapse of the social contract, grounded on a reading of the American experience since the country's founding. Her point is twofold: she aims to show that the social contract she identifies existed in fact and that it was a matter of consensus at the normative level. She succeeds on both counts. Her account of the late nineteenth and twentieth centuries is particularly strong. Thus her narrative really takes off with post–Civil War developments, including the Democratic and progressive political reforms that have redistributive effects through the New Deal. In turn, Baradaran reads the post–New Deal history...