South Dakota’s reputation as a financial haven is once again in national news thanks to the Pandora Papers as told by the Washington Post. Though I am far from an expert in trust and finance law, I thought I’d share some thoughts and data on how this happened.
Again, finance law is not my area of expertise, but there’s an interesting history of how South Dakota initially drew large-name banks to Sioux Falls and then nourished the trust industry. I’m mostly interested in how this went on largely without scrutiny and below the public’s radar.
It started in the late 1970s with a landmark court ruling — Marquette National Bank vs First of Omaha Corp — which allowed banks to follow usury laws in the states they were based in, not in the state the customers were living in.
This created a race to the bottom between a few states, scrapping usury laws to draw bank’s credit card operations away from New York. Delaware and South Dakota stepped up in a big way and succeeded.
South Dakota’s governor at the time, Bill Janklow (you know, the guy who killed a motorcyclist whilst speeding, yeah him) cut a deal with Citibank to move operations here. Several others soon followed.
Thirty years later, South Dakota is a banking powerhouse. With several companies following Citi, Sioux Falls is a town that credit built. Legislators didn’t stop there. As the WaPo article shows better than I can, it was only a matter of time until trusts were given favorable regulations.
What is remarkable to me as a non-South Dakotan who runs a university poll in the state is how hidden the financial industry is. This despite the fact of how the industry has literally transformed the state over the past few decades.
Even with some of the founders of the big banks like T. Denny Sanford giving away huge portions of his wealth to various worthy public causes, South Dakotans just don’t see the centrality of the financial industry in the state’s economy.
To put it bluntly, it dwarfs all other industries here. According to the U.S. Bureau of Economic Analysis, finance and insurance composes about 21% of the state’s GDP, by far the largest sector of the economy. Health and manufacturing are about 10% each.
And what of agriculture? Again, according to the BEA, ag accounts for just under 7%. But here’s the bewildering part to me, few South Dakotans are vaguely aware of just where the money is in South Dakota.
At the SDSU Poll, we have asked people about where these various economic sectors compare to one another in terms of total contributions to the South Dakota economy. While we can certainly quibble about how respondents conceptualize these things, the results were stark.
When asked to rank the economic sectors they put them in this hierarchy: Ag, tourism, health care, manufacturing, and financial services. They nearly perfectly inverted the relative size of each sectors’ contribution to the South Dakota economy.
Only 2.5% of our respondents properly place the financial sector at the top of the economic hierarchy, while 76.8% incorrectly placed ag on top. Again, we can quibble about how respondents conceptualize these things, but they are clearly underestimating the size of finance in SD.
Additionally, we asked them to estimate the percentage that agriculture contributed to South Dakota’s total economic activity. The mean score was 64%. They overestimated it by nearly nine-fold. This begs the obvious question of “Why?”
Once we understand this, we can answer the question of how trusts came to be so unregulated in this state.
To an outsider like me the answer is fairly simple, despite the economic transformations of the past three decades, the industry remains largely hidden from public attention and outside of the state’s identity.
First, a large portion of South Dakotans (like many ag states) are closely linked to farming and ranching, as 43% of our respondents are either in production ag themselves or their parents were. Clearly, a large portion of the population made their livelihoods in ag.
Historically, and even today, the benefits of the ag economy are widely diffused. That just isn’t the case with the financial industry. Far fewer people work in the industry directly, and the bulk of the profits are highly concentrated into a few hands.
According to federal and state numbers, there are approximately 46,000 ag producers in the state compared to 19,000 people in the financial industry; most of the latter are in the Sioux Falls metro area. Again, this minimizes the imprint upon the state.
Second, our landscape is literally dominated by production agriculture. Visually you cannot escape the impact that ag has on our landscape it is everywhere you look. Compare this with the financial industry. The visual footprint is minimal. Even Citi’s architecture (seen above in an image from siouxfalls.business) is nondescript.
As a non-South Dakotan who studies politics, it seems to me that people here have not incorporated these new economic realities into their social or political identity. People still see themselves as tied to the land, and see the economy in the same terms that their parents did.
This atmosphere gave an important opening for the credit card industry to implant itself back in the early 1980s, just as it did for the trust industry as it gradually established itself a decade or two later.
Legislators — whose interests tend to be sharply focused on ag and are term-limited — deferred to governors, regulators and industry. This makes sense given the technical intricacy of finance law and the disinterest of their constituents in this economic sector.
When the vast majority of the state’s citizens don’t have a firm sense of size, scope, and power of the financial industry, policy makers have little reason to fear any kind of public scrutiny of their decisions that made the state the “Switzerland of the Great Plains.”
I must add: I’m not making any normative case for or against these laws creating favorable conditions for the financial industry. Our state clearly has benefitted. I’m more interested in the how and why of it all.
David Wiltse is a South Dakota State University associate professor researching parties, elections, and campaign finance. He operates the SDSU Poll. Wiltse earned a doctorate from the University of Massachusetts Amherst, a master’s from Cal State Fullerton, and a bachelor of arts degree at Montana State University.