One of the great paradoxes of the American banking system is that the less money you earn, the more it costs you to get access to it. Up to 90 percent of American citizens today consider themselves middle class, and yet between 20 to 40 percent of the population relies on “alternative” financial institutions—such as payday lenders—to turn checks into cash, pay monthly bills, gain access to credit, or transfer money.

In How The Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, Mehrsa Baradaran, professor of law at the University of Georgia, argues that the flourishing of this fringe banking sector illuminates how class-tiered and discriminatory the financial system in the United States presently is. Baradaran posits that this inequality does not operate in tandem with the basic economic laws of supply and demand; neither does the U.S. banking system play according to standard market rules. This is a highly regulated and therefore distorted market; the question is how and for whose benefit the distortions are arrayed.

The inequality that is part and parcel of this distorted market, however, is not just an economic problem. It’s also, Baradaran believes, a threat to traditional American democratic values. Even though banks enjoy broad government support, they still refuse to provide even a basic form of credit to a huge proportion of working American taxpayers. Baradaran also believes that the initial fears about banks growing too concentrated, first expressed by Thomas Jefferson—who predicted that profits and efficiency would be put ahead of the needs of the American people—have now been realized.

J.P. O’ Malley sat down with Professor Baradaran on December 18 to discuss why the traditional reciprocal relationship between banks and government has now become so lopsided; why there is a pervasive misunderstanding about the role that debt plays in the American economy; and how the U.S. Postal Service may provide a solution to this present banking crisis.

Professor Baradaran, why do you believe the current structure of the banking system is a threat to America’s democratic values?

Well, Federal government money is funneled into the banking system with the premise that it is supposed to trickle down, or be lent out at a reasonable rate.

Normally this kind of thing would be determined by supply and demand.

But there really isn’t a market price for credit the way there is for other things in the market. The Federal government creates credit through its policy decisions. But when banks then refuse to lend to 40 percent of the American public, well, that clogs up some of the channels of our democracy.

Most of your book focuses specifically on the United States, but the idea that the banking market does not operate according to standard market rules can be applied to the entire world, right?

Yes. And the reason for this is because every banking system in the world is intertwined with government. We saw this during the financial crisis in 2008, when there wasn’t a single country that was able to let their banks fail. It’s the business of banks to deal with other people’s money, and that basic structure inevitably invites heavy government involvement.

But banks are private entities that have shareholders, and do run according to normal market incentives, are they not?

Yes. But the difference is that their failures are not treated like corporate failures.

And once we understand that, we need to work back and say: Okay, so if we cannot let the banking system fail, how then do we want to re-structure this system?

Is it your belief that the government had to intervene when the banks failed in 2008 in order to let the economy get back on its feet?

Absolutely. People tend not to understand why that was a necessary measure.

On the Right, the argument is: There is too much government involvement. On the Left, the argument is: it’s cronyism and the government is just helping its buddies.

The reality is the government did have to help the banks. But after that emergency measure, we should have asked: What does this mean going forward? That’s not a conversation we seem to have had in any serious way so far in the United States.

Can you talk about how so many pivotal events in the history of the United States have often centered around a struggle over how public needs would shape banking policy?

Well, it starts with Thomas Jefferson and Alexander Hamilton . It then carries through with Andrew Jackson, to Woodrow Wilson, and then Franklin D. Roosevelt, during the New Deal. Then after the New Deal it disappears from the public dialogue, primarily because, under FDR, there was a major restructuring process, and we subsequently had sixty years in the United States with no banking crisis.

Has the main fear about banking in this debate always been centralization?

Right, that if you created a central bank, or allowed money to conglomerate, that people would be left out. Jefferson thought that the future of the country was in popular agrarian farmers. Hamiltonians were right from the beginning when they said, in effect: We are going to be an industrial nation that needs some degree of financial centralization, some efficient way to manage money in the Federal government. This struggle over banking has been going on ever since in our nation’s history.

Fast forward to the 1980s, however, and there is a push in American banking toward conglomeration. Was this the main problem?

Yes, and the fact that nobody at the higher level of policy have asked: Do we really want Bank of America to swallow up nearly every bank in the country and be so big that there is nothing we can do about it? That, essentially, was Jefferson’s initial fear. There should have been a push to make sure these banks were regulated and controlled in a way that their failures would not be catastrophic.

The Federal Reserve has recently engaged in a controversial strategy called quantitative easing. What does this mean exactly?

Quantitative easing is the buying up of assets from banks, and the cash acquired from the Fed goes into the economy through the banks. In other words, the Fed creates trillions of dollars, buys bank assets, and doles out the cash, the idea being that so much easy money enables the banks not to use their reserves or increase their interest rates. That is supposed to facilitate lending and stimulate economic activity.

But is quantitative easing an effective method in getting a slow economy moving when other measures have failed?

I don’t think anybody knows the answer to that yet. The Federal Reserve would say quantitative easing has worked because the economy is better now. But it’s a mystery as to what the long-term effects of quantitative easing actually are.

It’s still not yet clear, for instance, that all of the money that quantitative easing puts on the banks balance sheets will be able to force inflation to come down or stay down in the slightly longer run.

Why do you believe the social contract has become lopsided between the banking industry and the U.S. government?

Well, there used to be a quid pro quo idea that the government is happy to provide private insurance bailouts if the banks stay small, and lend accordingly. But the one activity banks are supposed to be good at—providing credit to people—they are no longer doing much of. That is a major breach of the tacit contract. So we need to ask: why are we giving the banks all of this money if they are no longer lending and providing credit?

Why did the model of banking change in the United States in the late 1970s and early 1980s? Did a shift toward neoliberal thinking play a big role?

Yes, the ideological shift came with the Chicago School, and the idea of the free market at all costs, which came with the conservative revolution: first with Margaret Thatcher [in Britain] and then President Reagan here in the United States. There were also market changes, foreign competition, and technological changes that played a role. But the main problem during this period was this myth that banks are just like other corporations. They are not.

Is there a paradox in this idea?

Absolutely—because other corporations are able to fail, and that is the difference.

Other corporations don’t deal with the leverage that banks deal with. Take Apple, for example; that company is basically all cash, and it has no debt. Compare that to Lehman Brothers, which had a 28:1 leverage ratio. Banks are never like other corporations, because they are in the business of safeguarding, and using, other people’s money.

You discuss in How The Other Half Banks how debt can be an effective way to grow an economy and build individual wealth, too. If credit is the foundation of the U.S. economy, then why is debt always spoken about in such negative terms?

There is a great deal of misunderstanding about this subject in the public realm. People say public debt is like a family budget that you have to balance. But that is not the way the government operates its public finances. This is just a stupid boogeyman’s argument. The people who are having this debate have very little understanding about the economy.

Is this misinformation in the public realm about debt purposely constructed in such a way as to scaremonger people?

Well, I’m not a conspiracy theorist. I’m not sure if there is a villain in the background here. Some of the theatrics around the subject of debt, however, are sinister. Take Ted Cruz, for example. I think he knows better. But he uses it every chance he gets to push his own political agenda, and it plays well to the popular psyche.

If banks are not providing credit to the poor, you say the state should provide it directly? You suggest a form of postal banking, which lots of other countries, like Japan for example, use. How would that work?

A postal savings stamp, in the form of a plate block, issued in May 1941 (from the Adam Garfinkle collection). Postal savings stamps were issued to serve four slightly different savings programs (sometimes in conjunction with the Treasury and War Departments) from 1911 to 1961; the program was discontinued on June 30, 1970.

Yes. This already happens in countries like the United Kingdom, Germany, and France as well as Japan, and it used to happen in the United States. Here, basically, is how it works: Small bank accounts operate in Post Office branches. The Post Office could do what payday lenders do, but with much more reasonable interest rates—and the profits from this new line of service could also help keep the USPS solvent in an age of technological change. It would be a new product line, in effect. We could do what the UK does, which is allow people to have a savings account to use to pay bills, and only charge interest when the account is overdrawn for as long as it stays overdrawn.

Because the Post Office is still a public institution—or at least a semi-public one in the United States since 1971—does it make this potentially a more workable idea?

Yes, I think it would. The USPS doesn’t have those mixed incentives that private banks do. It doesn’t have shareholders to pay attention to, for example.

Is the main problem in the United States right now that so many people have to operate in cash?

Yes, when you operate in cash all of the time, you need some place to deposit that cash to turn it into electronic currency, so you can pay your bills. And that’s why so many people go to the payday lenders and the check cashers, because they need immediate cash and they can’t get credit cards. So there is still this huge divide: Most of us use electronic currency; we use our credit and debit cards and we don’t worry about cash. But in the bottom socio-economic tier people operate in cash only. This is time consuming and expensive. So we want to get them into the electronic currency system, and a postal banking system is a great way to do that.

Thank you, Professor.

My pleasure, and thank you.