In stationary-phase Escherichia coli, Dps (DNA-binding protein from starved cells) is the most abundant protein component of the nucleoid. Dps compacts DNA into a dense complex and protects it from damage. Dps has also been proposed to act as a global regulator of transcription. Here, we directly examine the impact of Dps-induced compaction of DNA on the activity of RNA polymerase (RNAP). Strikingly, deleting the dps gene decompacted the nucleoid but did not significantly alter the transcriptome and only mildly altered the proteome during stationary phase. Complementary in vitro assays demonstrated that Dps blocks restriction endonucleases but not RNAP from binding DNA. Single-molecule assays demonstrated that Dps dynamically condenses DNA around elongating RNAP without impeding its progress. We conclude that Dps forms a dynamic structure that excludes some DNA-binding proteins yet allows RNAP free access to the buried genes, a behavior characteristic of phase-separated organelles. Despite markedly condensing the bacterial chromosome, the nucleoid-structuring protein Dps selectively allows access by RNA polymerase and transcription factors at normal rates while excluding other factors such as restriction endonucleases.