A History of Money and Banking in the United States: The Colonial Era to World War II (26 page)

A History of Money and Banking in the United States:
The Colonial Era to World War II

becoming an embarrassment and losing the Republicans large numbers of German Lutheran votes. Also, they modified their hostility to immigration. By the mid-1890s, the Republicans had moved rapidly toward the center, toward fuzzing over their political pietism.

In the meanwhile, an upheaval was beginning to occur in the Democratic Party. The South, by now a one-party Democratic region, was having its own pietism transformed by the 1890s. Quiet pietists were now becoming evangelical, and Southern Protestant organizations began to call for prohibition.

Then the new, sparsely settled Mountain states, many of them with silver mines, were also largely pietist. Moreover, a power vacuum, which would ordinarily have been temporary, had been created in the national Democratic Party. Poor Grover Cleveland, a hard-money laissez-faire Democrat, was blamed for the panic of 1893, and many leading Cleveland Democrats lost their gubernatorial and senatorial posts in the 1894 elections. The Cleveland Democrats were temporarily weak, and the Southern-Mountain coalition was ready to hand. Seeing this opportunity, William Jennings Bryan and his pietist coalition seized control of the Democratic Party at the momentous convention of 1896. The Democratic Party was never to be the same again.161

The Catholics, Lutherans, and laissez-faire Cleveland Democrats were in mortal shock. The “party of our fathers” was lost. The Republicans, who had been moderating their stance anyway, saw the opportunity of a lifetime. At the Republican convention, Representative Henry Cabot Lodge, representing the Morgans and the pro-gold-standard Boston financial interests, told McKinley and Hanna: Pledge yourself to the gold standard—the basic Cleveland economic issue—and drop your silverite and greenback tendencies, and 161Grover Cleveland himself, of course, was neither a Roman Catholic nor a Lutheran. But he was a Calvinist Presbyterian who detested the takeover of the Presbyterian Church by the pietists.

A History of Money and Banking in the United States
177

Before the Twentieth Century

we will all back you. Refuse, and we will support Bryan or a third party. McKinley struck the deal, and from then on, the Republicans, in nineteenth-century terms, were a centrist party.

Their principles were now high tariffs and the gold standard, and prohibition was quietly forgotten.

What would the poor liturgicals do? Many of them stayed home in droves, and indeed the election of 1896 marks the beginning of the great slide downward in voter turnout rates that continues to the present day. Some of them, in anguish at the pietist, inflationist, and prohibitionist Bryanites, actually conquered their anguish and voted Republican for the first time in their lives. The Republicans, after all, had dropped the hated prohibitionists and adopted gold.

The election of 1896 inaugurated the fourth party system in America. From a third party system of closely fought, seesaw-ing races between a pietist-statist Republican Party vs. a liturgical-libertarian Democratic Party, the fourth party system consisted of a majority centrist Republican Party as against a minority pietist Democratic Party. After a few years, the Democrats lost their pietist nature, and they too became a centrist, though usually minority party, with a moderately statist ideology scarcely distinguishable from the Republicans. So went the fourth party system until 1932.

A charming anecdote, told us by Richard Jensen, sums up much of the 1896 election. The heavily German city of Milwaukee had been mainly Democratic for years. The German Lutherans and Catholics in America were devoted, in particular, to the gold standard and were bitter enemies of inflation. The Democratic nomination for Congress in Milwaukee had been obtained by a Populist-Democrat, Richard Schilling. Sounding for all the world like modern monetarists or Keynesians, Schilling tried to explain to the assembled Germans of Milwaukee in a campaign speech that it didn’t really matter what commodity was chosen as money, that “gold, silver, copper, paper, sauerkraut or sausages” would do equally well as money. At that point, the German masses of Milwaukee laughed Schilling
178

A History of Money and Banking in the United States:
The Colonial Era to World War II

off the stage, and the shrewdly opportunistic Republicans adopted as their campaign slogan, “Schilling and Sauerkraut” and swept Milwaukee. 162

The Greenbackers and later the pro-silver, inflationist, Bryanite Populist Party were not “agrarian parties”; they were collec-tions of pietists aiming to stamp out personal and political sin.

Thus, as Kleppner points out, “The Greenback Party was less an amalgamation of economic pressure groups than an ad hoc coalition of ‘True Believers,’ ‘ideologues,’ who launched their party as a ‘quasi-religious’ movement that bore the indelible hallmark of ‘a transfiguring faith.’ ” The Greenbackers perceived their movement as the “religion of the Master in motion among men.” And the Populists described their 1890 free-silver contest in Kansas not as a “political campaign,” but as “a religious revival, a crusade, a pentecost of politics in which a tongue of flame sat upon every man, and each spake as the spirit gave him utterance.” The people had “heard the word and could preach the gospel of Populism.” It was no accident, we see now, that the Greenbackers almost invariably endorsed prohibition, compulsory public schooling, and crushing of parochial schools. Or that Populists in many states “declared unequivocally for prohibition” or entered various forms of fusion with the Prohibition Party.163

The Transformation of 1896 and the death of the third party system meant the end of America’s great laissez-faire, hard-money libertarian party. The Democratic Party was no longer the party of Jefferson, Jackson, and Cleveland. With no further political embodiment for laissez-faire in existence, and with both parties offering “an echo not a choice,” public interest in 162So intense was the German-American devotion to gold and hard money that even German communist-anarchist Johann Most, leader of a movement that sought the abolition of money itself, actually came out for the gold standard during the 1896 campaign! See Jensen,
Winning of the
Midwest
, pp. 293–95.

163Kleppner,
Third Electoral System
, pp. 291–96.

A History of Money and Banking in the United States
179

Before the Twentieth Century

politics steadily declined. A power vacuum was left in American politics for the new corporate statist ideology of progressivism, which swept both parties (and created a short-lived Progressive Party) in America after 1900. The Progressive Era of 1900–1918 fastened a welfare-warfare state on America which has set the mold for the rest of the twentieth century. Statism arrived after 1900 not because of inflation or deflation, but because a unique set of conditions had destroyed the Democrats as a laissez-faire party and left a power vacuum for the triumph of the new ideology of compulsory cartelization through a partnership of big government, business, unions, technocrats, and intellectuals.

Part 2

THE ORIGINS

OF THE FEDERAL RESERVE

THE ORIGINS OF THE FEDERAL RESERVE

THE PROGRESSIVE MOVEMENT

The Federal Reserve Act of December 23, 1913, was part and parcel of the wave of Progressive legislation, on local, state, and federal levels of government, that began about 1900. Progressivism was a bipartisan movement which, in the course of the first two decades of the twentieth century, transformed the American economy and society from one of roughly laissez-faire to one of centralized statism.

Until the 1960s, historians had established the myth that Progressivism was a virtual uprising of workers and farmers who, guided by a new generation of altruistic experts and intellectuals, surmounted fierce big business opposition in order to curb, regulate, and control what had been a system of accelerating monopoly in the late nineteenth century. A generation of research and scholarship, however, has now exploded that myth for all parts of the American polity, and it has become all too clear that the truth is the reverse of this well-worn fable. In contrast, what actually happened was that business became increasingly competitive during the late nineteenth century, and that various big-business interests, led by the powerful financial house of J.P. Morgan and Company, had tried desperately to

[
Originally published as “The Origins of the Federal Reserve,”
Quarterly Journal of Austrian Economics
2, no. 3 (Fall): 3–51.
—Ed.]

183

184

A History of Money and Banking in the United States:
The Colonial Era to World War II

establish successful cartels on the free market. The first wave of such cartels was in the first large-scale business, railroads, and in every case, the attempt to increase profits, by cutting sales with a quota system and thereby to raise prices or rates, collapsed quickly from internal competition within the cartel and from external competition by new competitors eager to under-cut the cartel. During the 1890s, in the new field of large-scale industrial corporations, big-business interests tried to establish high prices and reduced production via mergers, and again, in every case, the mergers collapsed from the winds of new competition. In both sets of cartel attempts, J.P. Morgan and Company had taken the lead, and in both sets of cases, the market, hampered though it was by high protective tariff walls, managed to nullify these attempts at voluntary cartelization.

It then became clear to these big-business interests that the only way to establish a cartelized economy, an economy that would ensure their continued economic dominance and high profits, would be to use the powers of government to establish and maintain cartels by coercion. In other words, to transform the economy from roughly laissez-faire to centralized and coordinated statism. But how could the American people, steeped in a long tradition of fierce opposition to government-imposed monopoly, go along with this program? How could the public’s consent to the New Order be engineered?

Fortunately for the cartelists, a solution to this vexing problem lay at hand. Monopoly could be put over
in the name of
opposition to monopoly! In that way, using the rhetoric beloved by Americans, the
form
of the political economy could be maintained, while the
content
could be totally reversed. Monopoly had always been defined, in the popular parlance and among economists, as

“grants of exclusive privilege” by the government. It was now simply redefined as “big business” or business competitive practices, such as price-cutting, so that regulatory commissions, from the Interstate Commerce Commission to the Federal Trade Commission to state insurance commissions, were lobbied for and staffed by big-business men from the regulated industry, all done
The Origins of the Federal Reserve

185

in the name of curbing “big business monopoly” on the free market. In that way, the regulatory commissions could subsidize, restrict, and cartelize in the name of “opposing monopoly,” as well as promoting the general welfare and national security. Once again, it was railroad monopoly that paved the way.

For this intellectual shell game, the cartelists needed the support of the nation’s intellectuals, the class of professional opinion-molders in society. The Morgans needed a smoke screen of ideology, setting forth the rationale and the apologetics for the New Order. Again, fortunately for them, the intellectuals were ready and eager for the new alliance. The enormous growth of intellectuals, academics, social scientists, technocrats, engineers, social workers, physicians, and occupational “guilds” of all types in the late nineteenth century led most of these groups to organize for a far greater share of the pie than they could possibly achieve on the free market. These intellectuals needed the State to license, restrict, and cartelize their occupations, so as to raise the incomes for the fortunate people already in these fields. In return for their serving as apologists for the new statism, the State was prepared to offer not only cartelized occupations, but also ever increasing and cushier jobs in the bureaucracy to plan and propagandize for the newly statized society. And the intellectuals were ready for it, having learned in graduate schools in Germany the glories of statism and organicist socialism, of a harmonious “middle way” between dog-eat-dog laissez-faire on the one hand and proletar-ian Marxism on the other. Instead, big government, staffed by intellectuals and technocrats, steered by big business and aided by unions organizing a subservient labor force, would impose a cooperative commonwealth for the alleged benefit of all.

UNHAPPINESS WITH

THE NATIONAL BANKING SYSTEM

The previous big push for statism in America had occurred during the Civil War, when the virtual one-party Congress after secession of the South emboldened the Republicans to enact their cherished statist program under cover of the war. The alliance of
186

A History of Money and Banking in the United States:
The Colonial Era to World War II

big business and big government with the Republican Party drove through an income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high protective tariffs, and huge land grants and other subsidies to transcontinental railroads. The overbuilding of railroads led directly to Morgan’s failed attempts at railroad pools, and finally to the creation, promoted by Morgan and Morgan-controlled railroads, of the Interstate Commerce Commission in 1887. The result of
that
was the long secular decline of the railroads beginning before 1900. The income tax was annulled by Supreme Court action, but was reinstated during the Progressive period.

The most interventionary of the Civil War actions was in the vital field of money and banking. The approach toward hard money and free banking that had been achieved during the 1840s and 1850s was swept away by two pernicious inflationist measures of the wartime Republican administration. One was fiat money greenbacks, which depreciated by half by the middle of the Civil War, and were finally replaced by the gold standard after urgent pressure by hard-money Democrats, but not until 1879, some 14 full years after the end of the war. A second, and more lasting, intervention was the National Banking Acts of 1863, 1864, and 1865, which destroyed the issue of bank notes by state-chartered (or “state”) banks by a prohibitory tax, and then monopolized the issue of bank notes in the hands of a few large, federally chartered “national banks,” mainly centered on Wall Street. In a typical cartelization, national banks were compelled by law to accept each other’s notes and demand deposits at par, negating the process by which the free market had previously been discounting the notes and deposits of shaky and inflationary banks.