Monday, June 13, 2016

Wilson and the Fed, I: The Situation


There is no doubt that the United States — the world — was in deadly peril in the early years of the twentieth century. The last safety valve for the human race, the chance to own landed capital in America by taking advantage of the Homestead Act, had been shut off in the closing years of the nineteenth century.
"I am the head of the Reich...with a bird on my head."
The antiquated, even reactionary financial systems based on past savings in place throughout much of the world ensured that few, if any people would be able to gain a stake in the commercial and industrial frontier to replace the disappearing land frontier. Even where the financial system was advanced, as in the German Reich (the Second Reich, obviously), the tax system, and the universal collateralization requirement[1] ensured that future opportunities to own new capital would be restricted, as a rule, to the already wealthy.
The Panic of 1873 and the resulting Great Depression of 1873-1878 had been a temporary adjustment in the economy as consumption power caught up to productive capacity. The Panic of 1893 and the Great Depression of 1893-1898 revealed much more serious problems that were, nevertheless, ignored with the return of prosperity. As Dr. Harold G. Moulton (1883-1965) noted,
The panic of 1893 precipitated a genuine agitation for the improvement of our banking system, but before any legislation on the subject could be passed, there occurred the political campaign of 1896, the issue of which was once more the silver question. The success of the Republicans in this campaign was followed by the appointment of a monetary commission . . . which met in Indianapolis in 1897 for the purpose of “making a thorough investigation of the monetary affairs and needs of the country in all relations and aspects, and submitting proper suggestions as to the evils found to exist and the remedies therefor.” . . . .
With the return of great business prosperity[2] the need of reforming the banking system appeared less pressing to our legislators, who at best perceived none too clearly the fundamental weaknesses inherent in the system. . . . Agitation for banking reform continued, however, among scientific students of the question, and there were also some congressmen, notably Charles N. Fowler, at that time chairman of the Banking and Currency Committee of the House, who persistently endeavored to secure the passage of remedial legislation, designed primarily to insure an elastic bank note currency based on commercial assets.[3]
Bankers — and others — panicking in 1907.
The Panic of 1907 (“the Bankers’ Panic”), while more limited in scope and with effects of much shorter duration, revealed problems in the financial system that would have to be corrected if the United States was to be put on a sound foundation that would “secure the blessings of liberty to ourselves and our posterity.”
The financial and economic situation was not, of course, the only problem. A just system of money, credit, banking, and finance is, however, an essential element in a just social order. It is the means by which people acquire and possess private property in capital. If most people do not have access to these institutions, most people will not own capital.
Without capital ownership, most people will remain powerless, under the control of a private sector elite, or a public State bureaucracy. As Pius XI would put it a generation later,
Pius XI: There is a dictatorship of money.
In the first place, it is obvious that not only is wealth concentrated in our times but an immense power and despotic economic dictatorship is consolidated in the hands of a few, who often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure.
This dictatorship is being most forcibly exercised by those who, since they hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.[4]
The conclusion is inescapable. Economic democracy must precede, or at least accompany, political democracy. Political democracy is otherwise a hollow shell.
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[1] Kelso and Adler advocated the formation of a government capital credit insurance and reinsurance company to satisfy the demand for collateral. Vide The Capitalist Manifesto. New York: Random House, 1958, 241; The New Capitalists. New York: Random House, 1961, 57-71. There is, however, no reason other than expedience for companies offering capital credit insurance and reinsurance to be State-owned. Mutual insurance and reinsurance companies would appear more consistent with the principles of the Just Third Way.
[2] Caused by crop failure in Europe and bumper crops of wheat in the U.S. in 1897 and 1898.
[3] Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 343.
[4] Quadragesimo Anno, §§ 105-106.

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