Abraham Lincoln’s 1862 Homestead Act had opened up access to the landed capital of the “Great American Desert.” The frontier had, of course, existed before the Act, but it needed an aggressive program of expanded capital ownership in land before most people viewed the move west as a viable option.
|The Great American Desert|
Similarly, the industrial and commercial frontier had always existed, albeit with the advantage over the land frontier in that there is no natural limit to industrial or commercial expansion. The problem was that, given widespread acceptance of the demonstrably false assumption that the only way to finance new capital formation is to cut consumption and accumulate money savings, only exceptional individuals or the currently wealthy had any hope of acquiring significant industrial and commercial capital stakes.
What was needed was a complete overhaul of the United States financial system. The country was saddled with an inelastic currency backed by government debt, an inadequate system of reserves for commercial banks, an inefficient clearinghouse system, and concentrated control over money and credit, to cite only a few of the major problems.
The Slavery of Past Savings
|Panic of 1893|
Demands for reform of the financial system had become insistent since the Panic of 1893. The Great Depression of 1893-1898 and the Panic of 1907 proved beyond the shadow of any doubt that problems could be covered up for a while. They remained in full force, however, simmering below the surface, always ready to come to a full boil.
Since the Civil War, ordinary people had, in general, access only to savings in the form of the debt-backed currency, while the wealthy could create asset-backed money virtually at will by issuing bills of exchange. As a result, not only did the rich become richer, and the poor become poorer, the country was wracked by a series of financial panics. These panics were largely caused by the disconnect between consumption and production, combined with an inelastic debt-backed reserve currency grossly inadequate for the needs of an industrial and commercial economy such as the United States had become in the latter half of the nineteenth century.
|Pre-New Deal: "As ragged as Coxey's Army" — 1894.|
Government monetary and fiscal policy, as well as popular belief, was based on the assumption that only by restricting consumption and accumulating money savings is it possible to finance new capital formation. Only a few people actually understood that this was not, in fact, how much of the new capital was being financed during periods of rapid economic growth. Economic and financial history reveals that new capital formation is better and more efficiently financed by monetizing the present value of future increases in production, not past cuts in consumption.
Consequently, wealth was being concentrated, and large numbers of people being divested of small property and forced into the wage system for reasons that were, in reality, no reasons at all. In 1891, Leo XIII realized that the solution to the propertyless condition was not, as the socialists insisted, the abolition of private property in capital, but to make as many people as possible into capital owners.
By the first decade of the twentieth century, people might not understand all the financial and economic technicalities involved, but they knew something was wrong. Demands increased that something be done — now. These demands became a roar following the Panic of 1907.