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.
#30#
