The mistakes England made with the Bank Charter Act of 1844 managed to get themselves duplicated in the United States with the National Banking Act of 1863 (amended 1864). In both cases the legal tender reserve currency was backed by government debt, convertible into gold, and inelastic, i.e., fixed in amount, to try and avoid inflation. This lack of understanding about money and credit caused or contributed to a series of financial panics and currency crises in both countries.
|The 1862 Homestead Act slowed concentrated ownership.|
Linking the currency to past savings also operated to concentrate capital ownership in both countries, although the problem was much worse in England due to Abraham Lincoln’s 1862 Homestead Act making landed capital in “the Great American Desert” available on easy terms. Unfortunately, the benefits offered by the Homestead Act lasted only as long as there was land available. As soon as it became obvious that the amount of land available was limited, the rate of concentration of ownership in the United States began rivaling that of England.
Triggered by a sudden drain of gold reserves out of the U.S. in response to the drastic drop in the price of silver, the Panic of 1893 and the ensuing Great Depression of 1893 to 1898 brought the desperate need for reform of the money, credit, and tax system into sharp focus. Unfortunately, led by “the Great Commoner,” William Jennings Bryan, the presidential campaign of 1896 got diverted into “the Silver Question,” i.e., whether to abandon the gold standard and inflate the currency with cheap silver.
It was not until “the Bankers’ Panic” of 1907, engineered by financier J.P. Morgan to take advantage of shady financial dealings by the Knickerbocker Bank and Trust that the dull rumblings of the need for financial reform reached a crescendo. Unfortunately, the political situation in the United States was reaching a crisis.
Neither of the two major parties had a clear vision for the direction the country needed to take. Republicans and Democrats alike were simply vying for control of what was, the only question being who would be in control. Without significant change, however, matters would continue to deteriorate.
|Roosevelt targeted concentrated ownership.|
The only thing that had kept the lid on was Theodore Roosevelt’s reform efforts directed at breaking up monopolies and concentrations of power. For some reason, however, despite the fact that one of Roosevelt’s key “Trust Busters,” Judge Peter Stenger Grosscup, was a strong advocate of widespread capital ownership (Grosscup was acquainted with Archbishop John Ireland, also an expanded ownership advocate), Roosevelt himself seemed to have a blind spot about the necessity of everyone owning capital. His break with Grosscup at a critical time over a legal issue in the Standard Oil rebate case ensured that Grosscup’s views on expanded ownership would go unheard — and financial and economic (and thus political) power would continue to become increasingly concentrated.
The Progressive Movement (realizing that “progressive” has come to mean something completely different these days) was an effort to counter the hardline Republican conservatives, while the Populist Movement (that had evolved away from private property) worked to ameliorate the hardline Democratic conservatives. During the 1912 presidential campaign the Democratic conservatives, populists, and moderate socialists were able to come together behind Bryan who supported the anti-populist Woodrow Wilson in order to give the White House back to the Democrats. Rather than court or join with Roosevelt, however, William Howard Taft came under the influence of the hardline Republican conservatives, and sabotaged Roosevelt’s chances.
|Carter Glass of Lynchburg, Virginia.|
No sooner was Wilson in the Oval Office than he started reneging on all his election promises, especially the growing demand for monetary and tax reform. By joining with Congressman Carter Glass of Virginia, however, Bryan was able to shepherd through the Sixteenth Amendment and, especially, the Federal Reserve Act . . . over the protests and frequent vacillations of Wilson, who kept trying to hand the money power back to his Wall Street backers.
The Federal Reserve was a complete reversal of the British Bank Charter Act of 1844 and the U.S. National Banking Act of 1863. In place of an inelastic reserve currency backed by government debt, there would be an elastic reserve currency backed by private sector assets.
Unfortunately, this gave an opening to the financial reactionaries. In order to replace the debt-backed reserve currency consisting of the National Bank Notes, the Treasury Notes of 1890, and the United States Notes (“Greenbacks”), the Federal Reserve had to be able to deal in secondary government securities on the open market.
|Debt-Backed National Bank Note|
Instead of the rate of economic growth being determined by the amount of savings in the system, the elasticity of the reserve currency would enable commercial banks backed up by the Federal Reserve to create an asset-backed reserve currency as determined solely by the needs of the economy, not political or social goals.
And the amazing thing was that the system worked . . . until the politicians managed to seize control.#30#