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.
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| 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.
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| 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.
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| 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.
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| 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.
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