As we saw in the previous posting on this subject, a serious problem developed in the United States following the Civil War: wealth became concentrated. Many people had no realistic hope of ever owning land or technology that could generate an income to supplement or even replace wage income from labor.
|The Factory/Wage System|
True, wealth in the form of land had been concentrated before the war, particularly in the South, where the institution of chattel slavery permitted a relatively few owners of land to operate large plantations by purchasing other human beings. When, after the war, the wage system developed and supplanted capital ownership as the primary means of making a living, the financial system permitted a relatively small number of owners of technology to operate large factories by purchasing the labor of other human beings.
Thus, the institution of “wage slavery” in industry and commerce replaced the institution of chattel slavery in agriculture. This, as commentators since the days of Aristotle have noted, is not an acceptable situation for nominally free human beings. A “wage slave” is not, of course, actually owned as a thing, but his labor is purchased, which in the end is more cost efficient for the owner of productive wealth if human labor is required.
|Judge Peter S. Grosscup|
Concentrated ownership of productive wealth is a recipe for political and economic instability. Soon after the turn of the twentieth century, Judge Peter Stenger Grosscup (1852-1921), one of Theodore Roosevelt’s “Trust Busters,” published a series of articles in popular magazines highlighting the dangers of monopolies and the need for broad-based ownership of America’s corporate wealth. Although he was a Protestant, Grosscup was acquainted with Archbishop John Ireland (1838-1918), also a friend of Roosevelt, and may have been led to realize the importance of expanded capital ownership by Ireland, considered America’s leading authority on Rerum Novarum.
Grosscup, noting that monopolies and trusts were buying out small businesses, advocated greater regulation through the institution of federally chartered corporations and stronger anti-trust laws to supplement the inadequate Sherman Antitrust Act of 1890. (26 Stat. 209, 15 U.S.C. §§ 1-7. Grosscup may have influenced the Clayton Antitrust Act of 1914, Pub.L. 63-212, 38 Stat. 730.) Most of all, he pushed for a policy of widespread ownership of corporate shares with the full rights of private property in order to “people-ize” and save the corporation from becoming the means whereby the few could control the many. (It is possible that Chesterton was familiar with Grosscup’s articles, which would have influenced his recommendation that large enterprises be broadly owned by the workers on shares. See G.K. Chesterton, The Outline of Sanity. Collected Works, Volume V, San Francisco, California: Ignatius Press, 1987, 148.)
|J. Pierpont Morgan|
The problem was that Grosscup limited financing for his proposal to what people had accumulated in savings. This meant that wage workers and the poor, who needed capital ownership at least as much as former small owners, would have lacked the means to participate in the program. Neither Grosscup nor Roosevelt at that time appeared to appreciate the need for major monetary and tax reforms if Lincoln’s “government of the people, by the people, and for the people” was to survive.
Nevertheless, although opposed by the financial interests and the wealthy and championed by both socialists and populists, nothing substantive was done about monetary and tax reform until the Panic of 1907, “the Bankers Panic.” The panic was triggered — probably inadvertently — by the successful attempt by financier John Pierpont Morgan, Sr. (1837-1913) to drive a rival bank out of business by denying emergency credit and shutting off clearinghouse privileges. As shock waves reverberated throughout the global financial system, Morgan avoided a depression by extending emergency credit to other banks once he had his rival securely in his own hands. (See U.S. Congressional House Committee on Banking and Currency, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit, February 28, 1913. Washington, DC: U.S. Government Printing Office, 1913.)
A properly regulated central bank would immediately have provided the emergency credit Morgan first denied and then extended to his own advantage, and overseen clearinghouse operations to prevent Morgan’s tactic. Not surprisingly, reform of the financial system was the key campaign issue for both progressives and populists in the 1912 presidential campaign.
At the risk of alienating his Wall Street supporters who might have gone over to the Republican incumbent William Howard Taft (1857-1930), Democratic candidate Thomas Woodrow Wilson (1856-1924) was forced into an alliance with the populist champion William Jennings Bryan to counter the progressive Theodore Roosevelt. Very much against his will, monetary and tax reform became Wilson’s top priority. (Arthur S. Link, Woodrow Wilson and the Progressive Era. New York: Harper & Row, Publishers, 1954, 43.)
Once inaugurated, in addition to breaking his promises to appoint a commission to study the race issue, Wilson — safely back in the pocket of Wall Street — did everything he could to avoid meeting his obligations. Only an alliance between Representative Carter Glass (1858-1946) and Bryan kept Wilson’s feet to the fire. After months of debate and almost vicious infighting in the House and the Senate as the vested interests pulled out all stops to prevent reform, the Federal Reserve Act of 1913 was finally enacted. (There was a meeting in 1910 on Jekyll Island to develop a plan for reform that would keep Wall Street in control, but the Federal Reserve Act was a vast improvement over the so-called “Aldrich Plan.” See Harold G. Moulton, The Financial Organization of Society. Washington, DC: The Brookings Institution, 1930, 531n.)
Along with the income tax, the Federal Reserve Act was considered a populist triumph. Bryan regarded it as the crowning achievement of his political career. (William Jennings Bryan, The Memoirs of William Jennings Bryan. Philadelphia, Pennsylvania: The United Publishers of America, 1925, 372.) Assuming the system worked as intended, the Federal Reserve would provide the private sector with an “elastic,” (A currency that expands and contracts directly with the needs of the economy.) asset-backed, stable and uniform reserve currency for agriculture, commerce, and industry. The income tax would ensure sufficient funds to run government without adding to the costs of production or raising prices to consumers.
|Salmon P. Chase|
Matters did not, however, work out as planned. Although the system operated as intended for two years, the U.S. preparation for possible entry into World War I presented politicians with a dilemma: should they finance the war effort by raising taxes and face the possibility of not being reelected, or float debt and risk damaging the newly restored faith and credit of the U.S. government?
As had Salmon P. Chase during the Civil War, the politicians chose not to rely on the patriotism and good sense of their constituents and chose politically safe and financially precarious bond issues over taxation. This quickly drained all the liquidity out of the economy, and the commercial banks resorted to a loophole in the Federal Reserve Act to monetize government debt. A provision intended to retire the debt-backed United States Notes, National Bank Notes, and Treasury Notes of 1890 and replace them with asset-backed Federal Reserve Notes was used instead to back the new Federal Reserve Notes with government debt instead of private sector assets.
Fortunately, the politicians did exercise restraint, and after the war much of the debt was gradually retired. The Federal Reserve’s quick action in pumping asset-backed liquidity into the system immediately following the war greatly reduced the length and severity of the post-war recession.
Unfortunately, this accommodation between money and politics was not to last.