The recent bank failures have once again raised questions not only about the safety of the financial system, but its role in the economy. What goes on in the world’s financial centers seems to have no connection to people’s daily lives and the need to secure food, clothing, shelter, and the other essentials of life. What happens on Wall Street, stays on Wall Street . . . except when it seeps out to the real economy and destroys lives.
This is more than a little ironic, for the financial system was originally intended not to serve as a plaything for the rich, but to supply the needs of ordinary people, to enable them to produce, distribute, and consume the necessities of life. Like all other institutions of the common good, the financial should be open to all, and should serve the needs of all.
Of course, by “all,” we do not mean the abstraction of humanity, but individual human beings, the actual components of society, who have some claim on society because they are society. They are the whole reason for an economy in the first place.
The recent bank failures graphically illustrate what happens when the financial system is considered the exclusive purview of the rich and, sad to say, are nothing new. It also shows how easily reforms carried out to prevent the concentration of control over money and credit are perverted to serve the very people they were intended to rein in.
Take, for example, the “Bankers’ Panic,” the Panic of 1907.
The failure to take effective action to reform the financial system following the Panic of 1893 set the stage for the Panic of 1907. Even though widespread ownership of the means of production was becoming increasingly critical in the evolving industrial economy of the United States, nothing could be done because of the assumption that the financing for capital formation could only come from existing accumulations of savings.
This meant that ownership of the means of production would continue to become increasingly concentrated, and that “the money power” would become increasingly dominant until matters would reach such a pitch that those who “hold the money and completely control it, control credit also and rule the lending of money. Hence they regulate the flow, so to speak, of the life-blood whereby the entire economic system lives, and have so firmly in their grasp the soul, as it were, of economic life that no one can breathe against their will.” (Quadragesimo Anno, § 106.)
The Panic of 1893 and the subsequent Great Depression of 1893-1898 revealed serious flaws in the nation’s financial institutions. A monetary commission was appointed, the findings of which eventually resulted in the passage of the Currency Act of March 14, 1900 (Gold Standard Act, 31 Stat. 45). Unfortunately, the commission and the Act did not look at the underlying flaws in the system committed to an inelastic currency under the National Bank Act of 1863.
Instead, the Currency Act of 1900 only “tweaked” the provisions of the National Bank Act. Chiefly this was by decreasing capital (reserve) requirements and permitting the National Banks to issue notes up to the full amount of the government bonds they were required to purchase as a means of financing an economic stimulus package.
With the economy and the financial system being, in essence, a disaster waiting to happen, it was almost inevitable that a disaster would happen — and it did. The triggering event was an attempt by two brothers, F. Augustus and Otto Heinze, to gain a temporary monopoly — a “corner” — on copper by manipulating the value of the shares in the United Copper Company, controlled (but not wholly owned) by the Heinze family.
The attempt failed. The New York Stock Exchange suspended Otto’s trading privileges. A number of the banks in which his brother, F. Augustus Heinze, had an interest, experienced “runs” (depositors demanding all their money), and the New York Clearinghouse (controlled by J. P. Morgan) forced Augustus Heinze and Charles Morse to divest themselves of any and all shares in the financial institutions in which they had any ownership. On October 21, the board of directors asked for Charles Tracy Barney’s resignation as president of the Knickerbocker.
The National Bank of Commerce — also controlled by J. P. Morgan — then refused to serve as a clearinghouse any longer for the Knickerbocker Trust. The Knickerbocker had no other source of clearinghouse services, having been denied membership in the New York Clearing House Association.
There was a run on the Knickerbocker. Panic spread throughout the city. The next day Morgan began extending credit to other financial institutions as well as to the city of New York to bring a halt to the disaster that he had instigated, possibly unintentionally. Share values on the New York Stock Exchange fell by 50%, and the shock waves spread throughout the country and even to Europe.
Morgan continued to extend credit and took advantage of the opportunity to take over several companies that were close to bankruptcy as a result of the panic. He was lauded as a hero for saving the country from a crisis for which he was largely responsible.