How the Gold Rush and J.P. Morgan may give us healthcare, pension reform
PITY BEN BERNANKE. As chairman of the Federal Reserve, his every utterance (or cough or sneeze) is analyzed for clues as to the future direction of interest rates. The weight of the American economy is laid on his shoulders by pundits and much of the public. And he labors in the shadow of Alan Greenspan, the legendary Fed chief who became the icon of American prosperity during the glory days of the 1990s. It’s like following Elvis onstage.
But matters could be worse. Trying as Bernanke’s job as the nation’s head banker might sometimes be, it is nothing like the task his more distant predecessors faced. The modern Fed was born nearly a century ago of a grand compromise that terminated one of the longest-running and most bitter struggles in American political history: the fight over the money question.
From the 1780s until 1913, the money question roiled American public life -- spawning political parties and candidates, sparking legislative fisticuffs and convention brawls, prompting boardroom conspiracies and White House scandals. It fell into two parts. What constituted money? And who controlled it? Was money gold, silver, paper currency or bank notes? Should the private sector control the money supply, the way it controlled the supply of wheat, corn and steel? Or should the public sector, which typically controlled water supplies and police services? In other words, should money be primarily the province of capitalism or of democracy?
The money question wasn’t unique in testing the boundaries between the private and public sectors; most major issues had crossover aspects -- and many still do. But the money question engaged the passions of Americans more than any other.
It provided the first battleground between Alexander Hamilton’s Federalists and Thomas Jefferson’s Republicans, with Hamilton urging creation of a federally chartered but privately controlled bank to oversee and manage the American money supply, and Jefferson opposing Hamilton’s bank as unconstitutional and elitist.
Hamilton won, and Congress created the Bank of the United States; but Jefferson’s heirs had their revenge when they refused to renew the bank’s 20-year charter in 1811.
The War of 1812, however, convinced even the Republicans that the country needed a central bank, and a second Bank of the United States was established in 1816. This version lasted long enough to arouse the ire of Andrew Jackson, who objected to it on Jeffersonian constitutional grounds, on populist suspicion of banks and bankers generally and on a visceral distrust of Nicholas Biddle, the second bank’s director. Biddle had collaborated with Jackson’s enemies in Congress and manipulated the money supply to embarrass the president. Old Hickory thereupon declared war on the bank, vetoing its recharter bill and withdrawing the federal government’s deposits. The “bank war” escalated as Biddle deliberately engineered a financial panic, proving Jackson’s point that money was too vital to the people’s welfare to be left to the bankers. Jackson won the war -- but lost the peace when the nation’s financial system melted down in the panic of 1837, confirming Biddle’s contention that money was too complex to be left to the politicians.
The California Gold Rush of 1849 injected a flood of yellow liquidity into the American money supply, but at the cost of driving silver out of circulation. The Gold Rush also aggravated the crisis between North and South, and after the country descended into civil war in 1861, the opposing governments -- Union and Confederate -- resorted to paper currency to sustain their war efforts. Union paper helped defeat the Confederacy, but it presented an irresistible temptation to speculators, who bet on the rise and fall of the greenback against gold (and often found themselves hoping for Union defeats on the battlefield). In the aftermath of the war, a cabal of speculators led by Jay Gould and Jim Fisk attempted to corner the gold market, bribing officials of the Grant administration and nearly wrecking the financial system in the Black Friday debacle of Sept. 24, 1869.
From then until the second decade of the 20th century, the United States suffered a series of booms and busts. The panic of 1873 burst a bubble of railroad speculation; the panic of 1893 produced a run on the Treasury’s gold reserves that threatened to bankrupt the federal government. President Cleveland was forced to call in the country’s arch-capitalist, J.P. Morgan, who arranged a private bailout of the public sector -- and then refused to tell Congress how much money he made on the deal. Morgan was every populist’s image of a bloated banker, and his performance helped persuade the Democrats (and the Populist Party, separately) to nominate William Jennings Bryan for president in 1896 on a platform pledging to return silver to circulation (thereby drastically expanding the money supply) and curb the power of the bankers.
Bryan lost to the gold-hugging William McKinley, but the money question persisted into the new century. Another panic, in 1907, required another rescue by Morgan, which triggered another congressional investigation, in which Morgan again refused to open his account books or reveal the secrets of his wealth and power. But by this time, the Progressive tide was rising, and in 1913, Congress, determined to answer the money question once and for all, approved the Federal Reserve Act, the most important of the reforms of the Progressive era and one of the handful of most consequential measures in American history.
The act established the Federal Reserve system, which represented a compromise between the private sector and the public sector -- between the demands of the bankers and holdover Hamiltonians for capitalist control of the money system, and of the Populists, Progressives and remnant Jeffersonians for democratic control. The dozen Federal Reserve banks were privately capitalized but were directed by a board of governors appointed by the White House. Otherwise, the Federal Reserve system was designed to be institutionally independent of both the business and the political classes.
By comparison with what went before, the Fed proved remarkably successful in managing the American money supply. The Great Depression of the 1930s was a stumble, but it was hardly the fault of the Fed alone, being global in scope and decades in the making. And from World War II to the present, the Fed has sustained steady, long-term growth while sparing the American people the financial panics that wracked the country with sunspot frequency during the 19th century.
The secret of the Federal Reserve Act -- and of the subsequent success of the Fed -- was the willingness, born of exhaustion, of the two opposing camps to turn the money question over to a partly capitalist, partly democratic agency -- and thereafter to keep their hands off. It’s a model that works and that might be applied to other vexing problems. The healthcare and pension questions, for example, have defied solution in much the way the money question did during the 19th century. On healthcare and pensions, both the private and public sectors have strong interests in the outcome -- so strong as to prevent, thus far, any outcome besides a muddled extension of the status quo.
Reviewing the compromise that produced the Federal Reserve, modern reformers might well find the key to similarly happy, or at any rate acceptable, solutions. Details, naturally, would have to reflect the distinctive facets of healthcare and pensions, but the principle of a public-private compromise, followed by insulation from both the political and corporate spheres, would allow decisions to be made that can’t be made in the current setting.
Whether the resulting agencies would achieve the success of the Fed is something only time would reveal. But, at the least, Ben Bernanke would have company.