Unhappiness with the National Banking System
The previous big push for statism in America had occurred during the Civil War, when the
virtual One-Party Congress, after secession of the South, emboldened the Republicans to
enact their cherished status program under the cover of war.
The alliance of big business and big government with the Republican Party drove through an
and income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high
protective tariffs, and huge land grants and other subsidies to transcontinental railroads.
The overbuilding of railroads led directly to Morgan's failed attempts at railroad
pools and finally to the creation, promoted by Morgan and Morgan Controlled Railroads,
of the Interstate Commerce Commission in 1887.
The result of that was the long, secular decline of the railroads beginning before 1900.
The income tax was annulled by Supreme Court action but was reinstated during the progressive
period.
The most interventionary of the Civil War actions was in the vital field of money and
banking.
The approach toward hard money and free banking that had been achieved during the 1840s and
in the 1850s was swept away by two pernicious inflationary measures of the wartime Republican
administration.
One was fiat money greenbacks, which depreciated by half by the middle of the Civil War and
were finally replaced by the gold standard after urgent pressure by hard-money Democrats,
but not until 1879, some 14 full years after the end of the war.
A second and more lasting intervention was the National Banking Acts of 1863, 1864 and
1865, which destroyed the issue of banknotes by state chartered or quote, state banks by
a prohibitory tax and then monopolized the issue of banknotes in the hands of a few large
federally chartered quote, national banks, mainly centered on Wall Street.
In a typical cartelization, national banks were compelled by law to accept each other's
notes and demand deposits at par, negating the process by which the free market had previously
been discounting the notes and deposits of shaky and inflationary banks.
In this way, the Wall Street federal government establishment was able to control the banking
system and inflate the supply of notes and deposits in a coordinated manner.
But there were still problems.
The national banking system provided only a halfway house between free banking and government
central banking, and by the end of the 19th century, the Wall Street banks were becoming
increasingly unhappy with the status quo.
The centralization was only limited, and, above all, there was no governmental central
bank to coordinate inflation and to act as a lender of last resort, bailing out banks
in trouble.
No sooner had bank credit generated booms when they got into trouble and bank-created
booms turned into recessions, with banks forced to contract their loans and assets and to
deflate in order to save themselves.
Not only that, but after the initial shock of the National Banking Acts, state banks
had grown rapidly by pyramiding their loans and demand deposits on top of national banknotes.
These state banks, free of the high legal capital requirements that kept entry restricted
in national banking, flourished during the 1880s and 1890s and provided stiff competition
for the national banks themselves.
Furthermore, St. Louis and Chicago, after the 1880s, provided increasingly severe competition
to Wall Street.
Thus, St. Louis and Chicago bank deposits, which had been only 16% of the St. Louis,
Chicago and New York City total in 1880, rose to 33% of that total by 1912.
All in all, bank clearings outside of New York City, which were 24% of the national
total in 1882, had risen to 43% by 1913.
The complaints of the big banks were summed up in one word, inelasticity.
The national banking system they charged did not provide for the proper elasticity of the
money supply.
That is, the banks were not able to expand money and credit as much as they wished, particularly
in times of recession.
In short, the national banking system did not provide sufficient room for inflationary
Expansions of Credit by the Nation's Banks By the turn of the century, the political
economy of the United States was dominated by two generally clashing financial aggregations.
The previously dominant Morgan Group, which had begun in investment banking and expanded
into commercial banking, railroads and mergers of manufacturing firms, and the Rockefeller
Forces, which began in oil refining and then moved into commercial banking, finally forming
an alliance with the Kuhn-Lebb Company in investment banking and the Harriman Interests
in railroads.
Although these two financial blocks usually clashed with each other, they were as one
on the need for a central bank.
Even though the eventual major role in forming and dominating the Federal Reserve system
was taken by the Morgans, the Rockefeller and Kuhn-Lebb forces were equally enthusiastic
in pushing and collaborating on what they all considered to be an essential monetary
reform.