WEBVTT

NOTE 32. Unhappiness with the National Banking System

1
00:00:00.000 --> 00:00:05.000
Unhappiness with the National Banking System

2
00:00:05.000 --> 00:00:10.240
The previous big push for statism in America had occurred during the Civil War, when the

3
00:00:10.240 --> 00:00:15.940
virtual One-Party Congress, after secession of the South, emboldened the Republicans to

4
00:00:15.940 --> 00:00:20.520
enact their cherished status program under the cover of war.

5
00:00:20.520 --> 00:00:24.840
The alliance of big business and big government with the Republican Party drove through an

6
00:00:24.840 --> 00:00:31.240
and income tax, heavy excise taxes on such sinful products as tobacco and alcohol, high

7
00:00:31.240 --> 00:00:38.320
protective tariffs, and huge land grants and other subsidies to transcontinental railroads.

8
00:00:38.320 --> 00:00:42.920
The overbuilding of railroads led directly to Morgan's failed attempts at railroad

9
00:00:42.920 --> 00:00:49.500
pools and finally to the creation, promoted by Morgan and Morgan Controlled Railroads,

10
00:00:49.500 --> 00:00:53.760
of the Interstate Commerce Commission in 1887.

11
00:00:53.760 --> 00:01:01.000
The result of that was the long, secular decline of the railroads beginning before 1900.

12
00:01:01.000 --> 00:01:06.280
The income tax was annulled by Supreme Court action but was reinstated during the progressive

13
00:01:06.280 --> 00:01:07.840
period.

14
00:01:07.840 --> 00:01:13.160
The most interventionary of the Civil War actions was in the vital field of money and

15
00:01:13.160 --> 00:01:14.420
banking.

16
00:01:14.420 --> 00:01:19.520
The approach toward hard money and free banking that had been achieved during the 1840s and

17
00:01:19.520 --> 00:01:26.320
in the 1850s was swept away by two pernicious inflationary measures of the wartime Republican

18
00:01:26.320 --> 00:01:28.600
administration.

19
00:01:28.600 --> 00:01:34.560
One was fiat money greenbacks, which depreciated by half by the middle of the Civil War and

20
00:01:34.560 --> 00:01:40.520
were finally replaced by the gold standard after urgent pressure by hard-money Democrats,

21
00:01:40.520 --> 00:01:46.880
but not until 1879, some 14 full years after the end of the war.

22
00:01:46.880 --> 00:01:54.960
A second and more lasting intervention was the National Banking Acts of 1863, 1864 and

23
00:01:54.960 --> 00:02:02.240
1865, which destroyed the issue of banknotes by state chartered or quote, state banks by

24
00:02:02.240 --> 00:02:08.600
a prohibitory tax and then monopolized the issue of banknotes in the hands of a few large

25
00:02:08.600 --> 00:02:14.640
federally chartered quote, national banks, mainly centered on Wall Street.

26
00:02:14.640 --> 00:02:20.240
In a typical cartelization, national banks were compelled by law to accept each other's

27
00:02:20.240 --> 00:02:26.440
notes and demand deposits at par, negating the process by which the free market had previously

28
00:02:26.440 --> 00:02:32.240
been discounting the notes and deposits of shaky and inflationary banks.

29
00:02:32.240 --> 00:02:37.680
In this way, the Wall Street federal government establishment was able to control the banking

30
00:02:37.680 --> 00:02:43.900
system and inflate the supply of notes and deposits in a coordinated manner.

31
00:02:43.900 --> 00:02:45.580
But there were still problems.

32
00:02:45.580 --> 00:02:50.620
The national banking system provided only a halfway house between free banking and government

33
00:02:50.620 --> 00:02:56.140
central banking, and by the end of the 19th century, the Wall Street banks were becoming

34
00:02:56.140 --> 00:02:59.900
increasingly unhappy with the status quo.

35
00:02:59.900 --> 00:03:05.180
The centralization was only limited, and, above all, there was no governmental central

36
00:03:05.180 --> 00:03:11.420
bank to coordinate inflation and to act as a lender of last resort, bailing out banks

37
00:03:11.420 --> 00:03:13.160
in trouble.

38
00:03:13.160 --> 00:03:17.880
No sooner had bank credit generated booms when they got into trouble and bank-created

39
00:03:17.880 --> 00:03:24.360
booms turned into recessions, with banks forced to contract their loans and assets and to

40
00:03:24.360 --> 00:03:28.040
deflate in order to save themselves.

41
00:03:28.040 --> 00:03:32.980
Not only that, but after the initial shock of the National Banking Acts, state banks

42
00:03:32.980 --> 00:03:39.960
had grown rapidly by pyramiding their loans and demand deposits on top of national banknotes.

43
00:03:39.960 --> 00:03:45.600
These state banks, free of the high legal capital requirements that kept entry restricted

44
00:03:45.600 --> 00:03:52.560
in national banking, flourished during the 1880s and 1890s and provided stiff competition

45
00:03:52.560 --> 00:03:54.880
for the national banks themselves.

46
00:03:54.880 --> 00:04:02.440
Furthermore, St. Louis and Chicago, after the 1880s, provided increasingly severe competition

47
00:04:02.440 --> 00:04:03.880
to Wall Street.

48
00:04:03.880 --> 00:04:10.580
Thus, St. Louis and Chicago bank deposits, which had been only 16% of the St. Louis,

49
00:04:10.580 --> 00:04:18.800
Chicago and New York City total in 1880, rose to 33% of that total by 1912.

50
00:04:18.800 --> 00:04:24.320
All in all, bank clearings outside of New York City, which were 24% of the national

51
00:04:24.320 --> 00:04:30.640
total in 1882, had risen to 43% by 1913.

52
00:04:30.640 --> 00:04:36.240
The complaints of the big banks were summed up in one word, inelasticity.

53
00:04:36.240 --> 00:04:41.680
The national banking system they charged did not provide for the proper elasticity of the

54
00:04:41.680 --> 00:04:43.240
money supply.

55
00:04:43.240 --> 00:04:49.620
That is, the banks were not able to expand money and credit as much as they wished, particularly

56
00:04:49.620 --> 00:04:51.740
in times of recession.

57
00:04:51.740 --> 00:04:57.080
In short, the national banking system did not provide sufficient room for inflationary

58
00:04:57.080 --> 00:05:02.800
Expansions of Credit by the Nation's Banks By the turn of the century, the political

59
00:05:02.800 --> 00:05:09.440
economy of the United States was dominated by two generally clashing financial aggregations.

60
00:05:09.440 --> 00:05:14.760
The previously dominant Morgan Group, which had begun in investment banking and expanded

61
00:05:14.760 --> 00:05:20.880
into commercial banking, railroads and mergers of manufacturing firms, and the Rockefeller

62
00:05:20.880 --> 00:05:27.080
Forces, which began in oil refining and then moved into commercial banking, finally forming

63
00:05:27.080 --> 00:05:32.520
an alliance with the Kuhn-Lebb Company in investment banking and the Harriman Interests

64
00:05:32.520 --> 00:05:34.520
in railroads.

65
00:05:34.520 --> 00:05:39.620
Although these two financial blocks usually clashed with each other, they were as one

66
00:05:39.620 --> 00:05:42.280
on the need for a central bank.

67
00:05:42.280 --> 00:05:47.080
Even though the eventual major role in forming and dominating the Federal Reserve system

68
00:05:47.080 --> 00:05:53.560
was taken by the Morgans, the Rockefeller and Kuhn-Lebb forces were equally enthusiastic

69
00:05:53.560 --> 00:05:59.520
in pushing and collaborating on what they all considered to be an essential monetary

70
00:05:59.520 --> 00:06:00.120
reform.