Putting Cartelization Across the Progressive Line
The origin of the Federal Reserve has been deliberately shrouded in myth spread by pro-Fed apologist.
The official legend holds that the idea of a central bank in America originated after the panic of 1907,
when the banks, stung by the financial panic, concluded that drastic reform,
The reform, highlighted by the establishment of a lender of last resort, was desperately necessary.
All this is rubbish. The Panic of 1907 provided a convenient handle to stir up the public and spread pro-central bank propaganda.
In actuality, the banker agitation for a central bank began as soon as the 1896 McKinley victory over Bryan was secured.
The second crucial part of the official legend claims that a central bank is necessary to curb the commercial bank's unfortunate tendency to over-expand.
Such booms giving rise to subsequent bust.
An impartial central bank, on the other hand, driven as it is by the public interest, could and would restrain the banks from their natural, narrow and selfish tendency to make profits at the expense of the public wheel.
The stark fact that it was bankers themselves who were making this argument was supposed to attest to their nobility and altruism.
In fact, as we have seen, the banks desperately desired a central bank not to place fetters on their own natural tendency to inflate, but on the contrary, to enable them to inflate and expand together without incurring the penalties of market competition.
As a lender of last resort, the central bank could permit and encourage them to inflate when they would ordinarily have to contract their loans in order to save themselves.
In short, the real reason for the adoption of the Federal Reserve and its promotion by the large banks was the exact opposite of their loudly trumpeted motivations.
Rather than create an institution to curb their own profits on behalf of the public interest, the banks sought a central bank to enhance their profits by permitting them to inflate far beyond the bounds set by free market competition.
The bankers, however, faced a big public relations problem. What they wanted was the Federal Government creating and enforcing a banking cartel by means of a central bank.
Yet they faced a political climate that was hostile to monopoly and centralization and favored free competition.
They also faced a public opinion hostile to Wall Street and to what they perceptively but inchoately saw as the money power.
The bankers also confronted a nation with a long tradition of opposing central banking.
How then could they put a central bank across?
It is important to realize that the problem faced by the big bankers was only one facet of a larger problem.
Finance capital, led once again and not coincidentally by the Morgan Bank, had been trying without success to cartelize the economy on the free market.
First in the 1860s and 1870s, the Morgans as the major financiers and underwriters of America's first big business, the railroads, tried desperately and repeatedly to cartelize railroads,
to arrange railroad pools, to restrict shipments, allocate shipments among themselves and raise freight rates in order to increase profits in the railroad industry.
Despite the Morgan clout and a ready willingness by most of the railroad magnates, the attempts kept floundering, shattered on the rock of market competition,
Competition, as individual railroads cheated on the agreement in order to pick up quick
profits, and New Venture Capital built competing railroads to take advantage of the high cartel
prices.
Finally, the Morgan-led railroads turned to the Federal Government to regulate railroads
and thereby to enforce the cartel that they could not achieve on the free market.
Hence, the Interstate Commerce Commission, established in 1887.
In general, manufacturing firms did not become large enough to incorporate until the 1890s,
and at that point the investment bankers financing the corporations, again led by the Morgans,
organized a large series of giant mergers, covering literally hundreds of industries.
Mergers would avoid the problem of cheating by separate individual firms and monopoly firms could then proceed peacefully to restrict production, raise prices and increase profits for all the merged firms and stockholders.
The mighty merger movement peaked from 1898 through 1902.
Unfortunately, once again, virtually all of these mergers flopped badly, failing to establish monopolies or monopoly prices, and in some cases, steadily losing market shares from then on, and even plunging into bankruptcy.
Again, the problem was new venture capital entering the industry, and, armed with up-to-date equipment, outcompeting the cartel at the artificially high price.
And once again, the Morgan Financial Interest, joined by other financial and big business groups, decided that they needed the government, in particular, the Federal Government, to be their surrogate in establishing and, better yet, enforcing the cartel.
The famed Progressive Era, an era of a great leap forward in massive regulation of business by state and federal government, stretched approximately from 1900 or the late 1890s through World War I.
The Progressive Era was essentially put through by the Morgans and their allies in order to cartelize American business and industry, to take up more effectively where the cartel and merger movements had left off.
It should be clear that the Federal Reserve System established in 1913 was part and parcel of that progressive movement, just as the large meat packers managed to put through costly federal inspection of meat in 1906 in order to place cripplingly high cost on competing small meat packers.
So, the big bankers cartelized banking through the Federal Reserve system seven years later.
Just as the big bankers, in trying to set up a central bank, had to face a public opinion
suspicious of Wall Street and hostile to central banking, so the financiers and industrialists
faced a public steeped in a tradition and ideology of free competition and hostility
to monopoly.
How could they get the public and legislators to go along with the fundamental transformation
of the American economy toward cartels and monopoly?
The answer was the same in both cases.
The big businessmen and financiers had to form an alliance with the opinion molding
classes in society in order to engineer the consent of the public by means of crafty and
persuasive propaganda.
The opinion-moulding classes, in previous centuries the Church, but now consisting of
media people, journalists, intellectuals, economists and other academics, professionals, educators
as well as ministers, had to be enlisted in this cause.
For their part, the intellectuals and opinion-moulders were all too ready for such an alliance.
In the first place, most of the academics, economists, historians, social scientists
had gone to Germany in the late 19th century to earn their PhDs, which were not yet being
granted widely in the U.S. There, they had become imbued with the ideals of Bismarckian
statism, organicism, collectivism, and state molding and governing of society, with bureaucrats
and other planners benignly ruling over a cartelized economy in partnership with organized
There was also a more direct economic reason for the intellectuals' eagerness for this new statist coalition.
The late 19th century had seen an enormous expansion in professionalization of the various segments of intellectuals and technocrats.
Suddenly, tool and diamond had become graduate engineers.
by the Institute Engineers.
Gentlemen with bachelor's degrees had proliferated into specialized doctorates, physicians, social workers, psychiatrists.
All these groups had formed themselves into gilding and professional associations.
What they wanted from the state was plush and prestigious jobs and grants.
A, to help run and plan the new status system, and B, to apologize for the new order.
These guilds were also anxious to have the state license or otherwise restrict entry into their professions and occupations in order to raise the incomes of each guildsman.
Hence the new alliance of State and Opinion Molder, an old-fashioned union of throne and altar, recycled and updated into a partnership of government, business leader, intellectual and expert.
During the Progressive Era, by far the most important forum established by big business and finance, which drew together all the leaders of these groups, hammered out a common ideology and policy program, and actually drafted and lobbied for the leading new progressive measures of state and federal intervention, was the National Civic Federation. Other similar and more specialized groups
It was not enough, however, for the new statist alliance of big business and big intellectuals to be formed.
They had to agree, propound and push for a common ideological line,
a line that would persuade the majority of the public to adopt the new program and even greet it with enthusiasm.
The new line was brilliantly successful, if deceptive,
It is perceptive that the new progressive measures and regulations were necessary to save the public interest from sinister and exploitative big business monopoly, which business was achieving on the free market.
Government policy led by intellectuals, academics and disinterested experts in behalf of the public wheel was to save capitalism and correct the faults and failures of the free market by establishing government control and planning in the public interest.
In other words, policies such as the Interstate Commerce Act, drafted and operated to try to enforce railroad cartels, were to be advocated in terms of bringing the big bad railroads to heel by means of democratic government action.
Throughout this successful corporate liberal imposture, beginning in the progressive era and continuing ever since, one glaring public relations problem has confronted this big business intellectual coalition.
If these policies are designed to tame and curb rapacious big business, how is it that so many big businessmen, so many Morgan partners and Rockefellers and Harrimans have been so conspicuous in promoting these programs?
The answer, though seemingly naive, has managed to persuade the public, with little difficulty, that these men are enlightened, educated, public-spirited businessmen, filled with the aristocratic spirit of noblesse oblige, whose seemingly quasi-suicidal activities and programs are performed in the noble spirit of sacrifice for the good of humanity.
Educated in the spirit of service, they have been able to rise above the mere narrow and selfish grasp for profit that had marked their own forefathers.
And then, should any maverick skeptic arise who refuses to fall for this hokum and tries to dig more deeply into the economic motivations at work,
The question here, however, is not some sort of theory of history, but a willingness to use one's common sense.
All that the analyst or historian need do is to assume, as in hypothesis,
The question here, however, is not some sort of theory of history, but a willingness to use one's common sense.
All that the analyst or historian need do is to assume, as in hypothesis, that people in government or lobbying for government policies
may be at least as self-interested and profit-motivated as people in business or everyday life,
And then to investigate the significant revealing patterns that he will see before his eyes.
Central Banking, in short, was designed to do for the banks what the ICC had done for
the railroads, the Meat Inspection Act had done for the big meat packers and so forth.
In the case of Central Banking, the line that had to be pushed was a variant of the anti-big
Business, Shell Game, being perpetrated on behalf of big business throughout the Progressive
Era. In banking, the line was that a central bank was necessary to curb the inflationary
excesses of unregulated banks on the free market. And if big bankers were rather conspicuous
and early in advocating such a measure, why this only showed that they were more educated,
more enlightened and more nobly public spirited than the rest of their banking brethren.