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America's Emerging Liberal Oligarchy The Difference Between Change and Reform

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Pity a Poor Banker

by Christopher Chantrill
February 19, 2009 at 5:56 pm


LAST WEEK our noble solons lined up a bunch of bank CEOs and proceeded to lash themselves into a lather. All hands aft to witness punishment, as they say in naval fiction.

I’m sorry, Mr. Congressman. I don’t get it. I thought the whole point of government grants and bailouts and stimulus was to spray money around for people to spend. So what’s the problem if the bankers take you at your word?

Let’s get some clarity here. Banking is a government program, the means by which the government control the credit system. Bankers are the government’s toadies.

Mainly, governments like to control the credit system because they need money for wars. The banking granddaddy of them all, the Bank of England, got its start because the British government needed someone in 1692 to sell its bonds so it could fight a war. Thus was born the British National Debt. You’d expect ukpublicspending.co.uk to have a handy chart on this, and it does.

In the 18th century the British government used all that borrowed money to conquer the world. Then, in the long 19th century, they paid the National Debt back and built an industrial empire on the proceeds until it was time to Hang the Kaiser and defeat the Nazis.

By and large through all this the Bank of England did a pretty good job, at least until World War II.

In the United States the government has consistently screwed up the credit system, almost from the very beginning. Viewed in this light the Federal Reserve Board’s slam-bang on-off monetary policy of the last ten years is nothing new. The US government has never had a clue when it came to regulating credit conditions.

In its early years the US couldn’t decide whether it wanted a central bank. Treasury Secretary Alexander Hamilton pushed through the First Bank of the United States in 1791 and nationalized the debts of the revolutionary war, but Congress refused to renew the bank’s charter in 1811. With exquisite timing the United States found itself without a central bank to fight the War of 1812.

Still, the United States managed to pay off its National Debt by the 1840s as this chart from usgovernmentspending.com illustrates.

The Second Bank of the United States was chartered in 1815 but closed by President Andrew Jackson in 1837. Jackson also stopped a big land boom dead in its tracks with his Specie Circular of 1836. His action required that all payments for government land be made in gold or silver. The speculators ran for the hills in the Panic of 1837 and the money supply fell by about 35 percent. We are talking about a five-year depression.

Next up was the Civil War. It was financed in part by printing money and in part by hundred of millions of government bonds sold by Jay Cooke. But after the war the government turned to deflation to restore the value of the dollar. When it decided to demonetize silver it set off the Panic of 1873 and a sharp contraction in credit. The following years came to be called the Long Depression.

They were certainly deflationary. But with the passage of the Sherman Silver Purchase Act in 1890 the government swung back to an inflationary stance. The economy boomed for a while until people started trading in their silver certificates for gold. That set off the Panic of 1893.

Thank goodness the US had a banker like J. Pierpont Morgan who could bail out the US government in 1895 when it almost ran out of gold and halt the Panic of 1907 with a triage committee of the wealthiest men in New York City.

After Morgan saved the economy everyone agreed that the US needed a credit system without the taint of Morgan and his “money trust.” So we got the Federal Reserve and the Great Depression of the 1930s.

To heal the credit system in the 1930s the government had to devalue the dollar from $20.75 per ounce to $35. In the 1970s the government went off the gold exchange standard and floated the dollar eventually down to $800 per ounce in the nadir of the Carter malaise of 1979-80. In the early 1980s Ronald Reagan and Paul Volcker brought the dollar back, but new smash-ups from government credit wheezes like the Savings and Loan collapse of 1989 and the Fannie-Freddie meltdown of 2008 have reduced the credit system to a pulp. We don’t yet know what it will take to get the credit system off the rocks in 2009.

If you were a banker, what would you do right about now? Exactly. You’d pay yourself a big bonus and head for the hills.

Let’s have a witch-hunt and nationalize the banks. That’s the way to teach them a lesson.

Christopher Chantrill blogs at www.roadtothemiddleclass.com.

Buy his Road to the Middle Class.

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presented by Christopher Chantrill

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