Scribd Logo
Upload

Welcome to Scribd!

  • Lowenstein America - S Bank Select Chapters

    Uploaded by

    Dhruv Bindra
    22 views66 pages

    Original Title

    Lowenstein America_s Bank select chapters (1)

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    22 views66 pages

    Lowenstein America - S Bank Select Chapters

    Uploaded by

    Dhruv Bindra

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 66
    The End of Wall eet White America Age: Hes Penson Debs Rained General Moar, ‘Stopped the NYC Subway, Baneapted San Deg ‘nd Loom a tbe Next Financial Criss Origins ofthe Cras: The Great Bubble and Is Undoing When Gens Pal: The Rise and Pal of ‘Long-Term Capital Management Bate The Maing ofan Americ Capitalist AMERICA’S BANK THE EPIC STRUGGLE TO CREATE THE FEDERAL RESERVE ) || ROGER LOWENSTEIN ® 1 || ) | CONTENTS INTRODUCTION 1 PART ONE ‘THE ROAD TO JEKYL ISLAND one: THe Fonsiooen Words i: Two: PriviLeceo BANKER, SELF-MADE Senator 2 THREE: Jirrens on WALL StREEY 46 FOUR: PANIC 59 Five: THE Crossing 7 six: Proaressivisn 9: SEVEN: JeKYL ISLAND 107 ‘THE LEGISLATIVE ARENA eign nro THE CRUCIBLE 17 Nine: THE Great CAMPAION 147 en: Wooonow's MIRACLE 164 ELEVEN: THE PRINCETON DEPOT 179 TWELVE: THE "SLIME OF BRYANISH™ 18 THIRTEEN: “THE lMPossiBLe Has Harreneo” 233 FOURTEEN: EPILOGUE 155 ACKNOWLEDGMENTS 271 Nores or Inoex a7 INTRODUCTION So reavasive 1s 17s INFLUENCE that Americans today can searely imagine a wodld without the Federal Reserve. To begin with, the Fel Americas central bank—isues the Federal Reserve notes that we call “mone.” Te set the short-term interest ae eat affects the market for morgage, ca loan, corporate deb, and even the level of the stock market. Tt manages, sometimes adroity and sometimes wantingly, the supply of credit whose ebb and low alec ately buoys ad batters busines. I supervses—o ts supposed&o supervie—the nations banks, And as Americans were vividly re- minded during the meltdown of oof, the Federal Reserve acta the lender fase esr, providing loans ro banks when credit shuts down, Baely a century ago the Fed did not exist. Every other industi- alized nation had such a ental bank to oversee its banking system snd to ase stably, yet America financial sytem-—if system one can call it—was antiquated, disorganized, and deficient. The United States boasted the worlds largest economy, ite vast tereitry was sb boned with railroad tacks and telephone wire, tes were burt ing with factories churning outicon and tel. Ye, almost ait history hha mised a tuen is banks were disconnected and isolated lft prosper or flounder (oF fl) according to the reserves ofeach indi- ‘vidual institution. As Paul Warburg, one of the hercs of this story, ‘was to observe with his trademark acuity, America’ banks esembled less an army commanded by a central staff than they dian inchoate legion of disjointed and disunited infantry. Te was hardly surpris- ing thet throughout the later half of the nineteenth century and into the early twentieth, the United States—alone among the industrial powete—suffered a continual spate of financial panics, bank runs, ‘money shortages, and, indeed, fall-lown depressions. ‘This book tells the story of how, culminating inthe days before Christmas sor, the Federal Reserve came tobe. Te was not a gentle or an exsy birth, nor was it swift. To Americans of the early twentieth century, especially farmers, the prospect of a central bank threatened the comfortable Jeffersonian principle of small government. Toa peo- ple for whom local autonomy was stcrosanct, the nation ofa poverfil bank, joined to the even more powerful federal government, was deeply unnerving. Opposition to central authority had animated the sinutemen at Lexington and Concord, and the battle to establish the Fed resembled a second American evolution financial revolution, ‘America had, ofcourse, experimented with central banking early in ts history. Ate the Wat of Independence, a military success but 2 financial disaster, the government was saddled with debt. When in «due course the Constitution was ratified, providing a greater degree of political unity, Alexander Hamilton proposed 2 financial equva~ lent, a Bank ofthe United States, modeled after the Bank of England, ‘Thomas Jefferson was mightily opposed, as were his many fllowers. "Nonetheless, President Washington was persuaded, as was a majority ‘of Congress, and in 191, the Bank, headquartered in Philadelphia, opened for busines. ‘To modern eyes, the Bank was a strange beast, 20 percent owned by the government and go percent by private investors. Ie was autho rized to hold the government's deposits but not, specifically to be the nation's monetary steward oto perform other functions of a central ‘bank, Nonetheless, the Bank began to play this role. Tn paticulay, it strengthened the previously shoddy credit of the federal government, ‘The twenty years ofits initial charter were generally prosperous, and the number of private banks, which received charters from the states, swelled from five to more than one hundred ‘But the Bank was doomed by the rise of the ant-federalists, both in the White House, in the person of James Madison, and in Con- ‘gress. Rechartering filed by one vote in each chamber. Thus, in "Bur, America was returned to condition of monetary innocence, of Ihissez-fare, money again being the business of individual banks in ‘the sates, each of which issued notes according tits respective pow cers Inflation followed, and when the government’ credit became covertaxed by the War of iia, banks suspended opertions, causing ‘Madison to rethink matters. In 816, Congress, now with Madison's endorsement, chartered the Second Bank of the United States ‘The Second Bank, though endowed with more capital, was in most respects replica of the first, It succeeded at restraining the state banks fom issuing foo many notes, thus keeping a id on infla~ tion, It worked to mute excesses in the business eyle, And the Bank's notes were widely accepted a8 a common currency, no small thing for ‘nation pushing across an unsettled continent. But the Second Bank ‘met a fite no better than the first Although Congress approved its recharter, the margin was not sufficient to override the determined veto of Andrew Jackson. In 136, the national bank was, forthe sec= ‘ond time, allowed to expire. Once again, the country experienced an inflation, this time followed by a severe depression. In 1841, Congress chartered a third bank, President John Tyler, a southerner preoceu ‘pied with sates’ rights, vetoed it. And thee, for some seven decades, matters rested, Given the two Banks’ overall effective records (and allowing for some stumbles by each), the question must be asked: Why such a haste to abolish them? Despite their success, many Americans £e- ‘garded the Banks with profound suspicion, Alexis de Tocqueville, the French politcal thinker who toured Jacksonian America, noticed in his travels through what was sil afontier society a pair of seemingly inconsistent facts. The notes ofthe Second Bank were valued equally “on the edge ofthe wilderness” as they were in Philadelphia, testify ing to the people’ general regard fr its eed nonetheless, the Bank baad ecome the “objec of intense atred.” De Tocqueville’ diagnosis vvas that “Americans are obviously preoccupied by one great fear,” which he identified as fea ofa tyrannical government of, as he putt, ‘of “centralization.” De Tocqueville was plainly bewildered. To him— to most any Frenchman—the Bank of France seemed a natural out- growth of the national government, no lets Fench than the Court of Versailles. But in America, such a bank did not seem natural It re- awakened Americans’ primal anxieties, the colonials’ fear that eheir hard-won liberties would be crushed by a far off king. [Even after independence, the patern of settlement—the way that the frontier continually pushed westward—ensured that a perpetual class of outsiders would resent and resist the power structure in the Bast and especially the Northeast. Foe the oppesition to central bank= ing was always matter of geography as much as anything ese. In the ‘ote t0 establish the First Bank inthe House of Representatives, only three congressmen from southern states voted in favor; only one from ‘the North was opposed. Ie was no accident that Jackson, the slayer of he Second Bank, was a rough-hewn soldier and Indian fighter, the frst president not from the Eastern Seaboard, Many early Americans were not merely suspicious of a federal ‘banks they were suspicious of any big bank, a prejudice that loomed especially large in rural areas. To merchants and cty dwellers, banks ‘were a boon, but farmers and debtors (often the same people resented being hostage to banks, especially large metropolitan banks. And ost of America, fora very long time, was rural: when Jackson was clected president, only one of fifteen Americans lived in cites Although Europe also had agrarian traditions, farmers in Europe lived in villages. They were surrounded by neighbors, accustomed to interdependence. In America, farmers were dispersed and isolated, "They relied less on abot (which was scarce) and more on capital— ‘Which is to say, they relied on banks. It has been wily suggested, ‘ot without cause, that American farmers hated banks because they needed loans. Jefferson in particular was suspicious of finance, a pro- fession he considered ethically tainted. It is worth noting that Jefer- son nevervisteda town untithe was almorteighten, Jackson imilaly frowned on financiers. He squashed the Second Bank largely because, hae fl it was a tool of eastern elites” Jicksor!s heritage was remarkably enduring. Even generations later, the reformers who sought t establish the Fed could not admit to favoring a “central bank"—the very phrase was forbidden. Rhode Island senator Nelson W. Aldrich, the firs legishitor in the twenti- ‘eth century to draft bill for a national bank, felt as though he were doing battle not just with the populists and ant-hank agitators of | his own time but also, ashe phrased it, with "the ghost of Andrew Jackson” Before Congress could consider legislation, the public had to be persuaded of oat least exposed tothe idea of establishing a unify ing financial institution. In the first part of ou story, bankers and ‘others launch a campaign to win over influential citizens in busi- ress, universities, and he press. The reformers were a mixed bag— ‘economists, bankers, idealists bent on modernizing the system, and, as well, Wall Street financiers with the more selfserving ambition of enhancing profits [New York bankers wanted a central bank in part because they ‘wanted to assume a greater role on the world stage, The America of the late nineteenth century was an industrial powerhouse but a finan cial also-ran, The U.S, dole was a second-rate currency; incredibly, the dollar was quoted in fewer currency markets than the relatively puny Iealian lita or Austrian schilling. In monetary terms, America remained a stepchild of the Bank of England, whose interest-rate Asan an Jaco had sold and in stn er promise Phladelps merce and endased the ote fr sls sto, When ‘he mechan ied Jcaon wa linlelvig hin with rh S, The pernce rere oud heft preset on high Fiance. ra a maneuvers could, and often did, plunge Wall Street into recession Financial independence required a more resilient curteney, and one ‘whose supply was regulated not in London orn Paris but in America inelf [Bus what sort of bank would issue cis currency and what rules ‘would it live by? These questions had preoccupied Americans since the Civil War, They fought—unceasingly—over whether the money supply should be pegged to the country’s gold reserve, or to silver of to some other standard. Bankers of the Gilded Age were worried about inflaton, as bankers always ae; however, for strapped Ameri can farmers, money was in chronic undersupply. Farmers, industrial iat, bankers, consumers, workers, all had conflicting interests. What became clear to all—aftera disastrous panic in 1907, when the banks literally san out of money—was that the prevailing system in which ‘each bank stood on its own did not work. “The system's inadequacy was seen most clearly by & newcomer, Paul Warburg, a German expatriate. He was stunned by the primi= tive condition of American banking and relentlessly lobbied his fe- low Financiers to embrace seforms modeled on the central banks of [Burope. As Warburg acclimated to his adopted country, he recog- nized the need to cultivate the political establishment, then thor- ‘oughly Republican, and recruited the powerful Senator Aldrich ois. ‘Aldrich, however, was unprepared for the progressive tide that was reshaping American politics. Socal activism was onthe rise and ‘Americans—not unlike in our own time—resented the widening gap between rich and poor, evident in the palatial mansions of railroad tycoons and industrial barons. The progressive movement was an effort to balance the seals. Since progressives were all for modern= ization, they should have looked favorably on proposals for a cen- tral bank, but progressives were innately wary of bankers—even of reform-minded bankers. And they deeply mistrusted Senator Aldrich, ‘who had acquired his great wealth in shady, backroom dealings with ‘monopolists. Aldrich was so out of favor that he opted to abscond from public view, along with a band of Wall Street advisers, andre ‘write the nation’s banking las in secre. Aldrich’ clandestine effort, a strangerthan-fiction mission to a remote Georgia ishind, would forever link the Fed’s founding to the wildest claims of conspiracy theorists and cranks, Tn the second part ofthe story, as Wazburgs proporals are pains- ‘akingly translated into legislation, bankers pass the baton to polit cians, No sooner did this process stare than, in ior the electorate installed the Democrats in Congress. The Democrats were hostile to 2 central bank, After all, they were the party of Andrew Jackson “Moreover, they were concentrated in the West and South and natu- rally feared that a central bank would enhance the power ofthe big banks in New York. But the Democrats could scarcely overlok the pressure for reform that was sweeping the country: Moreover the Democratic president

    You might also like